In order that the alternate movements of silver and gold to the
mint for coinage may be seen, there is appended a statement of the
coinage(239) during the above periods, which well shows the
effects of Gresham’s law.
Ratio in the mint and in Period. Gold coinage. Silver dollars
the market. coined.
1:15 (silver lower in 1792-1834 $11,825,890 $36,275,077
market)
1:15.98 (gold lower in 1834-1853 224,965,730 42,936,294
market)
1:15.98 (gold lower in 1853-1873 544,864,921 5,538,948
market)
Single gold standard. 1873-1878 166,253,816 ........
1:15.98 (silver lower, 1878-1883 354,019,865 147,255,899
but no free coinage)
From this it will be seen that there has been an enforced coinage
by the Treasury, of almost twice as many silver dollars since 1878
as were coined in all the history of the mint before, since the
establishment of the Government.
It may, perhaps, be asked why the silver dollar of 412-½ grains,
being worth intrinsically only from 86 to 89 cents, does not
depreciate to that value. The Government buys the silver, owns the
coin, and holds all that it can not induce the public to receive
voluntarily; so that but a part of the total coinage is out of the
Treasury. And most of the coins issued are returned for deposit
and silver certificates received in return. There being no free
coinage, and no greater amount in circulation than satisfies the
demand for change, instead of small bills, the dollar-pieces will
circulate at their full value, on the principle of subsidiary
coin, even though overvalued. And the silver certificates
practically go through a process of constant redemption by being
received for customs dues equally with gold. When they become too
great in quantity to be needed for such purposes, then we may look
for the depreciation with good reason.(240)
There are, then, the following kinds of legal tender in the United
States in 1884: (1) Gold coins (if not below tolerance); (2) the
silver dollar of 412-½ grains; (3) United States notes (except for
customs and interest on the public debt); (4) subsidiary silver
coinage, to the amount of five dollars; and (5) minor coins, to
the amount of twenty-five cents.
The question of a double standard has provoked no little vehement
discussion and has called forth a considerable literature since
the fall of silver in 1876. A body of opinion exists, best
represented in this country by F. A. Walker and S. D. Horton, that
the relative values of gold and silver may be kept unchanged, in
spite of all natural causes, by the force of law, which, provided
that enough countries join in the plan, shall fix the ratio of
exchange in the coinage for all great commercial countries, and by
this means keep the coinage ratio equivalent to the bullion ratio.
The difficulty with this scheme, even if it were wholly
sufficient, has thus far been in the obstacles to international
agreement. After several international monetary conferences, in
1867, 1878, and 1881, the project seems now to have been
practically abandoned by all except the most sanguine. (For a
fuller list of authorities on bimetallism, see Appendix I.)
Chapter VIII. Of Credit, As A Substitute For Money.
§ 1. Credit not a creation but a Transfer of the means of Production.
Credit has a great, but not, as many people seem to suppose, a magical
power; it can not make something out of nothing. How often is an extension
of credit talked of as equivalent to a creation of capital, or as if
credit actually were capital! It seems strange that there should be any
need to point out that, credit being only permission to use the capital of
another person, the means of production can not be increased by it, but
only transferred. If the borrower’s means of production and of employing
labor are increased by the credit given him, the lender’s are as much
diminished. The same sum can not be used as capital both by the owner and
also by the person to whom it is lent; it can not supply its entire value
in wages, tools, and materials, to two sets of laborers at once. It is
true that the capital which A has borrowed from B, and makes use of in his
business, still forms a part of the wealth of B for other purposes; he can
enter into arrangements in reliance on it, and can borrow, when needful,
an equivalent sum on the security of it; so that to a superficial eye it
might seem as if both B and A had the use of it at once. But the smallest
consideration will show that, when B has parted with his capital to A, the
use of it as capital rests with A alone, and that B has no other service
from it than in so far as his ultimate claim upon it serves him to obtain
the use of another capital from a third person, C.
§ 2. In what manner it assists Production.
