MONEY AM) CURRENCY 
 
 ISEPH FRENCH JOHNSQl 
 
Cornell University 
 Library 
 
 The original of tiiis book is in 
 tine Cornell University Library. 
 
 There are no known copyright restrictions in 
 the United States on the use of the text. 
 
 http://www.archive.org/details/cu31924013816180 
 
Cornell University Library 
 HG 221.J67 
 
 Money and currency in relation to indust 
 
 3 1924 013 816 180 
 
MONEY AND CURRENCY 
 
 IN RELATION TO INDUSTRY, 
 
 PRICES, AND THE RATE 
 
 OF INTEREST 
 
 BY 
 
 JOSEPH FRENCH JOHNSON 
 
 Professor of Political Economy in New York University 
 
 AND Dean of the School of Commerce, 
 
 Accounts, and Finance 
 
 NEW EDITION 
 
 GINN AND COMPANY 
 
 BOSTON • NEW YORK • CHICAGO • LONDON 
 ATLANTA • DALLAS ■ COLUMBUS ■ SAN FRANCISCO 
 
Copyright, 1905, 1921, by 
 JOSEPH FRENCH JOHNSON 
 
 ALL RIGHTS RESRRVBD 
 
 * 521.9 
 
 gjit latlitnauin 9rtt» 
 
 C.INN AND COMPANY • PRO- 
 PRIETORS • BOSTON • U.S.A. 
 
TO 
 
 MY FRIEND 
 
 HERMANN HENRY KOHLSAAT 
 
 A STANCH FRIEND 
 
 OF 
 
 SOUND MONEY 
 
PREFACE 
 
 There are so many books upon money that the author of a 
 new one needs to offer a word of justification. This book differs 
 from others in several important respects. While it is intended 
 to be a complete exposition of the science of money, aiming its 
 appeal at the understanding rather than at the prejudices of 
 men, its unique characteristics, if it possess any, will be found 
 in the deep practical significance it discovers in the phenomena 
 of price, in its analysis of the demand for money, in its exposi- 
 tion of credit as related to prices and the rate of interest, and 
 in the clearness it gives to the concepts of commodity money, 
 fiat money, and credit money. 
 
 This book deals with money as an independent economic 
 entity, and seeks to bring out the fact that "price" in the world 
 of business is a more important word than "value." Economists 
 have too generally assumed that money, being only a medium 
 of exchange, can be left out of calculation in a scientific expla- 
 nation of the phenomena of production and consumption. They 
 reduce trade to terms of barter, assuming that men work for 
 goods and that they exchange goods for goods. Money cannot 
 thus be set aside. It is itself an economic good, one of the 
 most important in the entire list; and changes in its value 
 exert a powerful influence on the production and distribution of 
 wealth. Indeed, the welfare of society is influenced more by 
 changes in its value than by changes in the value of any other 
 commodity. As is pointed out in Chapter VI, the maladjust- 
 ment of prices caused by a change of relation between the 
 money demand and the money supply is equivalent to a new 
 alignment of values. As a result, the markets for goods are 
 
vi PREFACE 
 
 sometimes depressed or stimulated by forces that greatly puzzle 
 the practical man. 
 
 In recent years the theory of money has been beclouded by 
 controversy over what is called the "quantity theory of money." 
 In no scientific treatise has any theory deserving such an appel- 
 lation been expounded. Certain writers, it is true, in explaining 
 the law of demand and supply as determining the value of 
 money, have failed to give due recognition to the variable 
 nature of demand, and so have seemed to imply that the level 
 of prices — that is, the value of money — depends almost 
 wholly on the quantity of money in existence. In order that 
 there may be no excuse for such a crude inference, the demand 
 for money and the circumstances upon which it depends are in 
 this book subjected to careful analysis. It is shown that the 
 demand or need for money, on account of changes in the use 
 of credit, in money efficiency, and in the total volume of 
 exchanges, is subject to great fluctuations within short periods 
 of time. Any mere "quantity theory of money," therefore, must 
 be as inadequate as would be a "quantity theory of wheat." 
 
 To fiat money, a subject which has too generally been slighted, 
 two chapters are given. It is important that the conditions which 
 govern the value of such money be clearly understood. So long 
 as people think that its value is due to the government stamp or 
 to an act of Congress, its advocates in the United States, par- 
 ticularly during periods of industrial and trade depression, will 
 too easily get the public ear. In order to illustrate the princi- 
 ples involved, and to emphasize the elements of peril inherent 
 in the use of fiat money, a chapter is devoted to a discussion of 
 the greenbacks and their value during the period when they 
 were the standard of prices in the United States. The author's 
 conclusion, namely, that the greenbacks during this period were 
 essentially fiat money, getting their value from their utility as 
 money rather than from the government promise they bore, will 
 doubtless arouse some criticism. 
 
PREFACE vii 
 
 The theory of money and credit is developed in the first four 
 chapters. All the remaining chapters are illustrative of the 
 theory. In order that the illustrations may be in harmony with 
 actual conditions, the forces governing the ebb and flow of 
 currency and gold are described in Chapter V. Chapters VI, 
 VII, and VIII show how important is the relation which money 
 and credit, through the medium of price and the rate of interest, 
 bear to industry and the general welfare of society. The use of 
 gold and silver as money is considered in the next four chapters, 
 the issues raised in the long debate over bimetallism and the 
 free coinage of silver being reviewed in order that the principles 
 at stake may be brought to light. Fiat money constitutes the 
 important subject of Chapters XIII and XIV, the author's 
 theory and conclusions being reenforced by facts from the 
 experience of several countries. Credit money, which is not 
 money at all, but a form of credit possessing general accept- 
 ability, is treated in Chapter XV. The need for an elastic 
 element in the currency — a need that can be satisfied only by 
 credit money — is here considered. The last two chapters deal 
 with the monetary experience of the United States. Here, as 
 elsewhere, principles are made more conspicuous than the facts 
 of coinage and legislation, it being manifestly more important 
 to know why silver dollars are valuable than to know how many 
 of them have been coined. 
 
 The author has written for practical men as well as for 
 students in high schools and colleges. For this reason the 
 technical terminology of modern economics has been avoided. 
 For example, the phrase " marginal utility," which conveys no 
 idea that cannot be set forth in everyday speech, occurs only 
 once or twice and then is not essential to the context. Definite 
 meanings are given to the words "money," "credit money," 
 "currency," "cash," "circulation," etc., and an effort is made 
 to be consistent in their use. The book is entitled Money and 
 Currency partly for the purpose of making prominent the fact 
 
Vlll PREFACE 
 
 that these two words, although often used as synonyms, are 
 essentially different in meaning. 
 
 While the book is not intended to be historical or descriptive 
 in character, the reader will find in it the salient facts of every 
 important monetary system and most of the data that have served 
 as the basis for argument in recent controversies. Teachers who 
 wish to give their students a wider acquaintance with the history 
 of money and with the details of coinage are recommended to 
 use in connection with this book Mr. Horace White's admirable 
 treatise Money and Bankmg. 
 
 I wish to record my indebtedness to Professor Harry R. Seager, 
 
 who has read the proofs and made many helpful suggestions ; to 
 
 Hon. Frank A. Vanderlip and Hon. Lyman J. Gage, from whom 
 
 I have obtained much practical information ; and to Hon. George 
 
 E. Roberts, Director of the Mint ; Hon. William B. Ridgely, 
 
 Comptroller of the Currency ; and Hon. O. P. Austin, Chief of 
 
 the Bureau of Statistics, — who have promptly and fully answered 
 
 many letters of inquiry. 
 
 •' ^ ^ JOSEPH FRENCH JOHNSON 
 
 New York University 
 
 March, 1906 
 
 PREFACE FOR THE NEW EDITION 
 
 In this new edition Chapter XVII presents entirely new mate- 
 rial, bringing the review of monetary and banking legislation in 
 the United States up to date. A careful analysis is made of the 
 important Federal Reserve Act of December 23, 1913, and the 
 effects of its operation are considered. Important banking and 
 price statistics have been added in the Appendix. I am greatly 
 indebted to my colleagues. Major B. Foster and Chauncey R. 
 Porter, for help in preparation of this edition. 
 
 March, 1921 
 
CONTENTS 
 
 CHAPTER PAGE 
 
 I. The Medium of Exchange . ... i 
 
 II. Nature and Value of Moni;v . . . . . ii 
 
 III. Nature and Uses of Credit ... 34 
 
 IV. Circumstances affecting Demand and Supply 55 
 V. Domestic and Foreign Exchange ... 77 
 
 VI. The Relation of Money and Credit to Prices . 103 
 VII. The Relation of Money and Credit to the Rate of 
 
 Interest ... . .... 135 
 
 VIII. The Importance of Price . . i6r 
 
 IX. Commodity or Metal Money . 177 
 
 X. Production and Value of the Precious Metals . . 202 
 
 XI. Monometallism vs. Bimetallism . 217 
 
 XII. The Silver Question . . .... 241 
 
 XIII. Fiat Money : illustrated by the Greenback . . . 263 
 
 XIV. Fiat Money in Foreign Countries . . 291 
 
 XV. Credit Money ... 315 
 
 XVI. Money in the United States . . ... . 340 
 
 XVII. Panic of 1907 and War Inflation and Crisis . . 366 
 
 Appendix 
 
 I. Gold Standard Act of March 14, 1900 . . . . 389 
 II. Principal Features of the Aldrich Plan and the Federal Reserve 
 
 Act . . . . ■ • 393 
 
 III. Monthly Circulation Statement . . . 413 
 
 IV. Value of Gold Coin and Bullion Imported into and Exported 
 
 from the United States, 1864-1920 ... ... 4r4 
 
 V. Standard Index Numbers (1905-1920) . 415 
 
X MONEY AND CURRENCY 
 
 PAGE 
 
 VI. Estimated Monetary Stock of the United States on June 30, 
 
 1878-1919 ... . . . 416 
 
 VII. Wholesale Prices, 1913-1920 .... 417 
 
 VIII. Gold and Silver in European Central Banks, in Canada, and in 
 
 the Treasury and National Banks of the United States . . . 418 
 
 Index 419 
 
CHARTS 
 
 PAGE 
 
 I. Value Relation of Gold and Silver during the Nineteenth 
 
 Century . ... . . ... .... 230 
 
 II. Fluctuations in the Values of Gold and Silver from 1870 to 
 
 i9°4 . • ... . 249 
 
 III. Price Changes during the Greenback Period compared with 
 
 Changes in the Supply of Money ... . ... 281 
 
 IV. Greenback Price of Gold compared with Greenback Prices of 
 
 Commodities from 1862 to 1878 . 286 
 
 V. Value Changes of Indian Rupee from 1892 to 1899 compared 
 
 with Value Changes of Gold and Silver 305 
 
 VI. Wholesale Commodity Prices in Four Countries, 1914-1920 . 382 
 VII. Prices and Gold Stock in the United States, 1914-1920 . . 385 
 
 DIAGRAMS 
 
 I-III. Relation of Prices to Goods and to Money . . ... 29-31 
 
 IV. Relation of Capital Goods to Capital Funds .141 
 
 V. Relation of Gold Coin to Gold Bullion when Free Coinage is 
 
 permitted . . . . 181 
 
 VI. Relation of Coin to Bullion when Coinage is restricted . . . 267 
 
MONEY AND CURRENCY 
 
 CHAPTER I 
 
 THE MEDIUM OF EXCHANGE 
 
 1. Money devised to overcome the difficulties of barter. ^. Its evolution was 
 unconscious. 3. Money is the most exchangeable thing in any market. 4. Money 
 was probably first used as a medium of exchange and not as a standard. 5. Modern 
 credit is a promise or contract to deliver money at some future time. 6. Two 
 classes of credit and their relation to prices. 7. Seven different uses or definitions 
 of money. 8. Distinction between money, credit money, currency, and cash. 
 9. " Price " and " profit " the important words in business. 
 
 I. It is commonly assumed that the historian, if he could 
 carry his researches back far enough, would come upon a time 
 when men severally produced all that they consumed, — an age 
 of few wants and no exchanges except by force. To-day it is diffi- 
 cult for us to picture the human race under such primitive con- 
 ditions. There is hardly a child who is not familiar with the 
 words "buy" and "sell," and in the United States there is 
 probably no family whose members produce all the things they 
 consume. We do not know when the era of exchanging began. 
 We can only conjecture that men gradually discovered by 
 experience that their comfort could be increased by a division 
 of labor which permitted each worker to devote himself to the 
 tasks for which he had most skill. 
 
 Money is a tool invented to overcome the difficulties of barter. 
 Byanalysis of the double difficulty which under a barter economy 
 confronted a man wishing to exchange his surplus product, the 
 utility of money becomes evident. In order that goods might be 
 exchanged for goods, a rare coincidence of wants was essential. 
 A man who had arrows which he wished to exchange for fish was 
 
2 MONEY AND CURRENCY 
 
 obliged to find a man who had fish which he wished to exchange 
 for arrows. Evidently his problem would be greatly simplified 
 if there were one thing universally and at all times wanted, for 
 then he need only find a man who wanted arrows and take 
 from him that thing in exchange ; with that in hand, having 
 found a man who had food to spare, he could obtain it by sur- 
 render of the thing which everybody desired. 
 
 2. Concerning the origin of money we can only speculate, 
 for we have no record of a time when money was not used. 
 Money, like speech, is doubtless a product of unconscious 
 evolution. We do not know what substance was first used 
 as money, but it seems certain that it must have been in the 
 beginning some object of universal desire. Our knowledge 
 of the tastes of primitive men and women, and of their mod- 
 ern descendants, gives color to the hypothesis that the first 
 money consisted of some personal ornament. In the case of a 
 people living by the sea, for example, rare and beautiful shells, 
 if admired and prized by all, might naturally have begun to 
 serve as a medium of exchange. A man who had spent the day 
 fishing, and had got more fish than he and his family could eat, 
 would be glad to exchange some of his catch for other articles 
 which he desired. If he found a man who wanted fish, and had 
 nothing to give for them except these beautiful shells, he would 
 be tempted to make an exchange even though he himself had 
 no desire for more shells, for he would be better off with a sur- 
 plus of shells than with a surplus of fish, since the shells were in 
 more general demand. It is easy to see how, under such circum- 
 stances, men and women might devote whole days to hunting 
 shells, and at the end of each day exchange part of their stock 
 for food and other articles of desire, the shells thus gradually 
 coming into use as a current or common medium of exchange. 
 
 3. In some such fashion, doubtless, the evolution of money 
 began. The concepts expressed by the words "buy" and 
 " sell " are a product of the money economy. The buyer gives 
 up money; the seller receives it. The exchange is one of real 
 values or utilities, but it differs from barter in that only one 
 party, instead of both, as in barter, gets an object that may 
 
THE MEDIUM OF EXCHANGE 3 
 
 directly and immediately satisfy desire. The seller wants the 
 money and accepts it, not because he expects to get pleasure from 
 retaining it, but because he knows that it is the most exchange- 
 able thing in the market, and that with it he can most easily 
 obtain the things which will satisfy his tastes and needs. He 
 wants money merely because of its exchangeability. In our 
 hypothetical illustration shells were used as money because 
 there was a universal want for them. They were the most 
 exchangeable thing in the community, and it was that exchange- 
 ability which fitted them to serve as money. Just so soon as 
 men began to exchange their surplus products for shells, not 
 because they wanted them as ornaments, but because they 
 expected to exchange them for other things which they wanted, 
 the shells began to perform a new economic function, and to 
 be in demand on that account. They served as ornaments on 
 account of their beauty ; they served as money on account of 
 their immediate and universal exchangeability. 
 
 4. Some writers hold that the first service of money was as 
 a standard of values, and not as a medium of exchange. As 
 exchanges increased it is supposed that a need arose for some 
 standard with which all articles could be compared in order that 
 a basis of exchange might easily be reached. It is difficult to see 
 how any article could have served as a standard unless it first 
 served as a medium of exchange. Yet this question we need not 
 stop to consider. At the present time the article which serves 
 as a so-called "standard" or "denominator" of value is the thing 
 itself which possesses universal acceptability, and which serves, 
 either by itself or through its representatives, as a medium of 
 exchange. 
 
 5. Money has a fleet-footed auxiliary or representative in 
 credit. Much as the introduction of money simplified the prob- 
 lem of exchange, nevertheless its use in every purchase or sale 
 necessitated the handling and testing of two valuable things, 
 the article sold and the money given in payment. A man going 
 to market had to have money in his pocket. As the wealth of 
 men increased, exchanges grew in magnitude^ and the carrying 
 and counting of money became burdensome. Then here and 
 
4 MONEY AND CURRENCY 
 
 there, in peaceful and law-abiding communities, men who had 
 more or less frequent dealings with one another began to keep 
 accounts and to sell goods without demanding the money in 
 hand, their balances of debt and credit being settled at some 
 convenient or agreed-upon time. Thus began the evolution of 
 credit, and in the process men were doubtless quite unconscious 
 of the almost infinite possibilities of this new system of ex- 
 change. It gave to money an unsuspected potency or efficiency. 
 Wherever traders met there appeared credit, armed with power 
 of attorney for money,and fully competent, if its credentials were 
 not doubted, to represent money in any contract of exchange. 
 
 In the modern world of business credit plays so prominent 
 a part in all buying and selling that men often think, and speak 
 of it as an independent thing or force. The student, however, 
 must never lose sight of the relationship between credit and 
 money. Credit and money are not two different things ; credit, 
 indeed, is not a thing at all, but merely the name given to a 
 common and important use of money. A man who buys any- 
 thing with credit really buys with money, the payment merely 
 being deferred. Leaving barter out of account, we may say 
 that at the present time money figures, either potentially or 
 actually, on one side or the other of every exchange. Credit is 
 merely money's representative or proxy. 
 
 Broadly defined, credit is the power to get goods in exchange 
 by giving a promise or contract to deliver an equivalent at some 
 future time. An exchange of goods against a promise to deliver 
 goods is a kind of barter credit, and is not a common trans- 
 action. At the present time, in almost all credit exchanges 
 money is the thing promised. Hence credit may be concretely 
 defined as a promise to pay money. 
 
 It is evident that credit could not have been much employed 
 by men until after the rights of property were respected and 
 something resembling the modern law of contract was in force. 
 A man will not part with the product of his labor for a mere 
 promise unless he has confidence that the promise will be kept. 
 Credit is, therefore, a development of later times than money; 
 yet the explorer in Babylon has discovered promissory notes 
 
THE MEDIUM OF EjXCHANGE 5 
 
 which were graven on tablets in the days of Abraham, over two 
 thousand years before the Christian era began. To-day most 
 of the world's exchanges are effected by means of credit, and 
 these promises to pay money are enforced by the law of every 
 civilized land. 
 
 6. Credit differs from money in that not all forms of it pos- 
 sess an equal degree of acceptability. A man's check or prom- 
 issory note will be taken only by people who know him and 
 trust him, whereas every one will accept a bank note. Some 
 forms of credit within a community have almost the same 
 acceptability as money itself. For example, the greenback, 
 which is merely the promise of the United States to pay gold, 
 is a medium of exchange quite as acceptable within the country 
 as gold itself. We divide credit, therefore, into two classes : 
 (i) credit of general acceptability, such as greenbacks and bank 
 notes ; (2) credit of limited acceptability, such as bank checks, 
 drafts, and promissory notes. Credit of the first class is pop- 
 ularly called money, and is even so named in some scientific 
 treatises ; in this book, however, it will be designated as credit 
 money or representative money. The reader should bear in 
 mind that it is not money at all, it is credit. 
 
 In many countries certain forms of credit money have been 
 made legal tender, and on that account are prized by men as 
 highly as money itself, for no creditor can refuse to accept them 
 when offered by a debtor. In the United States, for instance, 
 the silver dollar and greenback, although these are credit instru- 
 ments, being the government's promises to pay gold, are legal 
 tender for the payment of any debt calling for money. 
 
 Although the nature of credit is simple, its relation to price 
 is not always perfectly evident. By the word "price" is meant 
 the amount of money for which a thing will exchange. When 
 we say that the price of a bushel of wheat is seventy cents, we 
 mean that a bushel of wheat will exchange for seventy cents. 
 If all exchanges were made for money, credit not being used 
 in any form, the problem of price would be comparatively 
 simple ; it would be perfectly clear that the price of wheat 
 measured the value or exchange power of money with respect 
 
6 MONEY AND CURRENCY 
 
 to wheat. But the use of credit seems to introduce a new ele- 
 ment. Some writers even affirm that credit is more important 
 than money in the determination of price, while others go to 
 the other extreme and hold that the use of credit has no effect 
 whatever on price. This is a theoretical question which we 
 cannot discuss until we have gone more deeply into the nature 
 of both money and credit. 
 
 7. Money has been the subject of innumerable books and 
 pamphlets, some of them written by the world's greatest think- 
 ers ; nevertheless no subject in political economy is to-day more 
 fruitful of controversy and misunderstanding among economists, 
 and none seems more cloudy and confused in the popular mind. 
 One cause of this misunderstanding is the lack of unanimity 
 in the use of the word "money." In the newspapers, in "the 
 street," and even in scientific treatises on political economy, 
 we find the word used in widely different senses. Definition is 
 essential to clear thinking. Let us consider, therefore, the dif- 
 ferent meanings which have been given to this word " money." 
 
 (a) Scientific use. Money is that thing which everybody in 
 a community desires in some degree, and is willing to take in 
 payment for goods parted with or for services rendered. This 
 is money in the scientific sense. It is sometimes distinguished 
 as standard or redemption money. In the United States, accord- 
 ing to this definition, gold coin alone is money. 
 
 {b) Popular use. Money is popularly used as a synonym of 
 cash or "ready money," being applied indiscriminately to all 
 forms of currency, such as gold coin, bank notes, greenbacks, 
 silver dollars, etc. This is the most common use of the word. 
 In this sense money is made to include not only so-called "stand- 
 ard money," but also all kinds of credit money. 
 
 {c) Figurative use. Money is frequently employed in general 
 literature and in popular speech as the equivalent of riches or 
 wealth; as when a man is said to be "making money," or to 
 have more money than he can spend. 
 
 {d) Financial use. Money is frequently employed as a syno- 
 nym of capita] or loanable funds ; as " the money market," 
 "time money," "money is tight." In this sense, which is 
 
THE MEDIUM OF EXCHANGE 7 
 
 common in financial circles, money means lending power, and is 
 more closely related, as we shall see later, to the savings of a 
 community than to the amount of money or cash in existence.^ 
 
 {e) Legal use. Among lawyers and in the courts money is 
 anything the law declares a legal tender for the payment of a 
 debt. Thus in the United States, bank notes, silver certificates, 
 and gold certificates, not being legal tender, are not money in 
 the legal sense, but gold coin, silver dollars, and greenbacks are. 
 
 (_/") Technical use under National Banking Act. National 
 banks in the United States are required by law to keep on 
 hand a certain amount of " lawful money " as a reserve for the 
 protection of depositors. "Lawful money" includes gold coin 
 and bullion, gold certificates, silver dollars, silver certificates, 
 greenbacks, and Treasury notes, — in fact all kinds of currency 
 except bank notes. It must not be confused with legal tender. 
 
 {g) Pseudo-scientific use. By some writers money is made 
 to include all media of exchange, not only money and credit 
 money, but also checks, bills of exchange, promissory notes, and 
 other forms of credit. Fortunately this vague use of the word 
 is not common.^ 
 
 When we analyze these various uses of the word " money," 
 we find that the essential element in them all is the idea of 
 universal acceptability. A representative of money — that is to 
 say, a promise to deliver money upon demand or at some future 
 time — may possess in ordinary transactions all the acceptability 
 of money itself, and may, therefore, popularly be classed as 
 money; yet it is not money, but credit, and must be sharply 
 distinguished from the thing it represents. In this book the 
 word will always be used in the scientific sense: Money is that 
 valuable thing or economic good which possesses in any country 
 or community universal acceptability as a m,edium of exchange 
 or means of payment. 
 
 1 Money, which is so commonly understood as the synonym of wealth, is 
 more especially the form in use to denote it when borrowing is spoken of. Bor- 
 rowing capital is universally spoken of as borrowing money; the loan market is 
 called the money market ; those who have their capital disposable for investment 
 are called the moneyed class. — J. S. Mill, Political Economy, Book III, chap, viii, 2. 
 
 ^ See Farrer's Studies in Currency, pp. 187-189. 
 
8 MONEY AND CURRENCY 
 
 8. Currency denotes all media of exchange that possess uni- 
 versal acceptability within a country ; it embraces, therefore, 
 money itself and credit money, the latter being all those forms 
 of credit which possess the same acceptability or exchange- 
 ability as the money which they promise. Thus in the United 
 States gold alone is money ; United States notes, bank notes, 
 silver dollars, and subsidiary coins are credit money; all these 
 lumped together constitute the country's supply of currency, or 
 monetary circulation.^ 
 
 Cash is practically a synonym of " currency," but is often used 
 with the special connotation of " ready money " as opposed to 
 credit of limited acceptability. Cash includes, therefore, both 
 money and all kinds of credit money. By bankers it is applied 
 also to " exchanges for the clearing house," — that is, all checks 
 or demand drafts on other banks, which are immediately con- 
 vertible into money or credit money. 
 
 For convenience of reference brief definitions of several 
 important terms are here given. 
 
 Utility is want-satisfying power. Anything that is wanted by 
 men possesses utility in the economic sense. It is not syn- 
 onymous with usefulness. Many things much desired by men, 
 and hence possessing great utility, would not popularly be 
 called very useful ; for instance, diamond scarf pins, cigars, and 
 silk hats. 
 
 Value means exchange power or purchasing pqwer. Nothing 
 has value unless it has utility and is limited in supply. The 
 value of a thing is shown by the quantities of other things it 
 commands in exchange. The greater the utility of a thing, — 
 in other words, the stronger the desire for it, — the greater its 
 value ; the greater its supply, the lower its value. 
 
 Commodity is the economist's term for "thing." As econo- 
 mists are not interested in things that do not satisfy wants, only 
 
 1 The so-called " supply of money " in the United States, as estimated period- 
 ically by the Secretary of the Treasury, includes credit money as well as money, 
 and might better be calledthe"supply of currency." On January 1,1921, the supply 
 of " money " was estimated to be $8,373,000,000, but of this amoUnt only about 
 $2,785,000,000, which was the estimated amount of gold in the country available 
 for use as money, could properly be called money. 
 
THE MEDIUM OF EXCHANGE 9 
 
 such articles as possess either utility or value can properly be 
 called commodities. 
 
 Good is a synonym of " commodity," and in recent economic 
 literature is more often used than " commodity." 
 
 K free good \& one supplied in such abundance that it has no 
 value and commands no price, such as air and water. A free 
 good possesses utility, but not value. 
 
 An economic good is one of which the supply is less than the 
 demand. It has both utility and value, and includes all articles 
 that are bought and sold in the markets, or for which men are 
 willing to toil. 
 
 Money is anything which all persons in a community or coun- 
 try are willing to take in final payment for goods or services. 
 
 Price is the amount of money a given commodity will ex- 
 change for. It expresses, therefore, the value of a commodity 
 with respect to money. 
 
 Credit is the power to obtain goods or services by giving a 
 promise to pay money on demand or at a specified date in the 
 future. 
 
 A credit instrument is an unconditional promise or contract 
 to pay money on demand or at a specified date in the future. 
 
 Credit money is any form of credit which possesses within a 
 country or community the same acceptability as money itself. 
 It is often called "representative money," and sometimes "fidu- 
 ciary money." 
 
 Currency includes both money and credit money. 
 
 Cash, like currency, includes both money and credit money, 
 but puts special emphasis on their immediate and general 
 acceptability. 
 
 Monetary circulation is a phrase commonly used to cover all 
 forms of currency, — that is, money and credit money. 
 
 Legal tender includes money and all forms of credit money 
 that the law compels creditors to accept. 
 
 Barter is an exchange of goods without the use either of 
 money or of a promise to pay money. It is often described as 
 an exchange of goods for goods, but this definition lacks preci- 
 sion, for money is itself a good. 
 
lO MONEY AND CURRENCY 
 
 9. Since all goods at the present time are made to be sold, 
 and are sold for money in hand or for credit, which calls for 
 money in the future, men easily get into the habit of regarding 
 money as the symbol and representative of universal wealth. 
 Capital goods are always spoken of in terms of money. Wages 
 and salaries and all incomes are paid in money or credit. The 
 average producer of wealth is much less concerned about the 
 quantity of wealth he produces than about the amount of money 
 he gets for it. Profit, which is the incentive to business activity, 
 is the excess of money income over money outgo ; like price, 
 it is a money item. Commodities, those economic goods which 
 are the real objects of human desire, apparently occupy a sec- 
 ondary place in the business world, for in the conscious pur- 
 poses and desires of men money is the primary thing. For this 
 and other reasons, as will be shown in the subsequent chapters, 
 " price " and " profit " are the two most important words in the 
 lexicon of political economy. The main purpose of this book is 
 to show how the prices of commodities and the profits of busi- 
 ness (including the wages of workingmen) are dependent upon 
 the laws governing the value of money. 
 
 LITERATURE 
 
 The following are among the best works on money in the English 
 language : Horace White, Money and Banking (Boston, 1902) ; F. A. 
 Walker, Money (New York, 1891); W. S. Jevons, Money and the 
 Mechanism of Exchatige (New York, 1880); and Investigations in Cur- 
 rency and Finance (London, 1884) ; J. S. Nicholson, Money and Mone- 
 tary Problems (London, 1895) ; David Kinley, Money (New York, 1904) ; 
 J. Laurence Laughlin, The Principles of Money (New York, 1903) ; 
 C. A. CONANT, Principles of Money and Banking (New York, 1906). 
 
 The reader will get help from any one of the following general works 
 on political economy: John Stuart Mill, The Principles of Political 
 Economy ; David Ricardo, Political Economy ; Henry R. Seager, 
 Introduction to Economics; N. G. Pierson, Principles of Economics 
 (translated from the Dutch, London, 1902) ; Frank Fetter, The Prin- 
 ciples of Economics ; C. J. Bullock, Introduction to the Study of Eco- 
 nomics; Arthur T. Hadley, Economics ; Charles Gide, Principles of 
 Political Economy (from the French, Boston, 1904) ; E. R. A. Seligman, 
 Political Economy (New York, 1906). 
 
CHAPTER II 
 
 NATURE AND VALUE OF MONEY 
 
 10. Exchangeability is the only utility of money, ii. Money is the standard 
 of prices, and is itself without price. 12. Significance of the expression " measure 
 of value," or "standard of value." 13. Money as a standard of deferred payment. 
 14. Money as a store of value. 15. Under normal conditions money is never idle. 
 16. The value of money is revealed by general prices. 17. The value of money 
 depends on demand and supply. 18. The demand for money is the need for 
 utility possessing universal exchangeability. 19. The demand for money is limited 
 and definite. Two misconceptions. 20. The demand for money is measured by 
 the amount needed to make exchanges and to serve as a store of value. 21. Credit 
 lessens the demand for money. 22. By supply of money is meant the number of 
 money units available for use as a medium of exchange or store of value. 23. Dis- 
 tinction between the supply of money units and the supply of money utility or of 
 money value. 24. The supply of money value is the product of the demand for 
 money, and is independent of the supply of money. 25. The supply of money 
 utility always tends to equal the demand. 26. The price of a commodity varies 
 because of changes either in the value of the commodity itself or in the value of 
 money. 27. Two kinds of money with which the world has had experience : com- 
 modity money and fiat money. 
 
 10. Exchangeability is the only utility possessed by money, 
 and it is on account of this utility, and this only, that it is 
 wanted. Money performs a specific service for men, like a hoe 
 or a knife, and is wanted for no other purpose. 
 
 Since, however, all forms of wealth can be obtained in 
 exchange for money, or for a promise to pay money, and are 
 usually obtained in that way, men have got into the habit 
 of regarding money as a mysterious thing, — a sort of symbol of 
 values, an omnipotent "third commodity," — the possession of 
 which gives them command over all comforts and luxuries ; and 
 they cannot easily think of it as a simple tool which they want 
 for a single service. Yet the only service that money performs 
 and all the advantages that flow from its use are due to its 
 exchangeability. As a carpenter wants saws, hammers, and 
 nails to build a house with, so a man wants money to make 
 
12 MONEY AND CURRENCY 
 
 exchanges with. Money differs from other tools only in the 
 fact that every man has occasion to use it. 
 
 1 1. Money is the standard of prices. By price is meant the 
 amount of money a thing will exchange for. It is sometimes 
 confused with value, but that word has a much broader signifi- 
 cance. By the value of an article is meant the amount of goods 
 in general for which it will exchange, — in other words, its pur- 
 chasing power, or the exchange relation it bears to all other 
 goods. Value is a general concept ; price is concrete. To get 
 an idea of the value of a bushel of wheat, we must know for 
 what quantities of goods in general it can be exchanged, — that 
 is to say, its exchange relation with corn, wool, iron, copper, 
 cloth, and so on through the list of all goods, including money. 
 The price of a commodity gives merely its exchange relation 
 with the single good, money .^ 
 
 Money itself has no price. This is self-evident, for a thing 
 cannot be exchanged for itself. In any country where gold is 
 freely coined into money, gold cannot properly be said to have 
 any price. Gold is practically the money of such a country, for 
 the value of a gold coin cannot differ much from that of the 
 bullion it contains. In the United States it is customary to 
 speak of $20.67 ^s the price of an ounce of gold, for that is the 
 sum of money into which an ounce of gold is coinable. Price is 
 here incorrectly used. The expression " mint price," which is 
 often employed, is less likely to produce confusion. It is nearer 
 the truth to say that an ounce of pure gold is $20.67, for the 
 two things are practically identical except in form, the one 
 being an ounce of gold coined, the other an ounce of gold 
 uncoined. The one cannot in the ordinary sense of the word 
 be the price of the other. ^ 
 
 1 Many economists have defined price as being the amount of any single good 
 for which another good will exchange. According to this definition, if a bushel of 
 wheat can be exchanged for two of corn, the price of one bushel of wheat would 
 be two of corn. Price is never used in this sense in everyday life. 
 
 2 In the United States statutes, the only place where an authoritative definition 
 of " dollar " can be found, it is defined as a coin containing 25.8 grains of standard 
 gold. Since standard gold is nine tenths fine, the dollar contains 23,22 grains of 
 pure gold. The silver dollar is incorrectly called " a standard dollar " in the law 
 of 1878. Silver is not freely coined, and silver dollars therefore are not money. 
 
NATURE AND VALUE OF MONEY 13 
 
 Money is the Standard of Prices 
 
 12. The use of money as a medium of exchange enables men 
 to compare the contemporaneous values of goods, and hence it 
 is often called the standard or measure of value. Since all 
 things are sold either for money or its equivalent, — a promise 
 to pay money, — we are able by comparing the prices of different 
 things at any time to compare their values. Thus, if we know 
 that wheat sells at eighty cents a bushel and corn at forty 
 cents, we know that the value of wheat is twice that of corn. 
 Money is a sort of common denominator to which each day the 
 values of all other things are reduced through the medium of 
 price. We compare the wealth of individuals in the same way, 
 involuntarily making an estimate of the sums of money for 
 which their respective properties would sell. 
 
 The expression "standard of value" is easily susceptible of 
 an interpretation much too broad and general. The use of 
 money enables us to compare the values of goods only at a 
 given time. It is a mistake to assume, as is often done, that 
 money is a permanent, changeless standard adapted to the 
 measurement or comparison of values over long periods of 
 time ; this it is not and cannot be so long as its own value is 
 subject to change. The world has never used a money which 
 did not change in value from year to year. The value of gold, 
 for example, was much greater in 1890 than in 1870, and con- 
 sequently the gold prices of most things were lower. The fall 
 of prices during that period was evidence not of a fall in the 
 values of all commodities, as was frequently assumed, but of a 
 rise in the value of gold. Indeed, a general rise or fall in the 
 values of all commodities is impossible, for if the values of 
 some increase, the values of others must necessarily decline. 
 All prices may rise or fall, for the purchasing power of a money 
 may change ; but the purchasing power of all commodities evi- 
 dently cannot increase at the same time. Simple as this propo- 
 sition is, it is sometimes overlooked by writers upon money. 
 
 Money serves merely as a medium of exchange, and so 
 becomes the standard of prices and convenient measure of 
 
14 MONEY AND CURRENCY 
 
 contemporaneous values. It is price, the outcome of money's 
 service as a medium of exchange, which enables us at any one 
 time to compare the values of goods. When we speak of money 
 as a standard of value we mean money as a standard of prices, 
 and nothing more. After we have analyzed the value of money 
 and found upon what circumstances it depends, we shall be 
 ready to consider the influence exerted upon business by gen- 
 eral price changes or by changes in the value of what is com- 
 monly called the standard. Controversy has raged about this 
 subject, and there is nothing in the whole field of finance more 
 important. 
 
 13. Since credit instruments of all kinds, including those 
 calling for payment after a term of years, are usually promises 
 to pay money, money is sometimes called a standard of deferred 
 payments. This expression means that men not only use money 
 as a medium of exchange in the present, but also agree to use 
 it in the future. To say that money is a standard of deferred 
 payments is equivalent to saying that long-time credit instru- 
 ments are usually written in terms of money. This fact sets 
 forth no new service performed by money. Money's one func- 
 tion is to serve as a medium of exchange. Universal exchange- 
 ability is the only utility which it possesses. On account of 
 this utility it fixes prices in the present and is employed by 
 men as the price maker in contracts calling for future delivery. 
 The reader must not infer that the use of money in such con- 
 tracts is not of importance. On the contrary, the fact that the 
 money of to-day is expected to serve as a means of payment or 
 means of exchange ten or twenty years hence is of great 
 importance. We shall consider this use of money in Chapter 
 VIII, — The Importance of Price. 
 
 Money as a Store of Value 
 
 14. Since men find it convenient to keep in hand a certain 
 amount of their wealth in the form of money, because of their 
 need for a medium of exchange in the present and in the near 
 future, money is said to serve as a store of value. Writers 
 
NATURE AND VALUE OF MONEY 
 
 15 
 
 upon money usually say that money has four functions ; that it 
 serves as a medium of exchange, as a standard of value, as a 
 standard of deferred payments, and as a store of value. We 
 have already discussed the first three of these functions and 
 have seen that they are all resolvable into the one function of 
 money as a medium of exchange. We shall find upon analysis 
 that the use of money as a store of value also grows out of its 
 use as a medium of exchange. 
 
 As a rule, men keep on hand or in store only as much money 
 as they expect to have use for in the immediate future. This 
 amount varies with different men according to their means, the 
 nature of their business, their distance from banks, and their 
 habits in the use of checks. If a man finds he has more money 
 on hand than he has immediate use for, he deposits it in a bank 
 at interest, or he makes some investment with it. He gains 
 nothing by keeping it. To make a profit out of it he must 
 either lend it or convert it into other goods. Money, if lost or 
 stolen, is more difficult to recover than any other property. All 
 dollars are so much alike that identification is practically impos- 
 sible. For these reasons money does not make so good a store 
 of value as some other kinds of wealth; stocks, bonds, real 
 estate, or even perishable commodities like wheat and cotton 
 serve this purpose much better. Therefore men store in money 
 only that part of their wealth which they expect to have occa- 
 sion to use as a medium of exchange; the rest they keep in 
 forms that will yield an income or in other ways give them 
 satisfaction. 
 
 While money does not at the present time perform any 
 unique service as a store of value, there is no doubt that it did 
 several centuries ago, when the rights of property were less 
 secure. During the Middle Ages men often found it advisable 
 to conceal the amount of their property from the taxgatherer 
 or from their feudal lord, and so converted their surplus wealth 
 into the precious metals, which they buried in the ground. 
 Even to-day, in such countries as India and China, the natives 
 have the habit of hoarding much of their wealth in the form 
 of money, having little knowledge of investment and being 
 
l6 MONEY AND CURRENCY 
 
 fearful of robbery. But in all civilized countries the practice of 
 hoarding money has ceased. The miser who gloats over glitter- 
 ing coin belongs to fable and tradition. The twentieth-century 
 miser gloats over stocks, bonds, mortgages, and warranty deeds. 
 
 The fact that banks keep large amounts of money on hand is 
 doubtless responsible for the idea that money still performs a 
 peculiar service as a store of value. This practice on the part of 
 banks, however, forms no exception to the rule. A bank keeps 
 money on hand because it is a dealer in promises to pay money 
 and must always be able to redeem these promises. It is be- 
 cause money is universally acceptable as a means of payment that 
 bank reserves are maintained. If a bank has more money than 
 it can lend, or more than is necessary in the opinion of its man- 
 agers to meet the demands of its depositors, it is under the 
 same inducement as a private person to get rid of the surplus. 
 
 Thus we see that the service of money as a store of value is 
 not one of its unique functions. The farmer has value stored up ■ 
 in a plow, in a threshing machine, in a rake, in hay and grain, 
 because he knows he will have occasion for the use of wealth 
 in these forms. For the same reason the banker stores value in 
 the form of money. The only thing peculiar about money is 
 the fact that every man has occasion for using it, and so every 
 man, if he has any wealth at all, is likely to keep some portion 
 of it stored in the shape of money. 
 
 15. Owing to the nature of its single utility, exchangeability, 
 money seeks constant employment, and under normal condi- 
 tions is never idle. In this respect it is unlike every other 
 good. Idle money is an abnormal thing. Men frequently hold 
 wheat and other goods back from the market in the hope of get- 
 ting a higher price. But money has no price, and the business 
 man sees no chance of making a profit by holding it. Indeed, 
 even when money is rising in value, that is to say when gen- 
 eral prices are falling, a man who has money can do something 
 better than keep it idle in his safe. It would not pay him then 
 to exchange the money for goods, for he would have to sell 
 them at lower prices than he had paid, but he can make a 
 profit by loaning the money or by buying mortgages or bonds, 
 
NATURE AND VALUE OF MONEY 17 
 
 for later he will get back the principal augmented by interest. 
 Business men, therefore, keep in their possession only that 
 amount of money for which they expect to have immediate use. 
 Banks with their large stores of money constitute no exception. 
 When a bank has in its vaults more money than is needed as a 
 reserve, it looks far and near for good paper in which to invest, 
 and often lowers its rate of discount in order to tempt bor- 
 rowers. So it happens that under normal conditions all the 
 money in a country is ever busy doing its work as a medium 
 of exchange and as a basis for credit operations. The existence 
 of any large supply not employed in one of these two ways is 
 certain evidence either of industrial and financial derangement 
 or of unscientific and restrictive legislation. 
 
 The Law of Value 
 
 16. The value of money is revealed by general prices. It is 
 clear that the value of money with respect to a single com- 
 modity, like wheat for example, is shown by the price of wheat. 
 A rise of the price of wheat means that the value of money 
 with respect to wheat has fallen. When wheat is one dollar a 
 bushel the value of money in respect to wheat is just twice 
 what it is when wheat is selling for two dollars a bushel. In 
 the latter case a dollar is worth only half a bushel of wheat. 
 In the same way with respect to all commodities, — the value of 
 money rises as their prices fall, and falls as their prices rise. 
 Thus general prices furnish an index to the value of money ; 
 rising prices of goods show that the value of money is falling, 
 and falling prices show that the value of money is rising. In 
 order to give concreteness to the vague expression "general 
 prices," statisticians construct what is commonly known as an 
 index number. In its simplest form an index number is the 
 average of the prices of a group of important commodities; a 
 rise of this average shows a decline in the purchasing power 
 of money with respect to the commodities. The commodities 
 chosen are assumed to be representative of all commodities, 
 and hence it is inferred that the value of money is falling when 
 
l8 MONEY AND CURRENCY 
 
 the index number is rising, and increasing when the index 
 number is declining. The uses and defects of the index number 
 are discussed in Chapter VI. 
 
 17. The value of money depends on the demand for and the 
 supply of money. In order to account for the value of money 
 it is not necessary to invent any new law or theory of value. 
 The value of any article depends upon its utility, i.e. upon 
 the intensity of the human need for it, and upon the limita- 
 tion of the supply.! Money is no exception to the general law 
 of demand and supply. The value of a piece of money, like the 
 value of a bushel of wheat, a diamond, a horse, or a saw, 
 depends upon the intensity of the human want it satisfies, and 
 that varies as the supply of money varies. 
 
 If all buying were done with money in hand, no form of 
 credit being used, an increase in the supply of money would 
 tend to cause a proportionate decrease in its value per unit 
 (unless some of the new money were hoarded or in other ways 
 withheld from use), for more money would be offered for goods 
 and sellers would be able to get higher prices. Thus, if no 
 credit were used, an addition of 10 per cent to the money supply 
 
 ' The refinements of economists with regard to what they term " marginal 
 utility " and the " law of cost " do not affect the truth of the law of demand and 
 supply, with which every business man is familiar. It is not necessary here to 
 analyze in detail the various theories of value. The reader will find, if he study 
 them in the text-books of political economy, that all are reducible to the simple 
 propositions of the familiar law of demand and supply. The concept of marginal 
 utility, for example, brings into clear view the reasons why the demand for an 
 article necessarily varies as the available supply of it is increased or diminished ; 
 it gives us what may be called the consumer's view or theory of value. If, on the 
 other hand, we study value from the producer's point of view, we discover that in 
 the case of all goods produced under a condition of free competition the supply 
 will be so regulated that value in the long run will tend to coincide with cost. But 
 neither of these views or theories is antagonistic to what may be called the trader's 
 or observer's theory or conclusion, to wit : that value depends on demand and 
 supply. The marginal-utility theorist emphasizes the effect of changes in the 
 demand ; the cost theorist emphasizes the effect of influences acting on the supply. 
 The student of money need not puzzle over the subtleties of these theories. The 
 law of demand and supply explains value phenomena, just as the law of gravita- 
 tion explains physical phenomena. Both are inductions born of observation, and 
 each suggests very difficult problems, one for the physicist and chemist, the other 
 for the economist and psychologist. 
 
NATURE AND VALUE OF MONEY 
 
 19 
 
 of a country would tend to raise prices 10 per cent. We cannot 
 say more than "tend," for we do not know that the demand 
 for money would not also increase the moment prices began to 
 rise. If men, as a result of the rising prices, began to sell more 
 goods, then the demand or need for money would increase, so 
 that the addition to the supply of money would not at once 
 exert a proportionate influence on its value. In a state of society 
 where credit is used, an increase of the money supply, as will 
 be shown later, may cause a rise of prices out of proportion to 
 the increase. 
 
