Monetary system

“ CHAPTER VII INFLUENCE OF MONETARY SYSTEMS ON PURCHASING POWER § 1 VII.1 THUS far we have considered the influences that determine the purchasing power of money when the money in circulation is all of one kind. The illustration given in the previous chapter shows how the money mechanism operates when a single metal is used. We have now to consider the monetary systems in which more than one kind of money is used. ”

“ The operation of such a system can be very easily traced. Whenever there should be so much currency in circulation that it would be worth less than four per cent., the surplus would at once be invested in the four per cent. interest-bearing national bond; and when business should revive and the demand for money to transact it should make money worth more than four per cent., then bonds would be converted into currency again until the equilibrium should be re-established. ”

“ Nearly half a century has elapsed since this essay was written; finance has made great progress, particularly in the United States, where, under peculiar circumstances, a succession of violent convulsions ended in building up a completely new system of currency and banking ”

“ The cautious and conservative reader will ask: if the evils of our present dollar are so great and the remedy so simple, why did not our civilization improve its monetary units years ago, as it improved all other units? ”

“ Danger and toil have always attended the explorers in finance, and they always will. Nevertheless the path is the way of civilization. The greater the development of civilized life, the larger will be the values in paper and credit."
The pathway to our present monetary standard is lined with the wrecks of different forms of currency, country pay, debased coinage of the Boston mint, credit bills of the Colony of Massachusetts, fiat money of the Province of Massachusetts Bay, legalized fiat money, inflated currency, land bank bills, silver notes, treasury notes, continental currency. ”

“ In order to reach a satisfactory understanding of the currency question, it is necessary to consider somewhat fully the nature and functions of money or any substitute for it.
“The theory of money which formed the basis of the ‘mercantile system’ of the seventeenth and eighteenth centuries has been rejected by 333all leading financiers and political economists for the last seventy-five years. That theory asserted that money is wealth; that the great object of every nation should be to increase its amount of gold and silver; that this was a direct increase of national wealth. ”

“ Likewise the degree of civilization to which a country has attained is reflected by the perfection of its monetary machinery. After having tried nearly every unwise experiment condemned by the teachings of history, the United States has finally reached a position where its currency meets the two fundamental requirements of sound finance, namely, (1) the standard of value is that in use among the great commercial states of the world; (2) all of the currency is either directly or indirectly convertible into the standard coin. ”

“ It is patent to the most casual observer that much more currency, or money, is required to transact the legitimate trade of the country during the fall and winter months, when the vast crops are being removed, than during the balance of the year. With our present system the amount in the country remains the same throughout the entire year, resulting in an accumulation of all the surplus capital of the country in a few centers when not employed in the moving of crops, tempted there by the offer of interest on call loans. ”

“ The only part of our monetary medium that has elasticity is the bank-note currency. The peculiar provisions of the law requiring national banks to maintain reserves to meet the call of the depositors operates to increase the money stringency when it arises rather than to expand the supply of currency and relieve it. ”

“ At certain times there are greater and less demands for money, which, under our present practices, make a dollar, to-day, worth four per cent. per annum interest, and to-morrow increase it to ten per cent. It must be remembered that we are now speaking of an irredeemable currency, the representative of the wealth of the nation: that the government representing the nation has uttered it, in behalf of the people, upon the soundest and, in reality, the only sure basis of value any money can have—the productive power and capacity of the nation. ”

“ The condition of our monetary laws to-day is such that, except by the slow increment of gold production, which must be shared by all the world, we possess no means of meeting either the increasing demand for money that expanding population and commerce bring, or the sudden demand that a failure of credit may bring at any time. ”

“ Interest upon capital must be charged, and risk of fluctuation in the value of that which is to be received in payment added. Hence high prices, acting as a protection to the foreign producer, who receives nothing in exchange for the products of his skill and labor except a currency good, at a stable value, the world over It seems to me that nothing is clearer than that the greater part of the burden of existing prostration, for the want of a sound financial system, falls upon the working man, who must after all produce the wealth, and the salaried man, who superintends and conducts business. ”

“ I hold, therefore, that a new axiom should be added to the science of political economy; namely, that as the purchasing power of money increases, its income producing power decreases, and in about the same ratio; and conversely, when the purchasing power of money decreases, its income-producing power increases. In other words, when prices rise interest rises; when prices fall interest falls. ”

“ Evidently the increase of money of credit is not to meet increased demand, but to increase trade independently of demand; and its decrease is not to meet decreased demand, but because trade, having been increased beyond the demand, under the stimulus of credit, must be returned to its proper support or perish. The rate of the currency is not an element of political economy. Those elements are population, demand, industry, supply, consumption, and savings or wealth, which, being mutually dependent, are not properly subject to great or sudden variations of relations. ”

“ The Sources of Currency Supply.—It is, then, clear that the larger part of the circulating medium of society is not money; that not all of the money that there is is bullion money; and that not even all of the bullion money need be ultimate money—redemption money of the highest rank. The sources of currency in society are various—some of it bullion, with a cost of production limit upon its supply, some of it government paper, substantially free of cost, some of it banking credit with certain peculiar and appropriate costs attending its issue. ”