But, though credit is never anything more than a transfer of capital from
hand to hand, it is generally, and naturally, a transfer to hands more
competent to employ the capital efficiently in production. If there were
no such thing as credit, or if, from general insecurity and want of
confidence, it were scantily practiced, many persons who possess more or
less of capital, but who from their occupations, or for want of the
necessary skill and knowledge, can not personally superintend its
employment, would derive no benefit from it: their funds would either lie
idle, or would be, perhaps, wasted and annihilated in unskillful attempts
to make them yield a profit. All this capital is now lent at interest, and
made available for production. Capital thus circumstanced forms a large
portion of the productive resources of any commercial country, and is
naturally attracted to those producers or traders who, being in the
greatest business, have the means of employing it to most advantage,
because such are both the most desirous to obtain it and able to give the
best security. Although, therefore, the productive funds of the country
are not increased by credit, they are called into a more complete state of
productive activity. As the confidence on which credit is grounded extends
itself, means are developed by which even the smallest portions of
capital, the sums which each person keeps by him to meet contingencies,
are made available for productive uses. The principal instruments for this
purpose are banks of deposit. Where these do not exist, a prudent person
must keep a sufficient sum unemployed in his own possession to meet every
demand which he has even a slight reason for thinking himself liable to.
When the practice, however, has grown up of keeping this reserve not in
his own custody, but with a banker, many small sums, previously lying
idle, become aggregated in the banker’s hands; and the banker, being
taught by experience what proportion of the amount is likely to be wanted
in a given time, and knowing that, if one depositor happens to require
more than the average, another will require less, is able to lend the
remainder, that is, the far greater part, to producers and dealers:
thereby adding the amount, not indeed to the capital in existence, but to
that in employment, and making a corresponding addition to the aggregate
production of the community.
While credit is thus indispensable for rendering the whole capital of the
country productive, it is also a means by which the industrial talent of
the country is turned to better account for purposes of production. Many a
person who has either no capital of his own, or very little, but who has
qualifications for business which are known and appreciated by some
possessors of capital, is enabled to obtain either advances in money, or,
more frequently, goods on credit, by which his industrial capacities are
made instrumental to the increase of the public wealth.
Such are, in the most general point of view, the uses of credit to the
productive resources of the world. But these considerations only apply to
the credit given to the industrious classes—to producers and dealers.
Credit given by dealers to unproductive consumers is never an addition,
but always a detriment, to the sources of public wealth. It makes over in
temporary use, not the capital of the unproductive classes to the
productive, but that of the productive to the unproductive.
§ 3. Function of Credit in economizing the use of Money.
But a more intricate portion of the theory of Credit is its influence on
prices; the chief cause of most of the mercantile phenomena which perplex
observers. In a state of commerce in which much credit is habitually
given, _general prices at any moment depend much more upon the state of
credit than upon the quantity of money_. For credit, though it is not
productive power, is purchasing power; and a person who, having credit,
avails himself of it in the purchase of goods, creates just as much demand
for the goods, and tends quite as much to raise their price, as if he made
an equal amount of purchases with ready money.
The credit which we are now called upon to consider, as a distinct
purchasing power, independent of money, is of course not credit in its
simplest form, that of money lent by one person to another, and paid
directly into his hands; for, when the borrower expends this in purchases,
he makes the purchases with money, not credit, and exerts no purchasing
power over and above that conferred by the money. The forms of credit
which create purchasing power are those in which no money passes at the
time, and very often none passes at all, the transaction being included
with a mass of other transactions in an account, and nothing paid but a
balance. This takes place in a variety of ways, which we shall proceed to
examine, beginning, as is our custom, with the simplest.
First: Suppose A and B to be two dealers, who have transactions with each
other both as buyers and as sellers. A buys from B on credit. B does the
like with respect to A. At the end of the year, the sum of A’s debts to B
is set against the sum of B’s debts to A, and it is ascertained to which
side a balance is due. This balance, which may be less than the amount of
many of the transactions singly, and is necessarily less than the sum of
the transactions, is all that is paid in money; and perhaps even this is
not paid, but carried over in an account current to the next year. A
single payment of a hundred pounds may in this manner suffice to liquidate
a long series of transactions, some of them to the value of thousands.
But, secondly: The debts of A to B may be paid without the intervention of
money, even though there be no reciprocal debts of B to A. A may satisfy B
by making over to him a debt due to himself from a third person, C. This
is conveniently done by means of a written instrument, called a bill of
exchange, which is, in fact, a transferable order by a creditor upon his
debtor, and when _accepted_ by the debtor, that is, authenticated by his
signature, becomes an acknowledgment of debt.
§ 4. Bills of Exchange.
Bills of exchange were first introduced to save the expense and risk of
transporting the precious metals from place to place.
The trade between New York and Liverpool affords a constant illustration
of the uses of a bill of exchange. Suppose that A in New York ships a
cargo of wheat, worth $100,000, or ￡20,000, to B in Liverpool; also
suppose that C in Liverpool (independently of the negotiations of A and B)
ships, about the same time, a cargo of steel rails to D in New York, also
worth ￡20,000. Without the use of bills of exchange, B would have been
obliged to send ￡20,000 in gold across the Atlantic, and so would D, at
the risk of loss to both. By the device of bills of exchange the goods are
really bartered against each other, and all transmission of money saved.
