HML RlMTIClkJSDU&riON I" ei 01 m m b( th Iv n ai oi UNIVERSITY OF CALIFORNIA AT LOS ANGELES nation. y citizens who be- ids on tlie active ;s are means, not I be used for any st in government irlies and to pro- ng political con- id. I fitness and good ed. 1 in the markets of uust be convertible y public or private pt for government o subsidize private liine control, is the cans, who differ this or the other f the Society are ing, from time to lirable reading on ciiiiciii |n/iiin.i»i iiiiM cvwiiv/iiiit mtcTitiuin 710 supply :«ncii uooks to members at the smallest possible advance beyond actual cost ; and to furnish and to circu- late, at a low price and in cheap form, sound economic and political literature in maintenance and illustration of the principles above announced as con- stituting the basis of'its organization. {.Sc-e also pages 2, 3 and 4 of this copier.') THE GIFT OF MAY TREAT MORRISON IN MEMORY OF ALEXANDER F MORRISON THE SOCIETY FOR POLITICAL EDUCATION. PUBLICATIONS. For the first or current year it is proposed that each Active M ember- sKall" pledge himself lo read the following books : 1. Politics for Young Americans, by Chas. Nordhoff. (Including the Constitu- •ion of the United States, etc.) Harper & Bros. [Copyr. 1875.] 200 pp., 75 cents. 2. History of A.merica.s Politics, by Alex. Johnston. Henry Holt & Co. [Copyr. 1879.] 12 X 274 pp., 75 cents. 3. Introduction to Political Economy, by Prof. A. L. Perry. Chas. Scribner's Sons. [Copyr. 1877.] 348 pp., $1.50. 4. .\li'Habet in Fina.s'Ce, by Graham McAdain. G. P. Putnam's Sons, [t'opyr. 1876.] 2o X 210 pp., $1.25. Also, the Constitution of the State of which the member is a resident. Tiie Executive Committee, in order to enable persons in places where no public library is accessible, to procure the above books at a reduced rate, has arranged fur a speci?l edition of them in uniform binding, with the imprint of the Society upon the cover, under the title, Library of Political Educa- tion ; First Series. The Society has arranged to fix the retail price, throughout the United Slates, at %y(.r> /or t/it se: 0/ /our booAs. AcXwcreA. If any member cannot procure them from the local bookseller, he should address Messrs. G. P. Putnam's Sons, 182 Fifth Avenue, New Vorlc, or Jansen, McClurg & Co., 119 State Street, Chicago, who are the publish- ing agents of the Society. For other and general reading on Political Economy, the specialties of fiscal science, — banking, currency, the silver question, taxation, free trade and protection, land tenure, etc., etc., a list of books is in course of prepa- ration, and will be furnished lo members on application and to others on receipt of ten cents. Nearly ready, also, is a list of works on the Constitu- tion of the United .Stales, prepared by W. E. Foster, Librarian of the Providence Public Library. Other lists will be added, so as to aid members in selecting judiciously from the mass of books which issue yearly from the press. ,\moi)g the propo.sed early i)ub]ications will be included : " What is a H.iiik ? " by Edward Atkinson, of Boston ; and " The Usury Question," com- |)ri>ingthe famous essays of Jeremy Hentham and John Calvin, together with a summary oi the results of the present usury laws of the United Siatis, by I). A. Wells. The Society proposes to continue the issue of the valuable pamphirls of the lloNKST MoNKV LKAGt'E of the Northwest, which did such stnjng ser- vice for the counirv during its activity, inchiiimg a revision of Mr. Thos. M. Nicliol's effective pamphlet on ' Honest M' lu-y," Oilier works are in con- templation for issue and distril^ution at an c ly date. (Ste also pagf f, 3 ««f this eoirr.) c: , ' > 1 ' i> J ' J* J J » >< « «< ft « « ft • ft . • c c ■ ( c « ' ft ,» « ft • • "• • AN Alphabet in Finance A SIMPLE STATEMENT OF PERMANENT PRINCIPLES AND THEIR APPLICATION TO QUESTIONS OF THE DAY BY GRAHAM McADAM • » WITH INTRODUCTION BY R. R. BOWKER NEW V O R K PUTNAM'S SONS 182 FIFTH AVENUE 188I Copyright, O. P. PUTNAM'S SOVS 1876. t ( » INTRODUCTION. z i 2 CO a: Z a. ◦ t 3 HIS Httic book, it may be more fitting for me than for the author to say, has been written as a political duty. This idea of duty, far removed as it is from partisanship, is based on a political faith which may be briefly set forth. Most men liave fair common sense, that is, the power to make a right judgment on simple questions clearly presented. Most men have also common honesty, that is, the will to act as their judgment tells tlicm is right. These are the chief grounds of faith in democracy — that men, according to their light, are given to think rii^htly rather than to think wrongly anfl glad to do right rather than to do wrong. It is on such political optimism that our theory of government is based, nor is any system of govern- ment, or sor; :i .iiwlvncrv of any sort, possible, ex- 13415'J iv AN ALPHABET IN FINANCE, cept with some belief in humanity. Every organi- zation pre-supposes true men, somewhere. Yet it is true that the number, especially of edu- cated men, who unwillingly harbor growing doubts of democracy, is sadly on the increase among us. I venture to say that this very despondency, and con- sequent inactivity, is the source of their infidelity ; it is their fault, rather than the fault of ** democ- racy," that they have lost faith. Democracy has not always meant universal suf- frage, but, practically, it means so to-day. It re- quires of every man that he shall do his duty. Ids duty. It is bad for the ignorant, or the vicious, to do ill ; but it is worse for the educated, or the hon- est, to do nothing. The political pessimists, if they still mean to be good Americans, now pin their doubtful faith upon educated suffrage. To them universal suffrage is only a count of noses, another form of that decision by lot which was of old the vox Dei. If this is anywhere true, it is true not because of the ignorant, but because of the educated ; not because the people would not learn, but because the teachers would not teach. It is to the educated citizen, indignant at the demoralization of " democ- racy " — which he looks upon as something apart from himself — that we must cry out : " thou art the man." IN TROD UCTION. V For to say that most men wish to think rightly and to do right, is to assert their desire for the basis of right thinking and right doing, their willingness " to listen to reason." They require enlightenment, information, and this must come from those trained, each in his degree, to require and to give it. The sense for leadership is a part of human nature — " There's nothing men so crave as leadership." Men naturally " look up," as each man knows from his own tendency, to those qualified to guide, and are willing to be led in directions which they are shown are the right directions. So strong is this sense, indeed, that right leaders wanting, men are prone to follow any who offer. Universal suffrage, then, when the several elements do their respective duties, is not a count of noses, but a balancing of brains — in which, provided " brains " acts as well as thinks, (for "knowledge is power "only when knowledge goes to work,) intelligence and righteousness are sure to tell in "the long run. Our government provides that all men shall be equal, in opportunity, so far as- human institutions can make it possible ; there is a higher law of equality which ordains that responsi- bility shall be equal to privilege, and recjuires the most from those most gifted or best trained. Dc- VI AN ALPHABET I.V FINANCE. mocracy is thus an army officered by nature, in which the sword-voice of the general may equal, by his in- spiration, the bullets or ballots of the thousand men behind him. Yet, after all, it is the body of the people who are the final reliance : we speak accu- rately of the great court of the people. It is in this way that the voice of the people is the voice of right. In this great assemblage, each man must fulfil his function, not as a part of one class teaching another class, — for in our country, and es- pecially under our system of popular education, there can be no lines of demarcation sufficiently stable to define classes — but as receiving from his neighbor on the one side and imparting to his neighbor on the other. If the educated refuse to fulfil their func- tion under universal suffi-age, it is difficult to see why they may be expected to do their duty under edu- cated suffiage. The voters who would be excluded under an educational test are, at the most, a small minority in this country, and an aristocracy of igno- rance, holding a permanent balance of power, is a contradiction of terms. Doubtless there are many