Money circulation

“ 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. ”

“ The competition among capitalists to loan money on these more ample securities has become very keen, and such securities command money at unprecedentedly low rates. These low and lowering rates of interest, instead of denoting financial strength and industrial prosperity, are a gauge of increasing prostration. Large accumulations of money in financial centers, instead of being caused by the overflow of a healthful circulation, or even a proof of a sufficient circulation, are unmistakable evidence of a congested condition caused by a decreasing and insufficient circulation. ”

“ The public, even mercantile, habitually fancies that ease in the money market, that is, facility of borrowing at low interest, is proportional to the quantity of money in circulation. Not only, therefore, are bank notes supposed to produce effects as currency, which they only produce as loans, but attention is habitually diverted from effects similar in kind and much greater in degree, when produced by an action on loans which does not happen to be accompanied by any action on the currency. ”

“ The paper money, according to the universal law, that an inferior currency always crowds out the superior one, will circulate alone. Suppose, then, it appears that the paper circulation alone is in excess of the real requirements of the business of the country, what then? Then something like the amount of that excess will go to the Treasury for redemption, and the coin paid out in that redemption being over and above the volume of the circulation required by the business of the country, will again either be hoarded or go into our foreign commerce and flow out. ”

“ No country can be subjected to such stress as to consent to part with its entire monetary circulation, or even the half of it. On the contrary, every influence which tends to contract the circulation tends to create a condition which makes further contraction more difficult. Rates for the loan of money are affected, prices of imported goods are influenced, imports fall off and exports increase, and inevitably in the modern money market local equilibrium is restored, often with considerable strain, but none the less without pulling down the pillars of the financial temple. ”

“ But in the present situation of the Bank, intrusted as it is with the function of supplying the public with that paper currency which forms the basis of our circulation, and at the same time not subjected to the liability of converting the paper into specie, every advance which it makes of capital to the merchants in the shape of discount, becomes an addition also to the mass of circulating medium. ”

“ Yet the pressure toward a popular currency for universal use grew stronger and stronger. The finance committee of the Assembly reported that "the people demand a new circulating medium"; that "the circulation of paper money is the best of operations"; that "it is the most free because it reposes on the will of the people" ”

“ The only general operation of banks beyond their discounts and deposits, which pervades the whole community, is that of furnishing a circulation in redeemable paper, beyond the amount of specie to redeem it in their vaults. And can it be doubted that this additional supply of money furnishes a powerful stimulus to industry and production, fully compensating any casual inconveniences, which sometimes, though rarely, occur? ”

“ The multiplying and fructifying nature of Rapidity of Circulation has never been understood by our national financiers. When, however, enterprises are multiplying and Exchanges are being permanently increased in number and variety, then there must be a larger volume of money, and this larger amount is secured in the ways already indicated, with perhaps slight disturbances of value, but the temporary ebbs and flows of business should have no effect at all on the mass of money, but only on its movement, and its value consequently would scarcely be disturbed. ”

“ So long as the existing wealth or available labour is not fully represented by the currency, the currency may be increased without diminution of the assigned worth of its pieces. But when the existing wealth, or available labour, is once fully represented, every piece of money thrown into circulation diminishes the worth of every other existing piece, in the proportion it bears to the number of them, provided the new piece be received with equal credit ”

“ The ultimate effects are on prices, and not on quantity of money or volume of trade. But a change in the velocity of circulation of money in any country, connected by international trade with other countries, will cause an opposite change in the quantity of money in circulation in that country. There will be a redistribution of money among the countries of the world and of money metal as between money and the arts. ”

“ Distrust increases the velocity of circulation, and decreases the trade performed by the money. We have shown that the general effect of irredeemable paper money issues, which are almost always in large quantities, despite pledges to the contrary, has been to raise prices.
XI.87 Finally, our study of deposit circulation and crises has afforded further illustration. Preceding a typical crisis, there is, in general, a tendency for deposits to increase and also for their velocity of circulation to increase, while prices tend to rise. ”

“ 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. ”

“ We must remember, however, that such persons as economists, who are most apt to think about the circulation of money, have a rapid turnover. They are usually city dwellers and the comparatively well to do, who, as we know, do not keep their cash inactive long. Laborers, especially thrifty laborers and laborers paid monthly, will keep cash on hand for several weeks without spending it. Farmers and others living in sparsely settled districts will even keep it for months. Probably the velocity of circulation of money differs widely among different classes and different localities. ”