 Nature and Measure of Demand 
 
 18. By the demand for money in a country is meant the 
 general need or desire in that country for utility in a form pos- 
 sessing universal and immediate acceptability. This evidently 
 depends upon the volume of business transactions, upon the 
 population of the country, the quantities of goods they produce 
 and exchange, their customs with regard to the use of credit 
 as a medium of exchange, their business organization, their 
 methods of production and exchange, and their habits with 
 regard to the keeping of sums of money on hand. In the same 
 way the demand for wheat is the desire or need for a food 
 utility of the kind possessed by wheat ; and its intensity depends 
 on the number of people, on their wealth or productive capacity, 
 on their use of other articles possessing food utility, and on the 
 amount of wheat they are in the habit of storing for future use. 
 As the supply of wheat increases, other things remaining un- 
 changed, the value of a bushel of wheat declines. In the same 
 way and for the same reason the value of each piece of money 
 falls as the total supply of money increases. 
 
 19. The demand for money is limited and definite, like the 
 demand for any other good. The theory of money has been so 
 much clouded by vague conceptions of the nature of demand 
 that some writers reject altogether the theory that the value of 
 money is determined by demand and supply. Other writers, 
 particularly those who have urged a return to the free coinage 
 
20 MONEY AND CURRENCY 
 
 of silver, have with much show of authority attributed to demand 
 a meaning that gives to certain gross fallacies the semblance of 
 demonstrated truth. It is very important, therefore, that the 
 reader should get at the outset a clear idea of what is meant 
 by this word "demand." 
 
 Two common misconceptions need to be cleared away. The 
 first is the notion that the demand for money consists of all the 
 goods on the market, and therefore is indefinitely great. For 
 the prevalence of this notion John Locke and John Stuart Mill 
 are in some degree responsible. Locke held that money differs 
 from other things in that the "vent " for it is not definite but 
 measureless. 1 Mr. Mill conveys the same idea in the following : 
 
 The demand for money, again, consists of all the goods offered for sale. 
 Every seller of goods is a buyer of money, and the goods he brings with him 
 constitute his demand. The demand for money differs from the demand' for 
 other things in this, that it is limited only by the means of the purchaser. 
 The demand for other things is for so much and no more, but there is always 
 a demand for as much money as can be got. — Political Economy, Book III, 
 chap, viii, 2. 
 
 Mr. Mill here had in mind the possible or potential demand 
 for money, not the real or effective demand. His statement is 
 true only in a general sense. Goods on the market are there 
 to be sold, and their owners want to sell them for money, but 
 no need for money arises until buyers have been found. The 
 retailer with a stock of goods worth ;$ 10,000 may give rise to 
 a demand for no more money than one whose stock is worth 
 only $1000, for he may sell no more goods. The demand for 
 money is not fixed by the quantity of goods offered but by the 
 quantity sold. 
 
 Another misconception of demand is born of the popular 
 confusion of money with wealth in general. On account of its 
 constant and universal use and its easy convertibility into 
 other forms of wealth, money possesses a peculiar fascination 
 for men. The poor man thinks of his needs in terms of dollars 
 and cents, and is sure he wants all the money he can get. The 
 
 1 See Locke's essay entitled " Some Considerations of the Consequences of the 
 Lowering of Interest, etc." 
 
NATURE AND VALUE OF MONEY 21 
 
 statement that his economic need or real demand for money is 
 no greater than his need for the tools which he uses in his 
 daily toil would be to him at first incomprehensible. Very few 
 men have all the good things of earth they want, and these 
 things can be bought with money. They think it is money 
 they need, whereas what they really want is better houses, 
 better clothing, more comforts, and more luxuries. Writers 
 upon money are not without responsibility for the vagueness of 
 popular ideas on this subject. For example. Professor Smart 
 speaks of money as "the one thing of which nobody ever has 
 enough, for in promise and potency it is almost everything 
 else."i The thing of which nobody ever has enough is wealth 
 in general. Money, instead of being the one thing of which 
 we never have enough, is the one form of wealth which lies 
 heaviest on our hands and which we are the most anxious to be 
 rid of. Indeed, the only intelligent thing to do with money is 
 to part with it. Any other use of it is wasteful. There are, of 
 course, foolish ways of getting rid of it, and wise ways ; but to 
 be got rid of by exchange — that is the mission of money. For 
 a man to have money about him which he does not use o* 
 expect to use, is as uneconomic and extravagant as it would be 
 for a man who is afraid of powder to own a gun. 
 
 The mere desire for money, or for wealth in general, is no 
 part of that demand for money which is responsible for its 
 value. No matter how strong may be the desire for money, if 
 the desire leads to no exchange, and so does not call for the 
 use of money, it is no part of the economic demand for it. 
 The demand for money comes only from those persons who 
 have wealth or services which they wish to exchange. The 
 man who has no horse has no need for a harness ; in the same 
 way the man who has no wealth or services to sell, has no 
 economic need of money and plays no part whatever in the 
 demand for it. 
 
 The notion that money is the essence of all wealth, and that 
 an excessive supply is inconceivable, was exemplified in the 
 sixteenth and seventeenth centuries by the struggle made by 
 
 ^studies ill Economics-, p. 145. 
 
2 2 MONEY AND CURRENCY 
 
 the nations of Europe to get possession of the precious metals. 
 It was then commonly believed that a country's wealth was 
 measured by the amount of money it possessed. Hence nations 
 deliberately sought to adopt policies of trade which would 
 increase their store of the precious metals. They imposed 
 heavy fines upon the export of gold and silver, and sought by 
 means of protective tariffs to discourage the importation of 
 commodities in order that a " favorable balance" of trade might 
 bring the precious metals to their treasuries. This is now 
 known as the mercantilist policy, and is recognized, as between 
 nations, to have been founded upon a fallacy. Gold and silver 
 are no longer regarded as the main or most useful forms of 
 wealth, nor does any nation consciously adopt any policy in- 
 tended to bring them into its possession. A country needs a 
 certain quantity of the precious metals for use in the arts and 
 for use as money. Any additional quantity, if it is not hoarded 
 as an idle and useless surplus, will merely lift the prices of goods 
 to an abnormal level. 
 
 20. The demand for money is measured by the amount 
 needed to make exchanges and to serve as a store of value for 
 use in future exchanges. We cannot measure the intensity of 
 any human want subjectively. We can estimate its strength 
 only by the activities to which it leads. We do not know how 
 hungry a man is until we know how much he can eat. We 
 measure a horse's thirst by the amount of water he drinks. In 
 the same way we can measure the demand or need for money 
 only by the amount that men get possession of for the accom- 
 plishment of their ends. If we could ascertain how many 
 exchanges are being made for money in a given community on 
 a given day, and the total value of goods and services so 
 exchanged, we should have the total volume of money exchanges 
 and should know the demand for money for use as a medium 
 of exchange. If, furthermore, we could ascertain how much 
 money the people of that community thought necessary to keep 
 on hand for use in future exchanges, how much storekeepers 
 carried in their tills in order that they might be able to make 
 change, how much the banks kept as a basis for their credit, 
 
NATURE AND VALUE OF MONEY 
 
 23 
 
 we should know all we could about the demand for money in 
 that community as a store of value. By combining the demand 
 for money as a medium of exchange and the demand for it as 
 store of immediately exchangeable value we should have the 
 total demand for money in that community. 
 
 The demand for money or for any article can be measured 
 quantitatively only by an analysis of the existing supply. For 
 example, all the wheat in the United States falls into one of the 
 following classes: (i) wheat that is being exchanged, (2) wheat 
 held by millers for conversion into flour, (3) wheat held by 
 farmers and speculators for higher prices. Those holding wheat 
 of the third class do not expect to get any satisfaction out 
 of its utility as food, nor to add to its utility and value by con- 
 verting it into flour. If their stock of wheat were destroyed, 
 they would not replace it, for they have no need for the utility 
 which it represents. Hence in measuring the demand for wheat 
 utility we must ignore this part of the existing supply. The 
 demand for wheat utility is revealed on any day by the quantity 
 being sold plus that which is stored for future use. If the 
 wheat falling under these two heads were in any way destroyed, 
 an immediate demand would arise for wheat to take its place. 
 The stock of wheat being held back from the market does not 
 represent any real or effective demand for wheat ; it stands only 
 for a potential or possible future demand. To distinguish it 
 from the supply of wheat on the market at any given time, 
 economists sometimes call it the potential supply or " stock " 
 of wheat. It indirectly affects the value of wheat if its exist- 
 ence is generally known, for according to its quantity it in- 
 fluences the effective demand, buyers always taking it into 
 account in their estimates of the value of wheat. 
 
 Since money seeks constant employment, no man under 
 normal conditions being able to make money by keeping it, 
 there is evidently no stock of money corresponding to the 
 wheat classed under the third head in the foregoing paragraph. 
 The supply of money in any country falls into one or the other 
 of the first two classes: (i) that which is being exchanged; 
 (2) that which is held because the owners expect to have use 
 
24 
 
 MONEY AND CURRENCY 
 
 for it in the near future. In other words, the stock of money 
 in any country under normal conditions always represents and 
 measures the real need or demand for money utility. All the 
 money is always at work. 
 
 Of money, therefore, we can say what can be said of no 
 other good, namely that the supply under normal conditions 
 always equals and measures the demand. This statement is 
 true only under normal conditions. During a panic, when per- 
 sonal credit loses much of its acceptability as a medium of 
 exchange, the need for money increases with great rapidity 
 and the normal adjustment between demand and supply is dis- 
 turbed, to the great inconvenience and loss of business men. 
 So likewise after a panic, on account of the prevailing business 
 stagnation, the need for money dwindles and bankers find them- 
 selves burdened with a stock for which the community has no 
 use. But this lack of adjustment between the demand and sup- 
 ply is never long-lived. The money famine of the panic period 
 usually results in an importation of gold, — if that metal is 
 being used as money, — while the plethora of money after a 
 panic generally ends in an exportation of gold, the gold move- 
 ments in both cases being brought about automatically by forces 
 described in detail in Chapter IV. 
 
 21. The use of credit as a medium of exchange tends to 
 lessen the demand or need for money, and hence to lessen its 
 value, so that the level of prices is higher than it would be if 
 credit were not used. As explained in Chapter I, credit is a 
 promise to pay money and serves as a medium of exchange. 
 Since many promises to pay money are canceled through the 
 agency of banks without the use of money, it is evident that 
 the demand or need for money must tend to decrease when the 
 use of credit is increasing. In a country whose business is 
 giving rise to a certain volume of exchanges the demand for 
 money itself varies in proportion to the use of credit, being 
 large if credit is little employed and small if credit is much 
 employed. This relation of credit to the value of money, and 
 hence to prices, is very important and will be treated at length 
 in subsequent chapters. 
 
NATURE AND VALUE OF MONEY 25 
 
 Credit money, like every other form of credit, by economizing 
 the use of money, lessens the demand for it and so lessens its 
 value. Credit money is in no sense the unit of prices or the 
 so-called standard of value. Its relation to prices is like that 
 of any other form of credit, an indirect one ; it affects prices 
 only through its influence upon the demand for money. For 
 illustration, let us suppose that Congress should decide to retire 
 and cancel the ^346,000,000 in greenbacks now outstanding, 
 and that no provision were made to fill their place with any 
 other kind of credit money. The disappearance of the green- 
 backs would break the adjustment between the money demand 
 and the money supply, and each piece of money left in circu- 
 lation would be subject to a greater demand than before, its 
 value rising in consequence. The rise in the value of gold in 
 the United States, the visible expression of which would be a 
 fall of prices, would attract gold to this country from other 
 parts of the world until the vacant place in our currency was 
 entirely filled with gold. Such a large draft upon the world's 
 stock of gold would undoubtedly raise its value and so tend to 
 cause a decline of prices in all countries using gold as money.^ 
 
 This illustration, the reader must bear in mind, is purely hypo- 
 thetical, and ignores several possible if not probable effects of 
 a sudden retirement of the greenbacks. In the business world, 
 which is the economist's only laboratory, interfering forces can- 
 not be eliminated. The economist, therefore, can predict ten- 
 dencies only, not precise results. However, if greenbacks were 
 to be called in and canceled, as we have supposed, it would 
 be safe to predict that prices would fall and that gold would 
 be imported into the United States ; but the extent of the fall 
 
 ^ It should be noticed that the quantity of money (i.e. the supply of money 
 units) needed in the United States would decline in proportion as the value of 
 gold rose. Thus, if the value of gold rose 10 per cent, the normal level of prices 
 would be some 9 per cent lower than before the greenbacks were retired, each dollar 
 would exchange for 10 per cent more goods than before, and hence the country, if 
 we suppose that meantime its business had not grown, would need 9 per cent less 
 money. Under this supposition, the supply of money in the United States amount- 
 ing to $2,500,000,000, the place left by the greenbacks would be adequately filled 
 when iSi2i,ooo,ooo of new geld had found its way into the money supply. 
 
26 MONEY AND CURRENCY 
 
 of prices and of the importation of gold could not be foretold, 
 for the readjustment of the world's business to a new level of 
 prices could not be accomplished without a disturbance of credit 
 and of business conditions that would seriously affect the demand 
 for money in every country. 
 
 Supply of Money 
 
 22. By supply of money is meant the number or quantity of 
 money units ^ available for use as a medium of exchange. As 
 has been pointed out, under normal conditions the supply of 
 money includes all the money in a country. In the case of any 
 other good the supply may be divided into effective supply, or 
 that portion which is wanted on account of its utility, and 
 potential supply, or that portion which men are holding for a 
 better market price. But under normal conditions there is no 
 potential supply of money, for no profit can be made by holding 
 it. The money supply of a country then includes (i) all the 
 money which is actually engaged in making exchanges, and 
 (2) the money held in the pockets of the people, in the tills of 
 shopkeepers, and in the reserves of banks. The money in the 
 second class is commonly said to be serving as a store of value, 
 yet all of it is held in response to a real demand for it for serv- 
 ice as a medium of exchange. Any pieces of money that have 
 been hoarded or converted into ornaments cannot properly be 
 considered part of the effective money supply ; such pieces 
 must be classed as in an abnormal potential supply. 
 
 23. The supply of money is something different from the 
 supply of money utility or money value. This distinction it is 
 important to notice for the reason that money's power of serv- 
 ice increases as its value increases. The reader will under- 
 stand the distinction if he thinks of the effect which a great fall 
 
 1 A money unit — often called the monetary unit — is a definite amount of 
 money which law or custom makes the basis for calculation or measurement. In 
 the United States the dollar is the money unit, in England the sovereign, in Ger- 
 many the mark, in France the franc. All commodities have their units of meas- 
 urement, as bushels of wheat, cords of wood, bales of cotton. 
 
NATURE AND VALUE OF MONEY 27 
 
 of prices would have upon the purchasing power of the money 
 at his. command. A fall in prices of 50 per cent, if it were 
 uniform in its application to all goods, would evidently enable 
 him to buy with his money just twice the amount which he 
 could buy before the fall took place, fifty cents buying as much 
 after the fall as a dollar had bought before. If the money supply 
 had not been reduced, its total value or purchasing power would 
 have been doubled. Thus, without any change whatever in the 
 supply of money units, a change of the greatest importance 
 may take place in the supply of money value. 
 
 In the case of no other good is this distinction of any conse- 
 quence, for the utility of no other good increases in the same 
 proportion as its value. Wheat, for example, derives its value 
 from its food utility, and this is not augmented by an increase 
 in the value of wheat. A bushel of wheat will feed no more 
 people when worth two dollars than when worth one dollar. 
 But the efficiency of money, that is to say its power to satisfy 
 the human want for which it exists, varies directly with its 
 value. The more money is worth, the more goods it will 
 exchange. Changes in the value of money, therefore, are of 
 greater consequence than changes in the value of anything else, 
 for such changes have an immediate effect upon the usefulness 
 of a given supply of money. 
 
 This brief analysis of the supply of money value shows how 
 futile it is to attempt to regulate it by legislation, or to inter- 
 fere with the necessary relation existing between it and the 
 supply of money units. The grocer who puts sand in his sugar, 
 or the confectioner who puts terra alba into his sweets, is pub- 
 licly condemned for the use of adulterants. In each of these 
 cases the apparent supply of the commodity is increased with- 
 out any increase of its utility. Arbitrary additions to the supply 
 of money units have the same adulterant effect; they enlarge 
 the apparent supply of money without any increase of its real 
 utility or effectiveness. 
 
 24. The supply of money value (i.e. of utility possessing 
 universal exchangeability) is the product of the demand for 
 money, is independent of the number of money units, and tends 
 
28 MONEY AND CURRENCY 
 
 always to equal the demand. Let us suppose an isolated com- 
 munity to contain a population of one hundred thousand people, 
 who are making and exchanging goods very much as are the 
 people of the United States at the present time. Their need for 
 money will be a need for a certain quantity of exchange power 
 or value, and will be determined by the volume of exchanges 
 they wish to make with money. All their other economic needs 
 will be for definite quantities of goods, and not merely for value 
 embodied in goods. A family that requires a barrel of flour 
 every month will not find that its need has changed merely 
 because the value of a barrel of flour has changed. In the case 
 of flour it is a certain amount of food that is wanted and not 
 a certain amount of value in the shape of food. In the case 
 of money, however, it is a certain amount of readily exchange- 
 able utility that is wanted rather than a certain number of coins 
 or bills. 
 
 The desired amount of money utility will always be in exist- 
 ence, for it is created by the need for it. If the supply of 
 money is ;^i, 000,000, the need for value in a form immediately 
 exchangeable will give to that million dollars a purchasing power 
 sufficient to render it capable of transacting all the business of 
 the community. As the population increases, the community 
 may be obliged to send out to get more flour or meat, but it 
 will be under no such necessity of increasing its supply of 
 money, for the value of the existing supply will increase as the 
 demand increases ; in other words, the purchasing power of 
 each money unit will increase and the prices of goods fall. 
 
 25. Thus the supply of money varies in value automatically, 
 always tending to equal the demand. Money is unique in this 
 power to adjust its utility to the demand. The dollar is the 
 only tool used which is capable of performing all the work asked 
 of it. No limit can be put upon its exchangeability, and hence 
 the service for which each dollar is potentially competent is 
 indefinitely great. 
 
 To return to our isolated community of one hundred thousand 
 people, let us suppose that it doubles in population and in the 
 production of wealth, and that the use of credit does not change. 
 
NATURE AND VALUE OF MONEY 
 
 29 
 
 Then its need for money has doubled. Although it will now 
 need twice as much money value as formerly, an increase of 
 the money supply will not be necessary, for the need will be 
 met by an increase in the value of each piece of money. In 
 other words, prices will fall 50 per cent, and things which for- 
 merly sold at one dollar will sell at fifty cents. 
 
 Relation of Prices to Money 
 
 26. Money may be called the unit of price but not the unit 
 of value. The latter expression is in common use, for men, as 
 has been said, are accustomed to think of money as a symbol of 
 
 SUPPLY Diagram I 
 
 all values, and so they instinctively think of the price of a good 
 as revealing its value. But price and value are very different 
 concepts, and changes in value are not necessarily reflected by 
 changes in price. The price of any article depends upon two 
 circumstances, its own value and the value of money. Any 
 cause tending to lower the value of potatoes, for example, tends 
 to lower their price, for men will then give less money in ex- 
 change for them ; in precisely the same way any cause tending 
 
3° 
 
 MONEY AND CURRENCY 
 
 to increase the value or general purchasing power of money will 
 ,tend to lower the price of potatoes and of other commodities as 
 well, for as the dollar increases in value men will demand larger 
 quantities of goods in exchange for it. 
 
 Diagram I (on page 29) may help the reader. Let the circle 
 on the right represent a bushel of wheat, and the circle on the 
 left the monetary unit of a country, say one dollar. The ex- 
 change relation between the two is the price of wheat, as indi- 
 cated by the horizontal line connecting the two, the price 
 being assumed at one dollar. 
 
 The value of wheat depends upon the demand for it and the 
 supply. The value of money depends upon the demand for and 
 supply of money. Let us suppose now that the supply of wheat 
 is increased without any change in the demand, and that the 
 value of wheat falls. Then if the demand and supply conditions 
 determining the value of money have not changed, we shall 
 have a fall in the price of wheat, as illustrated in Diagram II, 
 in which the dotted lines show the new position taken by 
 wheat in relation to money.' 
 
 Diagram II 
 
NATURE AND VALUE OF MONEY 
 
 31 
 
 Next let us suppose that the conditions governing the general 
 value of wheat remain unchanged, but that the value of money 
 has been raised by an increasing demand. Here again we 
 get a fall in the price of wheat, shown by the dotted lines in 
 Diagram III. 
 
 ^'—<-~^ 
 
 .'L^!S^_t°SlNTs 
 
 Diagram III 
 
 The reader will see, after very little analysis, that the price of 
 wheat depends on four very different circumstances : that it will 
 tend to rise (i) when the demand for wheat increases ; (2) when 
 the supply of wheat decreases ; (3) when the supply of money 
 increases ; (4) when the demand for money decreases ; and that 
 it will tend to fall when opposite changes take place. 
 
 That the prices of goods depend quite as much upon the 
 value of money as upon the value of the goods themselves is 
 a truth that the reader must clearly grasp. It may be a little 
 puzzling at first, for it is natural to think of money as a fixed 
 and stable thing, with respect to which other things fluctuate. 
 To many men the idea that money changes in value is as novel 
 when first presented as the notion that the ocean changes its 
 
32 MONEY AND CURRENCY 
 
 level. The reason for this misapprehension with regard to the 
 value of money lies in the fact that men think of price as being 
 identical with value, and since the "price" of gold (and of sil- 
 ver in a country where it is freely coined into money) never 
 changes, it is assumed that the value of gold is unchanging. 
 The common belief in the stability of money is analogous to the 
 illusion existing among primitive peoples with regard to the 
 solar system. They think the earth is stationary. It is their 
 viewpoint, and all changes on the screen of the firmament seem 
 to them to reflect changes in the heavens, not in the position 
 of the earth. The analogy, like all analogies, is imperfect, but 
 it is suggestive. The fact that changes in price reflect changes 
 in the value of money as well as changes in the values of goods 
 is very important. 
 
 27. The world has had experience with two kinds of money: 
 (i) commodity money, or money made out of material of which 
 the free use is permitted as money, so that its value is the 
 product of two sets of utilities, namely its utility as money 
 and its utilities as an ordinary commodity ; (2) fiat money, 
 or money the value of which has no relation to the value of 
 the material out of which it is made, being the product solely 
 of its utility as money. 
 
 Gold and silver have for many centuries been used as com- 
 modity money. The free coinage of these metals is essential 
 to their use as commodity money. Coins made of gold or silver, 
 if their free coinage is not permitted, are either credit money 
 or fiat money. By free coinage of a metal is meant that any 
 person has the right to take it to the government mint and 
 have it converted into standard coin. When the free coinage of 
 a metal is permitted, the value of the metal practically deter- 
 mines the value of money. ^ 
 
 The value of fiat money depends solely upon the demand for 
 and supply of money. By some writers it has been called 
 "pure money" or "ideal money." Others seem so impressed 
 by the risks connected with the use of fiat money that they 
 deny even its theoretical possibility, insisting that a substance 
 
 ^The use of the precious metals as money is discussed in Cliapter IX. 
 
NATURE AND VALUE OF MONEY 
 
 33 
 
 used as money must have value before it can be so used, and 
 that it gets no added value from such use. Fiat money is 
 more than a theoretical possibility and it is of vital importance 
 that its nature be understood. It is the subject of Chapters XIII 
 and XIV. 
 
 LITERATURE 
 
 Mill, Political Economy, Book III, chaps, vii, viii, and xv; White, 
 Money and Banking, Book I, chap, i ; Walker, Money, Part I, chaps, i-ii ; 
 KiNLEY, Money, chaps, i, ii, v, and viii ; Laughlin, Principles of Money, 
 chaps, i-ii; William Smart, Studies in Economics, chap, v; A. Del 
 Mar, History of Monetary Systems, also Money and Civilization. Karl 
 Menger's article on " The Origin of Money," in the London Economic 
 Journal (June, 1892), is keen and profound. W. W. Carlile's The 
 Evolution of Modern Money (London, 1901) is well written and learned, 
 but not always clear. W. A. Shaw's History of the Currency is a con- 
 venient compilation, but is confused in its inferences and deductions. The 
 same may also be said of J. Schoenhof's History of Money and Prices 
 (New York, 1896). H. D. MacLeod's works on money and credit, although 
 suggestive and informing, are marred by a too confident dogmatism. 
 
 Views not in accord with those presented in this book will be found in 
 Laughlin's Principles of Mottey, Scott's Money and Banking, Kinley's 
 Money, Farrer's Studies in Currency, and Carlile's Evolution of 
 Modern Money. Professor Laughlin's Principles is a valuable reference 
 book on account of its bibliographies and historical data. 
 
 The reader will find good expositions of the theory of value in the works 
 on economics by Mill, Marshall, Seager, Jetter, Gide, Pierson, and 
 Seligman. 
 
CHAPTER III 
 
 NATURE AND USES OF CREDIT 
 
 28. Various definitions of credit. To-day a credit instrument is a promise to 
 pay money. 29. The important service of credit as an instrument for the transfer 
 of capital. 30. Credit does not create, yet it leads to increased production. 
 31. The basis of credit is confidence. 32. To what extent is credit "based upon 
 goods".' 33. Credit of unlimited acceptability, — popularly called money. Bank 
 notes and government notes. 34. Credit of limited acceptability, — the promissory 
 note, checks, bills of exchange, book accounts. 35. Banks are dealers in credit. 
 36. Brief analysis of a bank's operations, — checks, drafts, "deposit currency," 
 clearinghouse. 37. Book accounts and bills of exchange. 38. Large use of credit 
 of limited acceptability. 39. Money as a basis of credit and as a hand-to-hand 
 medium of exchange. 40. Forms of credit that do not serve as a medium of 
 exchange. 41. Credit, on account of its swiftness and convenience, is employed 
 by men to the fullest possible extent. 42. Elasticity the essential characteristic of 
 a good credit system. In the United States this exists only in the case of credit 
 of limited acceptability 
 
 28. The word "credit" is employed in different ways in every- 
 day life and in the business world. No single definition will 
 cover its full significance. A man is said to have credit, for 
 instance, if he is known to be a man of integrity who always 
 pays his debts when due. Here credit means the power to 
 borrow or to get goods or services by promising to pay in the 
 future. To the bookkeeper the word "credit " means the opposite 
 of "debt," namely that something is owed to a person or to an 
 account. If a general wins a victory, we give him credit for it, 
 and his friends object if the credit is given to any one else. 
 Preserving the idea of indebtedness, we may say that by this 
 use of the word we give him his due. The etymology of the 
 word takes us back to the Latin credo, "I believe," and the 
 Roman accountants employed creditum as our bookkeepers do 
 "credit," as signifying something due a person. John Stuart 
 Mill in his Political Economy defines credit as being the per- 
 mission to use another's capital. Mr. H. D. MacLeod in his 
 Theory of Credit defines it as " a right of action." 
 
 34 
 
NATURE AND USES OF CREDIT 35 
 
 These definitions are correct enough, but they do not set 
 forth the relation of credit to money. When viewed as a 
 medium of exchange credit is merely a promise to pay money. 
 As a concrete definition that answers every purpose. A promise 
 to pay money, when printed or written or in any other way 
 given tangible form, is commonly called a " credit instrument." 
 Promissory notes and greenbacks, for example, are credit 
 instruments. Viewing credit abstractly, we may define it as 
 the power to buy goods or services by giving a promise or con- 
 tract to pay money in the future. These definitions tell us what 
 credit is as a medium of exchange. 
 
 Mr. Mill's view of credit as permission to use another's 
 capital calls attention to a very important service which credit 
 performs. When a man borrows ^1000 to increase the capital of 
 his business, and gives his promissory note therefor, the lender 
 has foregone the usc'of capital and permitted another man to use 
 it. Hence, if we were discussing the production of wealth and 
 the sources from which men get capital for business purposes, 
 it would be correct to say that they get some of it by means of 
 credit, whereby the man who has capital he does not want to 
 use transfers it to one who does want to use it. In a transaction 
 of this sort it should be noted, however, that the credit instru- 
 ment upon which the transfer is based, namely the promissory 
 note, is itself a promise to pay money. Modern industry would 
 not be possible without the use of money and credit. Both 
 enable men easily to get rid of those goods for which they 
 have no use, and to obtain those which they want. 
 
 Mr. MacLeod's definition gives us the legal aspect of credit. 
 A man who gives a promise to pay money gives a right of 
 action against himself. The holder of the promise may sue 
 him for payment and the law will enforce the payment. From 
 the legal point of view, therefore, it is quite proper to speak of 
 credit as a right of action. But that definition gives no idea of 
 the importance of credit as a medium of exchange. The defi- 
 nition may further be criticised in that it is not at all certain 
 that credit was not employed as a medium of exchange long 
 before credit contracts were enforced by the courts of law. 
 
36 
 
 MONEY AND CURRENCY 
 
 29. In this book credit is treated only in its relation to 
 money, i.e. as a medium of exchange; yet it should be noted 
 that this is not its primary and most important use. It is as an 
 instrument for the transfer of capital that credit is most useful 
 to mankind. By capital the economist means all those forms 
 of wealth — all those goods, such as tools, machinery, raw 
 materials, and foodstuffs — which men use in the production 
 of new wealth. These often belong to men who have neither 
 ability nor desire to utilize them, and would go to waste or lie 
 idle if our modern credit system had not been developed. This 
 enables men of brains, energy, and skill, whom economists 
 call entrepreneurs (i.e. men who undertake enterprises) to get 
 possession of a country's capital and devote it to productive 
 uses. The system is so finely organized that the average man, 
 even though himself a borrower or lender, does not fully under- 
 stand its mechanism. The entrepreneur does not borrow the 
 capital, i.e. the tools, raw materials, etc., which he needs ; he 
 gets credit from a bank, and with that buys what he needs 
 for the prosecution of his enterprise. He is commonly said to 
 borrow " money,'' or " capital,'' but these popular expressions 
 are inaccurate; he borrows credit, or, in other words, a right to 
 demand money, and with that buys his capital, becoming the 
 absolute owner of it. The popular idea that he borrows capital, 
 or money, although not in accord with the scientific definitions 
 of those terms, is justified, as will be shown later, by the neces- 
 sary correspondence existing between the amount of credit 
 which the banks of a country are able to lend and the amount 
 of wealth within that country which the owners do not wish to 
 consume or utilize in production. 
 
 30. Credit, it should be noted, is not itself a thing or com- 
 modity, nor does it create anything. It is merely an agency of 
 transfer. No more wealth, no more capital, no more goods, 
 exist after credit is given than before. Nevertheless the use 
 of credit does lead to an increase of wealth, for it brings the 
 productive agents of a country into the possession of those 
 men who are most competent to utilize them. Just as the rail- 
 road has rendered the rich prairies of Nebraska and Kansas 
 
NATURE AND USES OF CREDIT 37 
 
 available to the farmer, so does credit render available to the 
 modern business man remote hoards of capital that would 
 otherwise be idle. Indirectly, therefore, credit is an agent of 
 production, and it is always a fair inference that a country 
 possessing a highly developed credit system is making active 
 use of its productive resources. In such a country it is fair, 
 also, to infer that law and order prevail, for unless contracts 
 are observed credit cannot flourish. 
 
 Foundation of Credit 
 
 31. The basis of credit is confidence. No man will part with 
 his goods in exchange for a promise to pay money unless he 
 has confidence in the ability and will of the purchaser to keep 
 the promise and make the money payment when it falls due. 
 This confidence is twofold in character. The lender must, in 
 the first place, feel morally certain that the borrower is going 
 to be able to pay his debt ; that his affairs are in such shape 
 or that his business ability is such that he will be able to pay 
 the debt when it is due. In the second place, the lender must 
 feel certain that the borrower is a man of integrity who will not 
 seek to avoid payment. It is evident that no one will part with 
 something valuable in exchange for a mere promise if he is 
 doubtful about the promise being kept. To be sure, the law 
 protects the lender as far as possible, yet a man who is bent 
 upon frcud is sometimes able to circumvent the law. The 
 delay caused by litigation is vexatious, and men never volun- 
 tarily accept a credit instrument which is likely to be contested 
 in the courts. Credit, therefore, is based upon confidence in 
 character as well as upon confidence in business ability. 
 
 In the case of some credit instruments the lender's confi- 
 dence is founded upon the property of the borrower as well as 
 upon his character; as, for instance, when loans are secured by 
 a mortgage upon real estate or other property of the borrower. 
 Credit of this kind is of far less importance as a medium of 
 exchange than credit which is not secured by mortgage. The 
 greater part of the loans of our commercial banks is not secured 
 
38 MONEY AND CURRENCY 
 
 by the pledge of property, the banks relying for their safety 
 upon the character and business ability of the borrowers. 
 
 The confidence that underlies credit is not altogether per- 
 sonal. A man's ability to pay a debt usually depends upon his 
 ability to sell goods, and that depends upon the ability of peo- 
 ple to buy the goods and pay for them. The confidence upon 
 which credit is based, therefore, is rooted in general business 
 conditions. When times are brisk and the demand for goods is 
 temporarily outrunning the supply, the credit of any individual 
 is much better than when opposite conditions prevail, for more 
 confidence is felt in his ability to carry on his business success- 
 fully and make good his obligations. 
 
 32. On account of this dependence of credit upon business con- 
 ditions some writers have held that credit is based upon goods. 
 They describe it as the power to " convert goods into means of 
 payment," or as a "transfer of goods in consideration of a 
 promise of a future return of equivalent value." ^ This view is 
 given plausibility by some such illustration as the following. 
 Jones, a miller, has five thousand bushels of wheat in a ware- 
 house; he wishes to make improvements on his mill that will 
 cost ^1000, but has no money; by pledging the wheat as 
 security he is able to borrow $1000 from a bank, thus con- 
 verting the wheat into a means of payment. According to 
 this view, the amount of credit available in a given community is 
 strictly limited by the value of the bankable or easily salable 
 goods in the community. As the reader can readily see, this 
 is not the case. Banks do more than lend money upon the 
 security of goods already in existence; they lend readily to 
 men in whose power to produce goods they have confidence. 
 In other words, that confidence which is the corner stone of 
 credit may be founded either on the debtor's possessions or on 
 his personal character and business ability. Credit is limited, 
 therefore, not by a community's wealth, but by that plus 
 lenders' estimates of its power to produce wealth. 
 
 Nor is it correct to say, as do some writers, that what men 
 really borrow is goods, not money. What the borrower really 
 
 ' See Laughlin's Principles of Money, chap, iv; also Kinley's Money, p. 201. 
 
NATURE AND USES OF CREDIT 39 
 
 wants is goods, but to-day what he always borrows is money 
 or a right to demand money. Money, not goods, is what he 
 promises to repay. With the borrowed funds, whether in the 
 form of cash in hand or credit, he buys the goods he wants and 
 makes use of them. They belong to him. He cannot pay his 
 debt with them, for they are not what the lender wants. Those 
 writers who say that credit transactions are loans of goods 
 " expressed in terms of money," canceled by transference of 
 "titles to goods" (that is, money) from debtor to creditor, 
 speak in a vague and misleading metaphor. Money is not a 
 title to goods or property. It is itself a good, a piece of prop- 
 erty or wealth. It has real value as much as any other good 
 or commodity that men use. Money, or the right to demand 
 money, is the thing lenders part with, and money is the thing 
 they want back. To say, as some do, that credit promises the 
 return merely of equivalent value, the loan only having been 
 "expressed in terms of money," is not true. Lenders do not 
 want "equivalent value " in payment ; they want back the same 
 thing they loaned, namely a definite sum of money or a satis- 
 factory title to it; and they are satisfied with money even 
 though a rise of prices may have made its value less than when 
 they parted with it. 
 
 It may strike the reader that unnecessary emphasis is given 
 to this point of relation between money and credit. It is an 
 important point, however, and in the literature of money it has 
 been sadly obscured by a careless use of words. Furthermore 
 economists are prone to consider the problems of interest, 
 profits, and wages, the whole theory of the production, exchange, 
 and distribution of wealth, as if money were not used at all, it 
 being assumed that the introduction of money as a medium 
 makes no difference in results. Beyond question the general 
 laws governing production and distribution can in that way be 
 arrived at. It is right enough to say that the real profits of the 
 entrepreneur, the real income of the lending capitalist, and the 
 real wages of the workingman are goods, if the meaning 
 of "real" in this use is correctly understood. The word, how- 
 ever, is susceptible of misinterpretation. 
 
4° 
 
 MONEY AND CURRENCY 
 
 Wages, profits, and interest are not paid in goods but in 
 money. If money were always stable and changeless in value, 
 then changes in money wages would reflect changes in so-called 
 "real wages." But moneyis not stable. It is not a title to goods. 
 It is a fluctuating good, sometimes dearer, sometimes cheaper. 
 It is more, therefore, than a mere medium of transfer, for by its 
 changes of value it introduces into the business world a disturb- 
 ing element that is lacking in the classical economist's world of 
 barter. Hence, to be exact and scientific, we must be careful 
 to describe things as they actually exist, not as they might 
 exist in a hypothetical state. Shall we say that the average 
 laborer is to-day paid in goods .-' Certainly not. He is paid in 
 cash, and the dollars he gets do not always buy the same quan- 
 tity of goods, for prices are constantly changing. In the same 
 way the capitalist gets the principal and interest of his loans 
 in money, not in goods. In the modern world of business 
 money is the most important single commodity. It cannot be 
 ignored as a mere go-between, yet that is what those writers 
 do who declare modern credit to be the power to borrow goods 
 on condition that an " equivalent " be returned in the future, 
 and who assume that modern bankers lend goods and receive 
 back goods from borrowers. Money is the thing men toil and 
 sweat for in this world; it is the thing they borrow and repay; 
 it is a real thing, not a mere title to something, and credit is its 
 representative. 
 
 Is it not true, then, that credit is based on goods? It all 
 depends on what that expression means. In a certain sense 
 money itself can be said to be based on goods, for its exchange- 
 ability for goods is the essence of its value. Credit, being 
 merely money in posse, has the same dependence upon goods, 
 and also a dependence born of the contingent exchangea- 
 bility of goods into money. The banker who lends ;^iooo 
 to a grocer gives credit because groceries are easily market- 
 able, that is exchangeable for money, and he would not lend 
 the grocer a sum of money exceeding the sum his stock of gro- 
 ceries would sell for, nor indeed so large a sum. Undoubtedly 
 back of all loans or credit transactions there is confidence in the 
 
NATURE AND USES OF CREDIT 41 
 
 lender's mind that wealth exists, or will exist, sufficient to liqui- 
 date the debt at maturity. But that wealth must be exchange- 
 able, i.e. salable for money ; otherwise the lender refuses the 
 loan. It follows, as already said, that the credit given in a 
 community at a particular time is limited in a general way by 
 the amount of wealth in that community; in that meaning and 
 in that only is credit based on goods. 
 
 But there should be no quibbling about words. Whether we 
 say that credit is based on money, on confidence, or on goods, 
 the facts are clear. Every credit transaction to-day (barter 
 credit,^ like barter itself, being left out of account as unimpor- 
 tant) creates a contract to pay money, and can be settled or 
 canceled only by the delivery of money or of another contract 
 to pay money. The reader must not let this simple fact be 
 obscured by the complexity of credit operations in modern busi- 
 ness. In the United States we seldom see a gold coin. Almost 
 all exchanges are made with credit, — with greenbacks, silver 
 dollars, bank notes, checks, and bills of exchange, — one credit 
 obligation being canceled by another. Yet underneath all these 
 many millions of credit promises, giving them their value, rests 
 the dollar of 23.22 grains pure gold. If doubt as to the converti- 
 bility of these promises into gold should once enter our heads, 
 no matter how rich in goods the country might be, the whole 
 vast mass of credit would begin to melt away, its value disap- 
 pearing entirely if doubt became certainty, unless the law 
 should give a new definition to "dollar " and provide for a new 
 method of redeeming all outstanding credit. 
 
 Credit of General Acceptability 
 
 33. From the point of view of acceptability, or usefulness as 
 a medium of exchange, credit is divided, as we have already 
 seen, into two classes: (i) credit of general acceptability; (2) 
 credit of limited acceptability. 
 
 1 By barter credit is meant the swapping of goods, one delivery being deferred ; 
 or tlie borrowing of goods on promise to return the same, or an equivalent in 
 other goods, at a later date. In such transactions money does not appear on 
 either side, and no part of the bargain is " expressed in terms of money." 
 
42 MONEY AND CURRENCY 
 
 Credit of general acceptability includes those forms of credit 
 which all persons within a country are willing to take in pay- 
 ment for goods delivered or services rendered. Credit instru- 
 ments of this class are known as "credit money," and should 
 possess at least four qualities : (i) they must be issued by a 
 promisor in whom all the people have confidence ; (2) they 
 must be in convenient denominations ; (3) they must be easily 
 recognizable ; (4) they must be difficult to counterfeit. In 
 the United States the most familiar credit instruments of this 
 class are the bank note, the greenback, and the silver dollar and 
 certificate. These are mere promises to pay money, but every 
 man has such confidence in the promisor that he is willing to 
 take them in lieu of money. Since within the country they do 
 all the work of money as a medium of exchange, they are pop- 
 ularly called money. 
 
 The bank note is a bank's promise to pay money to bearer. 
 It is printed in convenient denominations and in some countries 
 is made legal tender for the payment of all debts. The accept- 
 ability of bank notes is due to the prevailing confidence in the 
 stability of banks and to the convenient denominations in which 
 the notes are issued. Credit is a bank's stock in trade, some- 
 thing which it must maintain at all costs. Its failure to redeem 
 one of its promises on demand means immediate bankruptcy 
 and ruin. Banks, therefore, guard their credit as a woman does 
 her good name, and as a result people come to feel that a bank's 
 promise to pay money is as good as money itself. 
 
 Under government credit money is included all noninterest- 
 bearing promises to pay issued by the government in denomi- 
 nations convenient for use as a medium of exchange. In the 
 United States there are several kinds of this credit money 
 which are described in Chapters XV and XVI. The people of 
 the United States in their daily transactions use credit money 
 almost altogether. The standard money of the country is gold, 
 but very little of it, except in the Pacific coast states, is in circu- 
 lation as a medium of exchange. It is estimated that all the 
 gold in the country amounts to something like ^2,785,000,000.^ 
 I*! January i, 1921. 
 
NATURE AND USES OF CREDIT 43 
 
 Of this sum the government holds about one third and the federal 
 reserve banks have in their possession about ^1,325,000,000. 
 The government's promises to pay money are generally acceptable 
 as a medium of exchange because of the popular confidence in 
 the ability of the government to redeem its promises. If for any 
 reason that confidence were shaken and people became doubtful 
 about the credit money being redeemed, its acceptability would 
 suffer at once. 
 
 Any form of credit which people generally are willing to accept 
 in place of standard money becomes credit money whether so 
 called or not. During the panic of 1893, for example, when 
 confidence in the business outlook was thoroughly shaken, the 
 use of personal credit was greatly restricted, and the demand 
 for a generally acceptable medium of exchange to take its place 
 far outran the supply. In many communities the " pay checks " 
 of large corporations were made to serve as a sort of emer- 
 gency currency. The people had confidence in the corporations 
 although they had lost confidence in each other. These " pay 
 checks," within the small field where they circulated, were 
 credit money. They could not be called national credit money, 
 for their circulation was limited. They were community credit 
 money. 
 
 Credit money serves not only as a generally acceptable medium 
 of exchange but also as a store of value. Men make no distinc- 
 tion between credit money and gold when they are laying aside 
 currency for use in the future as a medium of exchange. Banks 
 are glad to have their reserves in gold and gold certificates (the 
 latter representing gold coin on deposit in the United States 
 Treasury), yet they are almost equally well satisfied to have 
 greenbacks or treasury notes of 1890, for these are redeemable 
 in gold and are also legal tender. Credit money, however, is not 
 a denominator or measure of value. It is in no sense standard 
 money. It is a promise, and its value or purchasing power is 
 derived from the value of the thing promised, namely money. 
 The relation of credit money to the value of money, i.e. to the 
 prices of goods, will be discussed in Chapters IV and XV; 
 
44 MONEY AND CURRENCY 
 
 Credit of Limited Acceptability 
 
 34. Credit instruments of limited acceptability are issued 
 under such conditions as make them an acceptable means of 
 payment only within a restricted field. They include the prom- 
 issory note, the bill of exchange, various forms of bank credit, 
 and the book account. 
 
 A promissory note is an unconditional promise in writing to 
 pay a certain sum of money at a stated time. It is the simplest 
 form of credit instrument and is probably the first one that 
 came into use. Such a note may be given by a man or woman, 
 by a firm or corporation, in order to borrow money or in pay- 
 ment for goods. Promissory notes figure in all loan transac- 
 tions, and, as we shall see later, constitute a large part of the 
 property or assets of a bank. 
 
 For the protection of the holder of a promissory note a body 
 of law exists in every civilized country, which aims to provide 
 for all possible contingencies. A note, for instance, is a nego- 
 tiable instrument if made payable to order or to bearer. We 
 cannot enter into the law of promissory notes. For the present 
 purpose it is sufficient to call attention to the fact that such an 
 instrument will not be accepted except by men who have con- 
 fidence in the maker or indorser. A promissory note, therefore, 
 is capable of serving as a medium of exchange only within a 
 narrow field. Its main use is not as a medium of exchange, 
 but as an instrument for the transfer of capital from lender to 
 borrower. 
 
 35. Bank credits are the most important form of credit in the 
 country and furnish to the business world a medium of exchange 
 often described as "deposit currency." A bank is an institu- 
 tion which deals in credit. The reader must rid his mind of the 
 common notion that a bank deals in money. Just as a hard- 
 ware store handles hardware, a dry-goods store dry goods, or a 
 grocery store groceries, so a bank handles credit. Money is not 
 the thing it deals in any more than money is the thing in which 
 a hardware store deals. Since credit, however, is a promise to 
 pay money, a bank must always have on hand considerable cash 
 
NATURE AND USES OF CREDIT 45 
 
 in order that it may be able to keep its credit promises and so 
 make its credit with its customers as acceptable as money itself. 
 