discouragements, espe- cially in our large cities, — which, with the unassimi- lated population thrown upon the polls by too hasty naturalization acts, present many difficult problems,— INTRODUCTION. Vll against any attempts of the best-fitted toward re- gaining that lapsed influence in the state which the scheme of democracy pre-supposes. But it is the educated, who can read history and verify progress, who should have the pluck to work and wait, each for himself — to work faithfully and to wait hopefully. Any one man can do a great deal only by holding out a great while, — but by and by an army will be standing shoulder to shoulder with him. And each one who has done any part of his duty to his neigh- bor knows from his own experience that those about him in humbler spheres, such as our immigrant class, look up to his helpfulness cordially and are glad to accept what is wholesome in his influence, provided he gives it not like a prig but like a man. The political safety, then, is that the people should understand issues, should form right judgments, and should vote honestly according to tl>osc judgments. To assure the latter, to prevent undue temptation that by easy processes of corruption shall turn rea- sonably honest men into dishonest ones, is the object of civil service reform, which must be backed up by a public opinion that shall make " lie has betrayed his trust ! " only less a social brand than " he has been a state prison convict ! " ]iut not less imjior tant is the work of bringing issues clearly within the viii AN ALPHABET IN FINANCE. comprehension of all the people. We did not need Herbert Spencer to teach us, (although no one has proved it so thoroughly as he,) that the most com- plex subjects resolve themselves into simple elements before a sufficient analysis. Nowhere is this simpli- fication more possible, and more needed, than in the perplexing questions of finance now before the American people. Properly treated, they are seen to resolve themselves into matters of every day experi- ence. We have had so many nostrums in finance, so many "new plans" for resumption, that it is no wonder the public turns away discouraged from all debate on the subject. What is wanted is not nos- trums, — ourxvo\\ox\, each different, but such investiga- tion of the subject as will bring out the natural basic principle on which the issue must be permanently decided. The present book presents no new plan for resumption : it does seek to find what is the natural method. As its author writes, in a personal letter, which I may quote : — " I have made no new discoveries, developed no new laws, added not a jot to the history or science of money. The only originality is in the manner of putting things, and a considerable trial of this man- ner during the last two years has brought me rea- IN TR OD UC TIOiV. IX sonable assurance of its effectiveness. The exposi- tions of the subject usually given are so burdened with masses of facts and complications of figures, that few have either the patience or the leisure to dig out the underlying principles and articulate them in a logical skeleton. I have endeavored to present a clear, clean-cut outline of the elementary truths, and, using illustration only to illustrate, have endeavored to avoid starting distracting side discussions on the meaning of the complex evidences of history." Mr. Mc Adam's book, like Topsy, " was n't born --it growed." Engaged in editorial work upon the Brooklyn Times, the leading journal of the eastern division (Williamsburgh) of that city, he found by sad experience, both in studying the debates in Congress and the newspaper comments, and in his intercourse with his readers, that the simplest princi- ples of finance were continually lost sight of or mis- construed. This led him to prepare, with careful study, a modest scries of elementary articles, which proved useful to so many readers that it was thought they might be of service to the Wider circle reached by a book. Though these have been much revised and ex- tended, the book is still elementary, but there arc few readers who will deem it an insult to their in. X AN ALPHABET IN FINANCE. telligence to be asked to see how simple are these complex problems. The book is intended both to inform those whom it reaches and to put them in a position to inform others. It purposely deals, as Mr. McAdam states, chiefly with principles, and makes slight use of illus- tration ; in this respect Mr. David A. Wells' clever and useful allegory, " Robinson Crusoe's Money," is its counterpart and may be read in connection with it. The present volume was written only after long and unsuccessful search for a sufficiently simple work covering this particular ground. Those who desire to pursue the subject further are referred, for discus- sions of principles, to Prof. Jevons' " Money and the Mechanism of Exchange," and Prof. Bonamy Price's " Currency and Banking," and for illustrations of practice to Prof. W. G. Sumner's " History of Ameri- can Currency," which gives our own, and Mr. Walter Bagehot's " Lombard St.," which gives the English experience. There are those who distrust books and " theory," — which seems to mean a wider experience than their own, — in this subject particularly, to such extent that the only safe way out, to their minds, is to " let well enough alone " and permit the problem to find its " natural solution." They may well be re- INTRODUCTION. XI minded that the natural solution of human problems must come throujrh men. And the world must ^o on, whether they choose to go to sleep or not. There is nothing I for one believe in more thoroughly than the " let be " theory of government, that it should let things alone as far as possible, and that the laws of nature are commonly the best laws. The application in the present case is that, having thrown the government, by the legal tender act, in opposition to nature, human effort must get it back again into the course of nature. We can't " let well enough alone " till we go well. And nature must be given the opportunity. It is the ir resolute, weak-minded Hamlet, choosing " to bear the ills we have," who flics most surely to worse " others that we know not of" — as the murderous catastrophe of Shakespeare might have suggested to the Ham- lets of modern days. I cannot close without suggesting that if other Americans, acknowledging the responsibilities of ed- ucation, would do their duty in their several ways in the spirit in which this book is written, they would soon be converted to abundant failh in democracy. One of the best means of fulfilh'ng that duly is in llie circulation of just such books among those who disa- gree with their conclusions. The intrenchment of XII AN ALPHABET IN FINANCE. this cause must be among the people. There will always be an influence upon Congressmen, from those who must feel under contraction the pressure of their own mistakes, tending to set aside any plan of re- sumption the moment its success begins to be proven by the results at once desired and dreaded. To give the requisite resistance to our representatives, they must be made to know that to turn back will make them more unpopular than to go forward. In a word, the persistence must come from the people. To secure this, opponents must be converted. It is one of the lamentable facts of our political cam- paigns that we are out of the habit of hearing both sides. We read only " our own " papers, and listen only to speakers on our own side. This permits not only false logic but false issues, and keeps us fighting this year over " the bloody shirt," when we meant to be battling for financial honesty and civil service reform. Direct debate, as on the Southern stump, is the true method for campaigns before the people. Had not the South proved false to her fashion of free debate the moment it touched the one subject on which it was really important to her, she might have been to-day the new, free, prosperous South, without the awful desolation of that war which, re- pressed in words, worked itself out in blood. To INTRODUCTION. XUl promote this wholesome challenging of opinions should be a chief aim of political reformers. The shot must tell not in our own camp but in the ene- my's. Especially is this true of this question of finance, wherein metaphor has done duty for fact, as- sumption for argument, and such phrases as " the people's money " have been dragooned into the ser- vice of a theory which is the worst enemy of an hon- est and industrious people. " The people " need only a full informing to gratefully resolve, alike from the principles of morality and an enlightened self-interest, that they will spell out the Alphabet of Finance to make the American word as good as American g-o-l-d. R. R. BOWKER. September, 1876. CONTENTS. FAGB Introuuction iii CHAPTER I. Origin of Money i CHAPTER II. Ti£E Choice ov Gold 9 CHAPTER III. Qualities ok Gold for Money N CHAPTER IV. WiiAi- IS A SiA.MJAKij Unit? 23 CHAPTER V. Money a Creation of Government 28 CHAi'TEl; \T. IIow Much Gold? 33 CHAPTER Vn. Gold SELF-REfJULATiM; 37 CHAPTER VHI. Gresiiam's Law 44 XVUl CONTENTS. CHAPTER IX. PAGB The Double Standard Question 47 CHAPTER X. The Credit System 52 CHAPTER XI. Is A Bank-Note Money? ^6 CHAPTER XII. " Convertible " Bank-Notes 62 CHAPTER XIII. Convertible Notes Self-Regulating 69 CHAPTER XIV. Who Should Issue Paper Currency 75 CHAPTER XV. Inconvertible Notes — Legal Tender 83 CHAPTER XVI. Inconvertible Notes not Self-Regulating .... 