“ The volume of bank currency, under a well-regulated system, is determined by the requirements of the business of the country. When more is needed it will become profitable to issue more, and it will be issued. When less is needed, the excess flows back to the banks and withdraws. It is a self-adjusting process. The volume of Government paper-currency is fixed by law, and that law is made by politicians. ”

“ The old system was essentially weak, while the new was peculiarly strong, and as the hosts of wealth producers came together, and utilised the actual values created by their labor as the medium by which exchanges were effected, prices went up as the result of the increase in the currency, and there was no use for money except to pay debts. Under this system, the purchasing power of labor and products was steadily increasing, while the purchasing power of money was decreasing. ”

“ In this lies the main economic defect of our present currency system. An expansion in the volume of money in circulation entails a corresponding contraction in the volume of bank reserves, and necessarily a corresponding contraction in loans. A period of expanding business would naturally be attended by both an increased volume of loans and an increased volume of cash transactions, such as increased pay-rolls, increased retail sales. Increased cash transactions cause a larger volume of money to flow into circulation. ”

“ Over the whole circle of completed operations there is equilibrium of exchange, and the machinery by which that equilibrium is accomplished is currency in the widest sense. The index or indicator and safety-valve of the whole is the rate of interest. On these bank rates are based the operations of the modern bullion dealers or arbitragists, which serve to equalise or economise the distribution of the precious metals all over the world. ”

“ The Rate of Interest depends on the Demand and Supply of Loans. The two topics of Currency and Loans, though in themselves distinct, are so intimately blended in the phenomena of what is called the money market, that it is impossible to understand the one without the other, and in many minds the two subjects are mixed up in the most inextricable confusion. ”

“ We have erected them into a system, and while cutting prices by such means at one end, we are mounting up costs at the other. We are promoting, maybe, a quicker circulation of the currency of the realm, but we are impoverishing the currency of the race. ”

“ The present purpose, therefore, is to inquire into this vital though neglected part of the subject; to call attention to the economic truths that money and credit fluctuate as much, and often more, than commodities; again to point out that continuing trade is, in substance, only its original form of barter; to show that an exchange of a commodity for money constitutes but a single step, the second and most vital step being the replacement of the commodity with the money thus obtained. ”

“ The proportion which the currency of any country should bear to the whole value of the annual produce circulated by its means is a question upon which political economists have not agreed. Nor can it be controlled by legislation, but must be left to the irrevocable laws which everywhere regulate commerce and trade. The circulating medium will ever irresistibly flow to those points where it is in greatest demand. ”

“ Arbitrary control and issues of currency affect the production of wealth, by acting on the hopes and fears of men, and are, under certain circumstances, wise. But the issue of additional currency to meet the exigencies of immediate expense, is merely one of the disguised forms of borrowing or taxing. ”

“ A banking and currency system seems far away from the wage earner and the farmer, but the fact is that they are vitally interested in a safe system of currency which shall graduate its volume to the amount needed and which shall prevent times of artificial stringency that frighten capital, stop employment, prevent the meeting of the pay roll, destroy local markets, and produce penury and want. ”

“ An inflation of our paper money is demanded of us in any form, the form of greenbacks, the form of national-bank currency or both combined, but an inflation in any event upon one single ground—that there is at present an insufficient supply of currency in this land to fill the legitimate requirements of the business of the country. ”

“ 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. ”

“ Thus, then, the real working power or worth of the currency is founded on the entire sum of the relative estimates formed by the population of its possessions; a change in this estimate in any direction (and therefore every change in the national character) , instantly alters the value of money, in its second great function of commanding labour. But we must always carefully and sternly distinguish between this worth of currency, dependent on the conceived or appreciated value of what it represents, and the worth of it, dependent on the existence of what it represents. ”

“ If the volume of money in circulation be made to bear a direct and steady ratio to population and business, prices will be maintained at a steady level, and, what is of supreme importance, money will be kept of unchanging value. With an advancing civilization, in which a large volume of business is conducted on a basis of credit extending over long periods, it is of the uttermost importance that money, which is the measure of all equities, should be kept unchanging in value through time. ”

“ It is a particularly noticeable fact, that those who claim that an abundant paper currency inflates the prices of all commodities, relatively to gold, never find it convenient to speak of the variety, abundance, and cheapness of manufactures, that exist under an abundant currency; but only of the high prices of agricultural commodities, and real estate. ”

“ Under such conditions all parts of the circulating medium tend to expand or contract in unison and a change in weight of the basic gold dollar carries with it a control of the whole mechanism of exchange, cash, and credit. ”

“ The nation must continue to suffer until this is effected. After the currency shall be reduced to the amount which, when the present quantity of the precious metals is distributed among the various nations of the world in proportion to their respective exchangeable values, shall be assigned to the United States, when time shall have regulated the price of labor and of commodities, according to that amount, and when pre-existing arrangements shall have been adjusted, the sufferings from a depreciated, decreasing, and deficient currency will be terminated. ”