 That a bank deals in credit may be shown by a simple illus- 
 tration. If a man wishes to borrow $1000 and enjoys good 
 credit, people having confidence in his promise to pay money, 
 he may write a promissory note for ^looo and discount it at a 
 bank, by which is meant that he sells it to the bank for the sum 
 promised on its face less the interest charged. If the note is 
 payable two months after date, and the rate of interest is six 
 per cent, the deduction on account of interest will amount to 
 I per cent, or ;gio. He may take payment from the bank in 
 one of two ways : he may take ^990 in cash ; or he may leave 
 the currency with the bank as a deposit and take away a pass 
 book and check book, drawing later upon the bank whenever 
 he finds it convenient. In the United States and in England 
 the latter method is usually preferred. Thus, as a rule, when 
 a bank discounts a note for a customer, it at the same time 
 increases its deposits ; that is to say, it increases its indebted- 
 ness to depositors. The word "deposit," as is shown by this 
 illustration, is a bank's promise to pay money to an individual, 
 to a firm, or to a corporation. The evidence of the promise is 
 merely an entry in what is known as a "pass book." Banks 
 have learned by experience that all their depositors will not call 
 for all the money due them on any one day, and so are enabled 
 to rhake loans of this character much in excess of the amount 
 of lawful money which they have on hand. 
 
 This illustration shows how credit figures in the business 
 world. The borrower took his own credit to the bank and 
 exchanged it at a discount for the credit of the bank, namely a 
 bank deposit. The borrower took to the bank his own promise 
 to pay money ; he bore away from the bank the bank's promise 
 to pay money ; in other words, for the privilege of using the 
 bank's promise to pay money to the amount of ^990 this bor- 
 rower paid the bank $10, or will have paid it when his note is 
 finally liquidated. It is by transactions of this sort that the 
 banks of the United States make their profits. They are more 
 than lenders of other people's money ; they lend their own 
 
46 MONEY AND CURRENCY 
 
 credit. If they could not do that, their transactions would be 
 much smaller in volume than they now are, and their profits 
 much less. 
 
 Operations of a Bank 
 
 36. An analysis of each of the operations of a bank may 
 help the reader to a clear understanding of the relation of its 
 work to credit. A deposit, as has been said, represents a 
 bank's promise to pay money to an individual. To the bank it 
 is a debt, to the depositor a credit. A man may become a 
 depositor in three different ways : first, he may turn over cash 
 to the bank ; second, he may give it checks and other credit 
 instruments which he has received from other people; and, 
 third, he may give the bank his own promissory note. In all 
 our large cities the first method of deposit is very little used. 
 It has been found, for example, that the currency receipts of 
 the New York banks amount to less than 5 per cent of the 
 total receipts. Deposits are mainly in the form of credit instru- 
 ments. From the legal point of view a deposit is a right of 
 action against the bank for money, but the depositor has no 
 claim on the bank for the identical pieces of currency which 
 he deposited. The cash or credit instruments left by a depos- 
 itor with a bank become at once the property of the bank. It 
 has bought them with its credit and may do what it will with 
 them. 
 
 A check is a depositor's order upon a bank to pay money to 
 an individual, a firm, a corporation, or any other legal person. 
 Sometimes a depositor, wishing the fact of his credit at his 
 bank placed beyond question, gets a check certified; that is to 
 say, the cashier writes or stamps "certified" across the face of 
 it and puts his signature below. When a check has been certi- 
 fied it becomes the bank's promise to pay money, the depositor's 
 account having at once been debited as if the check had been 
 paid. A check, it should be noticed, is not a direct promise to 
 pay money ; it is an order upon a bank. The law makes it, 
 however, the writer's implicit promise that the money will be 
 paid. Any man obtaining goods by giving a check upon a bank 
 
NATURE AND USES OF CREDIT 47 
 
 in which he has no deposit account is liable to prosecution for 
 obtaining goods under false pretenses. A cashier's check is 
 an order on a bank signed by the cashier. In essence it is the 
 same as a customer's certified check. 
 
 A bank draft is an order of one bank upon another to pay 
 money to an individual, a firm, or a corporation. Each bank 
 makes a practice of keeping deposits with banks in other cities 
 in order that they may be able to " draw " upon them. A draft, 
 like a check, is on its face an order to pay money, but it is equiv- 
 alent to a promise that the money will 'be paid, such being the 
 understanding between the bank and the buyer of the draft. 
 The important uses of bank drafts are explained in Chapter V. 
 
 The check and draft, since they are based on the bank 
 deposit, are known as "deposit currency." They are such a 
 convenient medium of exchange that business men employ 
 them wherever possible, for they save the counting and han- 
 dling of money. If every check and draft had finally to be paid 
 with money, it is evident that their use would in the long run 
 effect no economy in the use of money. But liquidation in 
 money is usually not necessary. For illustration, let us sup- 
 pose that A, B, and C have deposit accounts in the same bank, 
 that A owes B $100, that B owes C ^100, and that C owes A 
 ^100. Let each pay his debt by check, and let each deposit in 
 the bank the check which he receives. When the bank receives 
 A's check it will debit A's account $100 and credit B's account 
 ;^iOO ; and so with each check, all the payments being effected 
 without the use of any money. The bank, being a common 
 debtor to several individuals, is able by a mere transfer of 
 credits on its books to cancel or liquidate the indebtedness 
 between the individuals. 
 
 Even if the checks in the foregoing illustration were depos- 
 ited in different banks, no money need change hands, for the 
 banks in all our cities have organized an institution which 
 serves them as a common debtor just as they serve individual 
 depositors. This institution, which is supported jointly by the 
 banks of a city, is called a "clearing house." It is a compara- 
 tively modern invention. As already shown, a bank's deposits 
 
48 MONEY AND CURRENCY 
 
 consist largely of checks and drafts upon other banks in the 
 same city. Before clearing houses were organized it was neces- 
 sary for each bank to send messengers out to collect payment 
 of these. This not only took time and was not safe, the mes- 
 senger being often waylaid by footpads on his return journey, 
 but it necessitated the handling of a great deal of currency. 
 Under the present system each bank sends a clerk to the clear- 
 ing house, once or twice a day, with all the checks and drafts 
 it has received upon other banks. At the clearing house the 
 claims of all the banks iipon each particular bank are totaled. 
 A bank which has claims upon other banks greater than their 
 claims upon it evidently has a net balance in its favor and is 
 called a "creditor bank" for that day. On the other hand, a 
 bank whose claims are less than the claims against it at the clear- 
 ing house is a "debtor bank." Each debtor bank sends to the 
 clearing house the balance which is due from it in the shape 
 either of currency^ or of a check upon some designated bank 
 with which the clearing house and all the banks have deposit 
 accounts. In London, for example, banks pay clearing-house 
 balances by check upon the Bank of England. The balances 
 due each day from the debtor banks are, of course, just equal 
 to the balances due to the creditor banks, and this amount is 
 paid to the latter by the manager of the clearing house. 
 
 By the simple machinery of the clearing house the mutual 
 indebtedness of banks is " cleared " with the use of very little 
 money. For example, in 1920 the average daily clearings at 
 the New York clearing house, by which is meant the average 
 value of the credit instruments sent each day for collection, 
 was ^830,060,031, while the average daily balance paid by the 
 
 ' To render the handling of legal-tender currency unnecessary in the settle- 
 ment of debts between banks, the law permits the use of gold clearing-house 
 certificates, which are issued to banks by the clearing house in exchange for gold 
 deposited with it. These certificates are legal tender between banks, but cannot 
 be used by individuals. For many years banks used for this purpose " currency 
 certificates," which were bills in large denominations issued to banks by the gov- 
 ernment in exchange for United States notes. The issue of currency certificates 
 was discontinued by the law of March 14, 1900, gold clearing-house certificates 
 and gold certificates issued by the government being substituted. 
 
NATURE AND USES OF CREDIT 49 
 
 banks, either in cash or gold clearing-house certificates, was 
 only $82,948,067, or about 10 per cent of the total indebted- 
 ness canceled. 
 
 37. The " book account " is a general name given to all 
 forms of credit of which the record is a mere matter of book- 
 keeping. It includes the retailer's accounts with his customers, 
 the accounts of wholesalers, and those of manufacturers. It 
 includes also the accounts kept by operators on stock and prod- 
 uce exchanges, many of them based upon a mere nod of the 
 head or crook of the finger as the parties are standing in the 
 midst of a howling mob. When a man buys anything and has 
 it charged, he buys it with credit in the form of a " book 
 account." This kind of credit is probably the means of effecting 
 more exchanges in this country than any other single form. 
 Book accounts are finally settled either by some other form of 
 credit, as by check or draft, or by the payment of cash. In the 
 United States accounts between merchants are usually settled 
 by check or draft. Most of the accounts of retailers with indi- 
 viduals, especially in the cities, are settled by check at the end 
 of each month. 
 
 A bill of exchange, or commercial draft, is an unconditional 
 order in writing by one person to another, requiring the pay- 
 ment of a certain sum of money. It originates in a sale of 
 goods, the seller " drawing " upon the buyer. A foreign bill 
 orders the payment of money in a foreign country. When the 
 drawee has accepted a bill it becomes his promissory note and 
 can be negotiated. 
 
 38. Various other forms of credit, such as the postal money 
 order and the money orders of express and telegraph companies, 
 serve as means of payment in a limited way, but it is not neces- 
 sary to describe them. We have considered all the common 
 forms of credit of limited acceptability. In the United States 
 nearly all large payments are effected by the use of some one of 
 these forms of credit. It should be noticed that some have a 
 wider field of circulation than others, and that none of them is 
 universally acceptable as a means of payment. Among business 
 men the bank draft and certified check have almost a general 
 
50 
 
 MONEY AND CURRENCY 
 
 acceptability, being more acceptable than money itself for 
 the settlement of large transactions usually. Their accepta- 
 bility is due to the confidence which men have in banks. The 
 draft and certified check, however, do not deserve the name of 
 credit money, for they are not used by people generally and 
 are not everywhere accepted as a means of payment. A man 
 cannot buy a railroad ticket with a certified check, and hotels, 
 as a rule, decline to cash drafts and checks of any kind when 
 presented by strangers. 
 
 All these kinds of credit, on account of their limited accept- 
 ability, have a short life and are generally presented for pay- 
 ment soon after they are received. It is evident, therefore, 
 that any increase in the volume of these credit instruments 
 necessitates an increase in the reserve of money which secures 
 their ultimate payment. While, as we have seen, not every 
 check is liquidated with money, yet experience has shown that 
 the amount of legal-tender currency in the vaults of a bank 
 should increase in proportion as the volume of its transactions 
 enlarges. 
 
 Two Important Uses of Money 
 
 39. It is important to note the distinction between the use 
 of money as a banking reserve and as a hand-to-hand medium 
 of exchange. A dollar in a bank, serving as a basis of credit, 
 is usually more eificient as a medium of exchange than when 
 in circulation among the people. For example, the manager 
 of a bank with deposits amounting to ^500,000 may find that 
 $100,000 in money is an adequate reserve. Checks amounting 
 to more than $100,000 may be drawn by the depositors, but he 
 is not called on to cash all of them ; some are deposited by the 
 payees in his bank, while others are offset at the clearing house 
 by checks of other banks deposited in his bank by his regular 
 customers. Thus a dollar in a banking reserve may be made to 
 mediate several exchanges at the same time. Hence it is neces- 
 sary to distinguish between the use of money as a basis of 
 credit in banking reserves and its use as a common fnedium 
 of exchange, or, to use a popular expression, as " hand-to-hand 
 
NATURE AND USES OF CREDIT 
 
 51 
 
 money." The importance of this distinction will become more 
 evident when we analyze the circumstances governing the 
 demand for money. 
 
 Owing to the fact that in the United States and in many 
 other countries certain forms of credit money are made legal 
 tender by the law, these become as efficient in banking reserves 
 as money itself. In the United States the greenback, the Treas- 
 ury note of 1890, and the silver dollar and certificate are " lawful 
 money," and are counted in bank reserves as equivalent to gold. 
 
 40. In the foregoing analysis of credit instruments only 
 those have been considered which are particularly available as 
 a medium of exchange or means of payment, thus serving in a 
 sense as a substitute for money. It must not be forgotten that 
 the primary purpose of credit is to effect the transfer of capital 
 from the hands of men who do not want to use it to the hands 
 of those who do want to use it. To effect such transfer is the 
 purpose, indeed, for which banks exist. The use of credit as 
 a common medium of exchange is secondary and incidental. 
 Some of the forms of credit most useful as instruments for the 
 transfer of capital are not well adapted to serve as a medium 
 of exchange. Such, for example, are the mortgage bonds of 
 corporations, and the interest-bearing bonds of nations, states, 
 counties, and cities. These are credit instruments and are 
 transferable, but. their value changes as the date of maturity 
 approaches, and a transfer of ownership is attended by time- 
 consuming formalities. For these reasons they do practically 
 no service as a medium of exchange. As claims upon property 
 they are an acceptable security for loans by banks and so lead 
 to an increase in the volume of deposit currency, but mortgages 
 and bonds themselves seldom pass from hand to hand as a 
 means of payment. ' 
 
 Superiority of Credit 
 
 41. Credit is a swifter and more convenient medium of ex- 
 change than money. As a tool of exchange money is a great 
 time saver. Credit, however, performs the same service and 
 does it with infinitely greater rapidity. Money surpasses barter 
 
52 
 
 MONEY AND CURRENCY 
 
 as the modern railroad " flyer " surpasses the crawling canal 
 boat, but credit leaps to its task with the swiftness of electricity. 
 If the world were stripped of its telegraph wires, its means of 
 communication would not suffer more than would the business 
 world if credit were destroyed. 
 
 Almost all large payments in this country are made by 
 check or draft. Even if a man has the currency actually in 
 hand, he usually deposits it in a bank and makes payments with 
 checks. Without the use of credit a large part of the business 
 upon which the prosperity and welfare of this country depend 
 could not be consummated. The government, for instance, 
 when it paid ^20,000,000 for the Philippine Islands did so by 
 a few strokes of the pen. 
 
 Credit, being the swifter and more convenient medium of 
 exchange, is employed by men to the fullest possible extent. 
 This proposition follows logically from what has been said in 
 preceding paragraphs, but the reader must bear in mind that 
 the conditions determining the use of credit differ in different 
 countries. For example, on the continent of Europe credit is 
 less employed than in England and the United States. The 
 people of the continent do not use the check book and the 
 bank deposit to the same extent as the people of England and 
 the United States. Nevertheless they employ credit to some 
 extent at all times, and their use of it tends .to increase when 
 conditions grow more favorable to its employment. Likewise, 
 in the United States, whenever confidence in business pros- 
 perity is growing and each man's prospects are improving, men 
 become more willing to extend credit and promptly do so. As 
 a general proposition, therefore, it may be said that the use 
 of credit in any country tends to increase whenever any cir- 
 cumstance broadens the confidence upon which it is based, 
 credit thereby becoming relatively a more important medium 
 of exchange, and money less important. 
 
 42. A good credit system is one which provides for an auto- 
 matic increase or decrease in the volume of credit whenever such 
 increase or decrease is demanded by business conditions. If we 
 contrast the work done by the two different classes of credit, that 
 
NATURE AND USES OF CREDIT 53 
 
 of limited acceptability with that of general acceptability, it is 
 easily seen that they are born of entirely different conditions. 
 Transactions between individuals who have confidence in one 
 another are most easily effected by the use of credit having 
 limited acceptability. Transactions between individuals who 
 lack this confidence, or who are not accustomed to bank 
 credits, call for the use of moncjf or some form of credit having 
 unlimited acceptability, i.e. credit money. The use of these 
 two classes of credit, it will be seen, varies with the degree of 
 confidence that exists in a business community. In times of 
 lessening confidence there is increasing need for credit money 
 to do the work which no longer can be done by the other forms 
 of credit ; in times of prosperity, when confidence is growing, 
 the need for " hand-to-hand money " lessens, for a larger pro- 
 portion of the transactions can be effected by limited credit. 
 An ideal credit system would be one which provided for these 
 changes in the volume of the different classes of credit respec- 
 tively, without any conscious effort on the part of men. 
 
 So far as credit of limited acceptability is concerned, the 
 system now in use in the United States appears to be ideal. 
 There is no restraint whatever in this country upon the crea- 
 tion and use of checks, drafts, and book accounts. The law 
 attempts no more than to secure the redemption of such prom- 
 ises when they have once been made. Their volume rises and 
 falls in harmony with the needs of business. National banks 
 are required by law to maintain a reserve of lawful money and 
 must not suffer it to fall below a fixed ratio to their deposit 
 liabilities ; but these requirements are probably not less severe 
 than the prudence of bankers would impose if the law were 
 silent. 
 
 With respect to the other class of credit, however, the prob- 
 lem of attaining an ideal system is more difficult of solution. 
 In some quarters it is urged that the government should 
 attempt its solution by the issue of additional greenbacks or 
 United States notes based upon some sort of security. By 
 others it is held that the problem can be solved only by giving 
 banks the same freedom with regard to the issue of bank notes 
 
54 MONEY AND CURRENCY 
 
 that they now enjoy with regard to bank deposits. Difficult as 
 the solution may be, it is certain that the United States will not 
 have the best possible credit system until an automatic expan- 
 sion and contraction of the volume of credit money has been 
 made possible.^ 
 
 LITERATURE 
 
 Mill, Political Economy, Book III, chap, xi ; C. F. Dunbar, Chapters 
 in the Theory and History of Banking, chaps, i-v ; White, Money and 
 Banking, Book III, chaps, i-iii ; Laughlin, Principles of Money, chaps, 
 iv-v ; H. D. MAcLt;0D, Theory of Credit, or Theory and Practice of Bank- 
 ing, passijn; Walter Bagehot, Lombard Street, — a fine description of 
 the London credit n:iarket ; J. G. Cannon, Clearing Houses (New York, 
 1900); Stephen Colwell, Ways and Means of Payment (Philadelphia, 
 1858); F. A. Cleveland, Funds and their Uses (New York, 1902), — very 
 helpful to the beginner ; J. S. Nicholson, Bankers'' Money (London, 1902) ; 
 A. K. Fiske, The Modern Bank (New York, 1904), — a practical description 
 of banking operations ; Henry Thornton, The Paper Credit of Great 
 Britain (London, 1802), — a classic; W. G. L. Taylor, The Credit Sys- 
 tem (New York, 191 3). 
 
 1 The credit system of England, like that of the United States, is highly devel- 
 oped with respect to credit of limited acceptability, the law making no requirement 
 with regard to the amount of banking reserves ; but in relation to credit of general 
 acceptability the English system is defective, the Bank of England not being per- 
 mitted to issue a bank note unless it is secured by a deposit of gold equal in 
 amount to the face of the note. Bank of England notes are practically gold cer- 
 tificates ; since their issue involves the disappearance of an equal amount of gold, 
 they are a mere substitute for gold and cannot be made to expand or contract the 
 currency as business needs require. 
 
 In other European countries note-issuing banks are subject to fewer restric- 
 tions than in England or the United States. The Bank of France, for example, is 
 practically under no legal restrictions with regard to the issue of notes, and is able 
 at all times to supply the country with all the currency that is needed. There is a 
 nominal limit to the volume of notes that may be issued, but this limit has always 
 in the past been raised when the growth of the country seemed to require an 
 increase, and will probably be raised in the future. The continental countries of 
 Europe, however, make relatively small use of so-called " deposit currency," not N 
 because the law hinders, but apparently because the people have not discovered 
 its advantages over coins and bank bills. 
 
 The credit system of Canada is in many respects ideal. The law leaves the 
 question of reserve to each banker's judgment, and permits a bank to issue notes 
 to the amount of its paid-up capital stock, imposing no requirements as to security. 
 As a result of this freedom, credit of both kinds, that of limited and that of general 
 acceptability, never fails in Canada to satisfy the fluctuating needs of the business 
 world. 
 
 The subject of credit money is discussed at length in Chapter XV. 
 
CHAPTER IV 
 
 CIRCUMSTANCES AFFECTING DEMAND AND SUPPLY 
 
 43. The demand for money, like the demand for any other commodity, depends 
 on a variety of circumstances. 44. It depends on the use of credit, on the rapidity 
 of circulation, and on the total volume of exchanges. 45. Credit lessens the need for 
 money as a medium of exchange and as a store of value. 46. The need for money 
 as a basis of credit, — a need which property cannot fill. 47. Credit increases the 
 efficiency of the money supply, and thus increases the importance of each money 
 unit. 48. Credit is analogous to the " short sale " of a commodity. 49. The use 
 of credit increases with the growth of confidence. Bank statistics are a clew to 
 the quantity of credit in use. 50. The more rapidly money circulates, the less the 
 need for money as a store of value. Increasing rapidity of circulation is equiva- 
 lent to an increase in the supply of money. 51. The demand for money tends to 
 vary with the total volume of exchanges; it depends, therefore, on population, 
 production of wealth, business organization, division of labor. 52. Changes in 
 the value of money are not more difficult to forecast than changes in the values 
 of other goods. 53. The supply of commodity money is automatically regulated. 
 The law of cost. 54. The supply of fiat money is regulated artificially. 
 
 43. By demand for money is meant the need for money util- 
 ity, that is for wealth or value in a form universally accept- 
 able as a medium of exchange or means of payment. By supply 
 of money is meant the quantity of money units available for 
 use as a medium of exchange. Since the utility of a piece of 
 money varies directly with its value, the supply of money utility 
 in a country depends upon the value of each piece as well as 
 upon the total supply of pieces, and tends to vary directly with 
 the demand, of which it is the product. 
 
 The foregoing propositions have already been explained and 
 illustrated. It now remains to consider certain important cir- 
 cumstances upon which the demand for and supply of money 
 depend. A similar investigation would be necessary if we were 
 endeavoring to analyze and account for the value of any other 
 good. When a business man seeks to explain or forecast 
 changes in the value of cotton, he is compelled to examine the 
 conditions upon which the demand for and supply of cotton 
 
 Si 
 
56 MONEY AND CURRENCY 
 
 depend. Is a larger acreage under cultivation, so that a larger 
 supply is forthcoming ? Has the demand been increased by the 
 discovery of new uses for cotton, or by any improvement in the 
 economic condition of those classes who are the largest con- 
 sumers of cotton ? Is the increasing use of some substitute 
 tending to lessen the demand ? Are improvements in manu- 
 facture making cotton goods more durable and so tending to 
 lessen the demand for the raw article, since a given supply 
 will last longer; or do these improvements, by bringing cotton 
 goods into greater favor, enlarge the consumption so much that 
 the demand for the raw good is increased? Calculations of 
 this sort are necessary to the explanation of changes in the 
 value of any commodity. Money is no exception. The value of 
 money, like that of all other things, is determined by demand 
 and supply, and if we wish to explain changes in it, we must 
 take into consideration the conditions or circumstances upon 
 which demand and supply depend. 
 
 In the case of no good is exact measurement of the demand 
 possible. The supply of a good on the market is something 
 tangible and can often be definitely ascertained ; but the de- 
 mand depends on the inconstant wants of humanity, and is 
 something that cannot be measured or photographed; it can 
 be only roughly estimated by the quantity of goods called for. 
 The conditions governing the supply are comparatively simple, 
 while those governing the demand are numerous and variable. 
 Changes in the value of money cannot be understood and 
 explained without some knowledge of the conditions upon which 
 demand and supply depend. 
 
 44. Since the demand for money is the desire or need for it 
 for use as a medium of exchange and as a store of value, it is 
 evident that any circumstance affecting the volume of exchanges 
 to be made with money, or affecting the need for money as 
 a store of value, must change the demand for money, and so 
 tend to change its value and cause the general level of prices 
 to rise or fall. In order, therefore, to account for any change 
 in the level of prices we must examine all the known condi- 
 tions governing the volume of exchanges performed by money 
 
DEMAND AND SUPPLY 
 
 57 
 
 and those determining its use as a store of value or basis of 
 credit. Upon analysis we find that there are three such con- 
 ditions which are important: (i) the use of credit; (2) the 
 rapidity of the circulation of money ; (3) the total volume of 
 exchanges. 
 
 Relation of Credit to Money 
 
 45. Credit tends to lessen the demand for money for use 
 either as a common medium of exchange or as a store of value. 
 That credit lessens the demand for money and so maintains 
 prices at a higher level than they would otherwise hold, will 
 be seen clearly if one considers what would happen if banks 
 notified depositors that their accounts would not be welcome 
 if they made a practice of writing checks for less than $100. 
 Such action by the banks would compel us to make all ordi- 
 nary payments by means of currency (that is, money or credit 
 money). Every man would be obliged to carry much more cash 
 than he does at present, and the demand for currency would in 
 consequence be enormously increased. If the supply of money 
 or credit money, such as bank notes, were not at the same time 
 increased in a corresponding amount, the value of money would 
 rise ; in other words, prices would fall. 
 
 A panic furnishes an excellent illustration of a change in the 
 use of credit. In times of panic, when every man questions his 
 neighbor's solvency, that confidence which is the foundation of 
 credit is shaken, and men are less willing than usual to accept 
 promises of money in lieu of money itself. As a result, a panic 
 is always marked by a startling fall of prices, which is the result 
 of the increased demand for money caused by the disuse of 
 credit. After the panic is over men slowly regain confidence 
 in the outlook and credit comes into use again, the demand for 
 money decreasing and prices rising.^ In the United States the 
 increased need for money caused by panic has usually received 
 
 ^ In 1892 the amount of lawful money held by the banks in this country was 
 33 per cent of the monetary stock ; in 1893, on account of the panic demand for 
 currency, the percentage declined to 29 ; in the dull and quiet year of 1894 the 
 percentage rose to 38, but declined again during the uncertainties of 1896 to 29. 
 See Report of Comptroller of Currency for ig02, Vol. T, p. 41. 
 
58 MONEY AND CURRENCY 
 
 tangible illustration by the importation of gold. For example, 
 during the panics of 1884, 1890, and 1893 many million dollars' 
 worth of gold was imported from Europe. Most of it was re- 
 exported after the panics were over, the revival of credit render- 
 ing its presence here unnecessary. 
 
 Credit lessens the demand for money to serve as a store of 
 value in two ways : (i) the use of credit in the form of checks, 
 drafts, etc., reduces the amount of currency which men need 
 on hand in pocketbooks or cash drawers ; (2) credit in the form 
 of credit money, being universally acceptable as a medium of 
 exchange, serves as a store of value in the pockets of the people 
 and in the tills of shopkeepers quite as well as money itself. 
 Those forms of credit money which are made a legal tender for 
 the payment of debt figure in banking reserves as a basis 
 for credit quite as prominently as money itself. The national 
 banks of the United States, for example, are permitted by law 
 to count as lawful money not only gold and gold certificates 
 but also credit money in the form of silver dollars, silver cer- 
 tificates, the United States notes known as greenbacks, the 
 Treasury notes of 1890, and subsidiary silver. In England the 
 notes of the Bank of England are legal tender, and by all banks 
 except the Bank of England itself are used in lieu of gold. The 
 use of credit money as a basis for further credits has been 
 greatly abused, and in the opinion of many financiers is a 
 source of weakness and possible danger in the monetary system 
 of the United States. There can be no doubt, however, that 
 such use of credit money lessens the need for gold in this 
 country.-* The credit instruments which serve as a medium of 
 exchange are all promises to pay money, and there must always 
 be enough money in existence to maintain confidence that these 
 promises will be honored and redeemed. 
 
 Just how much money is needed to serve as a basis for credit 
 it is impossible to determine except by experience, for the 
 
 ^ On September 12, 1914, the national banking reserve consisted of $156,000,000 
 gold and $747,000,000 credit money ; total, $903,000,000. On this as a basis rested 
 demand deposit credits amounting to $5,300,000,000. Of the total reserve, 82 per 
 cent was credit. 
 
DEMAND AND SUPPLY ^g 
 
 amount is not the same in different countries nor in the same 
 country at different times. In the United States the basis for 
 credit consists of the banking reserves and the g 150,000,000 in 
 gold held by the national Treasury. The law in this country 
 and in some others prescribes the minimum reserve to be held 
 by banks, but bankers have learned that this minimum is at 
 some times more than is necessary and at other times much 
 less. How much money should be set aside as a basis for 
 credit.' To that question the only correct answer is. Enough 
 to maintain that confidence which is the corner stone of credit. 
 That a certain amount of money is absolutely necessary has 
 been abundantly proved by experience. 
 
 46. The fact that money is and must ever be essential as a basis 
 for credit needs emphasis, for some writers, impressed by the 
 magnitude of the work which credit does, have shown a tendency 
 to treat it as if it were an independent entity that might some 
 day dispense with the need of money altogether. These writers 
 hold that credit is based upon wealth in general, and ignore its 
 dependence upon money. Credit is a contract to deliver not 
 property or wealth in general but money. A man who owns a 
 thousand bushels of wheat, by giving his promissory note and 
 pledging the wheat as security for its payment, can obtain 
 several hundred dollars in money or secure the acceptance of 
 his note in payment for goods. The promissory note, however, 
 is a promise to pay money, not wheat, and would not be accepted 
 if there were any doubt about the money being obtained if it 
 should be wanted. Wheat is accepted as a satisfactory basis for 
 credit simply because wheat is marketable and can in ordinary 
 times be sold for money. If, however, a man has wealth of a 
 kind which cannot be readily sold, such as a farm, notwith- 
 standing it has undoubted value, he finds difficulty in making it 
 the basis for a loan. The fact that real estate is not easily 
 marketable is responsible for that clause in our National Bank- 
 ing Act which forbids our national banks making loans upon 
 real estate. Good banking policy requires that bank credit 
 shall be based upon those forms of wealth which are quickly 
 and easily convertible into money. The notion that credit is 
 
6o MONEY AND CURRENCY 
 
 based upon wealth in general was largely responsible for the 
 wild-cat currency issued by banks in this country during the 
 first half of the nineteenth century. It was argued that bank 
 notes, since they were based on actual wealth, needed no 
 redemption in specie in order to be good. English bankers put 
 forth the same view during the so-called "restriction period "^ 
 (1797-1821). Wherever this theory has been put into practice 
 panic and destruction of credit have resulted. 
 
 47. Credit increases the efficiency of money. This proposi- 
 tion sets forth no new relation between money and credit. It 
 merely presents in a new way that relation between credit and 
 the demand for money which has already been explained. As 
 we have seen, a given sum of money, by serving as the basis 
 for credit, may through the agency of banks and clearing 
 houses give rise to a volume of deposit currency several times 
 greater in amount, bankers having learned by experience that 
 only a small proportion of the checks written will have to be 
 paid in cash. Each bank in the ordinary course of business 
 receives checks drawn upon other banks, sufficient in the long 
 run to offset the checks upon itself which fall into the posses- 
 sion of other banks. Thus through the agency of credit a small 
 sum of money is made the basis for the settlement of a large 
 volume of transactions. Hence it can be correctly said of credit 
 that it multiplies the capacity of money as a medium of ex- 
 change. Just as the lever increases man's lifting power, so 
 credit increases the efficiency of money. A reserve of $100,000 
 in a bank rests, as it were, on the end of the long arm of the 
 lever and supports business transactions amounting to $500,000 
 or more. Pursuing the analogy, we might say that the fulcrum 
 supporting this credit lever is confidence, for changes in confi- 
 dence always necessitate readjustment. 
 
 It is a mistake to suppose, as several writers appear to have 
 done, that credit in any way increases the supply of money. 
 Since credit instruments serve, as a medium of exchange, credit 
 does increase the supply of that medium, but it does not and 
 cannot increase the supply of money. Credit merely increases 
 
 1 See Chapter XIV, section 197. 
 
DEMAND AND SUPPLY 6 1 
 
 the efficiency of money and so lessens the need for it, for it 
 enables a country to get on with a smaller supply of money 
 than would be necessary if credit were not used. Since, how- 
 ever, goods can be bought with credit as well as with money, 
 any increase in the use of credit means a real increase in the 
 demand for goods, and advances prices quite as much as if 
 money itself had been offered. The prices of goods are there- 
 fore the combined result of the money and credit offered in 
 exchange for them.^ 
 
 The truth of this statement, however, does not imply, as 
 some writers seem to assume, that price is independent of 
 money. The price of a thing is the amount of money it is 
 exchanged for ; it represents the value of the thing in money, 
 and never anything else. Credit, by economizing the use of 
 money, merely increases its effectiveness, enabling a given 
 supply to exchange more goods than it could exchange if the 
 actual delivery of money were demanded. The need for money 
 to consummate a given volume of exchanges diminishes, there- 
 fore, in proportion as the use of credit increases. 
 
 Credit increases the importance of each unit of the money 
 supply. This proposition may seem at first paradoxical. In 
 fact some writers upon money^ have set forth the opposite view, 
 holding that since the great bulk of business transactions are 
 settled by means of credit, the quantity of money in a country 
 is of comparatively small consequence. They seem to regard 
 credit as a distinct entity, having an existence independent of 
 money itself. Even though the population and the production 
 of wealth increase, and the transactions of the business world 
 grow in magnitude, nevertheless, according to this view, credit 
 easily furnishes all the necessary increase in the supply of the 
 medium of exchange.^ The reader should have no difficulty in 
 
 1 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.- — J. S. Mill, Political Economy, Book III, chap, xi, 3. 
 
 ^ See Lord Farrer's Studies in Currency, p. l88. 
 
 * And, conversely, it is held by Lord Farrer and some others that any addition 
 to the money supply can have very little effect on its value. Carlile in his Evolution 
 of Modern Money (p. 283) gets so far away from the truth as to think that modern 
 
62 MONEY AND CURRENCY 
 
 discovering the fallacy which underlies this view of credit and 
 money. Nobody knows to what extent credit may multiply 
 the efficiency of money, but our ignorance on this point need 
 not confuse us as to the real nature of the whole transaction. 
 The thing to be noticed now is the fact that money is neces- 
 sary as the basis for all credit exchanges, and that the impor- 
 tance of each dollar must grow with every increase in the 
 volume of credit transactions for which it furnishes the basis, 
 In a community where no credit is used, the loss of ;^ioo 
 means a reduction by that amount in the power of the com- 
 munity to make exchanges at one time ; but if the commu- 
 nity has an expanded credit system, then the loss of ^loo will 
 reduce its capacity for exchanges by five times, ten times, per- 
 haps twenty times ^loo. An increase of the supply of lawful 
 money, such as takes place when a government prints legal- 
 tender paper money, increases the country's capacity for mak- 
 ing exchanges far beyond the amount of currency that is added 
 to the country's circulation ; and a decrease of the supply, such 
 as sometimes happens in the United States when national rev- 
 enues exceed expenditures, lessens the purchasing power of 
 the people and restricts business operations by an amount much 
 greater than is indicated by the sum that the government takes 
 out of circulation. 
 
 It is not possible to employ credit as a complete substitute 
 for money. That view of it leads to the fallacious belief that we 
 may entirely dispense with the need for money. Credit is rather 
 a device for increasing the efficiency of money, and in doing 
 this it increases the importance of each dollar in the country. 
 Hence changes in the quantity of money in existence are of 
 more consequence when credit is used than when it is not. 
 
 48. Credit is analogous to the sale of a commodity for future 
 delivery, and may be called a " short sale " of money. A man 
 who goes " short of wheat " is one who makes a sale of wheat 
 when he has none. He hopes to be able to buy wheat at a 
 
 banking reserves are analogous to old-time " hoards " in preventing surplus gold 
 from acting on prices. The gold which gets into banks usually has a much greater 
 effect on prices than that which people keep to spend. 
 
DEMAND AND SUPPLY 63 
 
 lower price before he is called upon to deliver. Although 
 money is not sold in the sense that wheat is sold, nevertheless 
 every purchase of a commodity is in effect a sale of money, and 
 a credit purchase is merely a short sale of money, the buyer 
 entering into a contract to deliver money at some future time. 
 Credit purchases in effect are equivalent to an increased offering 
 of money for goods, and tend to lower the value of money just 
 as the speculative sales of wheat tend to depress its value. 
 
 It may be objected that the value of a commodity like wheat 
 is never seriously affected by short sales, for every short sale 
 necessitates an offsetting purchase at a later date. In the case 
 of money, however, perpetual short sales are possible, as is evi- 
 denced by the business of bankers ; for the greater part of 
 their short sales of money (credit transactions) are offset by 
 others. In the case of wheat the day of settlement is never far 
 distant and the stock of wheat available for use by the bears is 
 steadily disappearing into the miller's hopper. But men who 
 make contracts for the future delivery of money face no inevi- 
 table day of reckoning and are perpetually able — unless their 
 excesses bring on panic — to fulfill their contracts with others 
 of the same sort, thus permanently depressing the value of 
 money. 
 
 It is clear, therefore, that the value of money is actually 
 depressed by any increase in credit purchases of goods, the 
 buyers giving contracts to deliver money at a future time. The 
 effect of purchases with credit is similar to that of purchases 
 with money. We may say, therefore, that an expansion of 
 credit amounts to the same thing as an increase of the money 
 supply, and gives an upward tendency to the prices of goods. 
 This statement must not be taken to mean that credit really 
 increases the supply of money. It exerts an influence on the 
 value of money solely by lessening the demand for it; that is, by 
 increasing the efficiency of each dollar it renders fewer dollars 
 necessary for the consummation of a given volume of exchanges. 
 
 49. Since credit is based upon confidence, the use of credit 
 tends to increase as men grow more confident with regard to 
 the future of their business. In good times, when the demand 
 
64 MONEY AND CURRENCY 
 
 for commodities is steady, when the wheels of factories are all 
 turning, when labor is fully employed at good wages, men extend 
 credit to their customers readily and the banks loan freely. 
 In such times, on account of the growth of confidence, credit 
 expands and prices rise. On the other hand, if some national 
 disaster has impaired men's confidence in the business outlook, 
 if floods or frosts have ruined important crops, if war is threat- 
 ened, or if legislation hostile to certain industries is feared, 
 business men grow anxious about their future obligations and 
 become more cautious in their extension of credit to customers. 
 This shrinking of confidence and consequent contraction of 
 credit sends a thrill through all markets and the prices of most 
 goods tend downward. 
 
 It is impossible to determine with any degree of exactness 
 the influence which credit is exerting at any given time upon 
 the prices of goods. Changes in prices may be the result of 
 many different factors, and we can never attribute to any par- 
 ticular one the precise measure of its importance. With regard 
 to the influence of credit we know only that conditions exciting 
 hope and confidence among business men always tend to increase 
 its use and to stiffen prices, and that opposite conditions unsettle 
 prices. We can get a fair estimate of the quantity of money in 
 a country, but credit is an imponderable thing which we can- 
 not measure. There are no statistics showing the volume of 
 transactions performed by credit at any given time. To gather 
 such statistics would be a most difficult and delicate task and 
 has never been attempted. ^ 
 
 Bank statistics furnish the only clew we have to the volume 
 of credit transactions. It is a fair inference that the volume of 
 deposit currency increases with the growth of bank deposits, 
 loans, and discounts. The results which follow the establish- 
 ment of a new bank show how this comes about. When a bank 
 is opened in a community which has hitherto had no banking 
 
 1 The Comptroller of the Currency in 1895, assisted by Professor David 
 Kinley, obtained reports from representative firms throughout the United States, 
 from Vfhich Professor Kinley drew the Inference that possibly 75 per cent of the 
 business transactions of the country were effected by credit. 
 
DEMAND AND SUPPLY 65 
 
 facilities, it becomes convenient for the people of that com- 
 munity to open bank accounts and make many of their pay- 
 ments with checks ; the need for money is correspondingly 
 diminished. If, therefore, the number of banks in a country is 
 increasing more rapidly than the population and the volume 
 of business transactions, we are justified in concluding that 
 the use of credit as a medium of exchange is becoming more 
 important. 
 
 A fair index to the use of credit is also furnished by bank 
 clearings. These do not show the amount of its own checks 
 received by each bank, and are, therefore, not an accurate meas- 
 ure of the full amount of credit business done through the 
 banks. Yet gains in the totals of bank clearings, except such 
 as may be attributed to the normal growth of population and 
 increase of production, may fairly be ascribed to changes in the 
 relative importance of credit as a medium of exchange. 
 
 Rapidity of Circulation 
 
 50. The more rapidly money circulates, the less the demand 
 for it to serve as a store of value, and hence the less its value. 
 The relation of what is commonly called the rapidity of cir- 
 culation of money to its value can best be explained by an 
 illustration. Let us suppose that in New York City the total 
 volume of exchanges effected each day by actual transfer of 
 cash amounts to ;^200,ooo,ooo and that the amount of cash in 
 that city (not counting that in bank reserves) is ;? 100,000,000. 
 It is evident that on the average each dollar performs two 
 exchanges each day. Suppose now that in Chicago the daily 
 exchanges in which currency is used foot up $100,000,000, and 
 that the supply of cash outside the banks is only $25,000,000. 
 Evidently in Chicago each dollar is effecting an average of four 
 exchanges daily, and we can say that money circulates more 
 rapidly, or changes hands more often, in Chicago than in New 
 York, and therefore that less money would be needed in Chi- 
 cago than in New York to consummate the same volume of 
 exchanges during a given period of time. 
 
66 MONEY AND CURRENCY 
 
 The reader should notice that the rapidity of circulation does 
 not lessen the need for money for use as a medium of exchange 
 at any particular moment. That need depends upon the volume 
 of exchanges which men wish to perform with money at the 
 given moment. In the phrase "rapidity of circulation" the 
 element of time is necessarily implied, for there can be no 
 circulation of money except during a period of time. In what 
 way, then, is the rapidity of circulation related to the demand 
 for money.-" It lessens the need for money as a store of value. 
 In a community where each dollar performs on the average four 
 exchanges a day, money is more actively employed than in a 
 community where a dollar changes hands only once a day; in 
 the former at any given moment the proportion of the money 
 supply lying unused in people's pockets is smaller than in the 
 latter. Hence the demand for money decreases as the circula- 
 tion of money becomes more rapid. 
 
 As a factor causing changes in the value of money the rapid- 
 ity of circulation is not of great importance, nor is its relation 
 to money in any way unique or peculiar. It is not important 
 for the reason that it is not, like credit, subject to great varia- 
 tions. In any community it is a pretty constant quantity. The 
 frequency with which a dollar changes hands clearly depends 
 on the circumstances which determine how much money it is 
 convenient for people to keep in store for future use. These 
 circumstances are not the same in different communities, but 
 they do not vary much from day to day or from season to sea- 
 son in the same community. In a rural district, for example, 
 with the nearest bank ten miles away, and the check book 
 unfamiliar, the leather wallet of the average farmer naturally 
 holds more money than the purse of the average city man. 
 The farmer's hired man stows away his wages in his trunk, 
 keeping the same coins and bills for months in anticipation 
 of the holiday when he can go to town and buy a new suit of 
 clothes ; whereas the city workman seldom has in his possession 
 more than a week's wages, all else having been spent or put 
 into a savings bank or a building and loan association. The 
 conditions of country life oblige men to keep on hand larger 
 
DEMAND AND SUPPLY 67 
 
 sums of money than are needed by men in towns and cities. 
 That is all that is meant by the statement that the rapidity of 
 circulation of money is greater in the city than in the country. 
 
 To consider in detail all the conditions governing the rapid- 
 ity of circulation of money would be a long and profitless task ; 
 it would be merely an inquiry into the conditions governing the 
 need for a store of money utility. This need is not subject 
 to sudden variations, being fixed by habit and environment. 
 Furthermore it is not something peculiar to money. If ten 
 farmers use a grindstone in common, the "circulation" of grind- 
 stones in that community is more rapid than if each farmer 
 owned one, and the need or demand for them is correspondingly 
 less. So the roller towel of the frontier hotel, by the rapidity 
 of its circulation, diminishes the demand for towels; and Mr. 
 Dooley's " pot of stirabout," offering its utility to the entire 
 family at the same instant, lessens the demand for pots and 
 dishes in the land where it is popular. These homely illustra- 
 tions suffice to show that money is not the only commodity 
 whose value is influenced by the rapidity of its circulation. 
 
 The rapidity of circulation of money, or the efficiency of 
 money, is usually described as if it were a factor influencing 
 the supply of money. Francis A. Walker, for example, says 
 that the supply of money "is composed of two factors, — the 
 amount of money and the rapidity of circulation." 1 Mr. Mill 
 expresses the same idea as follows : " The value of money is 
 inversely as its quantity multiplied by what is called the rapidity 
 of circulation. . . . The quantity of money laid out is not the 
 same thing with the quantity in circulation."^ This treatment 
 of the subject gives the student an impression that the supply 
 of money is in some way different from the supply of any other 
 commodity, and is apt to confuse him. Any increase in the 
 efficiency of money, whether the result of credit or of the rapid- 
 ity of circulation, increases the volume of transactions which 
 can be effected by a given supply of money, and so can be 
 viewed as equivalent to an increase in the supply of money 
 
 ^Political Econo7ny (advanced course), p. 131. 
 '^ Political Economy^ Book III, chap. viii. 
 
68 MONEY AND CURRENCY 
 
 itself, and as having a similar effect on prices. But the change 
 in prices is not the result of any change in the supply ; it is 
 the product of the diminished need for money. As the effi- 
 ciency of any tool is increased, the need for such tools for a 
 given amount of service is reduced. For example, if a railroad 
 adopts an improvement which increases the speed of its loco- 
 motives lo per cent, unless its business also increases its need 
 for locomotives will be reduced by lo per cent. The increase 
 in locomotive efficiency would be equivalent in effect to an 
 increase in the supply of locomotives. 
 
 Some writers attribute too much importance to the tendency 
 of money to vary its rapidity of circulation as the demand 
 varies. They hold that an increase in the demand for money is 
 usually attended by increased efficiency of the existing supply, 
 so that no actual increase of the supply is necessary. It is 
 quite possible that dollars change hands more often during a 
 panic than in ordinary seasons, but the increase in the rapidity 
 of circulation of money during a panic is never equal to the 
 increase in the demand for money, as is evidenced by the fall 
 of prices always accompanying a panic. During ordinary times 
 there is no reason for believing that changes in the demand for 
 money are offset to any extent whatever by changes in the 
 rapidity of money's circulation. That is dependent upon the 
 habits and environment of the people, from the influence of 
 which escape is not easy.^ 
 
 Volume of Exchanges 
 
 51. The demand for money tends to vary directly with the 
 total volume of exchanges. If credit and the rapidity of circu- 
 lation of money were constant quantities, always holding the 
 same relation to the quantity of money, the demand for money 
 would increase in exactly the same proportion as the volume of 
 exchanges. But the two factors named are not constant, credit 
 
 ' The fact that credit money is almost exclusively used among the people in the 
 United States does not affect the conclusions reached in this section. The more 
 rapid the circulation of credit money, the smaller the quantity of it needed to 
 mediate a given volume of exchanges. 
 