[Illustration.]
A has money due to him in Liverpool, and he sells his claim to this money
to any one who wants to make a payment in Liverpool. Going to his banker
(the middle-man between exporters and importers and the one who deals in
such bills) he finds there D, inquiring for some one who has a claim to
money in Liverpool, since D owes C in Liverpool for his cargo of steel
rails. A makes out a paper title to the ￡20,000 which B owes him (i.e., a
bill of exchange) and by selling it to D gets immediately his ￡20,000
there in New York. The form in which this is done is as follows:
NEW YORK, _January 1, 1884_.
At sight [or sixty days after date] of this first bill of exchange
(second and third unpaid), pay to the order of D [the importer of
steel rails] ￡20,000, value received, and charge the same to the
account of
[Signed] A [exporter of wheat].
To B [buyer of wheat],
Liverpool, Eng.
D has now paid $100,000, or ￡20,000, to A for a title to money across the
Atlantic in Liverpool, and with this title he can pay his debt to C for
the rails. D indorses the bill of exchange, as follows:
Pay to the order of C [the seller of steel rails], Liverpool,
value in account. D [importer of steel rails].
To B [the buyer of wheat].
By this means D transfers his title to the ￡20,000 to C, sends the bill
across by mail (“first” in one steamer, “second” in another, to insure
certain transmission) to C, who then calls upon B to pay him the ￡20,000
instead of B sending it across the Atlantic to A; and all four persons
have made their payments the more safely by the use of this convenient
device. This is the simplest form of the transaction, and it does not
change the principle on which it is based, when, as is the case, a banker
buys the bills of A, and sells the bills to D—since A typifies all
exporters and D all importers.
Bills of exchange having been found convenient as means of paying debts at
distant places without the expense of transporting the precious metals,
their use was afterward greatly extended from another motive. It is usual
in every trade to give a certain length of credit for goods bought: three
months, six months, a year, even two years, according to the convenience
or custom of the particular trade. A dealer who has sold goods, for which
he is to be paid in six months, but who desires to receive payment sooner,
draws a bill on his debtor payable in six months, and gets the bill
discounted by a banker or other money-lender, that is, transfers the bill
to him, receiving the amount, minus interest for the time it has still to
run. It has become one of the chief functions of bills of exchange to
serve as a means by which a debt due from one person can thus be made
available for obtaining credit from another.
Bills of exchange are drawn between the various cities of the
United States. In the West, the factor who is purchasing grain or
wool for a New York firm draws on his New York correspondents, and
this bill (usually certified to by the bill of lading) is
presented for discount at the Western banks; and, if there are
many bills, funds are possibly sent westward to meet these
demands. But the purchases of the West in New York will serve,
even if a little later in time, somewhat to offset this drain; and
the funds will again move eastward, as goods move westward,
practically bartered against each other by the use of bills. There
is, however, less movement of funds of late, now that Western
cities have accumulated more capital of their own.
The notes given in consequence of a real sale of goods can not be
considered as on that account _certainly_ representing any actual
property. Suppose that A sells ￡100 worth of goods to B at six months’
credit, and takes a bill at six months for it; and that B, within a month
after, sells the same goods, at a like credit, to C, taking a like bill;
and again, that C, after another month, sells them to D, taking a like
bill, and so on. There may then, at the end of six months, be six bills of
￡100 each existing at the same time, and every one of these may possibly
have been discounted. Of all these bills, then, only one represents any
actual property.
The extent of a man’s actual sales forms some limit to the amount of his
real notes; and, as it is highly desirable in commerce that credit should
be dealt out to all persons in some sort of regular and due proportion,
the measure of a man’s actual sales, certified by the appearance of his
bills drawn in virtue of those sales, is some rule in the case, though a
very imperfect one in many respects. When a bill drawn upon one person is
paid to another (or even to the same person) in discharge of a debt or a
pecuniary claim, it does something for which, if the bill did not exist,
money would be required: it performs the functions of currency. This is a
use to which bills of exchange are often applied.
Many bills, both domestic and foreign, are at last presented for payment
quite covered with indorsements, each of which represents either a fresh
discounting, or a pecuniary transaction in which the bill has performed
the functions of money.
§ 5. Promissory Notes.