38 CHAPTER XVII. Inflation 93 CHAPTER XVIII. Pure "Credit Money" 102 CHAPTER XIX. The "Closed Circle" 107 CONTENTS. XIX CHAPTER XX. PAGE The Three-Sixty-Five Bond Scheme 112 CHAPTER XXI. The Bond Scheme at its Best 117 CHAPTER XXII. Fractional Currency 123 CHAPTER XXIII. Foreign Exchange 126 CHAPTER XXIV. Banking 133 CHAPTER XXV. What is a Specie Basis? 142 CHAPTER XXVI. The "Bai.anck ok Trade" 147 CHAPTER XXVII. The Silver Scheme 158 CHAI'TKR XXVIII. Resumption 172 CHAPTER XXIX. Resumption — The P>ric;iiter Shie 197 CHAl'lEK XXX. The Practical Issue 204 The science which ends in the prediction of an eclipse, begins with the acceptance of an axiom. The reason why so many are lost in the labyrinth of conclusions is that they have suffered the clue to slip from their fingers. An essay on the importance of clearly under- standing first principles would be out of place here, yet it may be permitted to observe that in pursuing a logical study like that of money, to slide lightly over the opening steps because they are so childishly simple is only to lose a clear direction and go astray as the intricacies are approached. e > « « '^ AN ALPHABET IN FINANCE. CHAPTER I. ORIGIN OF MONEY, HE natural way of getting at the principles of monetary science, would be to run the line back to the historical beginning, mark the introduction of money into civilization, and trace its development to its present point. But to do this by an actual handHng of the particular facts would evidently be a tremendous labor. For- tunately, such a course is not at all necessary. The fundamental generalizations are so evidently true, that it is enough to state them in their logical order, and light them up with simple illustrations. Let us attempt this briefly, yet without undue as- sumption of previous knowledge, but only of com- mon logical faculties — and without any compunctions against making the simplest matter perfectly clear. 2 AN ALPHABET IN FINANCE. In a perfectly savage- state, every man supplies directly all his own needs — his own clothing, his own food, his instruments of the chase. The first step in civilization is the division of labor. Each in- dividual produces more of some particular thing than he needs for his own use, and he disposes of this sur- plus for portions of the surplus productions of others which he requires or desires. Barter is set up. The weaver of cloth trades his product of cloth, except what he wants for his own use, for corn and meat, or such other goods as he may desire. And for a little time, in an extremely rude state of society, barter may suffice for the few exchanges that are necessary. But presently the difficulty arises that the goods of- fered in exchange will not match. A weaver wants a dozen chairs, but the chairmaker, although he has the chairs to dispose of, does not want cloth ; he wants a pair of boots. Now, it may be the bootmaker wants cloth, and the weaver may endeavor to effect the exchange he desires through him. But a new difficulty meets him. He finds that the bootmaker wants only three yards of cloth. But a pair of boots is worth five yards, and the bootmaker will not trade. Even if he would it occurs to the weaver that a single pair of boots is not an equivalent for a dozen chairs, but only for three or four. Now, here ORIGIN OF MONEY. 3 is the problem : The weaver wants chairs, the chair- maker wants boots, the bootmaker wants cloth ; all these manufacturers have the stock ready to supply the needs of their fellow producers, but because the values of the things they respectively desire do not correspond, trade is blocked. Mark clearly what this means. What is Value? A hatter declares his hat to be more valuable than the baker's loaf. He means, when we run the mat- ter to the bottom, that the hat has cost more labor in production than the loaf has. He may not have put that labor directly into the hat himself: the silk- maker, the thread-maker, the paper-maker and in numerable laborers have contributed ; but to pur- chase the material results of their labor, the hatter has had to give his own labor in some way. It is the aijiount of labor, then, that essentially — at the bottom — constitutes value, and determines purchas- ing power. The goods offered for exchange in barter do not match in kind nor correspond in value. What can be done ? Suppose the three were to hold a council or. the situation ; we can imagine that they woukl strike out something like this': The weaver might say, " My friends, here is this cloth of mine whicli you continually want fir yourselves and families. 4 AN ALPHABET IN FINANCE. Although you, Mr. Bootmaker, only require three yards to-day, you may want more next week ; you certainly will want more after a time. And not only do you use this cloth, but your neighbors use it and I doubt not you could trade off any surplus you might have, if at any time you wanted anything else. Why not, therefore, take even more than you at present require, rather than that your goods lie un- sold in the shop." The council reflect. The boot- maker has an idea. " Let us take cloth as our me- dium of exchange. A pair of boots is worth five yards of cloth, and a chair is worth a yard and a half of cloth — two chairs for three yards. We can easily reckon our goods in yards of cloth, and trad- ing them for this can trade the cloth again for meat, and bread and fuel." And they agree— and the community agrees. The weaver gives the chair- maker eighteen yards of cloth and receives his dozen chairs ; and the chairmaker cuts off five yards of cloth from his roll and hands them over to the bootmaker, who returns a pair of boots. » Now here we have a true MONEY. And we shall see that the primal qualities it possesses are necessary to all true money. Let us take a clear look at them, for, simple as they are, they are wonderfully misun- derstood — to the utter confounding of all thought on ORIGIN OF MONEY. 5 the subject. Cloth is the medium of exchange. Di- rect barter not being adequate to the complex de- mands €i civilized trade, the community have adopted the device of double barter. They have agreed upon one universally acceptable commodity which shall stand as a middle commodity in their exchanges. General goods are bartered for it and it is bartered for general goods. The commodity chosen for this middle office is one whose value is well known. The hatter knows that a yard of cloth is worth a certain fraction of a hat ; the baker that it is worth so many loaves of bread. It is thus qualified to be the common measure of value. And let it be marked with the utmost distinct- ness, that the establishment of a common measure of value is pre-requisite to the adoption of a common medium of exchange. The hatter, the baker and the weaver must know what the ratios of exchange among their wares are before they can exchange at all — that is, they must, even in direct barter, have some measure of value. The measure they have is — for each man his own goods. They find that this method of measuring is inconvenient. Every trader must work out complicated sums in proportion with every man he deals with. Now they seek a common medium of exchange. But this does not do away 6 AN ALPHABET IN FINANCE. . with the need of measuring. Hence, since the medium must express the values of things exchanged in some common terms, the common terms must be agreed upon — the common measure of value must be fixed. The comprehension of this truth at the start is a matter of the last importance. It reveals at once the absurdity of all those visionary systems of exchange in which the measure of value is ruled out, and supplies the reason for those disturbances of trade which follow the separation, even by a little, of the medium from the measure. These things will appear clearer as we proceed. The medium and common measure is chosen. The butcher and the baker no longer puzzle over the "rule of three," but simply refer the values of their wares to the common measure. They fix their prices ; that is, they measure off the value in the money, cloth, the tiutt of value-measurement being the value of a yard of cloth. And they are no longer troubled to find people who have the particular articles they wish for and at the same time happen to want what they themselves have to offer. They first barter or sell their own goods for money, and then barter or sell the money for the goods of others. It must be clearly noted that the money is, in each case, as much sold as the goods. One valuable thing is traded for an- ORIGIN OF MONEY. 