DEMAND AND SUPPLY 69 
 
 in particular being subject to great changes. Changes, how- 
 ever, in the use of credit and in the rapidity of circulation have 
 no causal relation to the volume of exchanges, and there is 
 no reason for supposing that such changes tend to prevent an 
 increase in the volume of exchanges from increasing the demand 
 for money. The proportion of credit transactions to money 
 transactions may, on account of changes in confidence, vary 
 widely within short periods of time, but in the long run that 
 proportion depends on custom and on the existence of such 
 credit facilities as banks and clearing houses. In any given 
 country year after year the relative importance of credit as a 
 medium of exchange may gradually increase, but it cannot be 
 assumed that such increase is sufificient to handle the yearly 
 additions to the volume of exchanges, due to the increase in 
 wealth and population. 
 
 Experience, indeed, has repeatedly demonstrated that changes 
 in the use of credit and in the rapidity of circulation do not 
 keep the value of money from being affected by an increase in 
 the" volume of exchanges. Between 18 10 and 1850 the pur- 
 chasing power of money (gold and silver) rose all over the 
 world, the large increase in the world's business during this 
 period having been accompanied by very small additions to the 
 world's supply of gold and silver. The same thing happened 
 between 1873 and 1897, during which period, despite an 
 increase in the world's stock of gold, prices in gold-standard 
 countries fell some 50 per cent, marking an increase of nearly 
 100 per cent in the value of gold. We may conclude, there- 
 fore, that as the volume of exchanges increases, the demand for 
 money tends to increase, although not necessarily in the same 
 proportion. 
 
 The volume of exchanges in any country depends on the num- 
 ber of people, on their productive capacity, on the organization 
 of business, and on the extent to which the division of labor has 
 been carried. The demand for money, therefore, tends to vary 
 whenever changes take place in any of these factors. 
 
 If there were no changes in the habits of the people from 
 generation to generation, if the sons carried on business exactly 
 
70 MONEY AND CURRENCY 
 
 as their fathers did before them, producing the same amount 
 of wealth per capita, making payments in the same way and 
 always keeping at hand about the same amount of currency, 
 then we might say that the demand for money increases pari 
 passu with the population. Ignorant of the various conditions 
 upon which the demand for money depends, people often 
 assume that the value of money would be stable if only the 
 supply were increased at the same rate as the population. 
 Certain politicians in the United States have recommended 
 legislation intended to bring about an artificial regulation of 
 the money supply on this basis. This view of the subject over- 
 looks other factors in the demand for money quite as important 
 as population, and is therefore crude and unscientific. Changes 
 in population calling for an increase in money may be offset 
 by changes in other factors tending to lessen the demand for 
 money. The so-called " per capita test " of the money supply is 
 therefore quite worthless. 
 
 The demand for money tends to vary with the production of 
 wealth. In a community which produces very few goods the 
 total volume of exchanges cannot be large, and in such a com- 
 munity the need for money will be comparatively small. It 
 is evident that if the productive power of that community is 
 doubled, each man will have a larger quantity of goods to sell, 
 the volume of exchanges will be increased, and the need for a 
 medium of exchange will be enlarged. At present our indus- 
 trial society is so organized that practically all goods are made 
 to be sold. They are sold for money or for credit. It follows 
 that the need for a medium of exchange must increase as the 
 quantity of goods produced and exchanged increases. 
 
 We cannot assume, however, that the quantity of wealth 
 produced in the country is by itself an accurate index of the 
 amount of money needed to maintain a stable level of prices. 
 Even if we assume that no modifications are taking place in 
 the machinery of exchange, and that year after year, on the 
 average, goods are bought and sold the same number of times 
 before they reach the final consumer, yet it would not follow 
 that the demand for money would increase equally with the 
 
DEMAND AND SUPPLY 7 1 
 
 production of wealth. As production enlarges there is an in- 
 crease in the quantity of goods exchanged and in the average 
 size of each transaction. The increase in the magnitude of 
 transactions naturally leads to a larger use of credit, for, as 
 already shown, the most useful sphere of credit is in the field 
 of large exchanges. The expansion of credit makes it possible 
 for the community to effect the larger volume of exchanges 
 without any corresponding increase in the supply of money. 
 The production of wealth is only one factor in the demand for 
 money. It is important, but it must always be considered in 
 connection with that other important factor, credit. 
 
 Improvements in business organization which reduce the 
 number of times a good is bought and sold in its journey from 
 producer to final consumer reduce the total volume of exchanges 
 and so tend to lessen the need for money. Such improvements 
 are constantly taking place. During the last twenty years of 
 the nineteenth century, a period marked by the consolidation 
 of small business enterprises into large corporations, many 
 middlemen were dispensed with. Business changes of this sort, 
 greatly reducing the number of exchanges made in market- 
 ing goods, naturally lessen the demand for a medium of 
 exchange, and must be taken into account when the relation 
 of the value of money to the production of wealth is under 
 consideration. 
 
 On the other hand, the increasing division of labor, which is 
 a feature of modern industrial evolution, has a tendency to 
 increase the need for a medium of exchange. Men in middle 
 life recall the time when labor was employed in ways very dif- 
 ferent from those in which it is now employed, for the last 
 twenty-five years have been remarkable for the improvements 
 made in the application of labor to the production of goods. 
 Adam Smith doubtless felt that the limit had been reached 
 when he described the manufacture of pins and showed how it 
 involved one hundred and sixty different processes and gave 
 employment to one hundred and sixty sets of workers. But 
 since his day, on account of the great variety of mechanical 
 appliances that have been invented, the division of labor has 
 
72 MONEY AND CURRENCY 
 
 been applied to numerous articles of commerce, so that at the 
 present time it is difficult to name any commodity which is 
 the product of a single worker. The shoemaker buys the shoes 
 he wears, the watchmaker the watch he carries. The black- 
 smith, whose father made his own nails and horseshoes, now 
 finds it more economical to buy these and all the rest of his 
 equipment. Fifty years ago it was the ambition of many a 
 farmer to raise upon his own farm all that he and his family 
 consumed ; his fields and his stock furnished him with food ; 
 the wool on his sheep was made into clothing by the spinning 
 wheel and weaving frame in his house. Now the farmer, espe- 
 cially in western Europe and the United States, concentrates 
 his energies upon a few crops, and gets by exchange most of 
 those comforts and necessaries of life which his father used 
 to produce. Such industrial modifications evidently tend to 
 increase the need for money, for they increase the number of 
 exchanges that accompany a given production of wealth. ^ 
 
 52. We have now finished our analysis of the factors influ- 
 encing the demand for money, and have found that in order to 
 account for changes in the value of money from causes affect- 
 ing the demand we must consider the way in which goods are 
 produced and marketed, the growth of population, the produc- 
 tion of wealth, the use of credit, and the rapidity of money's 
 circulation. The reader may well ask, How out of this maze of 
 conflicting forces can one select those which at any given time 
 are predominant.'' And the manifest impossibility of the task 
 may lead him to the conclusion that the value of money is 
 more difficult of comprehension and explanation than the values 
 of goods in general. Such a conclusion would be an error. 
 The values of all goods depend upon demand and supply, and 
 there is none for which the human demand is not subject to a 
 bewildering variety of influences. The demand for money is 
 not peculiar in this respect, nor are changes in the value of 
 money more difficult to explain or forecast than are changes in 
 the values of other commodities. 
 
 1 In David A. Wells' Recent Economic Changes the reader will find many 
 interesting illustrations of the point made in this paragraph. 
 
DEMAND AND SUPPLY 73 
 
 The reader must not suppose that the purpose of our analysis 
 has been to discover what is the value of money. That we 
 always know, for it is revealed by the prices at which goods 
 sell. Leaving the advantages of correct theory aside, there are 
 two practical advantages to be derived from a clear conception 
 of the nature of the demand for money. In the first place, 
 business men, whose paramount interest is the prices of goods, 
 are certain to make costly blunders in their forecast of price 
 changes unless they inquire into the forces acting upon the 
 value of money as carefully as they do into those which affect 
 the values of particular goods. In the second place, our analysis 
 of the factors affecting the demand for money proves that these 
 are so potent and varied that it is not wise to attempt, as has 
 sometimes been attempted in the past, to regulate the value 
 of money by some simple legislative device aiming at artificial 
 interference with the demand or arbitrary control of the supply. 
 
 Supply of Money 
 
 53. The conditions governing the supply of money are much 
 simpler than those governing the demand. When a commodity 
 like gold or silver is used as money, free coinage being per- 
 mitted, the supply in the long run depends on the cost of pro- 
 duction. The supply of fiat money depends on the will of the 
 government issuing it. 
 
 When gold (or silver, or any other commodity) is freely used 
 as money, the supply of money in a country is automatically 
 regulated in such a manner as to keep the value of gold practi- 
 cally the same in all countries of the world. This automatic 
 regulation of the supply is one of the chief advantages of com- 
 modity money. It is effected through the medium of price. 
 When a country using gold as money has a larger supply pro- 
 portionate to its needs than other countries, the value of gold 
 in that country falls below its level in other countries and the 
 prices of goods there are correspondingly higher. Sales to for- 
 eigners decrease and purchases from foreigners increase until a 
 balance of indebtedness is created which compels an exportation 
 
74 
 
 MONEY AND CURRENCY 
 
 of gold in settlement. The loss of gold, by reducing the 
 supply of money, raises the value of money and lowers the 
 level of prices in the country losing it, while tending to raise 
 prices in the countries to which it has gone. By this simple 
 process, gold always seeking those markets where its purchas- 
 ing power is greatest, the supply of money in those countries 
 using gold as money is automatically adjusted so that its value 
 in all tends to be the same. A country is said to have "too 
 much money " when its prices are above the level of prices in 
 other gold-standard countries, and " too little money " when 
 its price level is below that of other countries ; for in the one 
 case gold buys less in that country than elsewhere, and in the 
 other case more. In either case, by the export or import of 
 gold, a readjustment is effected without conscious effort on the 
 part of men. What is said here of gold applies with equal 
 truth to silver in all countries where it is freely coined into 
 money.^ 
 
 This automatic regulation of the supply of metal money, it 
 should be observed, determines only the relative money supply 
 of a country, and not the absolute supply ; it determines the 
 share of money which each country shall have, but has no con- 
 trol over the total quantity to be distributed among the various 
 countries of the earth. This is determined by a law also auto- 
 matic and equally effective in the long run, but less certain of 
 instant application and less easy of comprehension. It is the 
 law of cost, and applies to all commodities, including gold and 
 silver, in precisely the same way. Briefly stated this law is as 
 follows : The supply of a commodity produced under conditions 
 of free competition is so regulated that its value in the long run 
 coincides with the cost of producing it under the most unfa- 
 vorable conditions. Capital and labor gravitate toward those 
 industries which yield highest profits. If any commodity is 
 selling at a price yielding extraordinary profits, additional capi- 
 tal and labor are attracted to that industry, the supply is 
 increased, and the value forced down. On the other hand, if 
 
 1 The international movements of tiie precious metals are explained more fully 
 in Chapter V. 
 
DEMAND AND SUPPLY 
 
 75 
 
 for any reason the value of an article falls below its cost, 
 producers curtail production, the supply is reduced, and the 
 value rises. 
 
 The truth of the law of cost in the case of most commodities, 
 especially those produced under well-known conditions, is so 
 clear and well established among business men that it needs no 
 demonstration or illustration. Its application to a metal like 
 gold, however, is not perfectly evident and is not generally 
 understood. Nevertheless the value of gold, like that of any 
 other good, tends to correspond with the cost of production, 
 and the only check upon any large increase in the supply of 
 gold — and consequent fall in its value — is the difficulty or cost 
 attending its production. A rise in the value of gold causes 
 an increase in the profits of gold mining, and men make greater 
 and greater efforts to produce gold. On account of the uncer- 
 tainties of gold mining these efforts are not always immediately 
 rewarded, but the history of gold production in the past shows 
 that sooner or later a rise in the value of the metal has been 
 followed by a steady increase in the world's annual output, and 
 that a fall in the value of gold, since it lessened the miner's com- 
 pensation, has caused the abandonment of the poorest mines and 
 so reduced the output. So the world's stock of gold available 
 for monetary use tends to increase more rapidly when the value 
 of gold is rising than when it is falling. These changes in the 
 supply of gold tend to keep it at a value which will yield the 
 gold miner only the average rate of profit. ^ 
 
 54. The supply of fiat money is regulated arbitrarily by the 
 government, and its advocates hold that its value may there- 
 fore be kept stable at any desired level, so that the prices of 
 goods need never be affected by changes in the value of money. 
 The world's experience with fiat money and various plans 
 recently urged for adoption are described in Chapter XL 
 
 In conclusion, let the reader bear in mind the important dis- 
 tinction between the supply of money utility, or value, and the 
 supply of money units. The supply of money value cannot be 
 
 1 The peculiar conditions governing the production and value of the precious 
 metals are discussed in Chapter X. 
 
76 MONEY AND CURRENCY 
 
 affected by any arbitrary act of men, and is independent of 
 the supply of money units, for it is the product of the demand 
 or need for money utility, and is always sufificient to satisfy 
 that demand. If money were the only medium of exchange 
 employed, there being no form of credit in use, the value of 
 each money unit would vary, other conditions remaining the 
 same, exactly in proportion as the supply of money varied, for 
 the value of the whole supply would always just equal the need 
 for money utility. But in a country employing credit as a 
 mediftm of exchange the effect of an alteration in the supply of 
 money cannot be foreseen, for no one can know how much 
 it will affect the demand through causing a contraction or 
 expansion of credit. 
 
 LITERATURE 
 
 Mill, Political Economy, Book III, chaps, viii, ix, xi, xii, and xxi ; 
 Walker, Money, Part I, chaps, iii and iv ; Kinley, Money, chaps, viii 
 and ix ; Thornton, Paper Credit, chap, iii ; David A. Wells, Recent 
 Economic Changes, passim. . 
 
CHAPTER V 
 
 DOMESTIC AND FOREIGN EXCHANGE 
 
 55. The mechanism by means of which payments are made between communi- 
 ties within the same country. 56. Reasons why New York exchange is every- 
 where acceptable in business circles. 57. Conditions which lead to shipments of 
 currency, and the limits between which the " price " of New York exchange may 
 fluctuate.' 58. In the long run the supply of New York exchange in any given 
 community is about equal to the demand. The seasonal movement of currency. 
 59. How changes in the rate of interest and in prices maintain an equilibrium 
 between the demand for New York exchange and its supply. 60. International 
 exchanges are governed by the same principles as domestic exchanges. 61. Lon- 
 don exchange as acceptable throughout the world as New York exchange is within 
 the United States. 62. The origin of sterling bills. Sight exchange, short bills, 
 long bills, cables. 63. The par of exchange and the significance of rising and fall- 
 ing rates. 64. The cost of gold shipments. The gold points. 65. The supply of 
 and demand for sterling exchange is due to a country's visible and invisible trade. 
 66. The invisible trade in securities and other forms of debt as important as the 
 trade in goods. The operations of arbitrage houses. 67. How investments affect 
 the rates for foreign exchange. Bank balances. 68. Miscellaneous items. Foreign 
 travel and ocean freights. 69. Gold movements are the result not of the so-called 
 balance of trade but of a balance of indebtedness created by international differ- 
 ences in prices and the rate of interest. 
 
 55. Before the reader can intelligently take up the considera- 
 tion of the practical problems involved in the use of money as a 
 medium of exchange it is necessary that he have some idea of 
 the way payments are effected between different communities and 
 between different countries. 
 
 Payments between different communities of the same coun- 
 try may be effected by the shipment of currency or by the use 
 of credit. In the United States some form of credit is usually 
 
 1 The figures showing the various costs in connection with shipments of 
 currency between New York City and other cities on pages 81, 82, 88, 89, 90, 
 and 91 are pre-war figures. Naturally during the war the cost of insurance and 
 freight to foreign countries was very high, but these figures will very likely 
 return soon to normal. See Chapter XVII for a further discussion of domes- 
 tic and foreign exchange as they are affected by the operation of the federal 
 reserve system. 
 
 77 
 
78 MONEY AND CURRENCY 
 
 employed, shipments of currency being made only when the 
 people of a community as a result of their business transactions 
 are called upon to make payments to outsiders in excess of the 
 payments due to them. Every bank in the United States has 
 funds on deposit in one or more banks in other communities, 
 and thus is able to sell to its customers drafts calling for the 
 payment of money in other cities. Every bank in the United 
 States can sell a draft on New York or even on London. All 
 country banks do not maintain deposit accounts in New York 
 City, but have deposit accounts with banks in near-by large cities, 
 and these have balances in New York upon which their country 
 correspondents are permitted to draw. 
 
 For example, a bank in Barre, Massachusetts, need maintain 
 no deposit account in New York in order to sell a draft on New 
 York, a credit balance in some Boston bank being all that is 
 necessary. When one of its customers desires a draft on New 
 York the Barre bank may issue it to him upon a blank fur- 
 nished by its Boston correspondent. The Barre bank immediately 
 notifies the Boston bank of the transaction. The latter debits 
 the Barre bank with the face of the draft, and advises its New 
 York correspondent that such a draft has been drawn at Barre ; 
 and the New York bank, when it honors or pays the draft, 
 debits its face to the Boston bank. In this simple way the 
 banks of the country are all linked together. Small banks in the 
 neighborhood of New Orleans, for example, sell exchange upon 
 New York through their relations with the New Orleans banks. 
 In the same way small banks in the neighborhood of St. Paul 
 have power to sell exchange upon New York or upon Chicago 
 through their relations with the banks of St. Paul. Thus the 
 country is made up of small financial circles and centers, all 
 included within a great circle of which New York is the grand 
 center. 
 
 56. The medium most employed for the payment of debts 
 between different communities is New York exchange. By this 
 is meant a draft, check, or other credit instrument payable 
 in New York City. The acceptability of New York exchange 
 throughout the country is due primarily to the fact that New 
 
« 
 
 DOMESTIC AND FOREIGN EXCHANGE 
 
 79 
 
 York is the commercial center of the country. Tradesmen 
 everywhere have dealings with New York City. There is not a 
 store in the country which does not receive either directly or 
 indirectly certain of its supplies from that city. The greater 
 portion of the surplus products of the country each year passes 
 through the port of New York on its way to Europe. The man- 
 ufacturers of New York are the largest customers of the pro- 
 ducers of raw material. 
 
 Thus it happens that every part of the country contains men 
 who are selling goods to New York, and also men who are buy- 
 ing goods from there. If all payments were made with money, 
 the one class would be receiving sums of money from New 
 York, while the other class would be shipping sums of money 
 to New York. By the use of credit the shipment of money is 
 almost entirely dispensed with. When a southern cotton factor, 
 for example, ships cotton to New York he may receive pay- 
 ment in a check on a New York bank. This he deposits in 
 his local bank, receiving credit therefor as if he had deposited 
 money. On the other hand, when a southern merchant receives 
 goods from New York he buys from his local bank a draft on 
 that city and with it satisfies the claim of his New York 
 creditor. In neither case is the shipment of money or currency 
 necessary. 
 
 How the local banks get their power to sell drafts on New 
 York can best be shown by a concrete illustration. We will 
 suppose that a bank in Aurora, Illinois, has on deposit $10,000 
 with the First National of Chicago. Let us suppose that an 
 Aurora manufacturer has sold stoves to an eastern dealer and 
 has received in payment a check for $1000 on the Corn 
 Exchange bank of New York. He will deposit this check in 
 his Aurora bank, which will send it to its Chicago correspond- 
 ent, and thereby increase its credit balance to ;^ 11,000. The 
 Chicago bank will send the check to its correspondent in New 
 York, and so increase its credit balance in New York by $1000. 
 By an arrangement with the First National of Chicago the 
 Aurora bank is able to sell drafts on the Corn Exchange of 
 New York, using for the purpose blank drafts furnished by the 
 
8o MONEY AND CURRENCY 
 
 First National. It is quite possible that on the same day a 
 merchant in Aurora, who has bought goods from New York, 
 will call upon the Aurora bank for a draft on New York. He 
 may not want a draft for exactly j^iooo, but that does not matter. 
 The Aurora bank is able to sell to him a draft for any amount 
 up to ^ I i,ooo, for its credit balance in the Chicago bank gives 
 it a right to "draw" upon New York for that amount. Thus, 
 on account of New York's trade relations with all parts of the 
 country, banks everywhere are usually able to sell drafts on 
 that city without being compelled to ship currency. 
 
 New York exchange is used not only for payments between 
 New York and other parts of the country but also for pay- 
 ments between points in the United States outside of New 
 York. A man living in Buffalo who owes $1000 to a man in 
 New Orleans can best pay the debt by remitting a draft on 
 New York City. This method is the one usually employed, for 
 Buffalo banks maintain no balances in New Orleans, and so can- 
 not sell drafts on that city. They can, however, sell a draft on 
 New York, and that will usually be accepted by New Orleans 
 banks at par. When the reader takes into account that New 
 York checks and drafts are every day being used in this way 
 for the cancellation of debts in all parts of the United States, 
 he will understand why New York exchange is deservedly 
 called "the business man's money." 
 
 Causes of Currency Shipments 
 
 57. But does not a bank sometimes receive a call for more 
 New York exchange than it can conveniently sell? This does 
 frequently happen, and as a result bankers are sometimes forced 
 to charge a small premium for New York exchange. The price 
 which they can charge is definitely fixed by the cost of ship- 
 ping currency. This cost depends upon three items: first, the 
 express charge ; second, insurance ; third, the loss of interest. 
 As a rule, the first two charges are linked together in a charge 
 made by the express company, on account of its guaranty to 
 deliver the currency to the consignee. The third item of cost 
 
DOMESTIC AND FOREIGN EXCHANGE 8 1 
 
 varies with the rate of interest. The moment a bank gives 
 money to an express company for shipment to New York City, 
 the bank's power to use it as a reserve, or basis for loans, has 
 gone. That money cannot again become the basis for banking- 
 transactions until it has reached New York. The amount of 
 this item is high or low according to the rate of interest at the 
 point from which the shipment is made. These three items 
 amount to about 50 cents per $1000 on a shipment of currency 
 between New York City and Chicago. Hence Chicago bankers 
 are not able to charge more than 50 cents premium on a New 
 York draft for $1000. A man who wishes to send j^iooo to, 
 New York will not pay a bank over 1^1000.50 for a draft, for at 
 that price he can ship the currency by express. 
 
 The shipment of currency from one point to another and 
 the fixing of the rate of exchange are matters attended to by 
 the banks themselves. No private business man — excepting 
 perhaps a few whose transactions foot up large totals — ever 
 thinks of shipping currency from one point to another. If 
 the people of a western city have been buying from the East 
 more largely than they have sold to it, so that their calls upon 
 the local banks for New York exchange exceed the incoming 
 supply, the banks themselves are forced to ship currency to 
 New York in order to cover their sales of exchange. In the 
 large cities the banks make a business of buying and selling 
 exchange from one another. When the First National of 
 Chicago, for example, finds that its New York balance is run- 
 ning low on account of the demand by its customers for New 
 York drafts, it endeavors to buy exchange from other banks 
 in Chicago, and will pay them a premium for it. In no case, 
 however, will it pay more than 50 cents per ^1000. The 
 sellers will be banks which find that they have on hand more 
 exchange on New York than they have need for, and they will 
 ask for this exchange as high a premium under 50 cents per 
 $1000 as they can obtain. Thfe height of the premium is fixed 
 by competition between buying and selling banks. Sometimes 
 the supply of New York exchange will be so great that it will 
 be sold by one bank to another at a discount. If a bank having 
 
82 MONEY AND CURRENCY 
 
 a large credit in New York City orders currency shipped to it, 
 the expense on each thousand dollars will be 50 cents. The 
 bank can better afford to sell drafts on New York to its neigh- 
 bors at a discount of 40 cents per ;^iooo than order the ship- 
 ment made.^ 
 
 58. In the long run the supply of New York exchange in 
 any community is about equal to the demand for it. This is 
 another way of saying that each community in the long run 
 sells to other communities as much as it buys from them. In 
 certain seasons of the year, however, agricultural districts buy 
 much more from the East than they sell to it. This is always 
 the case in the winter and spring. No crops are then being 
 harvested, yet merchants all over the country are laying in their 
 stock of spring and summer goods. As a result there is so 
 strong a demand throughout the country for drafts on New 
 York that country banks are generally obliged to make some 
 shipment of currency to New York in order to cover the drafts 
 they sell. The opposite condition prevails in the fall when the 
 crops are marketed and are going forward for export. Then 
 the farmers of the West and planters of the South are receiving 
 in payment for their goods eastern checks, which they deposit in 
 local banks. Country banks now find their balances piling up in 
 New York and are unable to sell New York exchange as fast as 
 they would like. As a result New York City banks are usually 
 ordered in the fall to make shipments of cash to the West. In 
 
 1 The cost of a currency shipment to or from New York always falls upon the 
 country bank, for it is always upon their order and for their convenience that ship- 
 ments are made. Following are the express rates per ;Jiooo charged in 1905 on cur- 
 rency shipments between New York and four leading cities : Chicago, 50 cents; 
 St. Louis, 60 cents; New Orleans, 75 cents; San Francisco, jSl.50. Banks some- 
 times ship currency by registered mail. This method is a little cheaper than ship- 
 ment by express, but is less expeditious, it being necessary to negotiate with an 
 insurance company after the package has been registered. The Treasury Depart- 
 ment frequently saves banks from the necessity of currency shipments; thus a bank 
 depositing $1,000,000 in the subtreasury at New York may receive an order for 
 that amount payable at the subtreasury in San Francisco. Many of the large 
 houses in Chicago carry accounts in New York banks, and some of them compete 
 with Chicago banks in the purchase and sale of New York exchange. In Chicago 
 and some of the other inland cities there are so-called exchange brokers whose 
 sole business is the buying and selling of New York exchange on commission. 
 
DOMESTIC AND FOREIGN EXCHANGE 8^ 
 
 the winter and spring, when the West is a heavy buyer from 
 the East, New York exchange is usually quoted at a premium 
 in western cities. In the autumn it is usually at a discount, all 
 banks having an excessive supply. 
 
 There is another reason for this seasonal movement of cur- 
 rency between New York and the country districts. In the 
 autumn, when the crops are harvested, there is a great increase 
 throughout the West and the South in the need for " hand-to- 
 hand money." This must be furnished by the country bank^, 
 and they are forced to draw on their New York balances, first 
 by sales of New York exchange and finally by ordering the 
 cash shipped to them. In the winter and spring cash flows 
 back into the country banks, until they have more than they 
 can profitably use. Then they build up their New York bal- 
 ances either by buying and remitting exchange, or by shipping 
 currency. 
 
 59. What is to prevent a community from sometimes buying 
 much more from New York than it sells to that city .'' Indeed, 
 is not any community always in danger of purchasing so much 
 from other parts of the country that its bankers may be obliged 
 to send out all their supply of currency in order to make the 
 payments .'' This brings up the question of the balance of trade 
 between communities.' The balance of trade is usually dis- 
 cussed by economists only in relation to trade between different 
 countries, yet the principles governing such trade differ in no 
 respect from those governing trade between communities within 
 the same country. 
 
 There is never any danger that a community will be stripped 
 of its money or cash as a result of its purchases of goods from 
 other communities. No matter how freely Chicago and the 
 country tributary to it may purchase goods from the East, those 
 purchases can never make any serious drain upon the cash 
 supply of Chicago. No matter how extravagant the people of 
 the West may be, their purchases of eastern goods can never be 
 greatly in excess of their sales to eastern consumers. Should 
 the people of Chicago for extraordinary reasons at any time 
 increase their purchases from New York and other eastern 
 
84 MONEY AND CURRENCY 
 
 cities, the first effect in Chicago would be an increase in the 
 demand for New York exchange and in bank shipments of 
 currency from Chicago to New York. The loss of currency in 
 Chicago, since it would reduce the lending power of Chicago 
 banks, would tend to cause a rise in the rate of interest and a 
 rise in the value of money. The prices of commodities named 
 would begin to decline ; not of all commodities, but of those 
 which are subjects of speculation, such as stocks, wheat, corn, 
 and pork. Most of the speculators in these articles are bor- 
 rowers, and the interest they pay is an important item in the 
 expenses of their business, so that when the interest rate rises 
 they are obliged to contract their operations. Chicago would 
 thus become a good place to lend in and also a good place in 
 which to buy stocks and bonds, wheat, and other speculative 
 commodities. In other words, the value of money would rise in 
 Chicago, and people in other parts of the country would in- 
 crease their purchases in Chicago markets, remitting New York 
 exchange in payment. The reader must not suppose that these 
 changes in price or in the rate of interest need be so great as 
 to attract general attention. Nevertheless it cannot be doubted 
 that such changes do take place, and that as a result the sales 
 of Chicago to other parts of the country are so adjusted that 
 in the long run they furnish a supply of New York exchange 
 equal to the demand. 
 
 Thus it happens throughout the country that in the course 
 of a year the debts of every community are always practically 
 balanced by its credits on account of sales, so that large ship- 
 ments of currency are never necessary. Indeed, if our mone- 
 tary and banking systems were perfect, no shipment of currency 
 from one part of the country to another would ever occur as 
 a necessary result of trade transactions. Money or currency 
 would only be shipped to a community as a result of an increas- 
 ing need for it as a medium of exchange or as a basis for the 
 expansion of bank credits. In Canada, for example, on account 
 of the elasticity of its bank-note circulation, seasonal variations 
 in the demand for currency are easily provided for by the local 
 banks and their branches. 
 
DOMESTIC AND FOREIGN EXCHANGE 85 
 
 International Payments 
 
 60. The principles governing international payments and the 
 flow of gold between nations are the same as those governing 
 payments between communities of the same country. To a 
 man who has given no thought to the subject, what is known 
 as the " balance of trade " appears to be the cause of gold ship- 
 ments. He may well wonder how this balance of trade never 
 happens to be large enough to exhaust a country's gold supply. 
 Horace Greeley frequently warned Americans against the pur- 
 chase of European articles lest they be impoverished and all 
 their money sent abroad. A little examination of the subject 
 will show that a country's gold supply can never be in danger 
 of serious depletion, no matter how extravagantly fond its 
 people may be of articles bearing a foreign trade-mark. 
 
 As was said in Chapter II, when a country is using gold as 
 money and admitting it freely to the mints for coinage, the 
 value of gold determines the value and purchasing power of 
 money. Gold is really the money of the country ; the coins 
 are merely convenient pieces of the metal so stamped that no 
 one has any doubt as to the quantity of gold they contain. A 
 man who owes $1000 in the United States owes 1000 times 
 23.22 grains of pure gold. In England the sovereign contains 
 about 113 grains of pure gold, or 4.8665 times as much gold 
 as the American dollar; so a sovereign is equal to $4.8665. 
 This equality in the relation between the weights of pure metal 
 in the coins of different countries is known as the "mint par" 
 or " par of exchange." The mint par between the English 
 sovereign and the American dollar is expressed by the equation 
 £,1 = $4.8665. If any person should take 1000 full-weight Eng- 
 lish sovereigns to the United States Mint, he could have them 
 coined into $4866. He would still have the same amount of 
 gold, only its form would be changed. 1 
 
 ^ The sovereign contains 123.27447 grains of Englisli standard gold, which is 
 eleven twelfths fine. It contains, therefore, 113.00157 grains of pure gold. 
 
 The franc, which is the French monetary unit, consists of 4.48025 grains of 
 pure gold (4.97806 grains of standard gold, nine tenths fine). It is the equivalent 
 of 19.3 cents United States money. The mint par between sovereigns and francs 
 
86 MONEY AND CURRENCY 
 
 6i. With respect to the trade of the world London holds a 
 position similar to that held by New York with respect to the 
 trade of the United States. England's insular position and 
 the character of her resources early led her people to seek the 
 profits of manufacture and to explore the earth in search of raw 
 material for her factories and of markets for her products. 
 Every country on the globe trades with London, just as all 
 parts of the United States trade with New York. In the same 
 way that a draft upon New York has become the business 
 man's medium of exchange in the United States, so has a 
 draft upon London become the medium of exchange between 
 different countries. Banks all over the world find it advan- 
 tageous to have credit balances in London banks, for their 
 customers are constantly calling for London exchange. These 
 balances are not built up by the shipment of gold, but by the 
 remittance of checks and drafts which banks receive from their 
 customers who have shipped goods to London. 
 
 62. Drafts on London frequently originate in commercial 
 transactions in which London is not concerned. A New York 
 importer of coffee from South America is quite as likely to 
 send in payment a draft on London as to send a check on New 
 York. Sometimes, indeed, as will appear later, it will be to his 
 advantage to send a draft on London. So an exporter of tea in 
 
 is £1 = 25.22 francs. The franc is divided into 100 centimes. The French law 
 provides that one kilogram of standard gold shall be coined into 3100 francs, of 
 which the government retains 7f as a seigniorage tax. 
 
 The monetary unit of Germany is the mark of 6.14757 grains of standard gold 
 nine tenths fine, or 5.53113 grains of pure gold. One kilogram of fine gold is 
 coined into 2790 marks ; seigniorage 14 marks. A sovereign equals 20.43 marks. 
 The mark is divided into 100 pfennige. The smallest gold coin is the five-mark 
 piece. 
 
 In New York exchange quotations are usually given on the following basis. 
 
 £1 = j!4.8665 
 4 marks = ^.952 
 
 $1 = 5.18 francs 
 
 Throughout this chapter, which is concerned with principles rather than with 
 details, I assume that all international payments are made with sterling exchange. 
 I do this in order that the reader may not be confused with unnecessary complica- 
 tions. Much use is made of exchange on Paris and Berlin, but the principles gov- 
 erning continental exchange are not different from those governing sterling. 
 
DOMESTIC AND FOREIGN EXCHANGE 87 
 
 China, even though his tea has been shipped to Paris, may be 
 paid by a draft on London instead of by a draft on Paris, and 
 may prefer payment in such form. In fact, a draft on London 
 may be used for the payment of a debt in any part of the 
 world, and will be as welcome as is a New York check in any 
 part of the United States. For this reason London exchange, 
 or " sterling exchange " as it is commonly called, comes near- 
 est to being what might be called the world's credit money. 
 Among business men everywhere it is the most acceptable and 
 common medium of exchange in the settlement of large trans- 
 actions. 
 
 The custom of the business world has given rise to what 
 is called a " sterling bill of exchange." A London importer 
 seldom sends a check in payment for the goods he receives. 
 Instead he allows himself to be " drawn on " by the exporter 
 in the foreign country. The exporter writes a draft upon the 
 London importer for the amount in question, attaches to this 
 draft the bill of lading and other evidences of the shipment, 
 and sells it to his local bank for the money of his country. The 
 local bank then forwards the draft to its correspondent bank 
 in London. If it is a sight draft, the London bank at once pre- 
 sents it to the drawee for payment ; if a time draft, the London 
 bank presents it to the drawee "for acceptance," whereupon 
 the drawee writes "accepted" and his signature upon its face. 
 After the draft has been accepted it becomes legally a promis- 
 sory note or bill payable, and may be discounted and passed 
 through several hands before it falls due. 
 
 Bills payable on demand are known as "sight exchange"; 
 bills payable within ten days are called " short bills " ; those 
 running for longer periods, "long bills." Drafts upon London 
 originating in a business transaction in the manner above de- 
 scribed are known as "commercial bills" and seldom run over 
 ninety days. When a banker in a foreign country makes a 
 draft upon a London bank such a bill is known as a banker's 
 draft, or a banker's bill. " Cable exchange" is a name given 
 in New York to drafts upon London sold by banks and paid 
 the same day in London in compliance with a cablegram. Such 
 
88 MONEY AND CURRENCY 
 
 bills, of course, cost more than the ordinary sight bill by at 
 least the cost of the cablegram. A long bill sells for less than 
 a sight bill on account of the deduction of interest. A sixty- 
 day sterling bill for ;£iooo is an order for the payment of 
 ;£iooo in London sixty days hence. In a community where 
 the prevailing rate of interest is 6 per cent such a bill would 
 naturally sell for i per cent less than ^looo. The custom of 
 drawing ten-day bills owes its origin to the length of the voyage 
 across the Atlantic, the intention being that such a bill shall 
 reach London at maturity. 
 
 The Par of Exchange 
 
 63. If the trade between New York and other parts of the 
 world were all settled with sterling bills or bankers' drafts on 
 London, and if our imports were always exactly equal to our 
 exports, sterling bills of exchange would always be at par in 
 New York City. By this is meant that bankers would at all 
 times be able to sell an order for a sovereign in London for 
 $4.86^. They might charge a fraction more in order to give 
 them a profit, but they could afford to sell sight sterling at par, 
 for the supply of sterling bills deposited with them by New 
 York exporters would just equal the demand for sterling on 
 the part of the importer. The New York bankers, by sending 
 the sterling bills to London, would create credit balances to 
 cover all the drafts sold by them, and so would not be obliged 
 to send any gold. 
 
 Such a condition, however, seldom exists. In some seasons 
 of the year the United States (and what is said of the United 
 States applies with equal truth to any other country) is im- 
 porting largely in excess of its exports ; in other seasons its 
 exports are in excess. When the United States is importing 
 more than it exports, the demand in this country for drafts on 
 London runs ahead of the supply in the hands of bankers and 
 they ask more than par for them. A shipment of gold to Lon- 
 don costs about two cents per sovereign. Hence any man who 
 has a debt due in London can afford to pay a banker a premium 
 
DOMESTIC AND FOREIGN EXCHANGE , 89 
 
 of two cents for a sight draft; in other words, he can afford to 
 pay a banker $4.88 for a draft rather than ship gold. The 
 price of sight sterling may rise even to $4,886 before debtors 
 in the United States find it advantageous to ship the gold itself 
 to London. 
 
 On the other hand, when bankers buy more sterling than is 
 wanted by importers, it is evident that their credit balances in 
 London are increasing. Bankers usually desire to have their 
 funds at home and not in foreign cities, but as it costs two 
 cents per sovereign to import gold, they can better afford to 
 sell drafts on London at less than par. Under such circum- 
 stances, therefore, bankers, as a result of competition among 
 themselves, sometimes lower the price of sight sterling to 
 $4,846. 
 
 Thus the price of a draft on London is constantly fluctuating 
 as the trade between this country and other parts of the world 
 varies, or as the relation between the demand for and supply 
 of sterling exchange is altered. When the price of sterling 
 exchange is rising we know either that our purchases abroad 
 are increasing or that our sales to foreigners are decreasing, 
 and that thus the relation between the demand for and supply 
 of sterling is altered. When the price of sterling is declining 
 we know either that our sales to foreigners are increasing or 
 that our purchases from foreign countries are decreasing, and 
 that thus the demand for sterling in proportion to the supply 
 is declining. 
 
 64. The expense in the case of the shipment of gold from 
 one country to another, as in the case of the shipment of 
 currency from one city to another in the United States, is made 
 up of three items : the freight charge, the insurance, and the 
 loss of interest. The first two items are free from fluctuation, 
 although they have declined somewhat during the last twenty 
 years. The loss on account of interest depends, of course, upon 
 the current rate. When the rate of interest is 2 per cent in New 
 York City the cost to a banker on a shipment of gold to London 
 is obviously less than when the rate is 5 per cent. In the same 
 way, when the rate of interest is high in London the cost of a 
 
90 MONEY AND CURRENCY 
 
 gold shipment from London is greater than when it is low. The 
 cost, however, does not necessarily fall upon the banker who 
 makes the shipment. It is borne by the banker on whose order 
 it is made.^ 
 
 It is evident that the price of sight sterling cannot fall below 
 a point in New York City at which it is profitable to export 
 gold. If the supply of sterling bills is so large in New York 
 that bankers are forced to offer them for less than ^4.846, it 
 soon becomes profitable for some house to buy sterling at this 
 rate and at the same time order gold shipped from London. If 
 a banking house can buy sterling at ^4.843 and import gold 
 from London at an expense of only two cents on the sovereign, 
 it makes a small percentage of profit by the transaction ; if the 
 importation amounts to a million dollars, the profit would be 
 
 1 During the last quarter of the nineteenth century the cost of shipping gold 
 from New York to London fell from three to two cents per pound sterling. The 
 charges for freight and insurance both declined, while the increased speed of 
 transatlantic liners reduced the loss on account of interest. 
 
 The following figures, showing the cost of shipping $1,000,000 in gold from 
 New York to London, were furnished by the representative of one of the largest 
 New York banking houses. 
 
 Invested in fine bars, 23,200,000 gr. (48,375 oz.) . . ^1,000,000.00 
 
 Assay office premium on bars, 4^ per JSioo . . . 400.00 
 
 Freight, ^ per cent . . ... 1,562.50 
 
 Insurance, i^ per cent . . . 625.00 
 
 Packing and cartage . . 70.00 
 
 Total outlay . . . . ^1,002,657.50 
 
 The Bank of England's "price" of gold varies from 77s. gid. to 77s. ioi,d. per 
 ounce, English standard, 9i6| fine. The mint coins an ounce of gold, English 
 standard, into 77s. io|d.; but the Bank of England, with which it is the custom of 
 bullion owners to deal, usually pays a fraction less than this sum, thus saving itself 
 from loss of interest while the bullion is being coined. It is assumed below that 
 the bank pays 77s. lod. per ounce. 
 
 48,375 oz. fine = 52,772.7 oz., 9163 fine. 
 
 52,772.7 oz. @ 77s. lod . , ;£'205,374 
 
 Deduct sundry expenses ... 4 
 
 Net receipts in London ... . ;^205,37o 
 
 Cost of sovereign (1,002,657.50 -i- 205,370) ... . $4.8822 
 
 Mint par in United States . . . 4.8665 
 
 Cost of shipment per sovereign . . $.0157 
 
 The reader will notice that no loss on account of interest is included in the 
 foregoing. The New York banker who furnished the figures held that no such 
 
DOMESTIC AND FOREIGN EXCHANGE 91 
 
 about ^700. On the other hand, if the demand for sterling is 
 largely in excess of the supply, bankers are able to sell drafts 
 on London for more than par ; but should the price rise 
 above ^4.886, it would soon become profitable for some banker 
 to sell sterling at the high rate and to export gold to London 
 to cover his drafts. If a banker, for instance, can sell sterling 
 for $4.8865 when it costs him only 1.8 cents per sovereign to 
 export gold, he makes a profit of two mills on each sovereign 
 (113 grains pure gold) exported. 
 
 That point in the price of sterling which makes the importa- 
 tion of gold profitable is called the " gold import point." The 
 price at which the exportation of gold is profitable is called the 
 " gold export point." These two prices are often referred to 
 as the "gold points." The reader must bear in mind that they 
 are not the same at different times, for they vary with the rate 
 of interest. 
 
 Visible and Invisible Items of Trade 
 
 65. The supply of and demand for sterling exchange in New 
 York City is due to the visible and invisible foreign trade of 
 this country. Our visible exports consist of merchandise, and 
 
 item was involved, for he sold sterling exchange as soon as he made a ship- 
 ment, and so was never out of money in consequence. If we include interest for 
 ten days at 3 per cent (^835.54), we raise the cost of the shipment to ^.0197 per 
 sovereign. 
 
 The Bank of England usually pays per ounce for American gold coin 77s. 5d., 
 such coin being only goo fine. As the Treasury Department charges a premium 
 for gold bars, it would be cheaper to ship coin than bars, were not the coin 
 likely to be underweight from abrasion. Bullion is taken by weight and disposed 
 of by weight ; but coin is taken by tale and disposed of in London by weight. The 
 premium charged for gold bars is to a certain extent offset by the finer assay in 
 England; the assay in the United States is on the basis of progressions of one 
 fourth, while the assay in England is in decimals. Coin, lieing packed in bags, is 
 liable to some loss from abrasion in transit. One of the largest New York shippers 
 says he figures on a difference of $.30 per Siooo in favor of gold bars. 
 
 According to another large bullion dealer in New York, the cost of a shipment 
 is even less than is shown above. He gives the items as follows : premium on 
 bars, jS.40 per ;(Siooo; freight, | of i per cent ; insurance, $.50 per ;^iooo; cartage, 
 jSi per keg of 150,000 ; packing, S1.50 per keg of jS5o,ooo. On the basis of these 
 charges, allowing for ten days' interest at 3 per cent, the cost of a shipment of 
 gold is $.0174 per sovereign. 
 
92 
 
 MONEY AND CURRENCY 
 
 include the products of our farms, forests, mines, and factories. 
 As every vessel clearing from an American port must declare 
 its cargo, we have a record of all our visible exports; and as all 
 goods imported from foreigners are examined at our custom- 
 houses, we have likewise a record of all our visible imports. 
 Since fairly accurate records of these exports and imports of 
 merchandise are published from time to time, they are quite' 
 commonly regarded by the people as being the sum total of 
 our foreign trade and as being the main sources of the supply 
 of and demand for foreign exchange. When the exports of a 
 country exceed its imports the excess is commonly known as 
 a " favorable balance of trade " and people usually expect an 
 importation of gold to result. When the imports are larger 
 than the exports the balance of trade is called " unfavorable " 
 because it is supposed to lead naturally to an exportation of 
 gold. 
 
 The expression "balance of trade" as used in this connec- 
 tion is not accurate, for it leaves out of account that part of 
 our foreign trade which is invisible. There is, furthermore, no 
 justification whatever for the use of the adjectives "favorable " 
 and "unfavorable." The so-called balance of trade has prac- 
 tically no relation whatever to the prosperity or general welfare 
 of a country. The idea that an excess of exports is desirable, 
 in that it seems to point to an importation of gold, had its 
 origin in a misconception of the true nature of national wealth. 
 A country needs a certain amount of gold for use in the arts 
 and as money, just as it needs a certain amount of wheat for use 
 as food, or a certain amount of coal for use as fuel. It should 
 import gold, just as it imports coal or wheat, only when there 
 is need for an increase in the stock of the metal. 
 
 66. A country's invisible foreign trade is quite as important 
 as its visible trade in its effect upon the price of sterling ex- 
 change. This invisible trade consists of the import and export 
 of debts. For convenience we may divide this trade into three 
 classes : first, the trade in stock-market securities ; second, 
 private investments of capital ; and, third, bank investments. 
 All of this invisible trade is related to the investment or 
 
DOMESTIC AND FOREIGN EXCHANGE 93 
 
 employment of capital and is based on some form of loan or 
 credit. We will consider each class separately. 
 