A third form in which credit is employed as a substitute for currency is
that of promissory notes.
The difference between a bill of exchange and a promissory note
is, that the former is an order for the payment of money, while
the latter is a promise to pay money. In a note the promissor is
primarily liable; in a bill the drawer becomes liable only after
an ineffectual resort to the drawee.
In the United States a Western merchant who buys $1,000 worth of
cotton goods, for instance, of a Boston commission-house on
credit, customarily gives his note for the amount, and this note
is put upon the market, or presented at a bank for discount. This
plan, however, puts all risk upon the one who discounted the note.
In the United States such promissory notes are the forms of credit
most used between merchants and buyers. The custom, however, is
quite different in England and Germany (and generally, it is
stated, on the Continent), where bills of exchange are employed in
cases where we use a promissory note. A house in London sells
$1,000 worth of cotton goods to A, in Carlisle, on a credit of
sixty days, draws a bill of exchange on A, which is a demand upon
A to pay in a given time (e.g., sixty days), and if “accepted” by
him is a legal obligation. The London house takes this bill
(perhaps adding its own firm name as indorsers to the paper), and
presents it for discount at a London bank. This now explains why
it is that, when a particular industry is prosperous and many
goods are sold, there is more “paper” offered for discount at the
banks (cf. p. 222), and why capital flows readily in that
direction.
It is chiefly in the latter form [promissory notes] that it has become, in
commercial countries, an express occupation to issue such substitutes for
money. Dealers in money wish to lend, not their capital merely, but their
credit, and not only such portion of their credit as consists of funds
actually deposited with them, but their power of obtaining credit from the
public generally, so far as they think they can safely employ it. This is
done in a very convenient manner by lending their own promissory notes
payable to bearer on demand—the borrower being willing to accept these as
so much money, because the credit of the lender makes other people
willingly receive them on the same footing, in purchases or other
payments. These notes, therefore, perform all the functions of currency,
and render an equivalent amount of money, which was previously in
circulation, unnecessary. As, however, being payable on demand, they may
be at any time returned on the issuer, and money demanded for them, he
must, on pain of bankruptcy, keep by him as much money as will enable him
to meet any claims of that sort which can be expected to occur within the
time necessary for providing himself with more; and prudence also requires
that he should not attempt to issue notes beyond the amount which
experience shows can remain in circulation without being presented for
payment.
The convenience of this mode of (as it were) coining credit having once
been discovered, governments have availed themselves of the same
expedient, and have issued their own promissory notes in payment of their
expenses; a resource the more useful, because it is the only mode in which
they are able to borrow money without paying interest.
§ 6. Deposits and Checks.
A fourth mode of making credit answer the purposes of money, by which,
when carried far enough, money may be very completely superseded, consists
in making payments by checks. The custom of keeping the spare cash
reserved for immediate use, or against contingent demands, in the hands of
a banker, and making all payments, except small ones, by orders on
bankers, is in this country spreading to a continually larger portion of
the public. If the person making the payment and the person receiving it
keep their money with the same banker, the payment takes place without any
intervention of money, by the mere transfer of its amount in the banker’s
books from the credit of the payer to that of the receiver. If all persons
in [New York] kept their cash at the same banker’s, and made all their
payments by means of checks, no money would be required or used for any
transactions beginning and terminating in [New York]. This ideal limit is
almost attained, in fact, so far as regards transactions between
[wholesale] dealers. It is chiefly in the retail transactions between
dealers and consumers, and in the payment of wages, that money or
bank-notes now pass, and then only when the amounts are small. As for the
merchants and larger dealers, they habitually make all payments in the
course of their business by checks. They do not, however, all deal with
the same banker, and, when A gives a check to B, B usually pays it not
into the same but into some other bank. But the convenience of business
has given birth to an arrangement which makes all the banking-houses of
[a] city, for certain purposes, virtually one establishment. A banker does
not send the checks which are paid into his banking-house to the banks on
which they are drawn, and demand money for them. There is a building
called the Clearing-House, to which every [member of the association]
sends, each afternoon, all the checks on other bankers which he has
received during the day, and they are there exchanged for the checks on
him which have come into the hands of other bankers, the balances only
being paid in money; or even these not in money, but in checks.