7 Other valuable thing. And the mere fact of the trade does not make the man who gets the money a whit the richer. He has put a certain value into the goods by his labor, and now realizes upon that value — gets it in available shape. But money is wealth in no higher degree than the wheat that is given for it. It simply brings the trader nearer the commodi- ties which he desires to purchase with his wheat. It measures the amount of his purchasing power and may be directly bartered. Money stands prominent above other commodities, not because it is peculiarly wealth, but because it discharges peculiar functions. Now, without affirming before proof that our view is complete, we shall find it useful to draw from our illustration a definition : Money is a cotnuwdity ivhich, because of its gen- eral acceptability and coniuionly knoivn value, lias been selected by the couiinunity to be a measure of value and a ?nediuin of exchange. And, again without asking prejudgment, we may anticipate the proofs to be hereafter rendered, and cmphasi/.c the principle, already revealed in essence, that the measurement of values is the supremely important thing in trade, and that this is always performed by money — b\' the valuable com- modity established as money. Through all the com- 8 AN ALPHABET IN FINANCE. plications of bills, checks, notes, book-accounts, and even in direct barter, money is never dispensed with. It is only superceded in some of its offices. In every trade transaction, whether it is present in material form or not, it plays its part as the measure of value. CHAPTER II. THE CHOICE OF GOLD. N our last chapter we reached the point where it appeared that a commodity generally acceptable could become a true money — that is, a measure of value and a medium of exchange. Cloth was the commod- ity chosen in our illustration ; but the reader will readily understand that it might easily have been some other commodity. And many other things have been and are used as this instrument of trade. The ancients employed cattle, — whence, through pccus, a flock, our word pecuniary ; the Greeks at one time used copper nails ; the North American Indians and the early colonists adopted wampum, beaver skins, and other commodities; cowry shells arc used to-day in Africa, in India cakes of tea, in China pieces of silk; Abyssinia has a salt money, Iceland a codfish money ; and at the annual fair at Nizhni Novgorod, Russia, tea is the estab- lished measure of value. All these articles have lO A A'' ALPHABET IN FINANCE. constituted true money, and a little reflection will show that they have been able to become money because of certain qualities common to all. First and most essential among these is what may be termed a natural (as distinguished from legal) pur- chasing power, derived from the acceptability of the article for its utility or its desirableness as an orna- ment, and determined in amount by the amount of labor necessary to produce it. Let us get this entirely clear. Trade at the bottom is exchange of the fruits of labor. A baker puts his labor into a loaf of bread, and the materials he uses are bought by his labor; a shoemaker simi- larly puts his labor in a pair of shoes. Now, a com- parison of the amounts of labor in the loaf and the pair of shoes will determine the ratio of exchange between these two articles — that is, will give their values with respect to each other.* If it takes fifty times as much labor to produce a pair of shoes as it does to produce a loaf of bread, then the value of a pair of shoes, expressed in terms of bread, will be fifty loaves. Value is expressed as a ratio of exchange. And natural value, natural purchasing power, is * It is perhaps unnecessary to speak of the effects of quality of ■abor and of supply, in this connection. Quality is generally reduci- ble, in value, to quantity ; and supply, as in the fine arts, in some thing above ordinary trade. The general law remains the same. THE CHOICE OF GOLD. II determined by the ratio of labor. The necessity of a clear definition of " value " as respects trade will readily appear. The common air has a value that is beyond all price ; but it has no value at all in trade because every one can get it for nothing. Value in trade depends upon labor. To take up the thread again : The essential quality common to all these various kinds of money is a natural value, generally recognized by the com- munity. Other qualities are, a certain degree of uniformity in value, a certain degree of stability in value, a certain degree of portability. But evidently they do not all possess these important qualities in like measure. Even more, they are all very de- ficient or imperfect in every oe fall of paper, but which outstrips it, and leaves a margin for insurance against risk. Farmers suffer much, because wheat is really valued in the foreign ports whither much of it is exported ; that is, it is put on par with gold— which as we have seen, must remain cheaper than general goods. At the one end of tlie trade liiu-, the merchant receives high prices for what he sells, 96 AN ALPHABET IN FINANCh. and pays low prices for what he buys ; at the other end the farmer — the laborer — the man of wages — the man of salary — receives low prices and pays high prices. The conclusion is inevitable : the founda- tion producing classes are ground to powder, and the producers and exchangers higher up in the indus- trial structure come tumbling headlong. The cur- rent phrase is pregnant with truth : " The bottom has fallen out of everything." " But," it is objected, " these times when this ruin- ous process is supposed to have been going on were times of piping prosperity." Nothing could be more fallacious than this common saying. During these years of violent changes of the standard of value, many found themselves suddenly endowed with wealth for which they had given no adequate return. The treacherous measure had taken from others and given to these. Yet those who had lost were not- aware of it. Had they not so many " dollars ? " or goods whose " price " was so many " dollars?" And thus a merchant turned his capital over and over, getting less and less in real value, yet more and more in "price" and number of "dollars," until the crash came. Then prices "settled," and the merchant found he had not enough value to meet his obliga- tions. Had this been all — enough surely ! — in the INFLA TION. 97 period of " prosperity," a few cunning or lucky ones would now be richer, and the many foolish or unlucky ones poorer. But this was not all. The period of " prosperity " was really opened by the war. The destruction of the gigantic civil strife created a demand for enormous quantities of all kinds of manufactures, produce, and merchandise. Those whose business it was to furnish these supplies reaped great profits, and such of them as were shrewd enough to cut off their operations before the demand stopped, kept fast hold upon their riches. But very few were thus wise. The war induced many to build great factories, whose manufactures could not find sale in times of peace, — to cultivate 'lands at such cost, that the failure of the excessive consumption of the war inevitably brought loss. While the destruc- tion of wealth continued, things were " lively,'' all staples and all war supplies were in great demand, and the handling of these kept the " wheels of trade " running, for nobody was really paying for the things destroyed'; they were bought by the government with its bonds. They were to be paid for by future generations. And then came another cause of " pros- perity." The gold of the country was exported and goods received in return. These goods passed into the general material for consumption, while the loss of 98 AN ALPHABET IN FINANCE. the gold was not felt at the time, because of the sup- ply of paper currency. In a word, this period of " prosperity " was a period of extravagant consump- tion. A man who has