 The sale of stock-market securities by New York to London 
 gives rise to sterling exchange in exactly the same way as the 
 sale of wheat. When an English investor buys the stock or 
 bond of an American corporation, the New York seller draws 
 on him, or on his broker, and sells the draft to a New York 
 banker, thus increasing the supply of sterling exchange in New 
 York and tending to lower its price. The opposite happens 
 when an English broker sells securities to a New York pur- 
 chaser. Then the New York buyer of the security must go to 
 his bank and purchase a draft on London in order to make pay- 
 ment, so increasing the New York demand for sterling. Like- 
 wise, when an American buys from a Londoner the securities 
 of an English company, or English consols, — the popular name 
 of the English national debt, — he must enter the New York 
 market as a buyer of sterling exchange. The demand for 
 sterling is also frequently increased by the investments of 
 Americans in the securities of foreign countries other than 
 England, for payment for such securities is frequently made 
 by drafts on London. A purchase of Russian bonds by an 
 American is quite as likely to be paid for by a London draft 
 as by a draft on St. Petersburg. So the demand for sterling 
 exchange, and hence the price of sterling exchange, is con- 
 stantly dependent upon the investments which Americans make 
 in the securities of foreign countries. 
 
 A large part of the supply of sterling comes from a similar 
 source, for whenever a foreigner in any part of the world buys 
 an American security he is quite likely to remit in payment a 
 draft upon London. Purchases by foreigners are usually made 
 by brokers upon the floors of their own stock exchanges, and 
 often do not result in any sale on the part of New York or in 
 any transaction on the New York stock exchange. An English 
 investor desiring to buy the stock of the Pennsylvania Railroad 
 does not send an order to New York, but gives his order to a 
 London broker. The London broker, as a rule, will endeavor 
 to buy the stock upon the London exchange. But if no holder 
 
94 MONEY AND CURRENCY 
 
 is willing to sell, he will be unable to buy unless he offers upon 
 the floor of the London stock exchange a price that makes it 
 profitable for some dealer to cable an order to New York for 
 the purchase of the stock there. 
 
 In every large city there are houses which make a business 
 of keeping close watch upon the stock markets of different coun- 
 tries in order that they may make a profit whenever they discover 
 slight disparities between the prices of securities in two differ- 
 ent markets. These are known as "arbitrage" houses. If the 
 price offered for Pennsylvania Railroad stock on the London 
 exchange is a fraction above the price at which it is selling in 
 the New York stock market, arbitragers buy in New York 
 and sell in London on the same day. Such a transaction is 
 often completed within two minutes. Of course they cannot 
 deliver the stock until it has arrived from New York, but if 
 immediate delivery be demanded, they may borrow stock in 
 London for the purpose and repay when their stock arrives 
 from New York. These arbitragers make impossible any great 
 differences in price in the stock markets of the world. Their 
 transactions are enormous. If for any cause the London stock 
 market is weak while the New York market remains strong, 
 the operations of arbitrage houses result in a great movement 
 of stocks from London to New York, increasing thereby the 
 demand for sterling exchange in the latter city. On the other 
 hand, if the New York market is depressed by some circum- 
 stance which does not affect the English or other foreign 
 stock markets, a stream of securities pours across the Atlantic 
 into Europe and a supply of sterling exchange in New York is 
 thus created. 
 
 This automatic movement of securities toward the markets 
 paying highest prices is the most sensitive part of our foreign 
 trade and is the one which appears to have the greatest effect 
 upon foreign exchange quotations. No public record can be 
 kept of this movement and no accurate estimate can be made 
 at any time of its volume. We only know that the rates of 
 foreign exchange instantly respond to any changes in the con- 
 ditions governing stock-market prices. 
 
DOMESTIC AND FOREIGN EXCHANGE 95 
 
 Investments of Capital 
 
 &J. The second class of our invisible foreign trade includes 
 all those investments of capital which are not made through 
 the purchase of securities upon the stock exchange. When an 
 Englishman purchases a farm or a gold mine in the United 
 States, or advances money to his sons who are managing a 
 cattle ranch in Wyoming, he increases the supply oi sterling 
 exchange in this country. He does not send over English gold ; 
 he either sends a check on London or permits his American 
 creditor to draw upon him. The result is the same in either 
 case, — an increase of the power of American banks to sell drafts 
 on London, and, consequently, a downward tendency in the 
 price of sterling exchange. It is impossible to make any esti- 
 mate of the amount of these investments from year to year. 
 No attempt has ever been made to keep records of such opera- 
 tions, and it is doubtful if trustworthy statistics could be ob- 
 tained even if every bank in the country engaged in the task. 
 Such statistics could not be secured by the government with- 
 out obnoxious inquiry into the private affairs of its citizens. 
 Every American who is educating his son or daughter in Europe, 
 or who invests in tramways in a European city or in a saw- 
 mill in Russia, is a buyer of foreign exchange, and usually of 
 sterling exchange. 
 
 The third class of invisible trade consists of bankers' invest- 
 ments and is usually the result of fluctuations in the interest 
 rate. If the rate in London is much lower than in New York, 
 London bankers, wishing to take advantage of the higher rate 
 in New York, authorize their New York correspondents to make 
 drafts upon them, thus increasing the supply of sterling ex- 
 change in New York. When a New York bank is advised by 
 a London correspondent to make a dr^t of ;£ 10,000, or in 
 round numbers $50,000, and to invest the proceeds in the dis- 
 count of good commercial paper in New York, the New York 
 bank is obliged to sell this draft in order to get the funds for 
 the purchase of commercial paper for its London correspondent. 
 In 1897, when business was very dull in the United States, but 
 
96 MONEY AND CURRENCY 
 
 had begun to revive in Europe, the interest rate in our large 
 cities was lower than in Berlin and Paris, and as a result our 
 bankers allowed their European balances to increase and really 
 became investors of capital in Europe. The supply of sterling 
 exchange on sale in this country was reduced by the amount 
 which American bankers invested in Europe. As a rule bankers 
 desire to employ their funds at home, yet whenever great 
 advances occur in the rates of interest abroad, these bank oper- 
 ations take place and have an important effect upon the rates of 
 exchange, and hence upon the importation and exportation of 
 gold. If the American bankers in 1897 had not been tempted 
 by the high rate of interest to increase their balances in Europe, 
 but had endeavored to sell exchange in order to have available 
 funds at home, importations of gold would have resulted. 
 
 68. There are a few miscellaneous items which must be 
 classed with the invisible trade. The most important of these 
 are the expenses of travelers and the freight charges paid to 
 foreign shipowners. It is estimated that Americans spend 
 between $75,000,000 and $100,000,000 a year in foreign 
 travel. Before an American crosses the Atlantic he buys of 
 his banker a draft or letter of credit, which entitles him to ob- 
 tain money in London or some other European city. As a rule 
 Americans buy London exchange ; hence the result of Ameri- 
 can travel and residence abroad is to increase the demand for 
 sterling exchange in New York City. This demand is some- 
 what offset by the supply of sterling brought by foreign tourists 
 to this country. They bring with them drafts or letters of 
 credit which they sell to American banks. 
 
 The item of freight on merchandise exported and imported 
 amounts to a large sum and is paid to foreign shipowners, 
 American vessels doing very little of the transatlantic busi- 
 ness. If an American imports or exports goods in an English 
 vessel, the payment of the freight bill gives rise to a demand 
 for sterling exchange. The American, indeed, may pay the bill 
 by a check to the New York agent of the English steamship 
 company, but the effect will be the same, for the agent in order 
 to remit to London will be obliged to buy sterling. 
 
DOMESTIC AND FOREIGN EXCHANGE 97 
 
 Gold Shipments and the Balance of Trade 
 
 69. The so-called balance of trade has very little relation to 
 the international movements of gold. As has been shown, gold 
 is exported from the United States when the price of a sterling 
 bill rises to a premium of about two cents per sovereign. The 
 increasing demand for sterling exchange, which causes such 
 a rise, is as likely to be due to an increase of the invisible 
 imports as to an increase of visible imports. Indeed, imports 
 of merchandise may be declining at a time that imports of 
 securities are increasing, and it is quite possible for a country 
 to have apparently a "favorable" balance of trade and yet be 
 obliged to export gold on account of large purchases by its 
 people of securities that have been held by foreigners, or on 
 account of the large expenditures of its people in foreign 
 countries. The demand for exchange, as we have seen, comes 
 from many different sources, and the supply of it is increased 
 in different ways. At no time are we justified in saying that an 
 increase in this or that item will result in a movement of gold. 
 
 When the United States imports gold we have evidence that 
 the metal is worth more here than abroad. Gold, like any 
 other commodity, is always seeking the place where it is worth 
 the most. This truth is easily understood in the case of wheat, 
 corn, or cotton, but is not so readily comprehended in the case 
 of gold, because this metal is used as money and as such has 
 no price. If the reader has understood the conditions creating 
 the demand for and supply of foreign exchange, he will have 
 no difificulty in seeing how these forces regulate a country's 
 supply of gold strictly in accordance with its value. 
 
 The United States is one of the leading gold-producing 
 countries of the world. Its annual output in 1919 was suffi- 
 cient to coin over $58,000,000. In some years this amount 
 of gold is more than the United States needs for use either 
 in the arts or as money. How do we know when the United 
 States is producing gold in excess of its needs.' On this 
 point there is only one source of information, namely, the 
 statistics of our exports and imports of gold. Since it is 
 
98 MONEY AND CURRENCY 
 
 convenient for bankers throughout the country, to keep their 
 surplus money in New York City, because of the interest paid 
 there on deposits, the new gold produced in excess of the 
 country's needs soon drifts into the reserves of the New York 
 banks. Its first effect is to depress the interest rate in New 
 York. Its second effect is an increase of loans to speculators 
 in stocks and in produce, and a lifting of prices in the specu- 
 lative markets. The low rate of interest in New York- leads the 
 bankers of London and other European cities to reduce their 
 New York balances, and such action creates a demand for ster- 
 ling exchange in New York, for the New York correspondents 
 of the foreign houses, in order to remit to them, are obliged 
 either to draw on their own London balances or to purchase 
 sterling exchange in the open market. Furthermore New York 
 bankers, on account of the low interest rate at home, are more 
 inclined than formerly to increase their balances in Europe, 
 and are, therefore, less willing to sell sterling exchange. This 
 disposition on the part of New York banks tends to increase 
 the demand for sterling exchange and to lessen the supply of it 
 offered for sale. Thus the operations of bankers themselves 
 tend to cause the price of sterling exchange to rise toward the 
 gold-export point. 
 
 Another force, and perhaps a stronger one, is at work in the 
 same direction. The higher prices for securities in New York 
 set the machinery of the arbitrage houses in motion, for they 
 are able to realize a slight profit by buying certain securities in 
 London and selling them the same day in New York. These 
 transactions result in an increased demand for sterling exchange 
 in New York, for the arbitragers, in order to make payment for 
 the securities which they purchase abroad, are obliged to buy 
 sterling exchange. 
 
 These forces, increasing the demand for sterling and lessen- 
 ing the available supply, lift the price of sterling exchange to 
 the gold-export point, and continue at work until the loss of 
 gold by New York has brought its price level and interest rate 
 to a parity with the price level and interest rate of other gold- 
 standard countries. 
 
C^ESTIC AND FOREIGN EXCHANGE 99 
 
 > FofSes ag^t in the same manner bring about the importa- 
 ^l|tion 3^' go^^penever it is worth more here than in other 
 Qcountaes. ^^ihe autumn the demand for a common medium 
 ,\J^ e:®an^i^jl the United States is often greatly increased 
 ^9^ tne haA^t requirements of the West and South. New 
 Drk is 5)ifiged to ship currency to the country banks, and 
 thes3^Bliipments frequently so contract the operations of the 
 New York banks as to produce a fall in the prices of stocks 
 and speculative commodities in New York City. New York 
 bankers sell London exchange and reduce their London bal- 
 ances to the lowest possible point. The relatively low prices 
 of stocks in New York lead to an increase of sales to for- 
 eigners, and so again the supply of foreign exchange is en- 
 larged. This goes on until the supply of exchange is so far 
 in excess of the demand that the quotations touch the gold- 
 import point and shipments of gold are ordered from London. 
 
 The reader will notice that in both cases the movement of 
 gold is the direct result of the differences in the price levels 
 of Europe and America, which represent differences in the 
 value of gold. He must not suppose that the disparity of prices 
 is so great as to attract the attention of the average man. 
 Indeed, the average man is not in a position to detect it, for 
 prices in the United States are quoted in dollars and cents, 
 whereas in Europe they are quoted in sovereigns, francs, marks, 
 etc. Nevertheless the prices, whatever the names used, show 
 exactly the purchasing power of gold in the different countries. 
 The large importer, or the arbitrager dealing in stocks and 
 bonds, has at his elbow tables of figures showing precisely the 
 relation between American and European prices. When there 
 is a slight advance in the American price of a good, without 
 any corresponding advance in the European price, he at once 
 knows what profit he can make by purchasing abroad and selling 
 at home. 
 
 Variations in the rate of exchange are equivalent to changes 
 in international price levels. A rise of sterling from $4.8465 
 to $4.8865 means a rise of almost i per cent in the cost to 
 Americans of foreign goods, and it tends to lessen our imports 
 
lOO MONEY AND CURRENCY 
 
 just as would an actual rise in the prices of European goods. 
 At the same time this rise of exchange from gold point to 
 gold point is equivalent in foreign countries — or wherever 
 sterling exchange is dealt in — to a fall of almost i per cent 
 in the prices of all American goods, for the purchasing power 
 of the sovereign in the United States rises from ^4.8465 to 
 $4,886$. Hence American exports are stimulated. A decline 
 of exchange quotations, of course, produces opposite effects, 
 encouraging imports into the United States and discouraging 
 exports. When the money supply of the United States is rela- 
 tively neither excessive nor deficient, the changes wrought in 
 our foreign trade by the rise and fall of exchange quotations 
 are usually sufficient to prevent any movement of gold. But if 
 the money supply is excessive, so that prices of certain goods 
 having an international market are above the price level in other 
 countries, then our imports of goods and securities, despite the 
 discouragement of rising exchange rates, continue in excess of 
 our exports until an exportation of gold becomes profitable. On 
 the other hand, if our money supply is relatively deficient, our 
 exports will be stimulated until the large accumulations of 
 sterling exchange force the price down to the gold-import point. 
 All these forces work automatically. No man engaged in the 
 transactions imagines that he is doing anything to correct the 
 monetary situation of the world or to cause an importation 
 or exportation of gold. Although each person is seeking per- 
 sonal profit only, he inevitably contributes to the general result. 
 Thus, as a result of the operations of men in different countries, 
 each acting independently in his pursuit of profit, the rates of 
 foreign exchange in each country are so adjusted that the value 
 of gold in all tends to be the same, gold always moving from 
 the country where prices are relatively high and toward the 
 countries where prices are relatively low.^ 
 
 1 The table on the following page, showing the account of the United States with the 
 world for the year 1904, gives an idea of the principal operations affecting the market for 
 foreign exchange. Only the first two items in each column are known ; all the others are 
 estimates based on imperfect knowledge of the facts. On account of the large sales of Cuban, 
 Mexican, and Japanese bonds in the United States, I have assumed that this country bought 
 from foreigners more securities than it sold them, the difference being $1 16,000,000. The 
 totals of the securities bought and sold by Americans are doubtless wide of the mark, for 
 there is no clew to the amounts of arbitrage transactions. 
 
DOMESTIC AND FOREIGN EXCHANGE 
 
 lOl 
 
 
 O VO HH « 
 
 
 a 
 
 
 
 < 
 
 X 
 u 
 
 W 
 
 z 
 
 o 
 
 M 
 
 a 
 
 Si 
 
 p 
 
 w 
 
 X 
 H 
 td 
 
 ■< 
 u 
 
 X 
 u 
 
 X 
 
 Visible Imports 
 
 Merchandise . . . 
 
 Gold 
 
 Invisible Imports 
 
 Stocks and bonds bought in foreign markets by 
 
 Americans (arbitrage included) 
 
 Other investments by Americans in foreign 
 
 countries . . . . 
 
 Interest and dividends on American securities 
 
 owned by foreigners 
 
 Profits by foreigners from other investments in 
 
 the U. S 
 
 Increase of American bank balances abroad . . 
 Reduction of foreign bank balances in the U. S. 
 
 American tourists abroad 
 
 Americans living abroad and drawing income 
 
 American embassies, consulates, etc., abroad . . 
 Ocean freights paid by Americans to foreigners . 
 Extraordinary 
 
 Payment to foreigners on account of indemnities, 
 subsidies, purchases of public property, etc. 
 (Panama Canal) . . . 
 
 '/i 
 O 
 
 c 
 E 
 
 s ■ 
 e2 
 
 U 
 
 N"« CO voo Locn 
 
 ON o ro H- HH ^ 
 
 ^ 
 
 N 
 
 u 
 o 
 
 < 
 
 X 
 
 
 H 
 k: 
 O 
 ft. 
 
 X 1 
 
 U 
 X 
 
 h 
 <: 
 s 
 
 u 
 
 Gold 
 
 Stocks and bonds bought in the U. S. by foreigners 
 (arbitrage included) 
 
 Other investments by foreigners in the U. S. . . 
 
 Interest and dividends on foreign securities owned 
 by Americans 
 
 Profits by Americans on investments in foreign 
 countries. ... 
 
 Reduction of American bank balances abroad . 
 
 Increase of foreign bank balances in the U. S. . 
 
 Foreign tourists in the U. S. ... ... 
 
 Foreign embassies, consulates, etc., in the U. S. . 
 
 Extraordinary 
 
 Indemnities, subsidies from foreigners, or sales of 
 Dublic Dronertv to fofeiffners _ 
 
 1 
 
 to 
 
 u 
 o 
 
 CL 
 V 
 
I02 iMONEY AND CURRENCY 
 
 It thus appears that a country's balance of indebtedness is 
 not determined by chance. If there were no international trans- 
 actions in debts or securities, no movements of capital from coun- 
 try to country, — in short, no invisible trade between nations, — 
 then the exports and imports of merchandise would balance 
 except when an excess of gold in one country lifted the price 
 level there and brought about an exportation of the yellow 
 metal. The invisible elements in the foreign trade of nations 
 complicate the subject, but introduce no new principles and lead 
 to no new conclusion. The balance of trade, so far as visible 
 goods are concerned, may be more or less fortuitous, depending 
 upon the crops and upon variations in the productive capacity 
 of a nation ; but the whole foreign trade of a nation, by which 
 is meant its imports and exports of goods and of debts, is 
 subject to an immutable law. The exports of goods and debts 
 always exactly equal the imports of goods and debts, except 
 when a balance of indebtedness is created on one side or the 
 other by differences in the value of gold in different coun- 
 tries. This balance of indebtedness, it should be noted, is not 
 the real cause of gold exports or imports, but is itself the effect 
 of conditions which render imperative a readjustment of the 
 gold holdings of nations. 
 
 LITERATURE 
 
 G. J. GOSCHEN, The Theory of the Foreign Exchanges (15th edition, 
 London, 1892) is probably the best boolc in English on the subject, but it 
 is not free from the notion that gold is shipped in settlement of a balance. 
 PlERSON, Principles of Economics, Vol. I, contains an admirable discus- 
 sion of the subject. Two books by George Clare, The A, B, C of the 
 Foreign Exchanges and A Money-Market Primer, explain the technique 
 and practical details of exchange transactions very clearly from the English 
 point of view. A. W. Margraff's International Exchange (Chicago, 
 1903) is intended to aid the untrained dealer in exchange and is full of 
 forms, documents, and details. The beginner will get help from Cleve- 
 land's Funds and their Uses. 
 
CHAPTER VI 
 
 THE RELATION OF MONEY AND CREDIT TO PRICES 
 
 70. The index number as representative of the level of prices. The arithmet- 
 ical mean, the geometric mean, the median, and the harmonic mean. 71. The 
 uses and defects of index numbers.. 72. A perfect index number would enable 
 men to compare the changing values of goods during a period of time. 73. Index 
 numbers prepared by Falkner, Sauerbeck, Soetbeer, Dun's Review, and the De- 
 partment of Labor. 74. The price of a. commodity dependent upon four circum- 
 stances. 75. How an increase of the money supply causes prices to rise. 76. The 
 effect of an increase in the money supply upon the consumption of gold in the arts 
 and upon foreign trade. 77. An illustration showing how a reduction of the money 
 supply must affect prices. 78. Why an increase of population must tend to 
 increase the demand for money and cause a decline of prices if the supply is 
 unchanged. 79. Why lowered costs of production tend to increase the demand 
 for money and to cause a fall in prices. 80. Examination of the common view that 
 a fall of prices caused by lowered costs of production is really a fall of values, and 
 does not indicate an appreciation of money. 81. This error due in part to a mis- 
 conception of the nature of the demand for money. 82, It is due also to the con- 
 founding of real costs of production with money costs. 83. Why the use of credit 
 of limited acceptability tends to lower the value of money. 84. An increase in the 
 supply of credit money acts on prices very much as would the same amount of 
 new money. 85. Prices do not change uniformly. 86. An illustration showing 
 the effect upon prices of a sudden increase of the gold supply in the United States. 
 87. One of the results would be an expansion of credit, so that the rise of prices 
 would be out of proportion to the increase of the money supply. 88. In the 
 United States prices would be affected in the following order: stocks, speculative 
 commodities, raw materials, wholesale prices, retail prices, loans, wages, custom- 
 ary prices. 8g. A fall of general prices is also irregular, speculative commodities 
 falling first, go. The process of price readjustment is a gradual one. 91. Do 
 prices rise in proportion to an increase of the money supply? 92. In countries 
 using commodity money there is never perfect adjustment between prices and 
 values. This maladjustment of prices often exerts a powerful influence on indus- 
 try. 93. A brief sketch of changes in the price level caused by fluctuations in the 
 output of precious metals during the last four hundred years. 
 
 70. In this chapter it is proposed, by illustration and by 
 reference to historical instances, to show how and why varia- 
 tions in the demand for and supply of money affect the prices 
 of goods. We shall see that the level of prices always tends to 
 rise when the demand for money falls off or when the supply 
 
 103 
 
I04 
 
 MONEY AND CURRENCY 
 
 is increased, and that prices tend downward whenever the 
 demand is increased or the supply diminished. We shall also 
 find that the prices of all articles do not change uniformly, but 
 one after another, and in such irregular order as to interfere 
 with the normal exchange values of goods and with the plans 
 and profits of business men. 
 
 Before proceeding with this subject a brief discussion of the 
 index number is necessary. The purchasing power or value of 
 money varies inversely with the level of prices. In order, there- 
 fore, to ascertain whether the dollar is rising or falling in 
 value, we must compare price levels. The index number is the 
 instrument devised for this purpose. It is, as it were, the price 
 of a composite commodity unit, representing approximately the 
 average price of commodities in general. In its calculation 
 several different methods are employed. 
 
 The simplest method gives the arithmetical average of the 
 prices of a number of representative commodities. It may be 
 found in the following manner. Suppose that sugar, wheat, 
 pine lumber, cotton, and quinine are the commodities selected, 
 and that we wish to ascertain how much the value of money 
 has changed with respect to these during a certain year. Sup- 
 pose that prices between January i and December 31 have 
 changed as follows : Sugar risen from 5 cents to 5^ cents a 
 pound, pine from $15 to $20 per thousand feet, cotton from 
 10 to 15 cents a pound; wheat fallen from 80 to 70 cents a 
 bushel, and quinine from 30 to 25 cents an ounce. Here we 
 have ounces, pounds, and square feet, — things we cannot 
 reduce to a common material base. If we should simply add 
 these prices and divide by five, the rise in the price of lumber, 
 although not so great proportionally as the rise of cotton, would 
 have a much greater effect on the result. In order to eliminate 
 the effect of unit differences we must take of each commodity 
 the same money's worth, and this we do by assuming that 100 
 cents' worth of each article is taken in the beginning, and by 
 calculating what the price of that quantity was at the end of 
 the period. This method gives the proportional change on the 
 basis of 100 in the case of each article. 
 
RELATION OF MONEY AND CREDIT TO PRICES 
 
 105 
 
 ARITHMETICAL AVERAGE OF PRICES 
 
 
 Price 
 January i 
 
 Price 
 December 31 
 
 Price Variation 
 OF Si 00 WORTH 
 
 Sugar 
 
 Wheat .... 
 
 Pine .... 
 
 Cotton ... ... 
 
 Quinine . 
 
 $ .05 
 
 .So 
 
 15.00 
 
 .10 
 
 •3° 
 
 $ .05i 
 
 .70 
 
 20.00 
 
 •15 
 
 •^5 
 
 ^i.oo to $1.10 
 1. 00 to .87I 
 1. 00 to I.33i 
 1. 00 to 1.50 
 1. 00 to .83 J 
 
 Totals . . 
 
 
 
 ^5.00 to ^5.64! 
 
 Average . 
 
 
 
 100 to 1 1 2.8 
 
 Sugar, it is evident, rose lO per cent, so that the price of what 
 on January i cost ;^i.oo was on December 31^1.10. A dollar's 
 worth of wheat fell to S/l- cents, the decline from 80 to 70 being 
 12^ per cent. Pine rose 33^ per cent and cotton 50 per cent. 
 Quinine fell i6| per cent. The average of all five articles rose 
 12.8 per cent. 
 
 This rise of prices indicates a decline in the value of money 
 in respect to these goods, but the percentage of that decline is 
 not the same as the percentage of price change. To ascertain 
 how much the value of money has fallen, we must find how 
 much less 100 cents will buy at the end of the year than at the 
 beginning. Since 1 12.8 cents will buy on December 31 only as 
 much as 100 cents bought January I, the purchasing power of 
 1 00 cents at the end of the year is evidently only y|^ part of what 
 it was at the beginning, or 88.6 per cent. Hence ;^i.oo would 
 buy on December 31 no more than ;^.886 bought on January i. 
 
 If we could in this way average the prices of all commodities 
 at different times, we should have an index number the changes 
 in which would indicate changes in the purchasing power of 
 money. A rise of 12.8 per cent in that number would mean 
 a decline of 11. 4 per cent in the purchasing power of money. 
 The general law is this : Changes in the index number show 
 directly variations in the general price level; changes in its recip- 
 rocal show variations in the value of money. 
 
Io6 MONEY AND CURRENCY 
 
 The arithmetical mean, as the basis for an index number, is 
 open to objection because it exaggerates the effect of rising 
 prices. Suppose, for instance, that at a given time the prices 
 of given quantities of coffee and tobacco are each $i.OO, and 
 that in the course of a year coffee falls to ^.50, while tobacco 
 doubles in price ; the index number after the change, if com- 
 puted by the arithmetical mean, would be 125, indicating a 
 decline in the value of money; whereas it would appear that 
 the value of money had not changed, since it had gained as 
 much in the case of one commodity as it had lost in the case 
 of the other. 
 
 To overcome this defect of the arithmetical mean some econ- 
 omists urge the use of the geometric mean, which is the 
 square root of the product of two prices, the cube root of the 
 product of three commodities, etc. In the case above sup- 
 posed, tobacco having risen to 200 and coffee dropped to 50, 
 the geometric mean would still be lOO, showing no change 
 in the value of money. 
 
 A third method adopts the median as an index number, the 
 median being the middle number of a series, there being as 
 many above as below it. A fourth method yields the har- 
 monic mean, which is computed from the reciprocals of a series 
 of numbers. We will not stop to discuss these different 
 methods. Fortunately it does not seem to be of much practi- 
 cal moment which method is used, for the results obtained by 
 the different methods do not vary widely. For example, index 
 numbers for the year 1885, as determined from the same data 
 by seven different methods, all fell between 69 and 72, It is 
 generally agreed that the difference between the results of 
 different methods is never likely to be great. 
 
 Defects of the Index Number 
 
 71. We cannot assume that any index number that has been 
 constructed gives an absolutely accurate indication of the changes 
 in the value or purchasing power of money during a long period 
 of years. It is practically impossible to get the data necessary 
 
RELATION OF MONEY AND CREDIT TO PRICES 107 
 
 for the construction of an ideal index number. Retail prices 
 are not a matter of record ; consequently the statistician bases 
 his calculations on changes in wholesale prices, although it is 
 well known that these are not always accompanied by changes 
 in retail prices. Again, human wants are constantly shifting. 
 Articles of great consequence in one decade may lose their 
 importance in the next and perhaps cease to be consumed at all. 
 If the prices of such articles have entered into the formation of 
 an index number, they must be dropped and the prices of other 
 articles be substituted. Anything like absolute accuracy under 
 such conditions is evidently impossible. 
 
 An index number should be deduced from the prices of basic 
 or representative commodities. If there is a rise in the prices 
 of such commodities as iron, copper, coal, lead, wheat, cotton, 
 corn, beef, lumber, and leather, it is morally certain that there 
 will be a rise in the prices of the countless articles into which 
 these enter as raw materials. When an index number is derived 
 from the prices of basic commodities, it will unquestionably 
 record the general tendencies of prices and show, if not the 
 exact, at least the general changes in the purchasing power 
 of money. 
 
 In order that the index number may reflect the varying 
 degrees of importance possessed by different commodities, 
 methods of " weighting '' it have been devised. For example, 
 if the value of the iron consumed in the world is found to be 
 five times greater than the value of the tin consumed, the price 
 of iron may be used five times in the list of prices from which 
 the index number is deduced, and the price of tin only once. 
 As factors in the demand for money, wheat and cotton are much 
 more important than ginger and pepper ; price changes in the 
 former, therefore, are given greater weight. However, the 
 importance of weighting seems to be mainly theoretical, for in 
 practice statisticians derive about the same results from both 
 weighted and unweighted tables. 
 
 The index number, it should be noted, shows the value of 
 money only with respect to goods. The value of money with 
 respect to human labor can be discovered only by an index 
 
I08 MONEY AND CURRENCY 
 
 number based upon rates of wages. Such an index number 
 it is practically impossible to make. The task has been 
 attempted several times, but the results have proved unsatis- 
 factory. Rates of wages vary so much in different communi- 
 ties, and at different seasons in the same community, that it is 
 impossible to determine with any exactness what is the average 
 wage rate in a country. So far as the discussion of money is 
 concerned, wage changes, as we shall see later, are of far less 
 importance than price changes, so that when we speak of the 
 value of money we need have in mind only its value with 
 respect to goods. 
 
 72. An ideal index number, by revealing variations in the 
 value of money, would furnish a basis for an exact measurement 
 of changes in the values of commodities from year to year. 
 Money, as we have seen, cannot properly be called a unit of 
 value, for money is itself constantly fluctuating in value. But 
 since the index number measures and records changes in the 
 value of money, by its aid in an analysis of the price changes 
 of any commodity we are able to eliminate the effect of changes 
 in the value of money and thus determine the amount of varia- 
 tion in the value of the commodity itself. To illustrate : Let 
 us suppose that during a certain decade the index number fell 
 25 per cent, say from 100 to 75. This would mean that one 
 could buy as much at the end of the decade with 75 cents as 
 one could have bought at the beginning with a dollar. It would 
 show, therefore, an increase of 33^ per cent in the value or 
 purchasing power of money. Evidently if the price of any 
 article had fallen exactly 25 per cent during the decade, its 
 value would be unchanged. If the price of an article had fallen 
 more than 25 per cent, then its value would have declined by 
 an amount proportionate to the extent by which its decline of 
 price exceeded 25 per cent; while if its price had fallen less 
 than 25 per cent, its value would have risen in proportion to 
 the difference between its decline of price and the 25 per cent 
 decline in general prices.^ Thus, if our index number were 
 
 ' Suppose that during the decade in question meat did not change in price, but 
 sold at 10 cents a pound. Would this fact mean that meat had not changed in 
 
KELATION OF MONEY AND CREDIT TO PRICES 
 
 109 
 
 perfect, by comparing the price changes of an article with con- 
 temporaneous changes in the index number we might arrive at 
 changes in the value of the article. An ideal index number, 
 therefore, and not money, would deserve to be called a unit or 
 measure of value. 
 
 73. The index number most commonly referred to in this 
 country for the period from 1840 to 1891 was prepared by 
 Dr. R. P. Falkner for the United States Senate Committee on 
 Finance.^ From 1 840 to 1 860 the prices of 90 commodities were 
 used; between i860 and 189 1, the prices of 223 articles. The year 
 i860 is taken as the base, the price of each article on January i 
 of that year being assumed to be 100. Falkner used the arith- 
 metical mean and made tables both from weighted and un- 
 weighted prices. Between i860 and 1879 the standard money 
 in this country was the depreciated greenback. In order to 
 show what the index number would have been if gold had been 
 used as money. Professor Falkner made a reduction in the green- 
 back index number proportionate to its depreciation as indi- 
 cated by the premium on gold. This method was the only one 
 possible, but it must not be inferred that prices would have 
 corresponded with this index number if the gold standard had 
 been maintained. 
 
 In order to show the effect of price changes upon the welfare 
 of workingmen. Professor Falkner compiled tables of prices in 
 which various articles were weighted in proportion to their esti- 
 mated importance in the average workingman's budget. An 
 index number computed on this basis, although it does not 
 reveal changes in the general value of money, is of great 
 sociological interest and importance. 
 
 value ? Clearly not, for money had risen in value during the decade 33^^ per cent, 
 and meat could not have maintained a steady exchange relation with money unless 
 its value had also risen in the same proportion. Suppose now that meat during 
 the decade fell in price from 10 cents to 9 cents. What change in the value of 
 meat would that decline in its price indicate .' Since the price of meat had fallen 
 from 100 to only 90, while the prices of things in general were falling from 100 to 
 75, it follows that the value of meat with respect to things in general had risen in 
 the proportion of 75 to 90, i.e. 20 per cent. 
 
 1 Aldrich Report on Wholesale Prices, etc. (government. document). 
 
no MONEY AND CURRENCY 
 
 The Falkner index number has been continued by the Depart- 
 ment of Labor at Washington, but with some modifications. 
 The base line is the average of prices for the period from 1 890 
 to 1899, and the prices of 259 commodities are used, an effort 
 being made to get the average yearly price of each. It is pro- 
 posed to continue this index number by annual publications in 
 the bulletin of the department.^ 
 
 The first index number derived from English prices with any 
 show of scientific accuracy was published in 1863 by the well- 
 known economist W. Stanley Jevons.^ Jevons based his calcu- 
 lations upon the prices of 39 articles, and first found their 
 average prices for the period from 1845 to 1850, calling that 
 price 100. His index number covered the period from 1844 
 to 1862 and was prepared in order to measure the effect the 
 new gold from California and Australia had exerted upon prices. 
 His study of this subject is a classic in the literature of finance. 
 
 The index number most commonly referred to in the English- 
 speaking world is that of the London Economist. It is practi- 
 cally a continuation of the Jevons number. The base is the 
 same, being the average for the period 1845- 18 50, and the same 
 39 articles are used, although by grouping they have been 
 reduced to 22 quotations.^ Jevons employed the geometric 
 mean, while the Economist gives the simple arithmetical aver- 
 age. One of the defects of the Economist' s number is the 
 necessary consequence of the small number of articles upon 
 which it is based ; a great rise in the price of any one of these 
 articles causes an excessive change in the index number. For 
 example, the price of cotton rose enormously during the Civil 
 War, but this rise in its price did not indicate a corresponding 
 fall in the purchasing power of money, for during that period 
 
 1 See Bulletin of the Department of Labor for March, 1902 to 191 2 ; April, 191 3. 
 In Bulletin No. zj Dr. Falkner published a continuation of his index number to 
 1899. 
 
 '^See Investigations in Currency and Finance, — chapter on "A Serious Fall in 
 the Value of Gold," etc. 
 
 ' Coffee, cotton, Pernambuco cotton, cotton yam, cotton cloth, sugar, tea, 
 tobacco, butcher's meat, wheat, wool, raw silk, flax and hemp, indigo, oil, timber, 
 tallow, leather, copper, iron, lead, tin. 
 
RELATION OF MONEY AND CREDIT TO PRICES III 
 
 cotton as an article of English trade did not possess great 
 relative importance. 
 
 A much-quoted index number is that published annually by 
 Mr. Augustus Sauerbeck in the. Journal of the Royal Statistical 
 Society. His baseline is the average prices of 1 867-1 877, and 
 he employs the simple arithmetical average. He uses the prices 
 of 37 articles and does not " weight " them except as he intro- 
 duces two or three grades of the more important commodities. 
 This index number is criticised because all of the articles are 
 raw products, such as wheat, coal, iron, leather, cotton, etc. 
 The objection does not seem sound, for if the prices of raw 
 materials change, the fact is certain to be reflected, even though 
 to a lesser degree, in the prices of manufactured goods. 
 
 One of the most carefully prepared index numbers is that of 
 Dr. Soetbeer, made from Hamburg prices and covering the 
 period from 1841 to 1891. It is based upon the average prices 
 of 1 14 commodities. In so far as possible he obtained the 
 quantity of each commodity imported into Hamburg and the 
 price paid for each consignment ; then by simple division he 
 obtained the average price. 
 
 A convenient table of prices is published each month in this 
 country by Dun's Review. No base line is taken, the index 
 number being merely a total of all the prices. As the prices 
 of 350 articles are given, changes in the totals are undoubtedly 
 indicative in a general way of changes in the purchasing power 
 of money. 
 
 The table on the following page gives the index numbers 
 of Sauerbeck, of the Economist, of Soetbeer, of Falkner, and of 
 the Department of Labor. The Falkner number is continued 
 from 1 89 1 to 1904 by reduction of the number calculated by the 
 Department of Labor. The second column shows the average of 
 prices that prevailed in the United States from 1862 to 1878 ; 
 the first column gives for that period the corresponding gold 
 prices based on the depreciation of the greenback.' 
 
 1 The index numbers of Sauerbeck, the Economist, and the Department of 
 Labor are continued to 1912 in the Appendix. Dun's index number was discon- 
 tinued in May, 1907. 
 
Ii; 
 
 MONEY AND CURK.ENCV 
 
 STANDARD INDEX NUMBERS (1860-1904) 
 
 
 
 
 U.S. Dei'Aet- 
 
 
 
 
 
 Falkner 
 
 1860= 100) 
 
 mentofCom- 
 
 1\1ERCE AND 
 
 Sauerbeck 
 (Base 
 
 "Economist" 
 (Base 
 
 Soetbeer 
 
 
 
 Paper 
 
 (Base 
 
 
 Gold 
 
 Labor (Base 
 
 i867-i877)» 
 
 1845-1850)1 
 
 1847-1850) 
 
 
 
 (1862-1878) 
 
 i89o-j899)> 
 
 
 
 
 i860 
 
 lOO.O 
 
 
 
 99 
 
 122 
 
 I2I.0 
 
 I86I 
 
 100.6 
 
 
 
 98 
 
 124 
 
 118. 1 
 
 1862 
 
 1 14.9 
 
 1 1 7.8 
 
 
 lO-I 
 
 131 
 
 122.6 
 
 1863 
 
 102.4 
 
 148.6 
 
 
 103 
 
 159 
 
 125.5 
 
 1864 
 
 122.5 
 
 190.5 
 
 
 105 
 
 172 
 
 129.3 
 
 1865 
 
 100.3 
 
 216.8 
 
 
 lOI 
 
 162 
 
 122.6 
 
 1866 
 
 136-3 
 
 191.0 
 
 
 102 
 
 162 
 
 125.8 
 
 1867 
 
 127.9 
 
 172.2 
 
 
 100 
 
 137 
 
 124.4 
 
 1868 
 
 1 1 5.9 
 
 160.5 
 
 
 99 
 
 122 
 
 122.0 
 
 1869 
 
 113-2 
 
 153-5 
 
 
 98 
 
 I2J 
 
 123.4 
 
 1870 
 
 "7-3 
 
 142.3 
 
 
 96 
 
 122 
 
 122.9 
 
 I87I 
 
 122.9 
 
 136.0 
 
 
 100 
 
 118 
 
 127.0 
 
 1872 
 
 127.2 
 
 138.8 
 
 
 109 
 
 129 
 
 I3S-6 
 
 IS73 
 
 122.0 
 
 137-S 
 
 
 III 
 
 134 
 
 138-3 
 
 1874 
 
 1 19.4 
 
 133-° 
 
 
 102 
 
 131 
 
 136.2 
 
 1875 
 
 "3-4 
 
 127.6 
 
 
 96 
 
 126 
 
 129.8 
 
 1876 
 
 104.8 
 
 118.2 
 
 
 95 
 
 123 
 
 128.3 
 
 1877 
 
 104.4 
 
 1 10.9 
 
 
 94 
 
 123 
 
 127.7 
 
 1878 
 
 99-9 
 
 101.3 
 
 
 87 
 
 116 
 
 120.6 
 
 1879 
 
 96.6 
 
 96.6 
 
 
 83 
 
 100 
 
 117.1 
 
 1880 
 
 106.9 
 
 
 
 88 
 
 "5 
 
 121. 9 
 
 i88t 
 
 105.7 
 
 
 
 85 
 
 108 
 
 121.0 
 
 1882 
 
 108.5 
 
 
 
 84 
 
 III 
 
 122.1 
 
 1883 
 
 106.0 
 
 
 
 82 
 
 106 
 
 122.2 
 
 1884 
 
 99-4 
 
 
 
 76 
 
 lOI 
 
 1 14.2 
 
 1885 
 
 93-0 
 
 
 
 72 
 
 95 
 
 108.7 
 
 1886 
 
 91.9 
 
 
 
 69 
 
 92 
 
 104.0 
 
 1887 
 
 92.6 
 
 
 
 68 
 
 94 
 
 102.0 
 
 1888 
 
 94-2 
 
 
 
 70 
 
 lOI 
 
 102.0 
 
 1889 
 
 94-2 
 
 
 
 72 
 
 99 
 
 106. 1 
 
 1890 
 
 92-3 
 
 
 1 1 2.9 
 
 72 
 
 102 
 
 108.1 
 
 1891 
 
 92.2 
 
 
 III.7 
 
 72 
 
 lOI 
 
 109.2 
 
 1892 
 
 87.6 
 
 
 106. 1 
 
 68 
 
 97 
 
 
 1893 
 
 87.2 
 
 
 105.6 
 
 68 
 
 96 
 
 
 1894 
 
 79-3 
 
 
 96.1 
 
 63 
 
 95 
 
 
 1895 
 
 77-2 
 
 
 93-6 
 
 62 
 
 87 
 
 
 1896 
 
 74-6 
 
 
 90.4 
 
 6i 
 
 91 
 
 
 1897 
 
 74-0 
 
 
 89.7 
 
 62 
 
 88 
 
 
 1898 
 
 77-1 
 
 
 93-4 
 
 64 
 
 86 
 
 
 1899 
 
 839 
 
 
 101.7 
 
 68 
 
 87 
 
 
 1900 
 
 91.2 
 
 
 110.5 
 
 75 
 
 97 
 
 
 1901 
 
 88.5 
 
 
 108.5 
 
 70 
 
 97 
 
 
 1902 
 
 93-2 
 
 
 1 1 2.9 
 
 69 
 
 89 
 
 
 i9°3 
 
 93-7 
 
 
 113.6 
 
 69 
 
 9' 
 
 
 1904 
 
 93-3 
 
 
 1 13.0 
 
 70 
 
 100 
 
 
 ' Continued to 1920 in the Appendix. 
 
DELATION OF MONEY AND CREDIT TO PJilCES 113 
 
 Prices and the Money Supply 
 
 74. The price of any particular good, since it represents the 
 amount of money for which the good exchanges, must be affected 
 by any alteration either in the value of the good or in the value of 
 money. Changes in the price of a commodity, therefore, may 
 be brought about in four different ways : by a change (i) in the 
 demand for the commodity ; (2) in the supply of the commod- 
 ity'; (3) in the demand for money ; (4) in the supply of money. 
 Changes of the first and second kind change the value of the 
 commodity, and will be considered in this chapter only in 
 so far as changes in the supply of commodities, by altering 
 the total volume of exchanges, affect the demand for money. 
 Changes of the third and fourth kind directly affect the value 
 of money, and it is the purpose of this chapter to show by 
 concrete illustration how such changes act upon prices. 
 
 A change in the general level of prices means a change in 
 the purchasing power or value of money, and can be brought 
 about only by circumstances which affect either the demand 
 for or supply of money. A rise in prices must ensue if the 
 demand for money declines more rapidly than the supply, or if 
 the supply increases more rapidly than the demand ; and a fall 
 of prices results if changes the opposite of these take place. 
 Under no other conditions can the value of money (or the 
 general level of prices) be raised or lowered. 
 
 75. We will first consider the manner in which a change in 
 the supply of money affects prices. Let us suppose that the 
 supply of money in the United States has been greatly 
 increased during a certain month by an influx of new gold 
 from the mines of Alaska, California, and Colorado. The 
 miners will turn their gold over to the United States Mint and 
 receive money or currency in exchange. ^ This money the 
 
 ^The miner turns his gold over to the United States Mint and receives a 
 check on the Treasury at the rate of JS20.67 per ounce pure gold, less the 
 expense of assaying and refining. This check is payable in legal tender and is 
 accepted like any other check. The cash paid out by the Treasury in exchange 
 for gold is replaced by the coin into which the gold is minted. Theoretically the 
 miner takes gold to the mint in the raw staie and carries away the same gold 
 
114 
 
 MONEY AND CURRENCY 
 
 miners will probably dispose of in one of four ways : (i) hoard 
 it ; (2) buy goods with it ; (3) lend it ; (4) deposit it in banks. 
 Such money as the miners hoard, which will probably be very 
 little, can have no effect on prices until it is spent in the pur- 
 chase of goods. But most of them will make the natural and 
 reasonable disposition of their money; each will spend more or 
 less for the satisfaction of his present wants, will keep a certain 
 sum for the satisfaction of future wants, and will either lend 
 the balance or deposit it in a bank. That portion which is 
 spent will constitute a new demand for certain classes of goods 
 and will tend to raise their prices. That portion which is 
 loaned will be expended by the borrowers in the purchase of 
 goods and payment of wages, and will tend to advance both 
 prices and wages. 
 
 Let us suppose that the banking reserves of the country are 
 increased 1^50,000,000 by the deposits of these miners. Will 
 this money lie idle and so have no effect on prices .-' Certainly 
 not. It will be the most potent part of the new supply. 
 Bankers are the last people in the world to look with com- 
 placence upon a hoard of idle money. Their dividends depend 
 upon their power to make a dollar do twofold or fourfold work. 
 The banks that receive this ^50,000,000 of new money will not 
 rest till they have found borrowers, even though they are 
 obliged to lower their rate of discount. That $50,000,000 may 
 be made the basis for an expansion of bank credit to the 
 amount of ;^200,ooo,ooo or even $300,000,000, and the bor- 
 rowers of this credit will buy goods and labor. Thus the new 
 gold, in the form of currency or bank credit, will gradually 
 increase the demand for various goods and so cause their prices 
 to rise. Since there is no reason why the demand for other 
 goods should have fallen off, the general price level will have 
 been raised, indicating a decline in the value of money. 
 