A clearing-house is simply a circular railing containing as many
openings as there are banks in the association; a clerk from each
bank presents, in the form of a bundle of checks, at his opening,
all the claims of his bank against all others, and notes the total
amount; a clerk inside takes the checks, distributes each check to
the clerk of the bank against whom it is drawn, and all that are
left at his opening constitute the total demands of all the other
banks against itself; and this sum total is set off against the
given bank’s demands upon the others. The difference, for or
against the bank, as the case may be, may then be settled by a
check.(241)
The total amount of exchanges made through the New York
Clearing-House in 1883 was $40,293,165,258 (or about twenty-five
times the total of our national debt in that year), and the
balances paid in money were only 3.9 per cent of the
exchanges.(242) For valuable explanations on this subject, consult
Jevons, “Money and the Mechanism of Exchange,” Chapters XIX-XXIII.
The explanation of the functions of a bank, Chapter XX, is very
good.
Chapter IX. Influence Of Credit On Prices.
§ 1. What acts on prices is Credit, in whatever shape given.
Having now formed a general idea of the modes in which credit is made
available as a substitute for money, we have to consider in what manner
the use of these substitutes affects the value of money, or, what is
equivalent, the prices of commodities. It is hardly necessary to say that
the permanent value of money—the natural and average prices of
commodities—are not in question here. These are determined by the cost of
producing or of obtaining the precious metals. An ounce of gold or silver
will in the long run exchange for as much of every other commodity as can
be produced or imported at the same cost with itself. And an order, or
note of hand, or bill payable at sight, for an ounce of gold, while the
credit of the giver is unimpaired, is worth neither more nor less than the
gold itself.
It is not, however, with ultimate or average, but with immediate and
temporary prices that we are now concerned. These, as we have seen, may
deviate very widely from the standard of cost of production. Among other
causes of fluctuation, one we have found to be the quantity of money in
circulation. Other things being the same, an increase of the money in
circulation raises prices; a diminution lowers them. If more money is
thrown into circulation than the quantity which can circulate at a value
conformable to its cost of production, the value of money, so long as the
excess lasts, will remain below the standard of cost of production, and
general prices will be sustained above the natural rate.
But we have now found that there are other things, such as bank-notes,
bills of exchange, and checks, which circulate as money, and perform all
the functions of it, and the question arises, Do these various substitutes
operate on prices in the same manner as money itself? I apprehend that
bank-notes, bills, or checks, as such, do not act on prices at all. What
does act on prices is Credit, in whatever shape given, and whether it
gives rise to any transferable instruments capable of passing into
circulation or not.
§ 2. Credit a purchasing Power, similar to Money.
Money acts upon prices in no other way than by being tendered in exchange
for commodities. The demand which influences the prices of commodities
consists of the money offered for them. Money not in circulation has no
effect on prices.
In the case, however, of payment by checks, the purchases are, at any
rate, made, though not with the money in the buyer’s possession, yet with
money to which he has a right. But he may make purchases with money which
he only expects to have, or even only pretends to expect. He may obtain
goods in return for his acceptances payable at a future time, or on his
note of hand, or on a simple book-credit—that is, on a mere promise to
pay. All these purchases have exactly the same effect on price as if they
were made with ready money. The amount of purchasing power which a person
can exercise is composed of all the money in his possession or due to him,
and of all his credit. For exercising the whole of this power he finds a
sufficient motive only under peculiar circumstances, but he always
possesses it; and the portion of it which he at any time does exercise is
the measure of the effect which he produces on price.
Suppose that, in the expectation that some commodity will rise in price,
he determines not only to invest in it all his ready money, but to take up
on credit, from the producers or importers, as much of it as their opinion
of his resources will enable him to obtain. Every one must see that by
thus acting he produces a greater effect on price than if he limited his
purchases to the money he has actually in hand. He creates a demand for
the article to the full amount of his money and credit taken together, and
raises the price proportionally to both. And this effect is produced,
though none of the written instruments called substitutes for currency may
be called into existence; though the transaction may give rise to no bill
of exchange, nor to the issue of a single bank-note. The buyer, instead of
taking a mere book-credit, might have given a bill for the amount, or
might have paid for the goods with bank-notes borrowed for that purpose
from a banker, thus making the purchase not on his own credit with the
seller, but on the banker’s credit with the seller, and his own with the
banker. Had he done so, he would have produced as great an effect on price
as by a simple purchase to the same amount on a book-credit, but no
greater effect. The credit itself, not the form and mode in which it is
given, is the operating cause.
§ 3. Great extensions and contractions of Credit. Phenomena of a
commercial crisis analyzed.