a fortune of $100,000 may be very " rich " for a little while by consuming $50,000 a year. But when his capital is all gone, poverty strikes him. And yet again, the presence of a fluctuating and depreciated currency, in connection with these other causes, brought on the era of speculation. The con- tinual variation of the standard made all business compulsory gambling, to the end of driving conserva- tives out of trade, and of awaking the love of gam- bling latent in the breast of most Americans. The gambling spirit became rife through the States; peo- ple became impatient of the slow and sure road to competence, and feverishly sought means of acquiring wealth at a stroke. As illustrative of the many un- happy results we may consider the railroad mania. And just here let us step carefully. Wild-cat roads may be built under a perfectly sound currency. Capitalists may rush into all kinds of mad speculation although the currency is the best ever devised. As we have pointed out before, the mere tool of trade cannot become a directing power, and actually control the working of men's minds. INFLA TION. 99 The mischief is done by inconvertible paper, or rather by the lowering of the measure of value by inconvert- ible paper, through subtle temptations. An excess of " money " produces an impression of excess of wealth. High prices lead to a delusion of great prosperity. Over accumulation of notes- in banks, and the nomi- nal swelling of bank accounts, presents a temptation to lavish loaning — a temptation which soon may be- come irresistible by the confident clamors from one side for means to put into magnificent new enter- prises, and a careless readiness on the other in com- mitting those means to the banker's hands. The gambling spirit, the spirit of high speculation, and the delusion of wealth work together to entice and draw and push the country to destruction. The railroads arc begun, the great schemes of all kinds under- taken. Millions of capital are either flung away or arc planted where no return can be had for many years. While the delusion lasts and while the cap- ital holds out, there is a time of great " prosperity." Work is plenty, " money " circulates freely, iron furna- ces arc in full blast, perhaps new furnaces are built, farmers get good prices for their produce, stuffs for clothing are in great demand, new dwellings arc erected, real estate rises — everything is at the height of activity, and everybody is getting " rich " by jumps. lOO A.V ALPHABET /.V FINANCE. And since everybody is getting rich, everybody is justified in pouring money around like water. And this acrain makes more work, more consumption of products, more "prosperity." Finally the crash comes. The capital put into the railroad is exhausted and there are no dividends. It is found that there cannot be any dividends for years. But the loan- ers of the capital want it back. They demand it of the bank and the bank demands it of the railroad men. The railroad men point to their unfinished road, but are not able to sell the stock for means to pay the bank. The bank cannot pay its depositors, and breaks. And the breaking of the bank breaks a merchant, and down go a dozen houses like a row of bricks. Then the country comes out of the fog, and makes the wretched discovery that it has been living at a high rate, not on its surplus of resources, but on the capital needed to carry on its producing labors.— It had a fortune of $100,000. It has been " rich " for two years by spending $50,000 annually. Business comes to a standstill. Theorists of a cer- tain kind call for" more money" to start the wheels of trade. Other theorists are aggrieved at the loss of " confidence." Others advise that everybody fall to spending freely and cease their " cant of economy." INFL^iTION. • 10 1 But those who have suffered directly keep their capital, if they have any left, shut up as safely as possible, awaiting a solid renewal of genuine business, with a currency which can be rehed upon to give a true adjustment oi vaiues CHAPTER XVIII. PURE "CREDIT MONEY: E have thus far dealt with inconvertible notes simply as temporizing expedients, issued in time of distress to make a forced loan. And we have had to do with the pa- per-money notion in its partial manifestations only. But this notion has a- complete development; not, happily,' in the experience of this country, but in the mind*; x>f visi6rtaries, wjio are striving with unmistak- able zeal to put their extraordinary theories into act- ual practice. In spite of the bitter teachings of the last ten years, in contempt of the plain lessons of his- tory, in the face of simple logic and common sense, a school of wise-acres has arisen who declare not mere- ly that an inconvertible paper is harmless, but that it can be permanently maintained as an instrument of boundless prosperity. In its simplest form the theory starts with the proposition that money is " the creation of the government," and hence evolves the bald dogma, that the government can make a " dol- PURE CREDIT MONEY. I03 lar " out of a bit of tin, or a bit of iron, or a bit of paper, just as it can out of a bit of gold — simply by putting upon it the stamp of its supreme authority. We have already considered this delusion. By call- ing a piece of gold a "dollar" the government con- fers upon it no value whatever. The piece of money has purchasing power because of the valuable metal of which it is made. If the government declared that half the quantity of gold should be a " dollar," then the "dollar" would simply have half its present pur- chasing power. If a quantity of tin, worth, let us say, a quart of potatoes, were constituted a " dollar," then potatoes would be worth a " dollar " a quart. We should have a different scale of "prices." Gov- ernment does not create the value of money ; it sim- ply declares, or defines, the unit of value-measure- ment, in precisely the same way that it declares the standard " }-ard " and the standard " pound." If, therefore, it made a bit of paper a " dollar," tiie " dollar " would be worth precisely what a bit of pa- per is worth as paper stock- l)Ut certain of the paper philosophers have put the notion in a subtler form. This is their argu- ment: In the beginning was barter ; then came gold as a medium; and then came "credit," The high- er the civilization, the less the proportion of coin 104 AN ALPHABET IN FINANCE. used and the greater the proportion of " credit '' pa- per. Hence, in a supremely civilized State, coin will disappear altogether, and paper be the sole currency. This is the sober reasoning of Mr. Peter Cooper in his printed pamphlet on the subject. It forcibly re- minds one of the sage who discovered that by using a stove instead of an open fire-place he saved half his coal, and straightway determined to use two stoves and save the whole of it. Or it is as if one should say to his grocer, " My friend, when I moved into this neighborhood, I had to pay you cash down for every pound of butter and peck of potatoes I bought of you. But you soon came to know me and were willing occasionally to give me ' tick.' At the present stage of our intercourse, you have acquired entire confidence in my honesty and the extent of my resources, and are willing to sell me all I want on credit. Suppose now, in the interests of a higher civilization, we carry out this process of evolution and abolish the bothersome system of periodical settlements. Let us make the thing credit all the way through ! " The process of development which these reason- ers ingeniously trace has never even begun. As we have pointed out before, " credit" is no substance in itself, to be cut off by the yard, or handed round in chunks. You cannot pay a debt by presenting to PURE CREDIT MONEY. I05 the man you owe a pound of " credit," or a square inch of " credit," or a quart of " credit." You may defer payment by giving " credit " on your books, leavine him to collect the debt at some future day either in money or goods ; or you may defer it by giving a promissory note ; or again, you may transfer the obligation of payment to a bank by giving a bank-note or a check, or to some other person by means of a bill of exchange or other " credit " paper. Now, the book accounts, and the checks, bills of exchange, etc., arc far more largely balanced by counter accounts, checks and bills than settled by a payment of money. It may at first sight appear, therefore, that in the bulk of trade transactions money is dispensed with. But is it ? Not at all. When a merchant draws his check in return for a dozen pieces of cloth, does he write, " The People's Bank will pay to the order of