 'j6. In the foregoing illustration it is tacitly assumed that none 
 of the new gold is at once taken by jewelers and others for use in 
 the arts, and this assumption is justified, for there is no reason 
 
 coined ; but practically he is given cash at once for his gold and does not have to 
 wait till it is coined. 
 
RELATION OF MONEY AND CREDIT TO PRICES 
 
 "5 
 
 for supposing that the demand of manufacturers for gold will 
 increase until gold has actually fallen in value, — that is, until 
 the prices of goods have risen. Of the new gold added to the 
 world's stock each year it is estimated that about 20 per cent 
 is absorbed by the arts' demand, but there is little evidence that 
 the consumption of gold in this way increases as its value falls. 
 The charm of gold as an ornament lies in its value almost as 
 much as in its beauty. 
 
 An important secondary effect remains to be noted. We 
 assumed an addition of at least ^50,000,000 to our money sup- 
 ply at a time when the demand for money was not increasing, 
 and saw that a rise of prices must result. Unless something 
 had happened to lower the value of gold elsewhere at the same 
 time, the price level of this country would rise above that of 
 other gold-standard countries. Our imports would in conse- 
 quence increase and our exports decrease, and thus a balance 
 of international indebtedness would be created that would com- 
 pel an export of gold from the United States. Thus, in accord- 
 ance with the law providing for the automatic distribution of 
 gold, explained in Chapters II and V, each country would finally 
 get its proportionate share of the new supply and prices in all 
 gold-standard countries would ultimately be lifted in the same 
 degree. 
 
 TT. To see how a reduction in the supply of money would 
 affect prices, let us suppose that the United States government 
 during a certain month, as a result of bond sales or increased 
 taxation, takes ^50,000,000 from circulation and holds it in the 
 Treasury's vaults at Washington. Even though this currency 
 comes in the first instance from the pockets of the people, it 
 will lead to a corresponding reduction of the banking reserves, 
 for the need of the people for currency as a medium of ex- 
 change and store of value will not immediately be affected, and 
 that need the banks must supply. The banks, their reserves 
 having declined ^50,000,000, will be obliged to call loans and 
 reduce their liabilities by something like ;$200,ooo,ooo. This 
 contraction of credit, whether accompanied by a rise of the 
 rate of interest or not, will mean a reduction in the volume 
 
Il6 MONEY AND CURRENCY 
 
 of available purchasing power, and certain business men will be 
 obliged to suspend or narrow their operations. The demand 
 for goods and labor will fall off and many sellers will find them- 
 selves obliged to lower prices in order to attract buyers. 
 
 Prices and the Money Demand 
 
 78. A change in the demand for money, as was shown in 
 Chapter IV, is less easily measured than a change in the 
 supply, yet its effect upon the value of money, and hence upon 
 prices, is quite as important. An increase in the demand for 
 money may result (i) from an increase in the volume of ex- 
 changes, (2) from a contraction of credit, or (3) from a lessened 
 rapidity of circulation. The third cause, as already shown, 
 amounts to an increase in the need for money to serve as a 
 so-called store of value for future use, and is nowhere sub- 
 ject to great fluctuations. The volume of exchanges within a 
 country depends mainly upon the number of its people and the 
 quantities of goods produced. Let us consider how changes 
 in these must affect the demand for money and so the level 
 of prices. 
 
 That an increase of population, if the use of credit is not 
 equally enlarged, must be accompanied by an increased need 
 for money is evident. If the population of a country grows from 
 ten million to eleven million, methods of production and busi- 
 ness remaining the same, the need for money as a medium of 
 exchange and as a basis of credit will increase in the same pro- 
 portion. If the supply of money has not also increased 10 per 
 cent, assuming that there has been no enlarged use of credit, 
 the value of money will have increased and the prices of goods 
 in general will have fallen. It is not easy to find a country in 
 which these conditions have all existed for any period, for most 
 countries during the last century have used freely coined gold 
 and silver as money, so that the supply has never been constant. 
 India, however, between 1893 and 1897, when the free coinage 
 of silver was not permitted, furnished a fairly good illustration 
 of what will happen when the supply of money does not increase 
 
RELATION OF MONEY AND CREDIT TO PRICES 117 
 
 as the population grows. The value of the silver rupee, which 
 remained the monetary unit of India until 1899, when the gold 
 standard was adopted, steadily rose above the value of the 
 bullion it contained, and prices tended downward.^ 
 
 As we have already seen (Chapter IV), it must not be con- 
 cluded that the supply of money should increase in the same 
 ratio as the population. The other important conditions seldom 
 remain unchanged; the development of credit, especially during 
 the last half century, has tended to lessen the need for money 
 and so to counteract the influence of the growth of population. 
 
 79. An increase in the volume of exchanges, due to improved 
 methods of production (i.e. lowered costs), tends to increase the 
 demand for money and to cause a fall in prices. If a country's 
 production of wealth is increased by improvements in machin- 
 ery or by a more efficient application of labor, it must follow 
 that a greater volume of goods will be exchanged, and, there- 
 fore, that more money will be needed than formerly to effect 
 exchanges at the old level of prices. If the improvements 
 in production have been general in their application, lowering 
 the costs and increasing the supply of most articles consumed 
 by men, the values of goods in general will not have been 
 affected ; each man on the average having doubled his produc- 
 tion, goods will exchange at the same ratios as before and have 
 the same values. For example, if the shoemaker has doubled 
 his productive capacity at the same time that the farmer has 
 doubled his, a pair of shoes will cost the farmer no more bushels 
 of wheat than formerly ; in other words, the value of wheat in 
 shoes will remain unchanged. But if, while this process has 
 been going on, the supply of money has not also been doubled, 
 it is evident that each dollar will be called on to exchange twice 
 as many goods as before, and that it will have twice the value 
 it formerly had ; that is, prices will have fallen 50 per cent. 
 
 In this illustration it should be noted that the influence which 
 
 credit might have had upon the change of prices has been left 
 
 out of account. If while production is doubling on account of 
 
 improvements the use of credit is enlarged, then the increased 
 
 1 Details are given in Chapter XIV. 
 
Il8 MONEY AND CURRENCY 
 
 demand for a medium of exchange may be fully met by credit, 
 so that there will be no change whatever in the general level of 
 prices. In the nature of things, however, there is no reason 
 why the use of credit should increase at a pace equal to an 
 increase in the demand for a medium of exchange. Increased 
 use of credit depends, as is shown in Chapter III, upon increas- 
 ing confidence and upon improvements in credit machinery. 
 
 80. The fall of prices caused by an increase in the produc- 
 tion of wealth as a result of improvements has been a matter 
 touching which there has been much misapprehension. People 
 usually think of such a fall of prices as being the result of a fall 
 in the values of commodities rather than of a rise in the value of 
 money, and some economists have taken the same view. It is 
 important to be clear upon this point. The popular misappre- 
 hension is easily explained. When an improvement in the pro- 
 duction of any particular commodity lowers its cost, the fall in 
 its price is actually indicative of a fall in its value or exchange 
 power. Naturally, therefore, when improvements throughout the 
 whole field of industry are reducing costs and are bringing into 
 the markets larger quantities of goods, people assume that the 
 resultant general decline of prices represents a general decline 
 of values. That this assumption cannot be true a moment's 
 thinking about the meaning of value will show. The value of a 
 good is its purchasing power, — its exchange relation with other 
 goods, — and is measured by the quantities of other goods for 
 which it will exchange. That a general fall or rise of the values 
 of goods is an absurdity was shown in Chapter II. A general 
 fall of the prices of goods means merely that money buys more 
 than formerly, i.e. that the value of monpy has risen. It can 
 mean nothing else, and the cause of the increased value, under 
 the conditions of our hypothesis, lies in the increased demand 
 for money due to the offer for it of larger quantities of goods. 
 
 81. Despite the a priori simplicity of this proposition writers 
 of some standing refuse to accept it, holding that a fall of prices 
 resulting from lowered costs of production does not mean an 
 appreciation of money. Such a fall of prices, they say, is born 
 of forces touching commodities only ; and then in great detail 
 
RELATION OF MONEY AND CREDIT TO PRICES 119 
 
 they show, in the case of one commodity after another, how 
 some new process or machine leads to a decline in its value and 
 so of its price. How, it is asked, can the value of money have 
 been affected when none of these forces has in the remotest 
 way touched money? 
 
 Their error, apart from the twist they give the words "value" 
 and " appreciation," seems to lie in a misconception of the 
 nature of the demand for money. That tends to vary, as has 
 been shown, with the quantity of goods exchanged, and any 
 circumstance, whether a rising birth rate, a steam plow, or a 
 rotary printing press, which leads to an increased production 
 and sale of goods, acts directly upon it, tending to cause the 
 value of money to rise and prices in general to fall. As each 
 commodity is affected by the improvement in its production, its 
 value certainly falls as does its price ; but as the process goes 
 on there is a constant readjustment of valuations. The values 
 (but not the prices) of those commodities first affected rise 
 whenever an improvement forces down the value of another 
 commodity, until at the end, if the costs of all commodities 
 have been lowered, we have the same exchange relations 
 between commodities that existed before the era of improve- 
 ments began. Money, if its supply has not also increased, will 
 have risen in value because of the increased demand for it, that 
 is, because more goods are offered for it. 
 
 A fall of costs due to improvements can lead to no general 
 fall of prices except by increasing the quantities of goods 
 produced. Take, for example, an improvement in the manu- 
 facture of automobiles, which brings their average price down 
 from ^1000 to ;^SOO. If the reduction did not lead to twice 
 the former sales, an upward tendency would be given to the 
 prices of other articles, for an increased amount of the commu- 
 nity's available money and credit would be offered for them. 
 If, on the other hand, the sales of automobiles should more 
 than double, and so absorb more of the country's available 
 money and credit than formerly, the demand for other articles 
 would necessarily be weakened, and we should have a fall in 
 the prices of articles whose costs had not been lowered. 
 
I20 MONEY AND CURRENCY 
 
 82. Another source of confusion on this subject is the tend- 
 ency of some writers to confuse real costs of production with 
 money costs. Such writers will object to the conclusions in the 
 foregoing paragraphs on the ground that a change in price is 
 assumed without a corresponding change in the cost of pro- 
 duction, which in the long run determines the prices of most 
 goods. This objection is not well grounded. To a business 
 man the amount of money he spends in producing or obtaining 
 a commodity is most important; it is the only "cost" which he 
 knows ; and the article cannot long sell under that sum. If the 
 relation of money to goods remained always the same, that 
 is, if the value of money were stable, changes in this money 
 cost (or expense, as it is called by economists) would coincide 
 with changes in real costs of production. By real cost of pro- 
 duction is meant the total value of the goods consumed in the 
 production of an article, — the value of the raw material, of the 
 means of subsistence given to laborers, and of a certain amount 
 of plant and machinery. Real costs are not changed by a gen- 
 eral rise or fall of prices, and it is these real costs which in the 
 long run fix the values of goods produced under conditions of 
 free competition. 
 
 For example, if general prices rise 5 per cent during a cer- 
 tain year, money costs will increase 5 per cent, for the raw mate- 
 rial, etc., necessary for the production of a particular article 
 will cost 5 per cent more money; but there will be no increase 
 on this account in real costs, for the rise of prices will not make 
 necessary increased quantities of materials, machinery, or labor. 
 
 This distinction between real costs and money costs is one 
 that the reader must clearly understand, for any misconception 
 here will lead him into quicksand. He must see clearly that it 
 is possible for prices to be rising even at a time when real costs 
 of production are falling. Something of that kind happened 
 during the five years following 1 898. During this quinquennium 
 there was no break in the, quickstep of industry, no folding of 
 hands on the part of inventors or entrepreneurs ; real costs of 
 production surely declined just as they did in the seventies and 
 eighties; yet the prices of commodities rose some 25 per cent 
 
RELATION OF MONEY AND CREDIT TO PRICES 121 
 
 and the money costs of almost all articles advanced in pro- 
 portion. That the per capita production of wealth increased 
 during this period there is no reason to doubt. 
 
 Influence of Credit 
 
 83. An increase in the use of credit, since it lessens the 
 demand or need for money by rendering the existing supply 
 more efficient, is practically equivalent to an increase of the 
 money supply, and therefore tends to cause a rise in prices. This 
 proposition has already been explained in a general way. Here 
 we shall consider briefly the different degrees of influence 
 exerted by the different kinds of credit. 
 
 Any circumstances tending to increase the use of credit of 
 limited acceptability, such as checks, bills of exchange, and 
 promissory notes, tends to lower the value of money and 
 raise the level of prices. That such an expansion of credit 
 would actually lift prices unless its influence were counteracted 
 by an opposing force, such as a reduction in the supply of 
 money or an increase in the demand for money, cannot be 
 denied if we have correctly conceived the relation of credit to 
 money; yet upon this point there has been considerable vague 
 writing and no little disagreement among economists. Writers 
 who admit that bank notes and government credit money may 
 influence prices deny that checks and promissory notes possess 
 such power, holding that these latter are born of the trans- 
 action which they consummate, and, therefore, that the demand 
 for money is not touched.-' 
 
 Such writers, it will be found, usually have a wrong conception 
 of the nature of credit, regarding it as something independent 
 
 1 To suppose that the " deposit currency " raises prices by increasing general 
 purchasing power in proportion to its increase in volume, is like supposing that 
 an increase of tickets increases the number of chairs at the opera. In " deposit 
 currency " an increase of transactions brings with it, as a necessary consequence, 
 the medium by which exchanges are made ; and offsetting goods against each 
 other could not raise general prices. — ^ Laughlin's Principles of Money ^ pp. 137-138. 
 There is no analogy between an opera ticket and a bank check, and never will be un- 
 less a system of wireless telephonies some day makes a ticket as satisfying as a seat 
 
122 MONEY AND CURRENCY 
 
 of and distinct from money. The difference between buy- 
 ing with credit and with money in hand is very slight; in both 
 cases money is the thing with which the buying is done, only 
 in the credit purchase the delivery of the money is promised 
 at a later date. If men go into a market offering checks for 
 commodities, they will influence prices just as much as if they 
 should offer cash or money in hand. In fact, when they offer 
 checks in payment they are really offering money, but for 
 convenience to both buyer and seller delivery is delayed. A 
 commercial traveler does not carry with him the goods he sells, 
 often not even a sample; must we conclude, therefore, that a 
 drummer for the rubber trust is not selling gum shoes, and 
 that his sales will not leave the retailer's demand for rubbers 
 less than it was before his trip .' 
 
 But, it may be asked, if credit in the form of checks and 
 drafts has such an effect on prices, how does it happen that the 
 great volume of these credit instruments created every day 
 does not keep the level of prices in a state of constant agitation.? 
 A reply to this question will bring to light two facts worth 
 noting. First, in ordinary times, when the conditions establish- 
 ing confidence are unchanging, there is no reason why credit 
 from day to day should effect a greater or less proportion of a 
 country's exchanges. In other words, there is no reason why 
 there should be more or less buying with credit to-day than 
 there was yesterday, and hence no reason why prices should rise 
 or fall to-day. But let something happen to fire the hopes of 
 men, then in the stiffening price lists we see the immediate effect 
 of a larger use of credit ; or let disaster threaten, and a sudden 
 decline of prices records the contraction of credit. Having in 
 mind ordinary times, therefore, we may say that the use of 
 credit of limited acceptability, like checks and drafts, keeps 
 prices at a higher level than they would maintain if such credit 
 were not used. That, it will be noticed, is equivalent to saying 
 that the use of such credit in ordinary times keeps prices from 
 falling. Anything, however, which affects the confidence upon 
 which credit is based must affect its use and so cause a change 
 in the price level. 
 
RELATION OF MONEY AND CREDIT TO PRICES 
 
 123 
 
 The second point to be noted in this connection is the fact 
 that violent changes in prices are usually the result of expan- 
 sion or contraction in the volume of credit of limited accepta- 
 bility. This fact receives such frequent illustration on stock 
 and produce exchanges, where practically no money is used 
 at all, and in the real-estate "booms " of western towns, that it 
 need not be dwelt on here. 
 
 84. Credit of general acceptability, i.e. credit money, acts 
 on prices very much as would the same amount of new money. 
 Such credit, it should be noted, satisfies within a given country 
 a want that cannot otherwise be satisfied except with money 
 itself. It differs from the check and bill of exchange in that 
 any one is willing to take it in payment for goods and services, 
 and it serves, therefore, in the pockets of the people as a full 
 substitute for money itself. In many countries, furthermore, 
 the law makes it legal tender, or so-called " lawful money," so 
 that the banks use it as a reserve for the security of their 
 depositors. Hence any arbitrary increase in its quantity (i.e. 
 any increase not called for by an increasing monetary demand) 
 puts into the hands of the people something which they treat 
 exactly as they would a corresponding amount of real money, 
 and the effect on prices is the same. 
 
 For example, any addition to the quantity of greenbacks or 
 silver dollars in circulation in the United States would have an 
 immediate effect upon the value of money and so upon prices. 
 At a given time a country needs only a certain amount of money 
 to accomplish all of its exchanges, and prices seek adjustment 
 to this amount. A certain amount is needed as a store of value 
 in the banks and in the pockets of the people, and a certain 
 amount for the consummation of exchanges. Credit money may 
 be made to serve both these purposes. In the United States 
 greenbacks and silver dollars, although they are credit instru- 
 ments, may be lawfully employed by the banks as a basis for 
 their credit operations ; hence any increase in their quantity 
 would have as much effect upon prices as a corresponding 
 increase in the quantity of gold. Bank notes, when properly 
 issued, possess a great advantage over government credit money, 
 
124 MONEY AND CURRENCY 
 
 for they are never put forth except when the demand for money 
 is increasing. Bank notes tend to keep prices from falling, but 
 do not cause them to rise.^ 
 
 Price Changes not Uniform 
 
 85. Prices do not change uniformly. The reader must not 
 suppose that the prices of all goods ever rise or fall together. 
 The level of prices is changed if the price of a single commodity 
 rises or falls while the prices of others remain unchanged. If 
 the prices of some commodities rise while the prices of others 
 fall to a corresponding degree, the level of prices is not 
 changed at all. Prices are the direct outcome of the contact 
 between goods and money or credit. When there is an in- 
 crease in the supply of money or in the use of credit, only 
 those goods are affected in price which come in contact with 
 the new money or credit, for those are the goods for which 
 there is an increased demand. 
 
 86. Let us suppose that a Connecticut farmer discovers in a 
 cave on his farm the storied treasure of Captain Kidd in the 
 shape of 5,000,000 ounces of gold (enough to coin ^100,000,000). 
 What will he do with this gold ? He will consult with some good 
 business man whom he trusts, and will select a dozen or more 
 banks in which to deposit his treasure. He will build himself 
 a new house and furnish it sumptuously. Some of his friends 
 will advise him to have a home in the city as well as in the 
 country, and he will buy a house on Fifth Avenue. He will 
 buy grand pianos and automobiles for his children and fit them 
 out with fine clothing. The discovery of that buried gold will 
 evidently increase the demand for various articles and so tend 
 to raise their prices.^ 
 
 Meantime the banks are busy. While they hold this money 
 they can increase their loans, and some" of their customers are 
 
 1 This statement is not true of national bank notes, which are not issued under 
 scientific conditions. The important difference between bank notes and govern- 
 ment credit money is discussed in the chapter on credit money. 
 
 2 In Sections 86 and 87 the monetary isolation of the United States is assumed, 
 so that none of the new gold is exported. 
 
RELATION OF MONEY AND CREDIT TO PRICES 125 
 
 enabled to make larger purchases of goods than they could 
 have made had not a farmer found Captain Kidd's treasure. In 
 all probability the banks first increase their call loans to specu- 
 lators in stocks, wheat, corn, cotton, and other produce ; and 
 as a result the demand for stocks and other speculative com- 
 modities is increased and their prices tend upward. But the 
 farmer does not wish to leave his money long with the banks, 
 for they pay him only 2 per cent interest on it. So he begins 
 to make investments, buying the stocks and bonds of railroads. 
 The purchase of these does not in itself cause the employment 
 of any labor or the purchase of any commodities, but what will 
 the persons who have sold the stocks and bonds do with the 
 money or credit they receive .-" They have sold their securities 
 in order that they may get money for the purchase of some- 
 thing else. The greater part of that money will go into the 
 construction of new railroads or new industrial plants. Nor 
 will the banks be content always to lend this new money to 
 speculators, for the call loan rate of interest is usually much 
 below the commercial rate of discount. They will extend more 
 credit to merchants and manufacturers, and these men will 
 begin to enlarge their operations. 
 
 Thus the farmer's gold, or the credit which it secures, must 
 soon find its way into the hands of men who are engaged in 
 industry, who buy steel, iron, lumber, etc., so that before long 
 there is an increased demand for building materials and labor. 
 Increased demand for commodities will cause their prices to ad- 
 vance almost immediately. Increased demand for labor, as a 
 rule, is first met by the employment of additional men at the 
 old rate of wages, so that the people have more money to spend, 
 and then the retail stores feel the effect of the farmer's new 
 gold. Retailers find their sales increasing and enlarge their 
 orders ; then wholesalers and manufacturers see good times 
 ahead. But before the new orders come in from the retailers 
 the manufacturers have already been confronted by the neces- 
 sity of paying higher prices for their raw materials on account 
 of the speculation caused by the farmer's deposits in the 
 banks. 
 
126 MONEY AND CURRENCY 
 
 In time the wages of labor in some employments may have 
 to be advanced in order to keep the men content or to secure 
 sufficient help. Since the laborers are paying higher prices for 
 some of the necessaries of life, they begin to find their wages 
 less adequate than formerly. But rates of wages, despite the 
 efforts of trade unions to maintain a correspondence, rarely 
 rise at once to the same extent as prices ; employers refuse to 
 admit the necessity for an advance, and the working classes are 
 themselves only vaguely conscious of it, for they do not readily 
 grasp the concept of a cheapening dollar. Wages are the last 
 thing to feel the effect of an increase of the money supply, for 
 not until prices have risen is the stimulus given to industry 
 which leads to an increase in the demand for labor. 
 
 The prices of some articles are fixed by custom and would 
 not be changed at all in the United States by such a compara- 
 tively small addition to the money supply as $100,000,000. 
 Such, for example, is the price of a city newspaper, or a quart 
 of milk in a country village, or the fares which travelers pay 
 upon railroads or street cars. These customary charges it 
 would require an extraordinary change in the money supply 
 to affect. 
 
 87. During all these changes wrought by an increase in the 
 money supply credit will also have been at work. In the illus- 
 tration given it was shown that credit was called into play 
 at once, for the bankers to whom the money was intrusted 
 immediately began to make loans with it. Even a slight rise of 
 prices would have some effect upon the profits of various pro- 
 ducers. Since many men would find the demand for their goods 
 increasing, they would be inclined to enlarge their operations ; 
 consequently the banks would find that the demand for loans 
 was increasing. Furthermore confidence in the business out- 
 look would grow as prices rose, and men would everywhere 
 be more willing than formerly to extend credit. Manufacturers 
 and wholesalers would be more liberal with their old customers 
 and would scrutinize less suspiciously the paper of new cus- 
 tomers. As a result the deposits and discounts of banks would 
 grow, credit would become a more and more important factor 
 
'RELATION OF MONEY AND CREDIT TO PRICES 127 
 
 in the purchase of goods, and the rise of prices would tend 
 to be more than proportionate to the increase of the money 
 supply.^ 
 
 88. In a country like the United States, where business is 
 done largely by the aid of banks, the credit system being highly 
 developed, an increase of the volume of money affects first the 
 prices of stocks and bonds, for these are the articles that are 
 bought by the men into whose hands the money naturally comes 
 first. The prices of such speculative commodities as wheat, 
 cotton, corn, steel, etc., are affected almost as quickly; not the 
 prices of all at the same time, but first one, then another. If 
 there is great speculative interest in wheat and little in other 
 produce, new money and the credit it supports may all for a time 
 go into the purchase of wheat. On the other hand, it may all 
 go into the stock market. After a time, however, it will get 
 into general circulation and affect the prices of most commodi- 
 ties, influencing first wholesale prices, then retail, and finally 
 rents, wages, and salaries. 
 
 89. The downward course of prices during a period when the 
 supply of money is not keeping pace with the demand, is also 
 irregular. Under modern conditions banks first feel the pinch, 
 for the people withdraw from them all the currency they need. 
 As business grows and the need for currency to consummate 
 exchanges at a given level of prices increases, the lawful money 
 reserves of banks are cut into, country banks reduce their bal- 
 ances in New York and other reserve centers, and the city 
 banks are forced to call loans and contract their credits. Spec- 
 ulative borrowers suffer first, and a fall of prices ensues on the 
 stock and produce exchanges, for most of the " bulls " in those 
 
 ' If we suppose that the farmer found, instead of gold, a store of iron and 
 copper worth $100,000,000 at the prices then prevailing, several interesting queries 
 arise. What would be the effect on the prices of iron and copper, and on the gen- 
 eral level of prices ! Would the prices of other goods than iron and copper be 
 affected ? Would there probably be an expansion of credit ? Which would be 
 the more beneficial to the country (its commercial isolation being assumed), 
 such a find of iron and copper, or the find of gold described in the text ? In con- 
 sidering these questions let the reader recall the conditions that led southern 
 planters to talk of burning cotton in 1904. 
 
128 MONEY AND CURRENCY 
 
 markets trade with borrowed funds. After stocks such com- 
 modities as wheat, corn, cotton, and pork, in which there is 
 always a large speculative interest, decline in price with more or 
 less suddenness. The heaviness of prices in the great specula- 
 tive markets invariably gives a chill to confidence in general 
 business circles, for the depression is popularly interpreted as 
 proof of apprehension among experts with regard to the future 
 demand for goods. There is always much talk about overpro- 
 duction, and very little or none at all about the real cause of 
 the slump. Certain manufacturers find that they can buy their 
 raw materials at lower prices than formerly, and keep their 
 mills running; others find difficulty in getting expected help 
 from the banks, and either run their mills on half time or close 
 them altogether. The fund paid to workingmen is reduced and 
 the sales of retailers fall off. Manufacturers and wholesalers, 
 as the demand for their goods declines, are forced to cut prices, 
 and thus at last the retailer is able to bring his prices down to 
 a level with the means of his customers. Although the total 
 fund paid to workingmen is at once reduced, the rates of wages 
 paid in different occupations are not immediately affected. 
 The laboring classes resist a cut with all the power of their 
 organizations, and their employers, hoping that the depression 
 of prices is only temporary, do not see clearly that a permanent 
 readjustment of wage schedules is necessary. 
 
 90. The process of price readjustment is a slow and gradual 
 one. A study of the course of prices during the last few years 
 (1897— 1915), when the general level has been lifted some 50 
 per cent by a great increase in the world's supply of gold, will 
 show that some articles have doubled in price, that others have 
 made only a slight advance, and that still others have not changed 
 at all ; that wages in some occupations have been advanced, 
 and that in others the old rates are still paid. That the process 
 was slow and long delayed the reader will discover for himself, 
 if he examines the statistics of gold production during the 
 last twenty-five years. The world's output of gold steadily 
 increased after 1887, having risen from ^105,000,000 in that 
 year to ^123,000,000 in 1889 ; to ^147,000,000 in 1892 and 
 
RELATION OF MONEY AND CREDIT TO PRICES 129 
 
 $181,000,000 in 1894. Despite the great addition to the 
 world's stock of gold, prices did not begin to rise in the United 
 States until 1897.^ 
 
 91. Would prices rise in proportion to the increase of the 
 money supply ? This question, although a matter of pure theory, 
 has caused considerable discussion. If we could assume that 
 the demand for money would remain unchanged, an affirmative 
 answer would be correct. With twice the amount of money, 
 the proportion of credit transactions remaining unchanged, each 
 dollar would exchange for only half as much as before. But, 
 as we have seen, an addition to the money supply sufficient to 
 raise prices appreciably has a stimulating effect on industry 
 and on the use of credit. We cannot assume, therefore, that 
 the demand or need for money will ever remain the same when 
 the supply is increasing. 
 
 But after the adjustment of prices to the enlarged money 
 supply is complete, industry being no longer under an artificial 
 stimulus, the new level of prices should almost exactly reflect 
 the proportionate increase of the money supply. If, for instance, 
 the money of a country were increased 50 per cent during a period 
 of five years, and no further changes were made in the supply 
 for another five years, the price level at the end of the ten years, 
 assuming that the readjustment of prices was then complete, 
 would be 50 per cent higher than it would have been if the sup. 
 ply of money had not been increased. According to the terms 
 of this supposition, as the reader will notice, any changes in the 
 use of credit, in money's rapidity of circulation, in population, 
 or in the production of wealth would not affect the conclusion ; 
 for we do not conclude that prices would rise 50 per cent, but 
 that they would be 50 per cent higher than they would have 
 been if the money supply had not been increased. 
 
 lAs regards the increase — practically the doubling — of the output of gold 
 after 1883, it is quite certain that no effect on prices has been felt from it to this 
 day [1896]. Such things as these must not awaken doubts in our minds as to 
 the correctness of the theory which declares that money is an ordinary article of 
 merchandise, the value of which is determined by the same causes as those which 
 determine the value of all commodities. — Pierson's Economics, Vol. 1, p. 390 
 (Wotzel's translation). 
 
I30 
 
 MONEY AND CURRENCY 
 
 Professor Kinley argues that an increase of money cannot 
 have a proportionate effect on prices because the first upward 
 tilt of prices would bring more goods into market and so increase 
 the demand for money ; ^ while a fall of prices caused by a 
 reduction of the money supply would lessen the volume of 
 goods offered and so lessen the demand for money, so that 
 the value of money would not rise " in proportion to the dimi- 
 nution in its quantity." Professor Kinley, it seems, is here 
 treating a temporary condition as if it were permanent. The 
 interaction of demand and supply will undoubtedly for a time 
 retard the influence of changes in the supply of money, but 
 only for a time. If more goods are brought forward at the first 
 upward tilt of prices, there will be less to be sold later on, so 
 that in the course of a year, or during what may be called the 
 economic life of commodities, — a few days in the case of fruits 
 and other perishables, a season for modish articles, — the aver- 
 age demand for money will not have been affected. Only in so 
 far as goods are brought forward which would otherwise never 
 have been offered, would the demand for money be really in- 
 creased, and goods of that character are a negligible quantity. 
 
 Maladjustment of Prices 
 
 92. When the money of a country is such that its supply is 
 subject to changes not corresponding to changes in the demand, 
 there is never perfect adjustment between prices and general 
 values. We have seen that changes in the supply of money do 
 not immediately affect the exchange relations of all goods to 
 money. The level of prices is agitated, rising here and there like 
 a crop of oats in a field that has been unevenly fertilized, and 
 considerable time must elapse before a new level of prices, put- 
 ting commodities into the same exchange relations which they 
 held under the old, is established. During this transitional 
 period there exists what may be called a maladjustment of prices 
 to values, the exchange relations of commodities being disturbed 
 by conditions not primarily affecting their demand or supply. 
 
 1 Money, pp. 158-160. 
 
RELATION OF MONEY AND CREDIT TO PRICES 131 
 
 So subtle and gradual is the transition that business men as a 
 rule give no thought to it and do not see its significance, so 
 that they are unaware when they sell goods at the old prices 
 that the money or credit they receive represents less or greater 
 value than before. 
 
 This maladjustment of prices is a matter of great consequence, 
 for the world's supply of gold and silver, the metals which most 
 civilized nations are freely coining into money, is constantly 
 increasing at a rate never corresponding with the increase in 
 the monetary demand. Never, therefore, is there perfect adjust- 
 ment between prices and values, such as would prevail if the 
 money demand and supply were constant ; and sometimes the 
 maladjustment is so great as to exert a powerful influence upon 
 all industry, diverting capital into channels into which it would 
 not otherwise flow, and bringing unexpected, if not undeserved, 
 gains or losses to many entrepreneiirs. 
 
 93. The world's experience has furnished many illustrations 
 of the effect upon prices of changes in the supply of money. In 
 the sixteenth and seventeenth centuries, as a result of the influx 
 of gold and silver from America, prices in Europe rose between, 
 200 and 300 per cent.^ Spain was most successful in the search 
 for the precious metals, and it was in that country that prices 
 first felt the stimulus of the new supplies. In those days credit, 
 especially international credit, was but little developed, and the 
 important markets of Europe, on account of the difficulties of 
 communication and transportation, were not in such close touch 
 as now, so that the new gold and silver flowed sluggishly from 
 country to country throughout Europe and into the Orient. 
 
 1 Adam Smith wrote as follows concerning the change in prices during this 
 period: " From about 1570 to about 1640, during a period of about seventy years, 
 silver sunk in its real value, or would exchange for a smaller quantity of labor 
 than before ; and com rose in its nominal price, and instead of being commonly 
 sold for about two ounces of silver the quarter, or about ten shillings of our pres- 
 ent money, came to be sold for six and eight ounces of silver the quarter, or about 
 thirty and forty shillings of our present money. The discovery of the abundant 
 mines of America seems to have been the sole cause of this diminution in the 
 value of silver in proportion to that of corn. It is accounted for accordingly by 
 everybody ; and there never has been any dispute about the fact, or about the 
 cause of it." — Wealth of Nations, Book I, chap, xi, pt. iii. 
 
132 
 
 MONEY AND CURRENCY 
 
 Nevertheless gradually the new supplies of the precious metals 
 were apportioned among the different nations in accordance 
 with the needs of each. 
 
 The period between 1810 and 1850 exhibits in striking man- 
 ner the effect on prices of a failure of the supply of money 
 (gold and silver) to increase at equal pace with the demand. 
 During these forty years the world's output of the precious 
 metals averaged only about ^36,000,000 per annum. It is 
 doubtful if the yearly addition to the world's supply was suffi- 
 cient to meet the demand for the precious metals in the arts 
 and to compensate for the abrasion and hoarding of coins. 
 Whether the supply of gold and silver available for monetary 
 use decreased or not, it is certain that the growing monetary 
 demand for them was not met by a growing supply, for during 
 the period their value doubled, prices falling some 50 per cent.^ 
 
 After 1850 new gold from California and Australia gave 
 prices an upward turn. Between 1820 and 1830 the world's 
 production of gold had amounted to less than ;^ 10,000,000 per 
 annum ; between 1830 and 1840, to about $13,000,000; between 
 1840 and 1850, to $36,000,000. The annual output of silver 
 during these years averaged about $25,000,000. After 1850 
 there was very little increase in the output of silver, but that 
 of gold rose to an annual average of $133,000,000 for the 
 decade ending i860. During that decade the addition to the 
 world's stock of precious metals amounted to $1,704,000,000, 
 of which only $73,000,000 was silver. The addition of this 
 new money to the world's supply, a quantity greater by $150,- 
 000,000 than had been added during the preceding forty years, 
 had an immediate effect on prices in the United States and 
 Europe, although the effect was not so great as it would have 
 been had not India and the Orient eagerly absorbed large quan- 
 tities of European silver. The new gold first acted on prices 
 through an expansion of credit. The gold discoveries were 
 the sensation of the time ; men's imaginations were fired and 
 their hopes lifted. In 1850 and 185 1 prices jumped fully 17 per 
 
 1 Jevons estimated the fall of prices between 1809 and 1849 at 59 per cent; 
 Sauerbeck, at 45 per cent. 
 
RELATION OF MONEY AND CREDIT TO PRICES 
 
 133 
 
 cent. The upward movement culminated in 1857, when prices, 
 according to Falkner's . index number, were some 23 per cent 
 above those of 1 849. In Europe the upward turn of prices was 
 less marked in 1850 and 185 1 than in the United States, but 
 the total advance between 1849 ^^^id 1857 was about the same on 
 both continents. 1 The panic of 1857, being attended by a con- 
 traction of credit,^ caused a sudden slump in price, averaging 
 in Europe and the United States about 10 per cent. 
 
 During the next twenty years the causes affecting general 
 prices were complicated in this country by the issue of irre- 
 deemable greenbacks, but in countries using gold or silver as 
 money prices rose slowly after 1857 and reached their next 
 high level just before the panic of 1873, when the price level 
 was slightly above that of 1857. The production of precious 
 metals continued on a large scale after i860, the average out- 
 put of gold for the next thirteen years being $125,000,000 and 
 of silver $58,000,000. This new gold and silver would doubt- 
 less have had a much greater effect on the value of gold, and 
 therefore on prices, had not credit been continuously stifled 
 during this period by the smoke of battlefields in Europe and 
 the United States. War, since it takes men from the farms 
 and shops, reduces the need for currency as a medium of ex- 
 change, but this diminution in the demand for money is usually 
 offset by the tendency of men at such a time to hoard gold and 
 silver, and of banks to increase their reserves. 
 
 Prices in the United States from 1861 to 1879 did not 
 reflect changes in the value of gold or silver, for during that 
 period the money of the country was inconvertible credit 
 money, the so-called "greenback." Prices rose as the value 
 of the greenback fell, and vice versa. The forces governing 
 the value of the greenback at this time will be discussed in 
 Chapter XIII. 
 
 1 Between 1849 and 1857 the index number of Jevons rose from 64 to 85, or 
 32 per cent; Sauerbeck's number, from 74 to 105, or 42 per cent; Soetbeer's num- 
 ber, from 83.8 to 107.7, Of 28 per cent. 
 
 2 The loans of the New York banks shrank from $122,000,000 in August to 
 $95,000,000 in October. See Sumner's History of American Currency, p. 182. 
 
134 MONEY AND CURRENCY 
 
 The reader must not expect to find in the facts of experience 
 full confirmation of any theoretic analysis of principles depend- 
 ent upon human wants and passions. Just as the physicist, 
 because of interfering forces beyond his control, can point to 
 no phenomenon affording a perfect illustration of the law of 
 gravitation or of the laws of motion in unimpeded operation, 
 so the economist is unable to find in the business world facts 
 that prove beyond cavil a single one of his propositions. Facts 
 demonstrate nothing. As Emerson said, "Everyman has facts 
 enough ; what is wanted is the heat that dissolves facts." 
 A sound theory is one that explains the facts by disclosing the 
 relations of cause and effect ; in so far as a theory fails to do 
 that, it is unsound or incomplete. 
 
 LITERATURE 
 
 Mill, Political Economy, Book III, chaps, viii, xii, xxii ; L. L. Price, 
 Money and its Relation to Prices (London, 1896) ; Elijah Helm, The 
 Joint Standard (London, 1894) ; J E. Cairnes, " Essays on the Gold 
 Question" contained in Essays in Political Economy ; Jevons, Investiga- 
 tions in Currency and Finance, pp. 13-159; Adam Smith, Wealth of 
 Nations, chap, xi ; Schoenhof, History of Money and Prices, — presents 
 views opposed to those in this chapter ; ToOKE and Newmarch, History 
 of Prices ; C. M. Walsh, Measuretnent of General Exchange Value 
 (New York, 1901) ; and Fundamental Problem in Monetary Science; 
 Nicholson, Money and Monetary Problems ; essay on the " Causes of 
 Movements in General Prices " ; David A. Wells, Recent Economic 
 Changes J Irving Yv&ws.'k, Purchasing Power of Money ; E. W. Kemmerer, 
 Money and Prices. For a more detailed discussion of index numbers see 
 BowLEY, Elements of Statistics ; Laughlin, Principles of Money, chap, vi ; 
 and the Bulletin of the Department of Cotnmerce and Labor ioT March, 1902. 
 The Sauerbeck number is found in the Journal of the Royal Statistical 
 Society; the Economist publishes its own number; and the Department of 
 Commerce and Labor issues a bulletin on wholesale prices during March or 
 April of each year. 
 
CHAPTER VII 
 
 THE RELATION OF MONEY AND CREDIT TO THE 
 RATE OF INTEREST 
 
 94. Capital and the rate of interest as defined by the economist and by the 
 practical man. 95. The rate of interest is determined by the demand for and 
 supply of capital. g6. The lending power of banks varies with the savings of 
 the people, so that the bank rate of discount and the rate of interest are fixed 
 by the same forces. 97. Why the capital fund of a country corresponds in value 
 with the capital goods, although the fund is derived from consumers' goods as 
 well as from capital goods. 98. The demand for capital is not a demand for 
 money ; yet an increasing demand for capital is usually accompanied by an expan- 
 sion of credit and an upward tendency of prices. 99. Except during a period of 
 price readjustment the supply of money has no relation to the rate of interest. 
 100. A temporary increase of the money supply tends to lower the rate of interest, 
 and a temporary decrease tends to cause it to rise. loi. A steady or continuous 
 increase or decrease in the money supply perpetuates a maladjustment of prices 
 and exerts a constant influence upon the rate of interest ; a steady increase tends 
 to keep the rate of interest above the normal. 102. Sooner or later the stimulus 
 given to industry by rising prices leads to speculation and panic. 103. When the 
 money supply fails to increase as fast as the demand, the rate of interest tends to 
 decline. 104. The decline of profits and the falling off in the demand for capital 
 are wrongly attributed as a rule to overproduction. 105. Changes in the rate of 
 interest in the London money market during the nineteenth century. 106. Why 
 bank reserves are large during a period of decreasing money supply. 107. A 
 maladjustment of prices makes the commodity rate of interest differ from the 
 money rate. 
 
 94. The rate of interest, according to economists, is the 
 percentage which the borrower pays the lender for the use 
 of his capital. By capital economists mean all those goods, 
 or kinds of wealth, which people produce in excess of their 
 immediate needs, and which are saved for use in the produc- 
 tion of additional wealth. This wealth they usually divide into 
 three classes, as follows: (i) tools and machinery, (2) mate- 
 rials, (3) means of subsistence. 
 
 The man of business uses " capital " in a different sense. 
 To him it means all the money and credit that are available for 
 business uses,; and the rate of interest is the percentage of 
 
 135 
 
136 MONEY AND CURRENCY 
 
 money which the borrower gives to a lender for the use of his 
 capital, or money. 
 
 We shall show in this chapter that the economist and the 
 practical man have jeally in mind the same thing when they 
 speak either of capital or of the rate of interest ; and shall then 
 consider the extent to which capital^ and the rate of interest 
 are dependent upon the supply of money and the use of credit. 
 
 If a man wishes to make shoes, it is clear that he must have 
 leather and the necessary tools, and also enough food to sup- 
 port him until the shoes are finished and sold ; and if he does 
 not own these things, and has no money with which to buy 
 them, he must borrow. Among a people not using money he 
 would be obliged to borrow the goods themselves, and might 
 have great difficulty in doing this, for the men who owned the 
 goods he wanted, although they might be willing to exchange 
 them for other things, might not be willing to lend them. 
 Money removes the necessity for such clumsy barter between 
 the borrower and the lender. Men who have goods they do not 
 wish to use, sell them for money, either cash in hand or credit, 
 and then either buy other things or deposit the money and 
 credit in banks. And men like our shoemaker, who want tools, 
 raw materials, and other capital goods, first borrow money and 
 credit from the banks and therewith buy the things they need. 
 Since money is the thing loaned, the rate of interest is always 
 figured in money, the borrower agreeing to repay the principal 
 plus a sum of money equal to a certain percentage of it. For 
 this reason men are apt to think that the rate of interest is in 
 the main dependent on the supply of money. This view of the 
 matter is superficial. 
 
 1 In this book the word "capital " is employed in the sense given it by the econo- 
 mist ; the business man's idea of capital is expressed by such phrases as " capital 
 funds " or " loanable funds." Recent discussions of the subject reveal a tend- 
 ency on the part of economists to adopt the business usage, and to make a dis- 
 tinction between abstract capital — money and credit available for use in business 
 — and concrete capital, which is often described as "capital goods," or "pro- 
 ducers' goods." Although inclined to favor the business usage, I adopt the econo- 
 mists' in this book lest the reader be confused should he pursue his study in the 
 classical literature of the subject. However we define the terms, the ideas under- 
 lying them can be clearly set forth, and that, of course, is the important thing. 
 
THE RATE OF INTEREST 137 
 
 * 95. The rate of interest is determined by the demand for 
 and supply of loanable capital. Notwithstanding the fact that 
 at the present time money is the thing always borrowed, the 
 rate of interest does not primarily depend on the abundance or 
 scarcity of money or upon the demand for it. It depends upon 
 the abundance of capital in the possession of people who do not 
 wish to utilize it, and upon the demand for it ; in other words, 
 upon the quantity of wealth which people have produced in 
 excess of their own needs, and upon the demand for it from 
 men who wish to put it to productive uses. 
 
 The demand for capital comes from men who see opportuni- 
 ties to make profit in business, and who have not capital enough 
 of their own to carry out their plans. A man, for example, 
 thinks he sees large profits in the manufacture of a pump he 
 has invented. His own savings amount to ;^ 10,000, but he 
 finds that if he had ^20,000 he could put up a larger plant and 
 make bigger profits than if he employed only his own capital. 
 Therefore he tries to borrow $10,000. The maximum rate of 
 interest he is willing to pay depends altogether upon the rate 
 of profit he expects to make. If he feels certain that he can 
 make 20 per cent, he may be willing to pay 10 or 15 per cent 
 for borrowed capital rather than not have the use of it. 
 
 The supply of loanable capital comes from men who have 
 wealth that they do not wish to employ productively, but from 
 which they wish some return, preferring to forego the imme- 
 diate consumption of it in order that they may have a larger 
 amount for use in the future. 
 
 Just as the value of a commodity is determined by what is 
 called its marginal or final utility, so the rate of interest is 
 fixed by the marginal productivity of capital. The demand for 
 capital is not the same with different borrowers. One man 
 might be willing and able to pay 10 per cent, whereas another 
 would see no hope of profit if he paid over 6 per cent, and 
 still another might not be able to pay over 4 per cent. The 
 demand for capital, therefore, will increase as the rate of 
 interest is lowered, and will diminish as the rate of interest is 
 raised. In the same way the amount of capital that will be 
 
138 MONEY AND CURRENCY 
 
 offered will tend to increase as the rate of interest rises, and' 
 tend to decrease as the rate of interest falls. Some men will 
 live economically and save as much as possible if they can lend 
 at 10 per cent, who would not save at all if only 2 per cent 
 were offered. If in a country at a given time there is a bor- 
 rowing demand for ^100,000,000 of capital offered at 6 per 
 cent, that would be the rate of interest provided there is not 
 more than ;^ioo,ooo,ooo of capital offered at 6 per cent. If 
 the supply of capital is in excess of that sum, then some of the 
 lenders, fearing they may not find a borrower, will offer loans 
 at less than 6 per cent, say at 5^ per cent. The rate always 
 tends toward that figure which establishes an equilibrium 
 between the demand and supply. 
 