“ In the end, the doubling of society's money will mean an increase (1) of the money in actual circulation, (2) of the money in banks, (3) of the loans and deposits based on this money, and (4) of prices. Approximately all these will be doubled. For, as long as prices fail to double, the surpluses and the tendency to spend them will continue to exist. Individuals, tradesmen, and bankers will all be trying to make use of their surplus, and their efforts to do so must tend to raise prices. ”

“ The first of these is the rapidity of monetary circulation, the second the use of credit, both of which economize the use of money. It is obvious that all simultaneous cash transactions require the use of different pieces of money. But the transactions of a day or a year are not simultaneous and the same piece of money may fill its functions as a medium of exchange many times. When the circulation is sluggish the demand for money for a given volume of exchanges is far greater than when it is rapid. Savings banks, for example, serve to increase the rapidity of circulation. ”

“ Full employment and active retail trade cause such a large amount of money to remain suspended in active circulation that the cash left in the banks increases rather slowly, even when the gold output is rising most rapidly. On the other hand, the demand for bank loans grows not only with the physical volume of trade, but also with the rise of prices, and with the desire of men of affairs to use their own funds for controlling as many business ventures as possible. ”

“ This is of supreme importance, for prices tend to carry with the amount and not simply with the kind of legal-tender money in circulation. The greater the amount the higher the range of prices; the less the circulation the lower the prices. Prices tend ever to follow up and down the amount of legal-tender money in circulation ”

“ Each piece of money is a mere coin, or means of circulation, only so long as it actually circulates. ”

“ It is in this sense that Franklin says, "war is robbery, commerce is generally cheating." [21] If the transformation of merchants' money into capital is to be explained otherwise than by the producers being simply cheated, a long series of intermediate steps would be necessary, which, at present, when the simple circulation of commodities forms our only assumption, are entirely wanting. ”

“ 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. ”

“ When the first effects of the great shock were over, when the lies and deceptions in the shape of rotten bank issues and fancy values had disappeared, when the self-acting contraction of currency and credit had done its work, business enterprise began once more to feel firm ground under its feet. Business men had less of that which called itself money, but they were sure that every dollar they did have not only called itself a dollar, but was a dollar and would remain a dollar. Upon the stability of its value they could unhesitatingly base their calculations. ”

“ People who had things to sell—the farmer and the active business man—complained that their profits were being cut down or entirely wiped out; for the prices of their products kept falling while many of the charges they had to meet—interest, rent, etc.—remained fixed. On the other hand, people who had money to lend—the "bloated bondholder" and the "dead hand" (estates, foundations, hospitals, endowed churches and universities, for instance) —were coming to "own the earth." Their money incomes were fixed, but each dollar would buy more and more every year. ”

“ If we have dollars of differing values, only the poorest will circulate. The farmer and the laborer, who are not in hourly touch with the ticker of the telegraph, will require, above all other classes of our community, a dollar of full value. Fluctuations and depreciations are always at the first cost of these classes of our community. The banker and the speculator anticipate, discount, and often profit by such fluctuations. It is very easy, under the impulse of excitement of the stress of money stringency, to fall into the slough of a depreciated or irredeemable currency. ”

“ A constant but unperceived rise in the value of the dollar with which those payments must be made, baffles all plans, thwarts all calculation, and destroys all equities between debtor and creditor. If we can not intelligently regulate our money volume so as to maintain unchanging the value of the money unit, if we can not preserve our people from the blighting effects which an increase in the measuring power of the money unit entails upon all industry, to what purpose is our boasted civilization? ”

“ Before the end of the year 1795 the paper money was almost exclusively in the hands of the working classes, employees and men of small means, whose property was not large enough to invest in stores of goods or national lands. 69 Financiers and men of large means were shrewd enough to put as much of their property as possible into objects of permanent value. ”

“ 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. ”

“ Consumption then went on as now, in many respects, in proportion to the number of inhabitants; but circulation, that is, alienation by sale, bore no proportion to it.
The effect of every increase in circulation is to swell the amount of taxes; and when they are extensively imposed in a country of industry, the whole currency is thereby made to flow through the coffers of the public, as the blood of the human body flows through the heart, and is by that diffused through every member. ”

“ 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. ”