Philanthropic Phitz- noodlc a dozen pieces of cloth, or the equivalent thereof in green cheese or other articles which the said Phitznoodle may elect? " No. He writes sim- ply, *' The People's Bank will pay to the order of Philanthropic Phitznoodle five hundred dollars." In other terms, the standard dollar is present in this transaction, performing its indispensable office of a measure of value. The check only discharges the I06 AN ALPHABET IiY FINANCE. function of a medium of exchange, and does not even do that in itself, but only through the value of the property controlled by the bank, it — the check — being a claim for a specific portion of that property. The trade, thus far, is the barter of a dozen pieces of silk, worth five hundred dollars, for an amount of the bank's resources worth five hundred dollars. The check has not bought anything, any more than the title deed to an acre of land buys in a trade. The acre of land itself exerts the purchasing power ; the title deed is only the legal evidence of owner- ship. The specific portion of the bank's resources buys the cloth ; the check only carries the title. Take away the acre of land, and the title-deed is worthless ; take away the banking property, and the check has no more value than a piece of waste paper. To sum up as to this phase of the paper money delusion: In the various forms of " credit " paper, there is no abandonment either of a basis of real value or of the monetary standard and unit of value. There must be a substantial valuable thing behind every check, note, bill and book-account used in effecting exchanges, and a unit of value-measure- ment must be furnished (of course by something possessing value to make measurement possible), in order that the commodities exchanefed can be measured one against the other. CHAPTER XIX. THE " CLOSED CIRCLE. HE pure "credit money" notion seems to take a subtler form still in the variation known as the " closed circle " — a variation sufficiently ingenious to capture so acute a thinker as the Rev, Thomas K. Beecher, as well as others of unquestioned ability in matters where they deign to study facts before evolving principles. This is the theory: A buys a hundred dollars' worth of goods from B ; B buys a hundred dollars' worth of goods from C ; and C " closes the circle " by buying a hundred dollars' worth of goods from A. Now the entire indebtedness of the three can be discharged by circulating a hundred dollars from any point all around the circle. But if A starts the cash going, he simply hands it with his right hand to B and receives it back again with his left IkuuI from C. Therefore, the work might have been done as well with a button or a bit of leather, or, better still, by a scra[) of paper with "One Hundred Dollars" inscribed thereon. I08 AN ALPHABET IN FINANCE. Now, say the theorists, let us extend this circle to embrace the whole country. Let the government issue these notes for its debts, let them pass from hand to hand in the work of exchanging goods, and let the circle be closed by their return to the govern- ment again for taxes and custom duties. This, to some, looks very fine ; but suppose we examine it. " A buys a hundred dollars' worth of goods from B." Why a hundred dollars' worth? How a hundred dollars' worth ? Of course this means that A buys goods which are equal in value to a hundred of those bits of gold we call " dollars," — or, in these days of suspended payment, equal in value to paper notes for which a hundred dollars' worth of gold is sometime expected, but which are at a discount /rom various causes. So again we strike gold performing its great office of a measure of value. This measurement of value cannot be made with a button, nor a bit of leather, nor a scrap of paper, having no value in itself and no definite value as a claim to anything else. '* How can you say," exclaims the paper-money man, "that these proposed notes have no definite value ! The govern- ment puts its stamp upon a piece of paper for ' One Dollar.' There you have your measure of value. A hundred dollars' worth of goods would be measured THE CLOSED CIRCLE. IO9 in value by a hundred of these dollar notes. This elucidation is actually made. But if the government puts its stamp upon a bit of paper — "One Pound," will the paper measure the weight of a quantity of sugar ? Or if it stamps a bit of leather " One Quart,'' can you find out with that how much water there is in the cistern ? To measure weight you must have weight — not something which " represents " weight, or is " based " on weight, or is " good for " weight, or is redeemable even in weight. To measure length you must have length ; to measure volume you must have volume ; to measure value you must have value. With redeemable notes you do not measure value with the notes, but with the gold in which the notes are payable. And not only m-jst you have actual weight, length, volume and value to make the vari- ous measurements, but you must have, evidently, definite amounts of each of these as units of measure- ment in the respective classes. So, we have the standard pound, the standard yard, the standard gallon — all determined with the utmost degree of scientific accuracy, and fixed by law ; and so, also, we have and must have, the standard " dollar," a cer- tain quantity of gold of a certain fineness ; namely, 25.8 grains of the metal, -^^ fine. And the value of the labor of digging this amount of gold and fashion- no AN ALPHABET IN FINANCE. ine it into a coin is the value we choose to call a " dollar." '• But," once more says the paper theorist, " the paper dollar is to be given value by being made re- deemable in taxes and customs, and the value will be definite and fixed because the dollar note will be re- ceived for exactly a dollar's worth of taxes or duties." This statement is also actually made. Now, what is a " dollar's worth " of taxes ? Is it the amount of value due the government, on prop- erty worth — but how shall we determine what the property itself is worth ? The unit of value is a cer- tain quantity of tax. And the quantity of tax is determined by the value of property as measured by this quantity of tax taken as a unit ! We trust this is clear so far. Furthermore, the rate of taxation is determined by the expenses of government, and therefore varies from year to year : — that is to say, the quantity of tax (which determines the unit of value) due to the government on property worth a certain number of times the unit (this number being fixed by the ratio of taxation) must be adjusted from year to year, the unit of value thus changing with it, and also the "value " of the property, upon the liability of which to taxation the unit of value is based. This should be very clear at this stage. And finally THE CLOSED CIRCLE. Ill but why pursue such extravagant but logical develop- ments to any further degree of nonsense ? We can not have a unit of value-measurement except by con- stituting a certain quantity of some valuable thing such unit. The United States has thus established its unit — 23.22 grains of pure gold, or 25.8 grains, -^^ fine. From the necessity of giving this unit some name, it was named a " Dollar." But we cannot make a bit of paper as valuable as 25.8 grains of gold by calling it also a " dollar," nor by giving it power to cancel a tax whose value can be determined by no mortal means. i CHAPTER XX. THE THREE-SIXTY-FIVE BOND SCHEME. HE unquestionably strong hold which the so-called " three-sixty-five bond scheme " has gained in the minds of many is a suffi- cient reason for a thorough consideration of it. It is usually stated as Peter Cooper states it : " The exchangeable value of anything depends upon its convertibility into something else that has value, at the option of the individual. This rule applies to paper money The currency must be con- vertible into something over which the government has entire control, and to which it can give a definite as well as permanent value. This is its own interest- bearing bonds. These are, in fact, a mortgage upon the embodied wealth of the country. . . . The degree of their value can be determined exactly by the amount of interest the government may think proper to fix. . . . This convertibility will always keep a check, both on the amount of currency and the amount of bonds. . . . But at no time will THE TIIREE-SIXTY-FIVE BOND SCHEME. II3 either the bonds or the currency be a mere drug upon the market, for they will be mutually convertible." It is sufficiently easy to reveal the utter absurdity of these propositions and the conclusions evolved from them. The only one that contains a grain of truth is