 Origin of Loanable Funds 
 
 96. The lending power of banks varies with the savings of 
 the people, so that the bank rate of discount is fixed by the 
 same forces which fix the rate of interest. The average bor- 
 rower always thinks of his wants in terms of money. A manu- 
 facturer who wishes to expand his business needs more capital, 
 but always thinks of his need as being for money or credit. 
 He consults the financial page of a newspaper and it tells him 
 that money is "tight," that the rate of discount is correspond- 
 ingly high, and that the banks are unable to expand their loans. 
 His ability to borrow seems to him, and to the banker from 
 whom he wishes to borrow, to depend altogether upon the sup- 
 ply of money in the community. If "money" is plentiful, the 
 rate of interest is low ; if it is scarce, the rate of interest is 
 high. So business men and bankers usually think of the rate 
 of interest as being determined altogether by the money situa- 
 tion, and often assume that a high rate indicates a need of 
 more money and that a low rate is due to a plethora of money. 
 We have here a confusion of money with capital which it is 
 necessary to clear away, for it has led to mischievous legisla- 
 tion in the past and is to-day the basis of worthless remedies 
 proposed for the relief of the money market. 
 
THE RATE OF INTEREST 139 
 
 The loanable funds in the possession of banks are derived 
 from and are representative of the loanable capital in a country. 
 When the amount of loanable capital increases the amount of 
 loanable funds increases in a corresponding degree. Banks 
 create nothing; all their lending power is the product of indus- 
 try. Among a people who produce little wealth and save none 
 a bank could not exist, for it would receive no deposits and 
 could make no loans. Every deposit of money or credit in a 
 bank represents actual wealth or capital that has been saved in 
 the community. In a country like the United States, where 
 practically all lending is done by banks, and where the sav- 
 ings of the people are deposited in them, their power to lend 
 varies with those savings. When a farmer at the end of a 
 season finds that after paying all expenses he has left ten 
 tons of hay for which he has no use, he can be said to have 
 saved ten tons of hay. In an age of barter he might have used 
 that hay as capital and enlarged his herd of cattle, or he might 
 have loaned it to a neighbor on condition that he should be 
 repaid eleven tons a year later, or he could have exchanged the 
 hay for other goods. Under the modern money regime he can 
 do any one of these things with his hay, but in a much easier 
 way. He may either use it himself or sell it for money or 
 credit, say ^100, and then either spend the ^100 or lend it. 
 That i^ioo represents the ten tons of hay for which he had no 
 use; it constitutes a "loanable fund" derived from the con- 
 crete capital, hay. If we could trace back to their origin the 
 g 1 0,000,000,000 of bank deposits in the United States, we 
 should find that all had their source in concrete products 
 of labor for which the owners had no immediate use. This 
 statement applies to both classes of deposits described in 
 Chapter III. The cash deposit represents goods which the 
 depositor has parted with ; the credit or loan deposit repre- 
 sents goods which the depositor (who is a borrower) is about 
 to acquire, and becomes the basis for a cash deposit in the 
 hands of the man from whom the goods are bought. The 
 concrete goods not immediately wanted by the owners con- 
 stitute the country's loanable capital ; the money and credit 
 
140 
 
 MONEY AND CURRENCY 
 
 for which these goods are exchanged constitute the loanable 
 funds of banks. 
 
 97. It should be noted that the capital fund of a country 
 arises not only from the sale of capital goods but also from 
 the sale of goods that are ready for consumption, which are 
 called "consumers' goods." For example, a manufacturer of 
 shoes, which are consumers' goods, is quite as likely to deposit 
 his profits in a bank or to use them in the enlargement of his 
 own business as is the manufacturer of plows, which are capi- 
 tal goods. How, then, can there be any necessary correspond- 
 ence between the amount of capital goods and the fund which 
 the business man views as capital .'' The size of the fund 
 available for business use evidently varies, other things the 
 same, with the rate of interest offered by the entrepreneur; a 
 high rate will tempt people to save and lend part of their 
 income who would not save at all if a low rate were offered. 
 Hence the capital fund swells as the interest rate rises and 
 contracts as the interest rate declines. 
 
 If for any reason, such as a rise in the rate of interest 
 caused by a war, a people become more parsimonious and the 
 capital fund of a country suddenly increases, at once there is 
 a stronger demand for capital goods and their prices rise, while 
 the prices of certain consumers' goods weaken, for people are 
 buying less of comforts and luxuries. This change in prices 
 will lead to an increased production of capital goods and to a 
 reduction in the output of consumers' goods. Thus there is a 
 constant correspondence or relationship between capital goods 
 and capital fund, between the capital of the economist and the 
 capital of the practical man. 
 
 The following diagram may help the reader.. Let circle I 
 represent the country's new wealth at any moment ; it is 
 divided into ia) consumers' goods, that is, goods capable of 
 immediately satisfying desire ; and (b) capital goods, which can- 
 not immediately satisfy wants and have value only because they 
 are aids to the production of consumers' goods. 
 
 Let circle II represent the fund of money and credit for 
 which all the goods in circle I are exchanged. This fund will 
 
THE RATE OF INTEREST 
 
 141 
 
 also be divided into two parts : (a') the money and credit spent 
 in the purchase of the necessaries and comforts of life, that is, 
 on direct satisfactions ; (3') that spent in the purchase of capital 
 goods, that is, in business or in the production of more wealth. 
 The two funds {a') and,(i5') in circle II are separated by a 
 wave line to indicate the fact that they are easily expanded or 
 contracted. Present and future wants are competing for the 
 total fund ; the business man or entrepreneur represents future 
 wants, and the more he bids in the way of interest, the more 
 he gets. On the other hand, the two classes of goods (a) and 
 if)) in circle I, being comparatively fixed in quantity at any 
 given time, are separated by a straight line ; yet the size of 
 
 A COUNTRY'S NEWWEALTH 
 
 THE MONEY AND CREDIT FOR WHICH 
 THE NEW WEALTH IS EXCHANGED 
 
 Diagram IV 
 
 each class of these is in some degree capable of immediate 
 expansion and contraction, for there are many goods which 
 lend themselves to either productive or unproductive uses. A 
 family horse, for instance, is a consumer's good ; yet a rise in 
 the price of horses may cause its sale to an expressman and so 
 make it a capital good. 
 
 It is evident that the origin of the fund (b') in the second 
 circle is not exclusively in (b) of the first circle ; the capital 
 fund (3') comes from all classes of people, from those pro- 
 ducing luxuries as well as from those producing capital goods. 
 Nevertheless the values of (b) and (b') will always pretty closely 
 correspond, and any sudden increase in {b') will lead to a corre- 
 sponding though gradual increase in the quantity of goods in 
 
142 MONEY AND CURRENCY 
 
 {b) ; for the resultant increase in the demand for capital goods 
 will raise their value and so lead to an increase in their volume 
 through increased production and through the conversion of 
 consumers' goods into capital goods. 
 
 Capital, then, as distinct from capital goods, may be defined 
 as that fund of money and credit which at any time is available 
 for use in business.^ 
 
 It is clear, therefore, that the bank rate of discount — the 
 rate charged by banks for the use of their money and credit 
 — must correspond with the rate of interest upon capital. 
 The loanable capital and the loanable funds of a country are 
 practically the same thing : the one a heterogeneous mass of 
 value in the form of various goods; the other the same mass 
 of value made homogeneous by the universal solvent, money. 
 The bank rate of discount, since it is determined by the de- 
 mand for and supply of loanable funds, is governed by the same 
 forces which fix the rate of interest on capital. The fact 
 that banks make a practice of deducting the interest from the 
 principal at the time a loan is made, tends to keep the dis- 
 count rate a fraction lower than it would be if the interest 
 were computed on the present worth of the loan, but that dif- 
 ference is a mere matter of arithmetic and does not alter the 
 significance of the rate of discount. 
 
 98. A demand for capital is not a demand for money. This 
 is a proposition of much practical importance. The demand 
 for money comes from people who have something to sell ; it 
 tends to vary with the volume of exchanges. The demand for 
 capital comes from men who want to borrow something, and 
 who want to get possession of the tools and raw materials of 
 industry ; it does not necessarily have any effect on the volume 
 of exchanges. The demand for money yields price ; the demand 
 for capital yields the rate of interest. 
 
 ^ The reader who wishes to examine other discussions of this rather abstruse 
 subject should consult Seager's Economics, Fetter's Economics, Veblen's Theory 
 of Business Enterprise, Bohm-Bawerk's Capital, and Irving Fisher's article on 
 " Precedents for defining Capital " in Quarterly Journal of Economics for May, 
 1904. 
 
THE RATE OF INTEREST 143 
 
 But does not the man who wants more capital, who wants a 
 larger plant than he can buy with his own wealth, — does not 
 he go into the market after money, or at least after its repre- 
 sentative, credit ? He certainly does. And that is the reason 
 why a man who borrows capital is usually spoken of as a bor- 
 rower of money. But his demand for capital, it should be noted, 
 makes no difference in the relation between the volume of 
 exchanges and the money supply. At a given time in a com- 
 munity there is a certain amount of money by means of which, 
 with the aid of credit, these exchanges will be effected. Let us 
 suppose that in a community the demand for capital is such 
 that the rate of interest is 5 per cent and that certain men 
 decide to build a railroad and borrow a large amount of the 
 necessary capital, increasing thereby the demand for capital so 
 that the rate of interest rises to 6 per cent. Has the demand 
 for money been increased ? Not at all. There has been no in- 
 crease in the amount of wealth to be exchanged, and no increase 
 in the volume of exchanges. The increased demand for "money" 
 has raised the rate of interest and has given a new direction to 
 the employment of capital, but it has not increased the number 
 or volume of exchanges to be made. A certain amount of the 
 lumber and iron in the community, instead of being sold to 
 building contractors, has been bought by the new railroad com- 
 pany. Certain workingmen, instead of finding employment as 
 formerly in various industries, have been employed in con- 
 structing the new railroad. An increase in the demand for 
 capital may give a new turn to the employment of labor and 
 may change the way in which wealth is consumed, but cannot 
 add to the quantity of wealth to be sold or to the amount of 
 money with which it is to be exchanged. 
 
 Although a demand for capital is not a demand for money 
 or for credit, nevertheless an increasing demand for capital 
 is usually accompanied by a change in the relation between 
 money and goods, for it is usually attended by an expansion of 
 credit and, therefore, by an upward tendency of prices. In our 
 illustration we assume that certain men decide to build a rail- 
 road and begin to bid for capital and to hire laborers. Their 
 
144 
 
 MONEY AND CURRENCY 
 
 operations will undoubtedly cause the prices of some goods to 
 rise, for there will be an increased demand for all the raw 
 materials which enter into the construction and equipment of 
 a railroad. The advance in these prices will in some measure 
 be counteracted by a fall of the prices of other goods, namely, 
 those goods which would have been bought by the ordinary 
 run of borrowers if the railroad men had not appeared in the 
 field. The decline of these prices, however, may be checked 
 by an expansion of credit. The construction of so important a 
 means of communication as a railroad always excites the spec- 
 ulative imagination of people and gives rise to various schemes 
 for the profitable employment of capital. The conditions which 
 inspired the railroad promoters with confidence in their project 
 are likely to exert a similar effect on other men, and stimu- 
 late an expansion not only of credit but of enterprise as well. 
 Thus a growing demand for capital, instead of increasing the 
 demand for money, is more likely to lessen that demand by ren- 
 dering the supply more efficient. A proposition near the truth 
 would be the following : An increase in the demand for capital 
 often tends to increase confidence and so to lessen the demand 
 for money by increasing the use of credit. 
 
 A demand for capital is not even a demand for credit as 
 a medium of exchange ; in other words, the increase in the 
 demand for capital does not necessarily lead to an increase, or 
 call for any increase, in credit as a medium of exchange. The 
 borrowing of capital itself is, of course, a credit transaction. 
 An increase in the demand may raise the rate of interest 
 and so increase the amount of capital that is loaned. To that 
 extent an increase in the demand for capital may be said 
 to increase credit transactions, but there will be no need of 
 increasing the volume of credit to be used as a medium of 
 exchange, for a change in the demand for capital, while it will 
 affect the rate of interest, will not affect the quantity of goods 
 exchanged and will not necessitate, therefore, an increase in 
 the medium of exchange of any sort, whether money or credit. 
 In so far as it stimulates saving by lifting the rate of inter- 
 est a growing demand for capital will lead to an increased 
 
THE RATE OF INTEREST 145 
 
 production of wealth, making necessary larger bank reserves and 
 a larger volume of currency in circulation. Thus an increasing 
 demand for capital, while not itself a demand for money, may 
 in the first instance lighten the strain on money by giving a 
 stimulus to credit, and may later give rise to an increasing need 
 for money by the stimulus it gives to the productive forces of 
 a country ; but neither of these effects is certain to follow. 
 
 Even in a country where credit is not used in any form as 
 a medium of exchange, an increasing demand for capital would 
 not involve a larger demand for money. In such a country, 
 all exchanges being for money in hand, the borrower would 
 get actual money from the lender, and it would seem that if the 
 demand from borrowers increased the demand for money must 
 increase. It is true that the borrowing demand for money 
 would increase, but there would be no increase in the buying 
 demand, that demand which determines the value of money. 
 Lenders would have in their possession a certain amount of 
 money, the product of their industry and saving, ancl they 
 would seek to lend all of it ; whether they could get 4 per cent 
 or 8 per cent would depend on the strength of the demand 
 for capital, i.e. the borrowing demand for money ; but the 
 demand for money which determined the value of money would 
 in either case be the same, for manifestly no more goods could 
 be bought with money borrowed at 8 per cent than with money 
 borrowed at 4 per cent. 
 
 This rather abstract analysis of the demand for capital may 
 seem unnecessary to the reader, but he will find later that 
 much confusion has existed upon this subject in the minds of 
 practical men, if not among theorists, and that this confusion 
 has led to costly blunders both in legislation and in practice. 
 The vocabulary of the "street" tends to perpetuate the con- 
 fusion, for business men -habitually speak of the rate of interest 
 as the "price" or "value" of money. The notion that mere 
 money will satisfy a demand for capital has a strong hold on 
 the mind of the average banker. This explains why bankers in 
 New York City, whenever there is a pinch in the loan market, 
 usually appeal to the Secretary of the Treasury for aid. 
 
146 MONEY AND CURRENCY 
 
 Effects of Changes in Money Supply 
 
 99. Except during a period of price readjustment, the supply 
 of money in a country has no relation to the rate of interest. 
 We have shown that the rate of interest — and the bank rate of 
 discount as well — depends upon the supply of loanable capital 
 and the demand for it, — that is, upon the amount of a country's 
 savings and the demand for them for productive purposes. If 
 the adjustment of prices is perfect, the supply of money not 
 being increased except to meet an increasing demand, the rate 
 of interest will be entirely independent of the amount of money 
 in existence. The saving and productive capacity of a people, 
 upon which the rate of interest depends, is not a product of 
 the money supply, but of their thrift and energy and of the 
 country's natural resources. 
 
 To illustrate : Let us suppose that a certain community is 
 using as money a substance the supply of which increases at a 
 steady rate, say 10 per cent per annum, and that the demand 
 for money increases at the same rate, so that the level of prices 
 remains uniform. Temporary fluctuations in the need for 
 " hand-to-hand money," we will suppose, are met by changes 
 in the volume of bank notes outstanding. In such a community 
 the rate of interest would be absolutely independent of the 
 money supply. In good times the rate of interest would rise, 
 not because of any scarcity of money but because borrowers 
 would be able and willing to pay more for the use of capital ; 
 the production of wealth would increase, more money would be 
 needed as a basis for credit, and more currency to serve as a 
 medium of exchange ; but if the additional money and currency 
 were at hand as needed, the adjustment of prices to values 
 would be maintained, bank deposits and the supply of loanable 
 capital would tend to become larger in proportion as the wealth 
 of the community grew, and the demand for loanable capital 
 would be the result of natural conditions, not of temporary 
 conditions produced by arbitrary changes in the money supply. 
 
 In this illustration we have assumed that the adjustment of 
 prices to the money supply is complete. This is an assumption 
 
THE RATE OF INTEREST 147 
 
 we are not warranted in making with regard to any civilized 
 country at the present time. Gold and silver are the money of 
 civilization, and changes in their supply are never in perfect 
 accordance with changes in the demand. During the last fifty 
 years, on account of variations in the supplies of the precious 
 metals, there has been no period when prices have had time to 
 get into adjustment with the supply of money. It remains for 
 us, therefore, to consider what influence changes in the supply 
 of money, which render necessary a readjustment of prices, 
 exert upon the rate of interest. 
 
 100. A temporary increase of the money supply in excess 
 of the demand tends to lower the rate of interest temporarily; 
 a temporary decrease of the money supply, the demand not 
 also decreasing, tends to cause the rate of interest to rise. 
 
 We will first consider the effect of a temporary increase in 
 the supply of money. Let us recur to our imaginary discovery 
 of the fabled treasure of Captain Kidd, which we have sup- 
 posed to amount to $100,000,000. After this gold has been 
 rendered available for use as money, the country evidently has 
 more money than is needed for the maintenance of the exist- 
 ing price level. The addition to the supply is something not 
 necessary. No one, however, will think of that fact. The banks 
 which receive the gold will look upon it as they have been in 
 the habit of looking upon gold; that is to say, as money possess- 
 ing a definite purchasing power. Their power to loan has been 
 increased, but there has been no increase in the' demand for 
 loans, no increase in the demand for capital, and no increase in 
 the supply of loanable capital* In order to bring out an increase 
 in the demand the banks must make borrowing more attractive, 
 and this they will do by lowering the rate of interest. First 
 the "call loan" rate will be lowered and the speculators in 
 New York who have been paying 3 per cent for money on 
 call or on demand will be offered loans at 2 per cent and 
 will increase their borrowings. Lower rates will also be offered 
 to manufacturers and business men in general, and in the 
 course of time, as described in the preceding chapter, this new 
 gold will get into circulation, becoming the basis of additional 
 
148 MONEY AND CURRENCY 
 
 credit operations, and creating apparently a new demand for 
 goods. Prices will rise until in the course of time, in a few 
 months or a few years, a higher level of prices will have been 
 established, which will make necessary more money than for- 
 merly for the exchange of the same amount of goods. 
 
 Let us suppose that this higher level of prices is reached 
 at the end of one year and that the rise amounts to 10 per 
 cent. Evidently the man who formerly found ^lOOO equal to 
 his needs for a given purpose or during a given season must 
 now have ^iioo; the increased money supply is no more 
 effective in making exchanges than the old supply had been, the 
 rise of prices having created an equivalent increase in the need 
 for money units. The banks, indeed, will have more money 
 than they had before the new gold came, and their lending 
 power in dollars will be 10 per cent greater than it was ; other 
 things being equal, the need for capital and the production of 
 wealth not having changed, their deposits and their loans will 
 in terms of money be 10 per cent greater, but this increase in 
 money will represent no gain whatever in values. A man who 
 wanted to borrow ^lOOO the year before will now need $1100 
 to accomplish the same purpose. He will find that the bank's 
 power to accommodate him is exactly the same as it was; in 
 other words, he will borrow ^i 100 with the same ease that he 
 could have borrowed ^1000 the year before; he will pay the 
 same rate of interest, the reduction in the rate having been 
 only temporary. 
 
 We have supposed in this illustration that the need for capi- 
 tal does not change during the year and that prices rise 10 
 per cent. Evidently the money needs of borrowers increase 
 10 per cent and the money in the hands of the banks increases 
 10 per cent. So the relation between the demand for loanable 
 funds and the supply is not altered. Thus the final result of a 
 temporary addition to the money supply is an apparent increase 
 of the lending power of banks, but their real lending power is 
 unchanged. 
 
 A temporary decrease of the money supply, if large enough 
 to be appreciable, produces effects the opposite of those just 
 
THE RATE OF INTEREST 149 
 
 described. If, in the course of a few months, ^100,000,000 were 
 arbitrarily taken from circulation in this . country, the lending 
 power of the banks would undoubtedly be greatly affected 
 at first. National banks of this country always hold a consid- 
 erable amount of lawful money which belongs to the govern- 
 ment. Let us suppose that Congress should pass a law requiring 
 that the banks should, within the next month, pay this money to 
 the government and that it should hereafter be kept at Washing- 
 ton. In order to make these payments the banks all over the 
 country would be obliged to call in loans and to refuse to make 
 additional loans. Since the need for capital in the country 
 would not have changed, the demand for loans would be in 
 excess of the power of the banks to lend, and the rate of inter- 
 est would rise to a high figure, only those borrowers being ac- 
 commodated who could afford to pay the high rate. As a result, 
 many enterprises would suffer from lack of funds. Speculation 
 in Wall Street and on the produce exchanges of the country 
 would be altogether on the "bear" side, for the caUing in of 
 loans by the banks would force speculators to sell their hold- 
 ings at a sacrifice. Certain industries would be crippled, men 
 would be thrown out of employment, and the sums of money 
 distributed in the form of wages would diminish. The adjust- 
 ment of prices to the diminished money supply would have a 
 depressing influence upon various forms of business and indus- 
 try, and would discourage entrepreneu.rs , thus tending to lessen 
 the demand for capital. 
 
 The settling of prices would lessen the amount of money 
 needed for the accomplishment of any particular enterprise, and 
 the old relation between the demand for and supply of loanable 
 funds would finally be restored. It is impossible to say how 
 long a time would elapse before the price level would be prop- 
 erly adjusted to the supply of money, and the rate of interest 
 again be normal. On the face of things it would seem that an 
 arbitrary decrease in the supply of money, since it would make 
 much capital idle and so tend to its destruction, would produce 
 an effect from which the country would be long in recovering. 
 The effect of an increase of the supply, on the other hand, 
 
150 MONEY AND CURRENCY 
 
 would be a stimulus to industry, an increase in the power of 
 banks to lend, and an increase for a time in the desire to bor- 
 row, and so in the demand for capital, which might work much 
 harm through the stimulus it gave to speculation and to under- 
 takings for which there was no real need. The effect, however, 
 of an arbitrary decrease of a supply would seem to be much 
 more injurious. ^ 
 
 loi. A steady or continuous increase or decrease in the 
 money supply not corresponding to changes in the demand, 
 since it perpetuates a maladjustment of prices, produces a con- 
 stant effect upon the demand for and supply of capital and so 
 has a constant influence upon the rate of interest. 
 
 We will first consider the effect upon the rate of interest of 
 a steady increase in the money supply, and will suppose that 
 this increase is constant and a little in excess of the need for 
 money, so that prices tend steadily upward. We shall iind that 
 such constant increase of the money supply will stimulate the 
 demand for capital and tend to cause the rate of interest to 
 rise above the normal. 
 
 We have already seen that the first addition to the supply of 
 money will cause the rate of interest to fall temporarily and 
 bring about an uneven uplift of prices, speculative goods ris- 
 ing first and retail prices last. All these price changes are 
 attributed by people in general to an increasing demand for 
 goods. Few business men suspect that their ability to sell goods 
 at higher prices than formerly is in any way due to a change in 
 the money supply. So far as the average man is concerned, the 
 new demand for his goods is a real demand backed by sufficient 
 money to support it. If the addition to the money supply is 
 constant, particularly if it is gradual and steady, being made by 
 monthly increments year after year, there will be a constant 
 tendency of prices to rise, producers will find their profits grow- 
 ing, the demand for capital will consequently increase, and the 
 
 ' An arbitrary increase or decrease of the money supply is one not called for 
 by the demand, an increase or decrease which renders necessary a new adjust- 
 ment of prices. Any change in the supply which corresponds to a change in the 
 demand will not affect the price level and could not be called an arbitrary change. 
 
THE RATE OF INTEREST 151 
 
 rate of interest will rise. Men will not stop to consider the 
 fact that the value of money has changed. To the business 
 man a dollar is a dollar ; he measures his prosperity in dollars ; 
 if the number of dollars into which he can convert his stock is 
 increasing, he takes it for granted that his wealth is growing 
 at the same pace. 
 
 As a result, therefore, of a steady upward tendency of prices 
 and of the consequent increase of what may be called the 
 "money wealth" and "money profits" of business and industry, 
 men in business are eager to extend their operations. New- 
 comers rush into industry and business from the professional 
 and other fields. Lawyers turn promoters for the develop- 
 ment of oil fields or for the construction of street railways. 
 Teachers and physicians abandon their callings and study the 
 A B C of Wall Street. Preachers dabble in real estate or take 
 up the schemes of eager and confident inventors. All this rush 
 into the industrial field is accompanied by a strong demand for 
 capital, and bankers, who are usually affected by the contagion 
 of the time, find that they can extend their credit to the utmost 
 limit at an unusually high rate of interest. In other words, 
 the increase in money profits brought about by maladjustment 
 of prices arouses an artificial demand for capital and so lifts 
 the rate of interest above its normal level, or that which it 
 would have held if prices had not been disturbed. 
 
 102. How long the industrial body can stand the effect of 
 this money stimulant gradually administered experience alone 
 can decide, and experience seems to teach the lesson that final 
 disaster, however long deferred, is inevitable. It is certain that 
 no mere change in the relation between the demand for and 
 supply of money can produce changes in the wants of men 
 sufficient to justify remarkable changes in the production of 
 wealth. All this expansion of credit and abnormal demand for 
 capital are usually attended by a confident popular belief that 
 at last a period of good times has arrived which will have no 
 end. Wild speculation ensues in this or that commodity, — in 
 real estate, in railroad stocks, in wheat, in cotton, — and numer- 
 ous enterprises are undertaken far in excess of the immediate 
 
152 MONEY AND CURRENCY 
 
 demand. Some morning a well-known firm or corporation 
 whose ventures have entailed unusual risks is notified by its 
 bank that some of its outstanding paper must be taken up. 
 Unable to realize on its assets without great sacrifice, it calls 
 upon some of its own debtors for payment, but they too are 
 unprepared for immediate liquidation. The next morning the 
 newspapers announce the firm's suspension, and rumor runs 
 through the street crying that many other important houses 
 are affected. The more timid creditors bring pressure to bear 
 upon their debtors. Some large corporation fails and drags a 
 bank down with it. Then there begins a general scramble on 
 the part of all for the payment of debts due them. No man 
 longer dare trust his fellow. Credit almost disappears from 
 the business world, and prices fall with a velocity that brings 
 ruin to every weak bank and business concern and to many 
 others whose solvency, if no panic had come, would have been 
 strongly buttressed. 
 
 During this collapse and panic the rate of interest rises to 
 abnormal heights. There is now a scramble for loans, not for 
 use in the production of wealth but for the payment of debts. 
 After the panic is over and the wreck has been cleared away 
 there will follow a period of dullness, and the rate of interest 
 will be as much below the normal as it formerly was above. 
 
 If the money supply continues steadily to increase, the time 
 will soon come again when men, tempted by the low rate of 
 interest and by restored confidence in the country's resources, 
 will once more make the round of borrowing and producing. 
 In the meantime a new generation comes upon the field, lacking 
 the experience of its elders ; again new enterprises are floated, 
 and the cycle of unwise production, speculation, and panic is 
 repeated. 
 
 103. A steady and continuous decrease in the supply of 
 money, or its failure to increase as fast as the demand, tends to 
 cause the rate of interest to fall. Such a decrease, whether 
 absolute or relative, i.e. whether the supply has actually grown 
 less or has merely failed to increase at even pace with the 
 demand, must lead to a fall of prices, as was explained in 
 
THE RATE OF INTEREST 153 
 
 Chapter VI. The first effect, as described in Section 100, 
 will be a lessening of the lending power of banks and an 
 upward tendency of the rate of interest. There will be, in other 
 words, what business men call a "scarcity of money," by which 
 is meant a scarcity of loanable funds. Since at first no change 
 will have been produced in the demand for funds, the borrow- 
 ing demand will be undiminished and the banks will be able 
 to get a higher rate of interest. Certain borrowers will be 
 forced to abandon or to curtail their operations ; of those who 
 succeed in negotiating loans at the high rate of interest many 
 will find themselves embarrassed when the time of repayment 
 comes, for the prices of their goods will be lower than antici- 
 pated and their receipts of money will be smaller. As a 
 result of these two circumstances — that some operations are 
 abandoned or curtailed and that business men find difficulty in 
 making repayment of loans — laboring men find increasing 
 difficulty in getting employment at the old rate of wages, the 
 amount of money and credit at the command of people will 
 diminish, and retailers here and there will with reason complain 
 that times are dull. 
 
 It must be remembered that the prices of goods do not tend 
 to fall uniformly under these conditions, for the readjustment 
 of prices is always a slow, uneven process. Often producers 
 will find that the prices of their raw materials have not changed 
 although the price of their product has fallen off. Such a 
 situation is discouraging. Other producers find some encour- 
 agement in the fact that the prices of their raw materials have 
 fallen, but the demand for their product has mysteriously 
 weakened and they are forced to sell without the expected 
 profit. 
 
 104. It is easy to trace the effect of such a condition upon 
 the demand for capital or loanable funds. To the average 
 business man the supply of goods seems already to be in 
 excess of the demand. Instead of feeling like enlarging his 
 operations, he sees a necessity for curtailment. Instead of 
 talking about the construction of a new shop, he considers the 
 advisability of closing his old one or of running half time in 
 
154 
 
 MONEY AND CURRENCY 
 
 order to " give demand a chance to overtake supply." Under 
 these conditions there will be heard general talk about over- 
 production and excessive competition, and more men will be 
 seeking to get out of business than to get in. In other words, 
 the demand for capital will suffer a serious check on account 
 of the depression caused by the gradual and not generally 
 understood weakening of prices. Banks will find their lending 
 power greater than the demand and will begin to lower the 
 rate of interest in order to attract borrowers. 
 
 If these conditions continue for ten years or more, there 
 will be intervals of reviving credit, rising prices, and temporary 
 advances in the rate of interest. The production of wealth 
 and the saving of capital will go on, but not at a uniform pace. 
 Expanding credit may lift the prices for a year or two, and 
 then they will drop to a lower level than they had reached 
 before, and another period of depression and discouragement 
 will ensue. 
 
 At such times, it should be noted, neither the banker nor 
 the average business man will think of ascribing the hard 
 times to any scarcity of money. The banks will be glutted with 
 money and will be unable to find uses for it. The statistics 
 of banks will give the impression that the country is burdened 
 with an overplus of money as well as with an overplus of goods. 
 But if the reader has followed the analysis, he will see that the 
 real cause of the low rate of interest and of the excessive supply 
 of cash in the banks is the weakening in the demand for capital 
 which has been caused by the fall of prices. The disease from 
 which, under these conditions, the business of a country is 
 suffering should be diagnosed as industrial anaemia rather than 
 as plethora of goods. 
 
 The reader must not conclude from this discussion that 
 changes in the supply of money are the all-important factor in 
 the determination of the rate of interest. The rate of interest, 
 it must be remembered, is the outcome of the demand for and 
 supply of capital, and these depend upon many circumstances, 
 of which the maladjustment of prices is only one. It has been 
 shown in this chapter that a single arbitrary increase in the 
 
THE RATE OF INTEREST 155 
 
 supply of money tends to cause the rate of interest to fall, and 
 that a continuous increase of the supply, since it artificially 
 stimulates the demand for capital, gives the rate of interest an 
 upward tendency ; and that a diminution of the money supply 
 has an opposite effect, the rate rising if the decrease is tempo- 
 rary, but tending downward if the money supply for any length 
 of time fails to keep pace with an increasing demand. The 
 whole truth may be summed up as follows : The rate of interest 
 depends on forces distinct from money, but with these forces 
 changes in the relation between the demand for and supply of 
 money are likely to interfere. 
 
 105. In this connection the course of the London money 
 market during the nineteenth century is of interest. London 
 adopted the gold standard in 18 16, the price level thereafter 
 being determined by the value of gold. The world's stock of 
 gold available for use as money was decreasing between 18 10 
 and 1850, and we should expect during that period a decline in 
 the London rate of interest. The statistics do not disappoint 
 us. In 1824 the market rate in London was 3.5 per cent. The 
 panic in 1826 made the average rate for that year 4.5 per cent. 
 By 1833 the rate had fallen to 2.7 per cent. There was a 
 slight rise in succeeding years, due largely to the expansion of 
 credit. The panic of 1839 raised the rate to 5 per cent. There- 
 after there was almost a steady decline until the panic year of 
 1847, when the rate rose to 5.9 per cent. In the next five 
 years the rate almost steadily declined, until in 1852 the aver- 
 age rate was only 1.9 per cent. At this date new supplies of 
 gold from Australia and California were making their way into 
 Europe and the interest rate took an upward turn in London, 
 being 3.7 per cent in 1853, 4.9 in 1854, 4.7 in 1855, 5.9 in 
 1856, and 7.1 in the panic year, 1857. The interest rate fell to 
 3.1 in 1858 and 2.5 in 1859, rates which were doubtless below 
 the normal. In i860 a rise began again, the rate being 5.5 in 
 1861 and 6.^ in 1866, the next panic year. Thereafter there 
 was an immediate decline, the rate for 1867 being 2.3 and for 
 1868, 1.8. Then followed a slight advance of the rate until 
 1873, when the average rate was 4.5 per cent. Here set in a 
 
156 MONEY AND CURRENCY 
 
 gradual decline of prices due to what we have called a relative 
 decrease in the supply of gold, the supply not increasing so 
 rapidly as the demand. It was accompanied in London by a 
 constant tendency of the rate of interest to fall, although there 
 were occasional advances caused by the expansion of credit. 
 The average market rate in London in 1894 was i per cent 
 and in 1895 .8 of i per cent per annum. After 1895 the effect 
 of the new gold from South Africa began to be felt in England 
 and the interest rate again began an upward journey. Prices 
 of commodities in England between 1896 and 1902 rose some- 
 thing like 25 per cent, and the rate of interest rose from .8 of 
 I per cent in 1896 to 4 per cent in 1903. 
 
 Between 1897 and 19 12 prices in the United States, according 
 to the statistics of the Department of Commerce and Labor, rose 
 some 50 per cent. _ In 1897 commercial (double-name sixty to 
 ninety days) paper sold in New York around 3.5 per cent. There 
 were only fifteen weeks during which it rose above 3.5 per cent, 
 and it never went above 4.5 per cent. For sixteen weeks it did 
 not rise above 3 per cent. In 1898 the rise of prices began 
 and the rate of interest followed suit. It touched 5 per cent 
 during nine weeks and 6 per cent during seven weeks. In 1899 
 it reached 5 per cent during twelve weeks and 6 per cent dur- 
 ing thirteen weeks. During the period 1900 to 1904 the rate 
 of interest averaged over 4.5 per cent, but a slight decline oc- 
 curred in 1904. In the last quarter of the year it rallied some- 
 what and averaged 4.5 per cent during the last week. During the 
 first half of 1905 the rate dropped as low as 3.75 per cent for some 
 weeks. By the end of the year it rose to 6 per cent, however. 
 During the period 1905 to 1909 it averaged practically 5 percent, 
 but this period includes the panic of 1907, when rates were abnor- 
 mally high. The first quarter of 19 10 had an average rate slightly 
 above 4.5 per cent. The rate rose to an average of nearly 5.5 per 
 cent for the third quarter and then fell to about 3.5 per cent by the 
 second quarter of 191 1. The average rate for the two years was 
 slightly above 4.5 per cent. 
 
 ^ Any conjecture with regard to the future course of prices and the interest 
 rate must take into account a variety of forces. The efficiency of our money 
 
THE RATE OF INTEREST 
 
 157 
 
 106. It may seem strange to the reader that banks should 
 have a large supply of money on hand at a time when prices 
 are falling because of a relative decrease of the money supply. 
 It would seem at first glance that abundance of money in the 
 bank reserves would mean that money was plentiful. How can 
 money be scarce when banks have more than they can lend? 
 It is a fact, as can be affirmed by an examination of bank sta- 
 tistics of the United States between 1870 and 1896, that banks 
 have more idle money on hand during a period of falling prices 
 than they have during one of rising prices. This fact has often 
 led at such a time to the assertion that money is abundant, 
 and has often been pointed to as evidence that prices were 
 falling not because of a scarcity of money but because costs 
 of production were falling. Now abundant bank reserves do 
 not signify an abundance of money but an abundance of loan- 
 able capital. It has already been pointed out that in a period 
 of falling prices there will always be a surplus of capital, for 
 the demand for capital will have fallen off. This surplus capital 
 will find its way into the banks in the form of credit and money ; 
 it is natural, therefore, that in such a time the banks should 
 have more money on hand than they can use profitably. This 
 money in the banks has no influence whatever upon prices, for 
 it is not in the hands of the people who can use it in the 
 purchase of goods, and is not serving as a basis for credit. 
 Business men have little desire to borrow and banks are timid 
 about lending, the outlook being unpromising. The banks can- 
 not use their money in buying goods, for that is not the way 
 their profits are earned ; they can only lend it, and satisfactory 
 
 supply is rising slowly, but there seems to be a check in the increasing annual 
 production of gold (see footnote on page 216). In this connection Professor 
 Irving Fisher wrote in the American Economic Review^ June, 191 2, as follows: 
 "' In view of all the evidence ... I am strongly inclined to the belief that the up- 
 ward trend of prices will continue for many years. . Taking all things into 
 consideration, the outlook for the next year or two in the United States would 
 appear to be for a reduction of gold imports, a slackening in the growth of bank 
 reserves and deposits ; and an increase of money in circulation, both absolutely 
 and relatively to deposits. . . . The net result will probably be a slight rise in 
 prices. In short, the outlook is for a slight general expansion." 
 
158 MONEY AND CURRENCY 
 
 borrowers for it they cannot find. The large sums of money 
 held by banks during a period of falling prices are not an indi- 
 cation of the plentifulness of money but of the opposite. 
 
 Commodity Rate .of Interest 
 
 107. The maladjustment of prices due to changes in the 
 relation between the demand for and supply of money causes 
 the money rate of interest to differ from what is called the 
 "commodity rate." By commodity rate of interest is meant the 
 percentage figured in goods instead of in money. The money 
 rate and the commodity rate are always equal if the level of 
 prices does not change during the life of a loan. Thus if a 
 man loan ^looo at 6 per cent for one year, the ^1060 which 
 he receives at the end of the year will, if the price level has not 
 changed, purchase 6 per cent more goods than he could have 
 bought with the ^1000 at the beginning of the year. His real 
 wealth has increased 6 per cent ; he is 6 per cent better off not 
 only with respect to money but also with respect to goods. The 
 commodity rate of interest on that loan is identical with the 
 money rate. But let us suppose that the loan was made in 
 the beginning of January, 1865, in the United States, in which 
 year, according to the Falkner index number, the level of 
 prices rose over 30 per cent. Was the lender who put out 
 money at 6 per cent at the beginning of 1865 better off when 
 he received $1060 in payment December 31, 1865 ? Certainly 
 not. He had 6 per cent more money, to be sure, but on account 
 of the 30 per cent advance in prices this ^1060 which he 
 received at the end of the year would buy less than he might 
 have bought with the ^1000 which he loaned at the beginning 
 of the year. The purchasing power of each dollar had decreased 
 on account of the advance of prices. What formerly could 
 have been bought with ^i.oo now required an expenditure 
 of ^1.30. Since 130 cents would buy no more at the end of the 
 year than 100 cents would have bought at the beginning, a 
 dollar at the end of the year would buy only 1^^, i.e. 7^ per 
 cent, as much as it bought at the beginning of the year. In 
 
THE RATE OF INTEREST 
 
 159 
 
 that year, therefore, the dollar declined in value 23 per cent. 
 Hence $1060 received by a lender at the end of the year would 
 buy no more goods than could have been bought with 23 per 
 cent less money at the beginning of the year ; that is, he could 
 buy no more than he could have bought with ;^8 16.20 at the 
 time the loan was made. Evidently when we estimate his real 
 wealth we find that his loan has netted him a loss and not a 
 profit. He is something like 18 per cent worse off than when 
 he made the loan. The commodity rate of interest, therefore, 
 instead of being positive, a payment by the borrower to the 
 lender, was negative, a payment of 18 per cent by the lender 
 to the borrower. 
 
 A general fall of prices has the opposite effect upon the 
 commodity rate of interest. If during the life of a 6 per cent 
 loan general prices fall 10 per cent, the lender, when he gets 
 back his principal and interest, is more than 6 per cent better 
 off than he* was when he made the loan. He has 6 per cent 
 more money, and each dollar will buy 1 1 per cent more goods 
 than each of the dollars he loaned. He is really, therefore, 
 17 per cent better off than when he made the loan. His rate 
 of interest, figured in goods, is 17 per cent. 
 
 It would seem that the low commodity rate of interest 
 realized by lenders during a period of rising prices would lead 
 them to advance the money rate, and that the high rate paid 
 by borrowers during a period of falling prices would tend to 
 discourage borrowing and so cause the rate of interest to fall. 
 As has already been pointed out, the rate of interest does tend 
 to rise during a period of rising prices and to fall during a 
 period of falling prices, but the reasons therefor are not to be 
 found in the commodity rate of interest. Business men know 
 nothing about the commodity rate of interest. They never 
 speak of it and never take it into account. To them money is 
 the all-important consideration and the money rate of interest 
 always represents a real and positive return. The tendency of 
 the rate of interest to rise during good times is not due to the 
 fact that it must rise in order to give the lender a fair return 
 on his capital, but to the fact that when prices are rising there is 
 
l6o MONEY AND CURRENCY 
 
 an increased desire on the part of men to borrow, — an increas- 
 ing demand for capital. On the other hand, when prices are 
 falling borrowers do not force down the money rate of interest 
 because the commodity rate is high ; they merely are less eager 
 to borrow because the returns upon borrowed capital are less 
 certain. During a period of falling prices the money rate of 
 interest falls, not in order that an adjustment between the 
 money rate and commodity rate may be brought about but 
 because the demand for capital grows less. 
 
 LITERATURE 
 
 Mill, Political Economy, Book I, chaps, iv, v, and-xi; Book III, chap, 
 xxiii ; Irving Fisher, Appreciation and Interest (publications of the Amer- 
 ican Economic Association, 1896) ; Robert Giffen, Essays in Finance, 
 second series, chap, ii, " Gold Supply : The Rate of Interest and Prices." 
 Data concerning the market rate of interest in London and New York may 
 be found in Fisher, Appreciation and Interests PALGRAvt, Bank Rate 
 and the Money Market; the Finajicial Review, an annual publication of 
 the New York Commercial and Financial Chronicle ; Irving Fisher, The 
 Rate of Interest J W. C. Mitchell, Business Cycles j and E. W. Kemmerer, 
 Seasonal Variations, etc. 
 
CHAPTER VIII 
 THE IMPORTANCE OF PRICE 
 
 io8. " Price" is a more important word in the business world than either "value " 
 or " utility." 109. Changes in the price level are important because of four cir- 
 cumstances : (i) the nse of credit; (2) the fact that production involves a period of 
 time; (3) the fact that prices do not change uniformly; (4) the psychology of con- 
 fidence and depression, no. An appreciating standard depresses industry, but it 
 increases the purchasing power of bonds, annuities, wages, and salaries, and so 
 apparently benefits both capitalist and laboring classes. The entrepreneur, how- 
 ever, is crippled, and other classes must suffer with him. in. A depreciating 
 standard seems to work injury to creditors, especially the bondholder and the 
 annuitant, and to the salaried and wage-earning classes, while it apparently bene- 
 fits the debtor and entrepreneur. The losses seem fully offset by the stimulus 
 given to industry. 112. In a consideration of the desirability of a permanent stand- 
 ard of prices the production of wealth is of more importance than long-time rela- 
 tions between debtors and creditors. 113. A brief discussion of the multiple 
 standard, the utility standard, and the labor standard. 114. The commodity stand- 
 ard now in use is a product of evolution, and will probably not be abandoned 
 because of theoretical considerations. 115. A plan for the use of the multiple 
 standard in the liquidation of loans. 
 
 108. It has been shown in the preceding chapters that the 
 price of a commodity shows the value of money in that com- 
 modity, and that general prices indicate the general value or 
 purchasing power of money ; that the price of a commodity 
 must change when there is a change in its own value or a 
 change in the value of money ; and that whenever there is 
 a change in the value of money the prices of all commodities 
 tend to be affected, but that they do not all change at the 
 same time or in the same degree. In a country like the United 
 States, with its numerous banks and well-developed credit sys- 
 tem, general changes of prices begin first with those articles 
 which are the favorites of speculators, like railroad stocks and 
 such commodities as wheat, corn, oats, copper, lead, cotton, etc., 
 and then run down through wholesale and retail prices and 
 last of all touch real estate and customary prices. We have 
 also seen that the maladjustment of prices caused by any great 
 
 161 
 
1 62 MONEY AND CURRENCY 
 
 change in the relation between the demand for and supply of 
 money has a subtle but real effect upon industry and upon the 
 rate of interest. In this chapter we shall consider the important 
 relation of prices to human welfare. 
 
 In many treatises upon political economy the subject of price 
 has received inadequate treatment. It has been commonly 
 assumed that "value" and "utility" are the important words, 
 and this assumption would be correct if there were always 
 a perfect adjustment or correspondence between prices and 
 values. If the value of money were stable, the question of 
 prices would be far less important than it is, for changes in 
 the prices of goods would always be due to changes in their 
 value, so that the whole problem of exchange would be one of 
 value rather than of price. A fall in the price of an article 
 would mean a fall in its value, and the cause would lie in the 
 conditions affecting the demand for and supply of the article. 
 Mr. Mill in his Political Economy tacitly assumes that the 
 value of money is stable and then proceeds to analyze the 
 processes of production and exchange as if no money were 
 used. According to his view goods were exchanged for goods, 
 money being merely the medium for effecting the exchange 
 and in no wise interfering with it. 
 
 If our conclusions are correct with regard to the effects of 
 changes in the value of money upon prices, it must be con- 
 ceded that in the world of business and industry, where wealth 
 is actually produced and exchanged, the prices of goods are of 
 more consequence than either their values or their utilities. It 
 is true that price is an expression of value and that utility is 
 at the foundation of value ; yet the only concept with which 
 men are familiar, the one about which all of their thinking cen- 
 ters, is the concept of price. Men do not exchange goods for 
 goods but for money. Either money or a contract to deliver 
 money figures in every exchange. Men estimate their wealth 
 and their profits in money, not in the quantity of goods which 
 they can buy or which they already possess. 
 