The inclination of the mercantile public to increase their demand for
commodities by making use of all or much of their credit as a purchasing
power depends on their expectation of profit. When there is a general
impression that the price of some commodity is likely to rise from an
extra demand, a short crop, obstructions to importation, or any other
cause, there is a disposition among dealers to increase their stocks in
order to profit by the expected rise. This disposition tends in itself to
produce the effect which it looks forward to—a rise of price; and, if the
rise is considerable and progressive, other speculators are attracted,
who, so long as the price has not begun to fall, are willing to believe
that it will continue rising. These, by further purchases, produce a
further advance, and thus a rise of price, for which there were originally
some rational grounds, is often heightened by merely speculative
purchases, until it greatly exceeds what the original grounds will
justify. After a time this begins to be perceived, the price ceases to
rise, and the holders, thinking it time to realize their gains, are
anxious to sell. Then the price begins to decline, the holders rush into
the market to avoid a still greater loss, and, few being willing to buy in
a falling market, the price falls much more suddenly than it rose. Those
who have bought at a higher price than reasonable calculation justified,
and who have been overtaken by the revulsion before they had realized, are
losers in proportion to the greatness of the fall and to the quantity of
the commodity which they hold, or have bound themselves to pay for.
This is the ideal extreme case of what is called a commercial crisis.
There is said to be a commercial crisis when a great number of merchants
and traders at once either have, or apprehend that they shall have, a
difficulty in meeting their engagements. The most usual cause of this
general embarrassment is the recoil of prices after they have been raised
by a spirit of speculation, intense in degree, and extending to many
commodities. When, after such a rise, the reaction comes and prices begin
to fall, though at first perhaps only through the desire of the holders to
realize, speculative purchases cease; but, were this all, prices would
only fall to the level from which they rose, or to that which is justified
by the state of the consumption and of the supply. They fall, however,
much lower; for as, when prices were rising, and everybody apparently
making a fortune, it was easy to obtain almost any amount of credit, so
now, when everybody seems to be losing, and many fail entirely, it is with
difficulty that firms of known solidity can obtain even the credit to
which they are accustomed, and which it is the greatest inconvenience to
them to be without, because all dealers have engagements to fulfill, and,
nobody feeling sure that the portion of his means which he has intrusted
to others will be available in time, no one likes to part with ready
money, or to postpone his claim to it. To these rational considerations
there is superadded, in extreme cases, a panic as unreasoning as the
previous over-confidence; money is borrowed for short periods at almost
any rate of interest, and sales of goods for immediate payment are made at
almost any sacrifice. Thus general prices, during a commercial revulsion,
fall as much below the usual level as during the previous period of
speculation they have risen above it; the fall, as well as the rise,
originating not in anything affecting money, but in the state of credit.
Professor Jevons seriously advanced a theory that, inasmuch as the
harvests of the world were the causes of good or bad trade, and
that their deficiency would regularly be followed by commercial
distress, then a periodic cause of bad harvests, if found, would
explain the constant recurrence of commercial crises. This cause
he claimed to have found in the sun-spots, which periodically
deprive the crops of that source of growth which is usually
furnished by the sun when no spots appear.(243) It has not
received general acceptance.
In the United States financial disasters have occurred in 1814,
1819, 1825, 1837-1839, 1857, and 1873. Those of 1837 and 1873 seem
to have been the most serious in their effects; but this field, so
far as scientific study is concerned, has not been fully worked,
and much remains to be learned about these crises in the United
States. The crisis of 1873 was due to excessive railway-building.
It was testified(244) concerning the New York banks in 1873 that
“their capital needed for legitimate purposes was practically lent
out on certain iron rails, railroad-ties, bridges, and
rolling-stock, _called_ railroads, many of them laid down in
places where these materials were practically useless.”
Under the effects due to swift communication by steam, but
especially to the electric telegraph, modern credit is a very
different thing from what it was fifty years ago. Now, a shock on
the Bourse at Vienna is felt the same day at Paris, London, and
New York. A commercial crisis in one great money-center is felt at
every other point in the world which has business connections with
it. Moreover, as Cherbuliez(245) says: “A country is more subject
to crises the more advanced is its economical development. There
are certain maladies which attack only grown-up persons who have
reached a certain degree of vigor and maturity.”
§ 4. Influence of the different forms of Credit on Prices.