the first, which, with a tautology ridiculously disguised, lays down the profound law that for a thing to have exchangeable value, it must be ex- changeable for a valuable thing. The rest contain nothing but sheer nonsense. The bonds are to be " a mortgage on the embodied wealth of the coun- try," — and yet give no one a claim to a penny's worth of that wealth. If the bond-holder wants interest, he gets it in bits of paper ; if he wants the whole sum named in the bond, he gets more bits of paper. If he still wants value for these bits of paper, he can exchange a number of them again for a " bond." In this merry-go-round there is not a pin's point of real value, but only the shadow of its nsmc and the figures of " dollars." To suppose that value can be given a piece of paper by making it exchange- able for another piece, and constituting that other piece a title to a certain number of other i)icces annually, is a most curious delusion. But supposing these interconvertible pieces of paper to have value, how would "the degree of their 114 ^^ ALPHABET IN FINANCE. value " be determined by the amount of interest? The amount of interest could determine nothing whatever but a certain proportional relation between their values. Can Mr. Cooper calculate the value of a house which yields a rental of 3.65 per cent on its market worth? How much is it — $500, $10,000, nothing? Again we strike that extraordinary and seemingly ineradicable blunder of mistaking a name for a thing. The problem is to fix and regulate the value of the " dollar." Mr. Cooper does it by giving the holder of a hundred " dollars " three and sixty- five hundredths " dollars " additional per annum. To use a figure : Let the name of the unit of value be changed, that we may rid our minds of the preposses- sions of the word and study the real thing. Let the people of the Moon agree to call their unit of value a " phantom." Now a hundred " phantoms " may be converted into a bond, bearing an interest of three and sixty-five hundredths " phantoms " annually. Have they fixed or regulated the value of the " phantom ? " What is a "phantom" worth? This discussion, when we interject simple illustratigns, begins to look puerile, does it not? Yet we have such conscien- tious men as Peter Cooper, such " statesmen " as Kelley, Baird, and Cary, and a host of others gravely propounding these ideas which we are analyzing, and THE THREE-SIXTY-FIVE BOND SCHEME. II5 obtaining a hearing, too, in very respectable quarters. The Germans have a comical adage about the absurdity of slaying lice with a club. Yet the pro- cess seems sometimes necessary. The advocates of the bond scheme unconsciously " fix " their " dollar " before they apply their marvellous scheme for fixing it. They call the bond a hundred "dollar" bond, and their note a "dollar " note, and now, say they, it is evident that this bond is actually worth a hundred " dollars," because you can get a hun- dred of these " dollar " notes for it. And it is equally evident that this note is worth one " dol- lar" because if you take a hundred of them you can buy a hundred " dollar " bond. They " fix " the breadth of the barn by telling the builder to make it three times the breadth of the barn door, and " regu- late " the breadth of the barn door by ordering it one-third the breadth of the barn. Furthermore, there is no regulating power in interest even if it is paid in a thing of fixed value. The value of the " dollar " is to be fixed by the value of the bond ; and the value of the bond fixed by the value of its interest ; and the value of its interest is the value of three " dollars " and sixty- five "cents." Let us make the absurd supposition (the actual supposition of the theorists) that the Il6 AN ALPHABET IN FINANCE. value of the " dollar " in which the interest is paid is already fixed. Will a fixed rate of interest, even in these fixed " dollars," fix the value of the bond ? Evidently not, because general interest is varying continually. Suppose that the bonds of the Lunar Railroad pay a steady interest of double 3.65. This being a good rate, these bonds would be always salable — that is, would practically be as convertible into greenbacks as the government bonds. And hence, a hundred-dollar government bond would be worth in the m.arket only half as much as a hundred- dollar Lunar Railroad bond. As general interest goes up or down, the value of securities with fixed interest must go down or up. This is the case with the English " consol," from which probably the 3.65 idea was derived. With its interest fixed at three per cent, and backed by the " embodied wealth of the whole country," the consol changes in price from day to day. Thus, the more rigidly we analyze, the more utterly, hopelessly absurd the 3.65 bond scheme appears. Expunging the complexities of the theo- rists' explanations, their dollar is the value of a hun- dredth part of a title to three dollars and sixty-five cents a year. Can any one of them make any sense of the definition ? CHAPTER XXI. THE BOXD SCHEME AT ITS BEST. N our last chapter, we saw how utterly absurd the three-sixty-five bond scheme is as it is presented by its chief advocates. It ought, however, to be noticed that this formal presentation is neither accurate nor true, and is never adhered to in the face of debate. The louse skips under the club, and when you have annihilated one of his abiding places, he has secured another which is at least just as good. Now, it is a real mis- fortune that the precise nature of the bond idea is not generally understood either among hard-money or soft-money believers. The failure on the one side to analyze it, and the inability on the other to pre- sent its points clearly and in order, has thrown a dense cloud over this field of the conflict, so that while the combatants strike lustily, each declares that he feels no blows, and the mere spectator can only guess at the results of the battle. The assertion may seem remarkable, that the paper advocates arc not Il8 AN ALPHABET IN FINANCE. able to present their own theories ; but a discussion with them, or a study of their pamphlets will amply illustrate the fact. The lack of logic which makes it possible to hold the paper-money theory, prevents at the same time the systematic formulation of it. The matter becomes less extraordinary, when we consider that the systematic formulation of such a theory is its refutation. Gathering up the fragmentary ideas which the paper theorists scatter through their writings, we shall find that the 3.65 bond scheme is really a varia- tion on the " closed circle " plan. The bonds are simply intended to regulate the volume of the cur- rency, and not — at least not primarily — to give value to the notes. They are designed simply to furnish an outlet of investment for excess, and a reservoir of currency to meet increasing demands. They are the patent attachment for securing " elasticity." In de- fault of any clear and straightforward statement by an advocate of the scheme, let us make one ourselves of as strong and plausible a kind as possible. We may do it thus : I. The government receives service from indi- viduals and renders service to the whole community. It pays and is paid. And the sum it pays out is exactly equal to the sum it receives. Let this flow THE BOND SCHEME AT ITS BEST. II9 and reflow from the Treasury, therefore, take place with paper. Let the government issue its notes for its debts, and redeem those notes by accepting them in satisfaction of its credits — for taxes, etc. That which will extinguish a debt — as a debt of taxes, cus- toms, duties — has a natural value. 2. But notes redeemable only by acceptance on counter claims might be issued faster than they could be returned. Or again, notes issued only for goods and service rendered the government might not be sent out fast enough. Hence the danger on one side of an excess and consequent depreciation, and on the other of a scarcity and a constriction of busi- ness. To avoid both dangers, to enable the volume of the currency to expand and contract according to the varying demands of trade, let the notes be con- vertible, at the option of the holder, into bonds bear- ing a daily interest of one cent on a hundred dollars, and let the bonds be convertible, at option, into notes. Any excess of notes will then be immediately corrected by the investment of the surplus, over ordinary business requirements, in government bonds — practically put out at 3.65 interest in call loans. Any scarcity will at once be met by a reconversion of bonds into greenbacks. 