It does not, indeed, follow that credit _will_ be more used because it
_can_ be. When the state of trade holds out no particular temptation to
make large purchases on credit, dealers will use only a small portion of
the credit-power, and it will depend only on convenience whether the
portion which they use will be taken in one form or in another. One single
exertion of the credit-power in the form of (1) book-credit, is only the
foundation of a single purchase; but, if (2) a bill is drawn, that same
portion of credit may serve for as many purchases as the number of times
the bill changes hands; while (3) every bank-note issued renders the
credit of the banker a purchasing power to that amount in the hands of all
the successive holders, without impairing any power they may possess of
effecting purchases on their own credit. Credit, in short, has exactly the
same purchasing power with money; and as money tells upon prices not
simply in proportion to its amount, but to its amount multiplied by the
number of times it changes hands, so also does credit; and credit
transferable from hand to hand is in that proportion more potent than
credit which only performs one purchase.
There is a form of credit transactions (4) by checks on bankers, and
transfers in a banker’s books, which is exactly parallel in every respect
to bank-notes, giving equal facilities to an extension of credit, and
capable of acting on prices quite as powerfully. A bank, instead of
lending its notes to a merchant or dealer, might open an account with him,
and credit the account with the sum it had agreed to advance, on an
understanding that he should not draw out that sum in any other mode than
by drawing checks against it in favor of those to whom he had occasion to
make payments. These checks might possibly even pass from hand to hand
like bank-notes; more commonly, however, the receiver would pay them into
the hands of his own banker, and when he wanted the money would draw a
fresh check against it; and hence an objector may urge that as the
original check would very soon be presented for payment, when it must be
paid either in notes or in coin, notes or coin to an equal amount must be
provided as the ultimate means of liquidation. It is not so, however. The
person to whom the check is transferred may perhaps deal with the same
banker, and the check may return to the very bank on which it was drawn.
This is very often the case in country districts; if so, no payment will
be called for, but a simple transfer in the banker’s books will settle the
transaction. If the check is paid into a different bank, it will not be
presented for payment, but liquidated by set-off against other checks;
and, in a state of circumstances favorable to a general extension of
banking credits, a banker who has granted more credit, and has therefore
more checks drawn on him, will also have more checks on other bankers paid
to him, and will only have to provide notes or cash for the payment of
balances; for which purpose the ordinary reserve of prudent bankers, one
third of their liabilities, will abundantly suffice.
§ 5. On what the use of Credit depends.
The credit given to any one by those with whom he deals does not depend on
the quantity of bank-notes or coin in circulation at the time, but on
their opinion of his solvency. If any consideration of a more general
character enters into their calculation, it is only in a time of pressure
on the loan market, when they are not certain of being themselves able to
obtain the credit on which they have been accustomed to rely; and even
then, what they look to is the general state of the loan market, and not
(preconceived theory apart) the amount of bank-notes. So far, as to the
willingness to _give_ credit. And the willingness of a dealer to _use_ his
credit depends on his expectations of gain, that is, on his opinion of the
probable future price of his commodity; an opinion grounded either on the
rise or fall already going on, or on his prospective judgment respecting
the supply and the rate of consumption. When a dealer extends his
purchases beyond his immediate means of payment, engaging to pay at a
specified time, he does so in the expectation either that the transaction
will have terminated favorably before that time arrives, or that he shall
then be in possession of sufficient funds from the proceeds of his other
transactions. The fulfillment of these expectations depends upon prices,
but not specially upon the amount of bank-notes. It is obvious, however,
that prices do not depend on money, but on purchases. Money left with a
banker, and not drawn against, or drawn against for other purposes than
buying commodities, has no effect on prices, any more than credit which is
not used. Credit which _is_ used to purchase commodities affects prices in
the same manner as money. Money and credit are thus exactly on a par in
their effect on prices.
It is often seen, in our large cities, that money is very
plentiful, but no one seems to wish its use (that is, no one with
safe securities). Inability to find investments and to find
industries in which the rate of profit is satisfactory—all of
which depends on the business character and activity of the
people—will prevent credit from being used, no matter how many
bank-notes, or greenbacks, or how much gold there is in the
country. It is impossible to make people invest, simply by
increasing the number of counters by which commodities are
exchanged against each other; that is, by increasing the money.
The reason why more credit is wanted is because men see that
increased production is possible of a kind that will find other
commodities ready to be offered (i.e., demand) in exchange for
that production. Normal credit, therefore, on a healthy basis,
increases and slackens with the activity or dullness of trade.
Speculation, or the wild extension of credit, on the other hand,
is apt to be begotten by a plethora of money, which has induced
low rates for loans, and moves with the uncertain waves of popular
impression. By normal credit we mean that the wealth represented
by the credit is really at the disposal of the borrowers; in a
crisis, the quantity of wealth supposed to be represented by
credit is very much greater than that at the disposal of the
lenders.(246)
§ 6. What is essential to the idea of Money?
There has been a great amount of discussion and argument on the question
whether several of these forms of credit, and in particular whether
bank-notes, ought to be considered as money. It seems to be an essential
part of the idea of money that it be legal tender. An inconvertible paper
which is legal tender is universally admitted to be money; in the French
language the phrase _papier-monnaie_ actually _means_ inconvertibility,
convertible notes being merely _billets a porteur_. An instrument which
would be deprived of all value by the insolvency of a corporation can not
be money in any sense in which money is opposed to credit. It either is
not money, or it is money and credit too.
It would seem, from all study of the essentials of money (Book
III, Chapter IV), that the necessary part of the idea of money is
that it should have value in itself. No one parts with valuable
commodities for a medium of exchange which does not possess value;
and we have seen that Legislatures can not control the natural
value of even the precious metals by giving them legal-tender
power. Much less could it be done for paper money. Paper,
therefore, may, as an instrument of credit, be a substitute for
money; but, in accordance with the above test, it can not properly
be considered as money in the full sense. Of course, paper money,
checks, etc., perform some of the functions of money equally well
with the precious metals. F. A. Walker holds that anything is
money which performs money-work; but he excludes checks from his
catalogue of things which may serve as money. It is practically of
little importance, however, what we include under money, so long
as its functions are well understood; it is merely a question of
nomenclature, and need not disturb us.
Chapter X. Of An Inconvertible Paper Currency.
§ 1. What determines the value of an inconvertible paper money?
After experience had shown that pieces of paper, of no intrinsic value, by
merely bearing upon them the written profession of being equivalent to a
certain number of francs, dollars, or pounds, could be made to circulate
as such, and to produce all the benefit to the issuers which could have
been produced by the coins which they purported to represent, governments
began to think that it would be a happy device if they could appropriate
to themselves this benefit, free from the condition to which individuals
issuing such paper substitutes for money were subject, of giving, when
required, for the sign, the thing signified. They determined to try
whether they could not emancipate themselves from this unpleasant
obligation, and make a piece of paper issued by them pass for a pound, by
merely calling it a pound, and consenting to receive it in payment of the
taxes.
In the case supposed, the functions of money are performed by a thing
which derives its power of performing them solely from convention; but
convention is quite sufficient to confer the power; since nothing more is
needful to make a person accept anything as money, and even at any
arbitrary value, than the persuasion that it will be taken from him on the
same terms by others. The only question is, what determines the value of
such a currency, since it can not be, as in the case of gold and silver
(or paper exchangeable for them at pleasure), the cost of production.
We have seen, however, that even in the case of metallic currency, the
immediate agency in determining its value is its quantity. If the
quantity, instead of depending on the ordinary mercantile motives of
profit and loss, could be arbitrarily fixed by authority, the value would
depend on the fiat of that authority, not on cost of production. The
quantity of a paper currency not convertible into the metals at the option
of the holder _can_ be arbitrarily fixed, especially if the issuer is the
sovereign power of the state. The value, therefore, of such a currency is
entirely arbitrary.
The value of paper money is, of course, primarily and mainly
dependent on the quantity issued. The general level of value
depends on the _quantity_; but we also find that deviations from
this general level, in the direction of further depreciation than
could be due to quantity alone, is caused by any event which
shakes the confidence of any one that he may get the existing
value for his paper. The “convention” by which real value (the
essential idea of money) was associated with this paper in the
minds of all is thereby broken. _Fiat_ money—that is, a piece of
paper, not containing a promise to pay a dollar, but a simple
declaration that this is a dollar—therefore, separates the paper
from any connection with value. And yet we see that _fiat_ money
has some, although a fluctuating, value at certain times: if the
State receives it for taxes, if it is a legal acquittal of
obligations, then, to that extent, a certain quantity of it is
given a value equal to the wealth represented by the taxes, or the
debts. Jevons remarks on this point(247) that, if “the quantity of
notes issued was kept within such moderate limits that any one
wishing to realize the metallic value of the notes could find some
one wanting to pay taxes, and therefore willing to give coin for
notes,” stability of value might be secured. If there is more in
circulation than performs these functions, it will depreciate in
the proportion of the _quantity_ to the extent of the uses
assigned to it; so that the relation of quantity to uses is the
only thing which can give value to _fiat_ money, but beyond a
certain point in the issues other forces than mere quantity begin
to affect the value. Although the paper is not even a promise to
pay value, the form of expression on its face, or the term used as its designation, generally tends, under the force of convention and habit, to give a popular value to paper. |
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