3. Back of both the bonds and the greenbacks 120 AN ALPHABET IN FINANCE. stands the credit of the government, based on the embodied wealth of the whole country. Nor is this security a delusive one because the government does not propose to make over that wealth in bulk to the holders of bonds or notes. The significance of the assurance is that the government will always have power to draw taxes, customs and duties from that wealth, and thus redeem its notes and pay the in- terest on its bonds. This, we think, is as strong a statement of the bond scheme as it is possible to make. It would be easy of course to make it less vulnerable to passing criticism by involving it with illusory complexities. But as a plain, straight-forward presentation of the plan, we think our formulation fairly embraces all points of strength or plausibility. Even should a paper-money believer deny this, he cannot deny that it brings out clearly the chief features of the bond idea. Yet the careful reader of these pages will have no difficulty in detecting a weakness in the scheme which reduces the whole structure to cloud and smoke. Where is the measure of value and the standard of value? The notes are to have value because they will pay taxes. A " dollar " note is to be worth a '"' dollar " because it will be received for a THE BOND SCHEME AT ITS BEST. 121 " dollar's " worth of taxes. How much is a " dol- lar's " worth of taxes ? How can you measure off any definite quantity or value in taxes, customs or duties? We could measure off a yard of cloth, and call that a " dollar." This would give us a measure and standard of value, although as a standard it would be very variable. We could measure a bushel of wheat, or a peck of potatoes, or a gallon of milk, or a pound of butter, and constitute any of these the unit of value-measurement, calling it — if we liked the name — a " dollar." But how can we measure off taxes ? — by the pound, by the foot, by the quart ? — is there any possible way of measuring them ? Evidently the only way to measure taxes is by a measure of value. A. tax is imposed as a certain per ccntagc of the value of the property. You have got to have your unit of value-measurement, your " dol- lar " or whatever it may be, before you can measure taxes at all. It is as sheer nonsense to talk of using taxes as a measure of value as it would be to say we will establish a unit of value by per ccntagc — let us call five per cent a dollar. Five percent of what? The only way to obtain a measure of value is to take some valuable thing which can be measured, and agree that a certain quantity of it shall be the unit of value. The United States has taken gold, and 122 AiV ALPHABET IN FINANCE. declared its unit of value-measurement to be 25,8 grains, -^^ fine. It calls this quantity of gold a " dollar" — it might have called it an " eagle," or a " dime " if it so chose. And for convenience and the security of the people, it puts this quantity of gold and multiples of it in the form of coins, stamped with the government certificate of value. CHAPTER XXII. FRACTIONAL CURRENCY. HE ill-advised measure of "silver substitu- tion," that is, the substitution of silver " change " for the paper fractional notes, has been so unfortunately confounded with the specie resumption question, that a few words respect- ing it are necessary. The first principle of subsidiary coinage is simple enough. Gold is too valuable a metal to express conveniently the small values of minor exchanges ; a "cent " in gold would weigh about a quarter of a grain. Therefore, cheaper metals, metals having more bulk in proportion to their value, are used, as silver, nickel, copper. But the matter becomes a little more complex when it is understood that, usually, subsidiary or fractional coins are made of less metallic than nom- inal value. They are merely tokens, and without promise of redemption in standard coin. They arc the same in character as inconvertible paper notes, 124 AN ALPHABET IN FINANCE. and the fact that they are nevertheless able to cir- culate without depreciation from their face valuation is thought to give support to the paper-money idea. The reader will have no difficulty in perceiving the error. We have seen that a certain small amount of inconvertible notes, ultimately secured, might circulate without depreciation. So long as the standard money is not displaced, but is suf- fered to remain in the trade channels in sufficient quantity to maintain the standard of value and perform its functions as a regulator of the volume of the currency, then the legal tender paper is up- held by it. But this limitation of quantity is secured with regard to fractional coins by three provisions, (i) By direct restriction at the mint. Our mints will not coin silver upon individual order as they will gold. The mint buys the silver and issues the coin only on government account. (2) By a seigniorage, or charge for coining. The present " half-dollar " contains about thirty-seven cents worth of silver, at the present value of the metal.* But thirty-seven cents will not buy a half-dollar coin at the mint. Every man who wants such a coin must pay for it at its face value. With standard coins, the mint is only paid the proper weight of gold, 25.8 grains to the dollar. The precise bearing of this oh our depreciated paper should * July 1S7O. FRACTIONAL CURRENCY. 1 25 be noticed. The original receivers of this paper paid in real value — in the value of the goods they sold — very much less than a standard dollar, twenty per cent, forty per cent, sixty per cent less. (3) By cutting off the legal tender quality. Fractional coins are lawful money, but only to the amount of five dollars. They can only be used for small "change." — These three restrictive measures are found ample to keep the sub- sidiary coins within safe limits and maintain them cur- rent at standard values in the ordinary course of trade. They remain convertible to all intents and purposes, by the joint operation of law, custom and limitation. But why all this machinery ? why not make sub- sidiary coins of exactly proportional value to the principal coins? Simply because that would put on us the expense of coining a fresh lot of change every time a slight rise in the value of silver made it profit- able to export our halves and quarters and dimes. This is what happened in the year following 1848. Fractional coins were then of full value. The slight fall of gold sent them rushing from the country, and ferry tickets, 'bus tickets, eating-house cards and the like were made to serve in their stead. In 1853, the fractional coins were placed on the basis of 384 grains to the dollar instead of 412J, and they were deprived of their unlimited legal tender quality. CHAPTER XXIII. FOREIGN EXCHANGE. HE matter of foreign exchange has been made a deep mystery to the general pub- lic — and even in Wall street it is possible to seek information without getting much light on anything but the technical and " practical " features. In itself it is a very simple affair, and since its abstrusities have been woven into many of the theories about specie resumption, with the result (if not the design) of convincing the uninitiated that for him to have an opinion is a bit of ludicrous pre- sumption, it becomes important to subject these abstrusities to a common sense analysis. "Exchange" is a process of settling accounts between parties separated by long distances, or by national boundaries. The latter kind of exchange is what we have now to do with, although there is in principle no difference between " Inland " and " Foreign Exchange." In its primal form, foreign exchange may be called a method of setthng by FOREIGN EXCHANGE. 12/ pairing off. Thus : American A owes Englishman B $i,ooo, and Englishman C owes American D $ 1,000. Evidently these four can square their reckoning by pairing. Let American A pay Amer- ican D, and Englishman C pay Englishman B, and the whole affair will be adjusted. Exactly this is accomplished by a " Bill of Exchange." The Amer- ican creditor, D, puts his claim in the form of an order, directing his English debtor to pay the money to B, the English creditor of the American A. A, the American debtor, buys this bill of exchange (thus paying D his money) and forwards the docu- ment to his English creditor, who collects his money from C. Here is the essence of the bill of exchange. But in commercial usage, by far the greater number of bills arise in a practically different manner. Thus, a merchant sends cotton to England : he does not wait for the English merchant to buy a bill of ex- change and send it to him ; but draws a bill himself agajjist his English debtor or consignee, on the secu- rity of the cotton, and !