 The level of prices, it should be noted, is itself of no impor- 
 tance ; it does not matter whether prices are high or low, if 
 
THE IMPORTANCE OF PRICE 163 
 
 there is perfect adjustment between prices and the supply of 
 money. Whether the value of the dollar shall be much or little, 
 whether prices, in other words, shall be high or low, is of no more 
 consequence than the question whether the mile shall contain 
 ten thousand or five thousand yards. But changes in the value 
 of a dollar, that is, changes in the level of prices, are of the 
 utmost importance, for they are always attended by an irregular 
 readjustment of prices. The question of high and low prices is 
 entirely different from the question of rising and falling prices. 
 
 When prices are rising with more or less steadiness the 
 monetary standard is called a "depreciating" standard ; when 
 they are falling the standard is said to be "appreciating," 
 growing more valuable. Economists have generally held that 
 the effects of a depreciating standard, if the rise of prices 
 is not too pronounced, are less harmful than the effects of an 
 appreciating standard. We have already in the preceding chap- 
 ter had occasion to call attention to the remarkable stimulus 
 to industry which follows from a steady and continuous rise of 
 prices, and to the depressing effect of falling prices. 
 
 109. The disturbing effects of a change in the value of the 
 standard are due to four circumstances, — (i) the use of credit, 
 (2) the fact that production involves a period of time, (3) the 
 fact that prices do not change uniformly, and (4) the psychol- 
 ogy of confidence and depression. 
 
 It is evident that if men did not borrow and lend, a change in 
 the level of prices would be less hurtful than it is. In our dis- 
 cussion of the commodity rate of interest it was shown that a 
 change in the price level had a curious effect upon relations 
 between borrower and lender ; if the level of prices is rising, 
 the lender receives back in real value much less than he loaned ; 
 while if the level of prices is falling, the borrower is obliged to 
 return in real value much more than he received. If prices are 
 falling, the borrower, in order to repay the principal, is obliged 
 to sell more goods than he was able to buy with the money 
 when he borrowed it. 
 
 A farmer who borrows money when wheat is one dollar a 
 bushel is very much discouraged as the price of wheat falls, for 
 
1 64 MONEY AND CURRENCY 
 
 his ability to pay his debt is steadily diminishing. He is injured 
 very much as if he had borrowed one thousand bushels of wheat 
 and were required to repay the loan in bushels of larger capacity. 
 The farmer's case is no different from that of the man who 
 borrows money or credit and engages in manufacturing. A 
 certain time must elapse before he can turn the capital over and 
 go into the market with his finished product. If in the mean- 
 time a change in the price level has occurred and the price of 
 his product has been lowered, he will take in less money than 
 he expected, his money profits will be small, and his ability to 
 pay his debt will be impaired. 
 
 It is incorrect to argue that this entrepre7ieur and farmer are 
 both just as well off with less money because the value of money 
 has increased. They are not as well off. If prices fell uni- 
 formly, it would be evident to everybody that the purchasing 
 power of a dollar had increased and that the fall of prices was 
 due not to overproduction in this or that industry but to a 
 change in the value of money, and men might learn to minimize 
 the evil effects of such a change. But the fall is not uniform 
 and is never ascribed by business men to changes in the value 
 of money. Indeed, it is impossible to determine in any given 
 case whether a fall of price is due to a fall of value in a partic- 
 ular good or to a rise in the value of money. The problem is so 
 intricate and so many different influences are involved that a 
 complete analysis of the causes in any particular instance can- 
 not easily be made. 
 
 Furthermore a fall of prices, since it strikes first this com- 
 modity and then that, always catches the entrepreneur unpre- 
 pared. Inasmuch as the wholesale prices are the first affected, 
 he finds that his cost of living is the same as before ; the prices 
 of some of his raw materials have declined, but others have not 
 felt the change ; his laboring men insist upon the old rate of 
 wages. He is obliged to sell at a lower level of prices than his 
 money costs of production were based upon. It will not cheer 
 him to tell him that money has increased in value and that the 
 money he is getting for his goods will on the average buy more 
 than the money he paid out. All his debts are money debts. 
 
THE IMPORTANCE OF PRICE 165 
 
 A definite sum of money is what he needs in order to keep on 
 his feet. The thing he is interested in is prices, not values, 
 and the inexplicable turn which prices have taken threaten him 
 with ruin. 
 
 The psychological effects of a change in the price level are 
 of the utmost importance. Very few men who engage in busi- 
 ness or industry know with certainty what their profits are 
 going to be. The production of wealth is always attended 
 with risk. Men assume this risk, sometimes boldly, sometimes 
 timidly. If times are considered good and the prices of con- 
 spicuous articles are rising, there is a general feeling of confi- 
 dence that business ventures can safely be undertaken, and 
 men engage freely in production. As a result of this confidence 
 there is a larger production of wealth and the average purchas- 
 ing power of every member of the community is increased. 
 The industrial millennium would be reached if only this pro- 
 duction could always be wisely directed ; that is to say, if men 
 could always gauge the wants of their customers, if producers 
 could foresee changes in the popular tastes and vary their pro- 
 duction accordingly, for then the cpndition commonly described 
 as overproduction would never ensue. The ability of people 
 to buy would grow as the supply of goods increased. Unfor- 
 tunately, however, it is impossible to gauge changes in the 
 demand for goods, and industrial mistakes will doubtless con- 
 tinue to be made and to bring about the recurring periods of 
 prosperity and hard times. But of the effect which the mental 
 condition, the hopefulness, of a people has upon their produc- 
 tivity there can be no doubt. The business man is always dis- 
 couraged by any loss which he cannot understand or explain, 
 and his discouragement is communicated like a contagious dis- 
 ease to others. Likewise he is greatly stimulated by unexpected 
 profits, and his new confidence is also contagious, stimulating 
 his neighbors to enterprise. 
 
 Here we find perhaps the worst effects of a gradual fall of 
 prices. Men do not and probably never will thoroughly under- 
 stand the relation between money and goods. To them money 
 is a thing of fixed and changeless value ; goods are what they 
 
1 66 MONEY AND CURRENCY 
 
 make and sell, and changes in prices are always attributed to 
 changes in the demand for or supply of goods. As a result, 
 when a rising demand for money is not met by an increased 
 supply, and the prices of commodities here and there begin to 
 weaken, business men are unable to explain the phenomenon 
 and are puzzled and distressed. The practical man usually at- 
 tributes such a fall of prices to excessive competition and over- 
 production. During the last twenty-five years of the nineteenth 
 century these two phrases were in every one's mouth in expla- 
 nation of the heavy prices and vanishing profits of that period ; 
 and many a young man was advised to keep out of business and 
 enter one of the professions on the ground that business was 
 "overdone"!^ 
 
 Effects of Changes in the Price Level 
 
 no. An appreciating standard depresses industry and causes 
 a lessening of the demand for capital, but it increases the pur- 
 chasing power of bonds, annuities, wages, and salaries, and so 
 apparently benefits both the capitalist and the laboring classes. 
 We have already described its effect upon industry and upon 
 the demand for capital. The laboring man seems to be benefited 
 by a fall of prices for the reason that wages are the last thing 
 to be affected in the readjustment of prices caused by an appre- 
 ciation of the gold standard. A general fall of prices, unless 
 the efficiency of labor greatly increases at the same time, must 
 sooner or later bring about a corresponding decline in the rate 
 of wages ; but this decline, experience shows, does not come 
 until after the change in the value of the standard has affected 
 the prices of most goods. It would appear, therefore, that the 
 laboring man, for a time at least, gets the old money rate of 
 wages and is able to buy more comforts and luxuries than 
 before ; in other words, he is earning as many dollars as for- 
 merly and each dollar exchanges for more goods. 
 
 ^ A successful merchant in Chicago, who was a devout church member, told the 
 writer in 1880 that he intended to send his two boys to college and make lawyers 
 or doctors of them. " Competition is so fierce nowadays," he said, " that a busi. 
 ness man can't be a Christian and succeed." The boys, however, chose the 
 father's business and since 1897 have made their fortunes. 
 
THE IMPORTANCE OF PRICE 167 
 
 The capitalist class seem to be benefited by a fall of prices in 
 so far as their investments are in bonds, mortgages, leaseholds, 
 and annuities, which yield a fixed money income. Also as 
 lenders of capital for short periods they appear to be gainers ; 
 although the money rate of interest tends to decline, yet the 
 commodity rate is high and the purchasing power or value of 
 the lender's principal is steadily increasing. But as owner of 
 goods or property the capitalist derives no benefit from the 
 shrinkage of prices ; to the landlord as to the business man, 
 the shrinkage of prices seems a shrinkage of values. 
 
 If we analyze the benefits received by the lender of capital, 
 the bondholder, the annuitant, and the laboring man, we shall 
 find that they are more apparent than real. The benefit derived 
 from a fall of prices by the owner of bonds, mortgages, and 
 leaseholds is short-lived. The prices of bonds usually rise dur- 
 ing a period of falling prices, there being an increased demand 
 for them, not only from men who had formerly been bond pur- 
 chasers, but also from men who had formerly been engaged in 
 business. As the returns from industry decline men begin to 
 withdraw from business and se'ek to invest their capital in some 
 fixed form. Consequently the prices of bonds tend to rise, and 
 the capitalist is obliged to invest his new capital and reinvest 
 his old at disappointing rates of income. But the capitalist 
 class are owners of more than bonds and leaseholds ; they are 
 the owners of the capital stocks of railroads and industrial cor- 
 porations, and the dividends on these always fall off during a 
 period of declining prices. ^ The rewards of capital come from 
 industry, and any cause depressing that is certain sooner or 
 later to lessen the income of the capitalist class. 
 
 In like manner we find that the advantages of falling prices 
 to the wage earner or salaried man are more apparent than 
 
 1 Between 1880 and 1897 over 75 per cent of the railroads in the United States 
 passed into the hands of receivers, the stock in many cases being wiped out. This 
 era of corporation bankruptcy, which cost capitalists or investors many hundred 
 million dollars, was not altogether the product of excessive capitalization, as is often 
 taken for granted. During that period the general price level declined some 40 
 per cent. Railroads were forced to reduce their rates, and their money incomes 
 declined. Their money indebtedness had been fixed by issues of long-time bonds 
 and could not be correspondingly reduced. 
 
1 68 MONEY AND CURRENCY 
 
 real. Wages and salaries, like the rewards of capital, are paid 
 out of the fruits of industry. If these are declining, the total 
 sum paid in wages and salaries must decline. There can be no 
 escape from this conclusion. It would follow, therefore, that a 
 fall of prices benefits only those who continue to receive wages 
 and salaries after the fall has begun. During such a period, as 
 we have seen, industrial establishments curtail their operations 
 and discharge part of their force, and business houses reduce 
 their expenses by cutting down the salary list as much as pos- 
 sible. The wage rate is not at first lowered, but the number 
 of men who have employment is reduced. Viewing the salaried 
 and wage-earning class as a whole, therefore, we cannot say 
 that a general fall of prices is an advantage. It helps only the 
 favored few who are able to keep their positions. 
 
 The professions are variously affected by a fall of prices. It 
 may be regarded as an advantage to teachers in the public 
 schools and in colleges, for their salaries come out of taxes 
 and invested funds and their tenure of office is comparatively 
 secure. The purchasing power of the preacher's salary is also 
 increased, so that he is better dff. Apparently the position of 
 the doctor and lawyer is improved, for their money fees are 
 not immediately affected by any change in the value of money. 
 It should be noted, however, that the doctor's clientele will 
 have less money to spend and so will probably call less fre- 
 quently for his services, and that his charity list will be liable to 
 increase. Lawyers' fees will be more difficult to collect ; yet the 
 lawyer is fortunate in that his services continue to be in demand 
 even when times are hard. As for the preacher, even he is 
 fortunate if he escape loss, for contributions for support of the 
 churches are obtained with increasing difficulty. Furthermore 
 among all the professions competition tends to become greater 
 because the certainty of income they seem to promise is im- 
 mensely attractive in a period of depression. 
 
 III. A depreciating standard seems to work injury to all 
 creditor classes, especially the bondholder and annuitant, and 
 to the salaried and wage-earning classes, while it apparently 
 benefits the debtor and entrepreneur. A steady rise of prices, 
 
THE IMPORTANCE OF PRICE 169 
 
 unless wages and salaries advance at equal pace, evidently 
 lessens the real value of wages and salaries and makes the 
 income from bonds and annuities of less and less consequence 
 to the recipient. A little analysis, however, will show that 
 this hurtful effect of rising prices is more apparent than real. 
 As has been shown, a gradual rise of prices tends to be 
 accompanied by a rise of the rate of interest and by increased 
 industrial activity. While salaries and wages do not rise at 
 an equal pace with prices, nevertheless there is an increased 
 demand for labor, more men have employment, and increasing 
 quantities of money and credit are distributed in wages and 
 salaries. The production of wealth is increased and a greater 
 share goes to labor than formerly. There are undoubtedly 
 many cases where individual members of the wage-earning 
 class suffer loss through the failure of their incomes to increase 
 as prices rise, but the class as a whole is benefited, for the 
 number of unemployed is immediately reduced. 
 
 To the owner of capital who is able to change his investments 
 and take advantage of new conditions it is not at all certain 
 that a depreciation of money brings any loss. Since the pro- 
 duction of wealth is stimulated, the share going to the owner 
 of capital should surely increase. As the owner of bonds, he 
 certainly seems at first to suffer loss, for these usually fall in 
 price at the outset. The rising rate of interest and the brilliant 
 prospects of industrial enterprise make bonds, with their fixed 
 rate of income, less attractive than stocks, which rise in price 
 at such a time and upon which the rates of dividend rise. The 
 prices of bonds, therefore, instead of advancing on account of 
 an increasing money supply, usually tend downward. While the 
 bondholder must sell at some sacrifice, he finds full compen- 
 sation in the rising dividends from stocks and in the higher 
 rate of interest on his loans. He must, like all other men, 
 beware of the evil day when, confidence having become rash- 
 ness, men scatter the seeds of capital over stony ground and 
 seek to mortgage an imaginary crop. That day of panic, born 
 of excessive speculation and of misdirected effort, cannot be 
 wholly charged up to the depreciation of money ; it is quite as 
 
I/O MONEY AND CURRENCY 
 
 certain to come when an appreciation of the standard is lower- 
 ing the price level, and would doubtless be on the calendar 
 of industry even though men used an ideal money incapable of 
 great appreciation or depreciation. 
 
 As an owner of real estate the capitalist is at first hurt by a 
 depreciation of money, for the price of real estate is slow to 
 respond to changes in the value of money. Instead of ad- 
 vancing in price on account of a relative increase in the supply 
 of money, real estate not infrequently suffers a decline ; some- 
 times, indeed, it advances in price while general prices are 
 falling, and then takes its turn in declining after prices have 
 begun to rise. This is a peculiarity of prices which is not diffi- 
 cult to understand. Income from real estate is often fixed for 
 long periods by leases and so cannot be quickly changed to corre- 
 spond with changes in the returns from industry. An upward 
 tendency is very quickly given- to rents in the cities, but the 
 rents of farms and residences are slow to rise. A man who is 
 getting 5 per cent for an investment in real estate congratu- 
 lates himself when times are hard and business failures are 
 numerous, but when times change and he sees his friends mak- 
 ing 15 or 20 per cent in business, his 5 per cent investment 
 in real estate does not satisfy him and he is anxious to sell. 
 
 To people entirely dependent on fixed incomes a depreciation 
 of money is undoubtedly a serious matter. All incomes from 
 real estate, leaseholds, annuities, and pensions undoubtedly 
 suffer, and there is little chance of recompense. During the 
 great rise of prices in the seventeenth century, consequent 
 upon the production of precious metals in the New World, many 
 thousand families in Europe were severely crippled by the 
 decline in the purchasing power of their incomes. Adam Smith 
 estimated that prices rose between 200 and 300 per cent 
 between the middle of the sixteenth and the end of the seven- 
 teenth century. This rise of prices was the cause of much pri- 
 vation and loss among all those families whose incomes had 
 been fixed by contracts extending over long periods. 
 
 At the same time these two centuries were the most remark- 
 able in the history of the civilized world. It was the period 
 
THE IMPORTANCE OF PRICE 171 
 
 in which modern industrial civilization was born, and the pro- 
 duction of wealth increased at a pace unprecedented. Some 
 writers even attribute the great stimulus given to industry 
 during these centuries to the influx of precious metals from the 
 New World. We must beware of attributing any important 
 event in history to a single cause, yet the student of money 
 who has considered in all its bearings the relation of money to 
 industry and to human welfare can be forgiven for inclining 
 to the belief that the stagnation of the Middle Ages was due in 
 some measure to the scarcity of the precious metals, and the 
 prosperity of the succeeding centuries to their abundance. 
 Price is so important a concept and plays so large a part in 
 the affairs of men that any derangement or maladjustment of 
 prices, due to continuous breaks in the relation between the 
 demand for and supply of money, cannot fail to have an impor- 
 tant effect upon the material welfare of man. 
 
 Industry the Important Consideration 
 
 112. In discussing the stability of the standard most writers 
 have assumed that its chief importance grows out of the pos- 
 sible injustice to the debtor or creditor classes, wrought by 
 appreciation or depreciation. As we have seen, a fall of prices 
 imposes an extra burden upon the debtor, while a rise of 
 prices robs the creditor of real value. These are undoubtedly 
 important considerations, but they are not the most important. 
 The worst effects of a change in the value of the standard are 
 in the field of production. A depreciating standard tends to an 
 overstimulated production and may lead to an unwise use of 
 capital and labor. An appreciating standard, on the other hand, 
 tends to discourage the production of wealth and so to bring 
 hardship upon all. It is this effect upon production which 
 makes the question of price an all-important one. Money is 
 much more than a mere go-between or messenger, and cannot 
 be left out of account when considering the forces that direct 
 the productive efforts of men, for changes in its value are 
 universal in their effect. 
 
172 MONEY AND CURRENCY 
 
 Imagine the confusion that would result if an average modi- 
 fication of the English language, amounting to 5 per cent of 
 its vocabulary, should take place during a certain year, the 
 changes not being the same in degree in all families and all 
 communities. One might still call a horse a horse, while 
 another knew it as a " bucephalus." A man might try to buy 
 shoes of a storekeeper who knew them only as "footings." 
 Even if the change in the language were uniform, all our 
 written literature would gradually become obsolete and unin- 
 telligible ; but if the change were not uniform, the smooth and 
 easy exchange of everyday ideas would suffer amazingly. Just 
 as language is a medium of exchange of ideas, so is money a 
 medium of exchange of goods and services. Money performs 
 its work by virtue of its exchangeability, and like language is 
 in common use. Universal aphasia would have very much the 
 same effect upon conversation that fluctuations in the value of 
 money have upon the production and exchange of wealth. 
 
 Different Standards Considered 
 
 113. In recognition of the fact that changes in the price 
 level alter the relation between debtor and creditor, economists 
 have discussed somewhat the question of an ideal standard of 
 deferred payments. The subject is mainly of theoretical inter- 
 est at present, for there is little likelihood that practical men 
 could be persuaded to adopt an ideal standard, even if one could 
 be devised. As yet, however, there is no agreement among the 
 theorists. It is agreed that stability is essential to an ideal 
 standard, but in respect to what should this stability exist.' 
 Upon this point there has been much discussion. Let us 
 consider briefly some of the different views. 
 
 The oldest plan to preserve a just relationship between 
 debtor and creditor, despite fluctuations in the value of money, 
 is known as the multiple or tabular standard. This assumes 
 that an ideal standard should possess stability with respect to 
 goods. A man who lends money parts with a certain quantity 
 of purchasing power, that is, he surrenders command over a 
 
THE IMPORTANCE OF PRICE 
 
 173 
 
 certain quantity of goods. The multiple standard provides that 
 when the debt is paid he shall receive as principal the same 
 quantity of purchasing power, and so be in respect to goods as 
 well off as when he made the loan. In order that this result 
 may be achieved, it is proposed that a government commission 
 shall make weekly or monthly estimates of changes in general 
 prices, and that the amount of money necessary to cancel a loan 
 shall vary as these estimates vary. The commission would 
 select a hundred or more representative commodities and from 
 the prices of these compute an official index number, changes 
 in which would be assumed to reflect changes in the value of 
 money. Suppose that during the life of a certain loan this 
 index number rose from 100 to no; this would mean that 
 ;^iio at the end of the period was worth in goods no more 
 than i^ioo had been worth at the beginning, and hence that 
 the debtor should repay as principal a sum of money 10 per 
 cent larger than the sum he borrowed. On the other hand, if 
 during the period the index number of prices fell from 100 to 
 90, an increase in the value of money would be shown and the 
 debtor would repay in money 10 per cent less than he had 
 received. 
 
 Some writers have held that an ideal standard of deferred 
 payments should be based upon utility, since utility, the power 
 to satisfy human wants, is the source of all value. No practi- 
 cable plan for the adoption of a utility standard has been pre- 
 sented, but it is held theoretically that exact justice between 
 debtor and creditor cannot be obtained except under a standard 
 based on utilities rather than on goods. According to this 
 view an ideal monetary unit would always represent the same 
 amount of utility or satisfaction. From generation to gener- 
 ation the standard of life has been rising. At the present 
 time men do not get the same satisfaction out of a tallow 
 candle that their grandfathers did. Candles, therefore, ought 
 to be lower in price. A carpet means much less to the average 
 American family than it did fifty years ago. So does a piano, 
 a stove, or a pair of shoes, or a rocking-chair. If changes in 
 the value of money are to record changes in the utilities of 
 
174 MONEY AND CURRENCY 
 
 goods, then the prices of goods ought to fall as their relative 
 importance to men decreases. 
 
 A third standard is known as the labor standard. Since all 
 goods are the product of human labor, it is held that a perfect 
 money is one that will always buy the same amount of labor. 
 According to this standard the money wages of labor would 
 always be on the average the same, but as civilization advanced 
 and machinery made labor more productive there should be a 
 steady fall of prices due to the increasing value of human labor. 
 This fall of prices, it is held, would injure nobody, for each man 
 through the fall of prices would get the benefit of his increased 
 productivity even though his money wages did not increase. 
 
 1 14. The standard now in use throughout the civilized world 
 is the commodity standard. Gold and silver are the world's 
 money metals, and in nearly all countries one or the other is 
 used as the standard of deferred payments. Under the com- 
 modity standard the borrower returns the same commodity, or 
 the same quantity of it, which he borrowed. This standard, as 
 we have seen, is far from ideal. If a man borrows a thousand 
 dollars when prices are high and makes repayment when prices 
 are low, he gives the lender a greater command over goods 
 than he possessed when he parted with his money. And unless 
 the total sum of utilities is greatly increased, he gives the 
 lender command over a greater number of utilities — a greater 
 amount of pleasure or satisfaction — than he possessed when he 
 made the loan. If wages meantime have fallen, he gives the 
 lender command over a greater amount of human effort. 
 
 The subject of an ideal standard has had for some time and 
 is likely always to have a theoretic interest. Whatever may be 
 thought of the justice or injustice of the commodity standard, 
 it is the one which the world has unconsciously adopted, and 
 no amount of theorizing about its defects can bring about an 
 immediate change. Speculation about the desirability of a 
 utility standard or a labor standard is likely to be as futile in 
 the field of money as speculation about Volapiik has been in 
 the field of language. The English language is full of imper- 
 fections familiar to every scholar. Countless improvements in 
 
THE IMPORTANCE OF PRICE 175 
 
 construction, vocabulary, and orthography have been suggested, 
 but there is no power strong enough to make the people adopt 
 them. Nor can the character of money be changed as a result 
 of the discovery of imperfections in the money that is now in 
 general use. 
 
 1 1 5. The general use of the multiple standard in the liquida- 
 tion of loans would save the producer from some of the evil 
 effects of rising and falling prices. Rising prices would increase 
 his money profits, but his money indebtedness would increase 
 at the same time ; and so the artificial stimulus given to indus- 
 try by rising prices would be counteracted in some measure. It 
 would not be altogether nullified, however, for the profits made 
 by men employing their own capital would not be affected. In 
 the case of falling prices the multiple standard would save the 
 producer from considerable discouragement, for as the prices of 
 his goods fell, and his profits declined, the amount of his money 
 indebtedness would also grow less. Here also the partial use 
 of this tabular standard would not destroy all of the evil effects 
 of an appreciating standard, for the men doing business on 
 their own capital would get no relief. 
 
 This device is practicable, but we may well doubt its general 
 adoption. The utmost we can look for is the creation by Con- 
 gress of a statistical commission for the daily or weekly calcu- 
 lation and publication of an official index number. If. a law 
 were passed providing for the publication of such a number and 
 enforcing its use in the case of all credit instruments where it 
 had been agreed upon by both lender and borrower, it is possi- 
 ble that the merits of the multiple standard might bring it into 
 favor, particularly in the case of long leases and mortgages. It 
 is doubtful, however, if banks and business men in general 
 would take time to make the necessary calculations. Men are 
 not yet awake to the importance of guarding themselves in 
 ordinary business transactions against losses from subtle and 
 unforeseen changes in the value of money. When prices are 
 rising men are usually too busy making money to be concerned 
 about any question of justice as between debtor and creditor ; 
 the borrower is complacent over his unexpected profits, and the 
 
176 MONEY AND CURRENCY 
 
 lender over the rising rate of interest. On the other hand, 
 when the price level is declining all the influence of the so- 
 called " moneyed " classes is opposed to any arbitrary scaling 
 of debts, while borrowers are prone to view with satisfaction 
 the falling rate of interest. 1 
 
 LITERATURE 
 
 C. M. Walsh, The Fundamental Problem in Monetary Sciences L. L. 
 Price, Money and its Relation to Prices j Elijah Helm, The Joint 
 Standard, chaps, vi-xiii ; Robert Giffen, Essays in Finance, second 
 series ; J. S. Nicholson, Money and Monetary Problems; F. A. Walker, 
 International Bimetallism j H. J Davenport, Outlines of Economic 
 Theory (New York, 1896); L. Darwin, Bimetallism (London, 1898); 
 ]Yyotis, Investigations, etc. J- Alexander Del Mar, Money and Civiliza- 
 tion; also The Science of Money ; E. Benjamin Andrews, An Honest Dol- 
 lar ; Smart, Studies in Economics, chaps, v and vii ; M. Chevalier, On the 
 Probable Fall in the Value of Gold (New York, 1859); David Kinley, 
 Money, chap, xiii ; R. H. Patterson, The New Golden Age (London, 1882). 
 The advocates of bimetallism and of the free coinage of silver have found 
 their most effective argument in the evil effects of falling prices ; see litera- 
 ture at end of Chapters XI and XII. 
 
 1 The use of the phrase "commodity standard " in this chapter is criticised by 
 Professor A. Piatt Andrew (^Political Science Quarterly, December, T906) on the 
 ground that in economic literature it " has come to refer to a currency standard 
 that has a stable value in exchange for commodities." In most books, as in 
 this, such a standard is designated the " multiple standard." 
 
 When a single commodity like gold is freely coined, the values of the com- 
 modity and of money are practically the same. The author, having found in the 
 books no phrase describing generically such a standard, calls it the " commodity 
 standard." Possibly " single commodity standard " would be better. 
 
CHAPTER IX 
 
 COMMODITY OR METAL MONEY 
 
 Ii6. Gold and silver the only metals now used as commodity money. 117. The 
 free coinage of a metal is essential to its use as commodity money. " Seign- 
 iorage" and "brassage." 118. When the free and gratuitous coinage of a metal is 
 permitted an ounce of the metal coined can never be worth much more or less 
 than an ounce uncoined. 1 19. The value of commodity money (gold in the United 
 States) is the product of a double demand, — the demand for it for use as money 
 and the demand for it in the arts. 120. Error of statement that the value of 
 money in the United States is derived from the value of gold. 121. The true 
 relation between gold and money is obscured by the fact that gold has no price. 
 122. Free coinage gives to a metal practically all the utilities of money. 123. The 
 free coinage of a metal increases the demand for it. 124. The statistics of coinage 
 do not indicate the full effect exerted upon the value of gold by the monetary 
 demand. As gold rises in value a given quantity satisfies a larger monetary 
 demand. 125. A seigniorage charge raises the value of the coin above that of the 
 bullion. Under a system of free coinage the imposition of a seigniorage tax, even 
 though the seigniorage is coined, will not lead to a rise of prices. 126. A seignior- 
 age of 100 per cent would yield paper money regulated in value by the value of 
 gold. 127. The effects of seigniorage illustrated in France. 128. The advantages 
 and disadvantages of seigniorage. 129. The principles governing the use of com- 
 modity money apply to silver as well as to gold. The silver standard in Mexico. 
 130. Gresham's law : Whenever the bullion in the coin is worth more as bullion 
 than as money, the coin will either be melted for use in the arts or be exported as 
 bullion to a foreign country. 131. The supply of commodity money is regulated 
 automatically through the medium of price and the rate of interest. 132. A silver 
 price level is unrelated to a gold price level. 133. Credit money is often coined 
 from metal. 134. The law of legal tender as applied to gold and silver. 
 
 116. As explained briefly in Chapter II, the world has had 
 experience with two kinds of money, — commodity money and 
 fiat money. The difference between these two is not funda- 
 mental ; the nature and principles of money, the laws govern- 
 ing its value and use, are the same whether money is made out 
 of a valuable material like gold or out of a comparatively value- 
 less substance like paper. The difference between fiat and 
 commodity money is found only in the method whereby the 
 supply is regulated. In the case of commodity money, a certain 
 
 177 
 
178 MONEY AND CURRENCY 
 
 commodity being freely used as money, the supply is regulated 
 automatically, being subject to conditions affecting the supply 
 of the commodity used; whereas the supply of fiat money is 
 regulated artificially. 
 
 Many different articles have served as commodity money. 
 Tobacco was at one time money in Virginia. Wampum served 
 the Indian and the early settlers of this country as money. 
 Even copper and iron were once used as money. The Greeks 
 of the heroic age are supposed to have used cattle as money, 
 but this is probably an error. The ancient Greeks used iron 
 and copper as money or as a medium of exchange, and employed 
 cattle merely as a money of account, a steer being valued at a 
 definite amount of the common medium. This use of the steer 
 by the Greeks was similar to the present use of the guinea in 
 England or to the use of the old York shilling in some parts of 
 this country during the first half of the nineteenth century. 
 There is no coin known as the guinea, but English shop- 
 keepers find it a convenient name for twenty-one shillings. In 
 the same way the ancient Greeks doubtless found it convenient 
 to express large values in terms of cattle instead of in large 
 sums of their clumsy coin. 
 
 At the present time metal money consisting either of gold 
 or of silver is the only form of commodity money in the civi- 
 lized world. These metals have been found by experience to 
 serve the purpose better than other metals or than any other 
 commo'dity. Their beauty, their indestructibility, their porta- 
 bility, their great value in small bulk, first made them univer- 
 sally desired and so gradually led to their use as a medium of 
 exchange and standard of prices. On account of their homo- 
 geneity they are easily tested and are readily converted into 
 coins of convenient sizes. 
 
 Gold and silver are supposed, on account of their relative scar- 
 city and high cost of production, to possess greater stability of 
 value than most other commodities, but it is doubtful if they 
 possessed this superiority before they were used as money 
 metals. Their present comparative stability is due to the fact 
 that the mass of each metal in existence in the form of coin 
 
COMMODITY OR METAL MONEY 179 
 
 and bullion is so large that the relatively small annual incre- 
 ment from the earth's gold and silver mines does not greatly 
 affect its value. If silver and gold had not for many centu- 
 ries been used as money, no large mass of either metal would 
 exist in a form available for various uses ; the output of each 
 year would have been promptly devoted to artistic and indus- 
 trial uses, and the value of each would fluctuate from year to 
 year, responding sensitively to slight changes in the quantity 
 produced. 
 
 117. The free coinage of a metal is essential to its use as 
 commodity money. By the free coinage of a metal is meant its 
 free use as money by all persons, the government converting 
 into coin all the metal brought to it. The monetary unit in the 
 United States, for example, is the dollar, a gold coin containing 
 25.8 grains of standard gold.^ Any person owning gold may 
 have it coined at a United States mint. 
 
 The coinage of gold in this country is not only free, i.e. 
 open to all persons, but is also gratuitous, the expense of mint- 
 age being borne by the government. But a person bringing gold 
 to the mint must pay for the necessary alloy, for the refinement 
 of the metal, and for its conversion into bullion, which is the 
 technical name for standard gold ready for coinage. These 
 expenses are sometimes known as the "brassage" charge. 
 
 In England and the United States brassage is the only expense 
 paid by private persons, but in most other countries a further 
 charge known as " seigniorage " (the seignior's or lord's share) 
 is exacted. In France, for example, the free coinage of gold is 
 permitted, but the coinage is not gratuitous, for out of every 
 3100 francs coined the government retains y^ francs as seign- 
 iorage. In the United States,^ if a man take standard gold to 
 
 ^ The gold dollar, having proved too small for convenient use, is no longer 
 minted. Gold is coined into two-and-a-half-, five-, ten-, and twenty-dollar pieces. 
 
 2 Freedom of coinage in the United States with respect to both gold and silver 
 was granted in the law of 1792, as follows: "That it shall be lawful for any per- 
 son or persons to bring to the said mint gold and silver bullion in order to their 
 being coined ; and that the bullion so brought shall be there assayed and coined 
 as speedily as may be after the receipt thereof, and that free of expense to the 
 person or persons by whom the same shall have been brought. And as soon as 
 
l8o MONEY AND CURRENCY 
 
 the mint, he is entitled to the same weight of gold in the shape 
 of coin ; but in France and several other countries, on account 
 of seigniorage charges, the coins received weigh less than the 
 bullion that is delivered to the mint. 
 
 Relation between Coin and Bullion 
 
 1 18. When the free and gratuitous coinage of a metal is per- 
 mitted, an ounce of the metal coined can never be worth much 
 more or less than an ounce uncoined. An equivalence of value 
 between coined and uncoined bullion is established by freedom 
 of coinage. Thus free coinage of a metal practically makes the 
 metal itself money, the metal varying in value with every fluc- 
 tuation in the value of the coins made out of it. In the United 
 States, on account of the free and gratuitous interchangeability 
 between gold bullion and gold coin, gold bullion is regarded as 
 practically the same thing as money, although technically^the 
 coins alone are money. As a matter of fact, we are using gold 
 as money exactly as did the ancients before the days of coin- 
 age, except that in olden times delicate scales for the weighing 
 of gold dust was part of every merchant's equipment, while 
 improvements in the art of coinage have substituted for the 
 scales the stamp of the mint. In the United States, and in 
 most other countries where gold is freely coined, banks count 
 the gold bars in their vaults as part of their money reserve. 
 In a country where the free coinage of silver prevails, silver 
 bullion is in the same way prized as money. 
 
 119. The value of gold (or any commodity freely used as 
 money) is the product of a double demand, — the demand for it 
 for use as money, and the demand for it for use in the arts. 
 Gold possesses two separate utilities, that is to say, it is wanted 
 for two separate and distinct purposes. Its value is the result 
 of this double demand. A certain portion of the world's gold 
 
 the said bullion shall have been coined, the person or persons by whom the 
 same shall have been delivered, shall upon demand receive in lieu thereof coins 
 of the same species of bullion which shall have been so delivered, weight for 
 weight, of the pure gold or pure silver therein contained." In 1873 the free 
 coinage of silver was suspended. 
 
COMMODITY OR METAL MONEY 
 
 l»l 
 
 supply is appropriated for use as money, and a certain portion 
 for use in the arts, and its value must tend to rise whenever 
 the demand from either source is increased. 
 
 The value of money in the United States, for example, is 
 determined by two sets of demand and supply conditions : 
 (i) directly, by demand for and supply of gold coins in the 
 United States; and (2) indirectly, by the demand for and supply 
 of gold throughout the world. The reader will observe that no 
 exception to the law governing the value of money is here 
 involved. Automatically, through the operation of self-interest 
 among men, the supply of gold coins is so regulated that their 
 value coincides in the long run with the value of the gold bullion 
 of which they are made. The following diagram illustrates the 
 
 WORLD DEMAND FOR USE 
 IN ARTS AND AS MONEY 
 
 DEMAND FOR MONEY IN 
 UNITED STATES 
 
 GOLD BULLION 
 
 JS8 GRAINS 
 
 FREE COINAGE >^-+ 
 
 MELTINO POT -<- 
 
 WORLD'S SUPPLY OF COLD 
 
 SUPPLY OF MONEY IN 
 UNITED STATES 
 
 Diagram V 
 
 relation between gold as bullion and gold as money. Here we 
 have two hundred and fifty-eight grains of standard gold both 
 in the form of bullion and in the form of a ten-dollar gold piece. 
 The value of the bullion depends upon world conditions of 
 demand and supply; that of the coin depends on the money 
 demand and supply in the United States. Although entirely 
 
l82 MONEY AND CURRENCY 
 
 different conditions govern the values of these two things, 
 the value of the one must always nearly equal that of the 
 other, for the one can be converted into the other without 
 cost to the person making the conversion. When the conditions 
 governing the value of money in the United States lift its value 
 above that of the bullion, more bullion is coined and the value 
 of money is lowered by the increase in its supply. The supply 
 of available bullion is at the same time reduced and its value 
 correspondingly raised. On the other hand, if the demand for 
 gold as bullion lifts its value above that of the coin, an equi- 
 librium is effected by means of the melting pot.^ The coin and 
 bullion, it should be noticed, do not always possess exactly the 
 same value ; if they did, no bullion would ever be coined, and 
 no coins would ever be melted down. 
 
 1 20. It is frequently said that the value of our money 
 depends on the value of gold. It should be noticed that this 
 statement is only a half truth, for it is equally true that the 
 value of gold depends upon the value of money. Gold, as we 
 have said, gets its value from a double demand, and its value 
 will tend to increase whenever there is an increase in either 
 demand. Some writers talk about what they call the commer- 
 cial value of gold, or the value of gold in the markets of the 
 world, as if that were something quite independent of its mone- 
 tary value, and as if this commercial value fixed the values 
 of gold coins. The so-called " commercial value " of gold and 
 silver is in reality the product of the demand for those metals 
 for use not only in the arts but also as money. Any increase 
 in the demand for money in Europe or in the United States 
 will tend to raise the commercial value of gold ; and any increase 
 in the demand for money in China will tend to raise the com- 
 mercial value of silver. The value of money is not in any sense 
 derivative from that of gold ; yet under a system of free coinage 
 
 ^ The " melting pot " in this section serves to include all methods of withdraw- 
 ing gold from use as money when its value as bullion exceeds its value as coin. 
 It includes, therefore, the exportation of gold, which, as shown in Chapter V, is 
 always evidence that it is worth more as bullion abroad than as money at home. 
 When gold coins are packed in bags for export, they are essentially reduced to 
 bullion as much as if they had been melted. 
 
COMMODITY OR METAL MONEY 183 
 
 any increase in the supply of gold will cause an increase in the 
 supply of money, so that the values of gold bullion and money 
 will fall together ; and, conversely, if an increasing demand for 
 money raises its value, the value of gold will be lifted at the 
 same time. 
 
 Practically all the gold mined in the United States (some 
 ^58,000,000 in 1919) is turned over to the government mints, 
 the owners receiving immediate payment in gold coin or in 
 checks convertible into cash. It does not follow, however, that 
 all the new gold is absorbed by the demand for money. Gov- 
 ernment officials have learned by experience that the coinage 
 of all the gold received involves needless expense, for a cer- 
 tain portion of it is always wanted in the shape of bullion bars. 
 Therefore the government converts some of the country's 
 new gold into coin, some into exporters' bars, and some into 
 so-called jewelers' bars. It is estimated that the industrial or 
 manufacturing demand for jewelers' bars absorbs about 20 
 per cent of the annual output in this country; all the rest 
 becomes money, for exporters' bars are counted as money both 
 in the vaults of the national Treasury and in the reserves of 
 banks. If the demand for gold in the arts increases, its value 
 tends to rise, and the proportion of the whole supply coined 
 into money is diminished, an upward tendency at the same time 
 being given to the value of gold coins or money. 
 
 121. The truth as to the relation between the value of gold 
 as money and gold as bullion is not easily seen for the reason 
 that since gold has no price variations in its value cannot be 
 measured in the ordinary way. Its so-called "price" is always 
 ;^20.67 per fine ounce, or $18.60 per standard ounce, and that 
 price is the same whether for bullion or for coins. How, 
 then, can there be any difference between the values of the 
 two } The reader can easily answer this question unaided if he 
 will bear in mind the obvious fact that_ the " mint price " of 
 gold furnishes no indication whatever as to the value of gold. 
 Gold is no exception among commodities. Wool, for example, 
 may be said to be subject to a threefold demand, being wanted 
 by the manufacturers of knitting yarns, of clothing, and of 
 
1 84 MONEY AND CURRENCY 
 
 blankets. Its value is derived from those articles, and will 
 vary as the demand for them varies. The quantity of wool 
 that is converted into each of these commodities is determined 
 by the demand for and value of each. If war increases the 
 value of blankets, then blanket manufacturers will outbid the 
 others and obtain a larger share of the world's stock of wool 
 than usual ; on the other hand, if fashion dictates a larger use 
 of woolen clothing, then the bidding from manufacturers of 
 cloth will raise the price of wool and a larger share of the stock 
 will go to them. There is no such bidding for gold in the mar- 
 kets of a gold-standard country, but exactly the same competi- 
 tion for the stock of gold is carried on between the arts demand 
 and the money demand. On the one side are the manufacturers 
 of jewelry, gold plate, etc., and the strength of their demand 
 depends on the popular demand for articles made of gold, their 
 profits tending to increase as that demand increases. On the 
 other side are the whole people bidding for gold by their offers 
 of goods for money, their bids rising in proportion as they lower 
 the prices of their goods, and falling as they raise the prices 
 of their goods. 
 
 Value of the Metal Increased 
 
 122. Free coinage gives to a metal practically all the utilities 
 of money. We have seen that in the United States, on account 
 of a law which permits the free coinage of gold, the value of an 
 ounce of gold when uncoined is practically the same as its value 
 when coined ; and that on this account people naturally look 
 upon gold itself as money. To the average man gold is the one 
 thing which never changes in price ; he thinks of an ounce 
 of pure gold as at all times worth ^20.67, for that is the sum of 
 money into which he can have it coined at the mint. So he 
 prizes an ounce of gold just as he would prize $20.67. ^^ is 
 right in his thought .that the two things are practically the 
 same, but he is wrong in supposing that $20.67 is the price of 
 gold ; an ounce of pure gold when coined is $20.67 ! that ($20.67) 
 is simply its money name, just as "ounce" is the Troy weight 
 name. Because gold may at all times be converted into a definite 
 
COMMODITY OR METAL MONEY 185 
 
 sum of coined money, its value being practically the same 
 when coined as when uncoined, the metal possesses for most 
 people a peculiar fascination, and is regarded as something 
 totally unlike all other metals. A man with uncoined gold in 
 his possession feels that he has something as good as money 
 itself; it does not possess the same ready exchangeability, for 
 scales and tests are needed, but it possesses the same value 
 or purchasing power and can with little trouble be converted 
 into coin. 
 
 123. The free coinage of a metal into money increases the 
 demand for it. This proposition follows logically from the pre- 
 ceding one. Since the free coinage of gold gives to it the 
 utilities of money, it is now wanted on account of these utilities 
 as well as on account of what may be called its art utilities. If 
 the world were not using gold as money, the demand for it 
 would come entirely from the arts ; this demand, due to the 
 beauty of gold and to its use by dentists and in certain trades, 
 would be the only demand it would fill. Its value would be 
 fixed solely by its art utilities. But free coinage gives it a 
 new utility, the money utility, and the demand for it is thereby 
 increased. The value of gold at the present time, therefore, 
 is greater than it would be if it were not freely coined into 
 money. 
 
 124. It is impossible to determine what proportion of its 
 value gold derives from its use as money, for we cannot make 
 accurate comparison of the monetary and nonmonetary demands. 
 Since only about one fifth of the new gold mined each year is 
 now absorbed by the arts, we may justly infer that the monetary 
 demand is at least four times greater than the nonmonetary. 
 This method of comparison, while it is the only one possible, 
 does not allow the proper weight to the monetary demand, for 
 that does not find full expression in the statistics of coinage. 
 In 19 19, for instance, the world's coinage of gold amounted to 
 about ^61,000,000, or nearly 3,000,000 ounces. ^ These fig- 
 ures by no means measure the money demand for gold born of 
 the prerogative of free coinage. The large use of gold bullion 
 
 1 See Report of Director of the Mint for ig20, p. 286. 
 
l86 MONEY AND CURRENCY 
 
 as money must also be taken into account. In all civilized 
 countries, on account of the right of free coinage, uncoined 
 gold is specially prized as being equivalent to money itself, and 
 by banks is preferred to coin in the settlement of international 
 obligations. From the mere statistics of coinage, therefore, we 
 get no idea of the effect which the money demand has upon the 
 value of gold. When a metal is coined into credit money, as is 
 silver in the United States, the case is entirely different, for then 
 the metal itself acquires no utility as money, and the effect upon 
 the value of the metal is proportionate to the quantity coined. 
 
 There is still another reason why we cannot safely assume 
 to measure the money demand for gold by the quantity of it 
 that is coined. Even though only coined gold were used as 
 money, yet the intensity of the demand for money would not 
 be revealed by coinage statistics. The quantity of gold needed 
 as money declines in proportion as its value rises. If the value 
 of gold rises lOO per cent, only half as much gold is needed to 
 consummate a given volume of exchanges.^ It is evidently 
 absurd, therefore, to hold, as do some writers, that the money 
 demand for gold was not increasing after 1873 merely because 
 the world's coinage at that time was declining. In 1873 the 
 mints of the world, it is estimated, coined 12,000,000 ounces of 
 gold, whereas in 1883 they coined only 5,000,000 ounces, and 
 in 1891 only 5,700,000 ounces. We cannot conclude from these 
 figures that the money demand for gold declined after 1873, for 
 after that year the value of gold increased, so that an ounce of 
 it in 1883 and 1891 satisfied a larger demand for money than 
 in 1873. 
 
 It should be noted that the quantity of gold consumed in the 
 arts does not decline in proportion as the value of gold rises. 
 A rise in the value of gold is never accompanied by a corre- 
 sponding decline in the demand for gold bijoutry, nor is a fall 
 
 1 In the language of the economists, the " demand curve " for gold to serve as 
 money varies with absolute uniformity as its value varies. That can be said of no 
 commodity except when it is freely coined into money. If the value of salt, for 
 instance, were doubled, there would be no reason to expect that the consumption 
 of salt would be reduced one half. The " demand curves " of most commodities 
 are irregular in their variations, but that of money is uniform. 
 
COMMODITY OR METAL MONEY 187 
 
 in its value attended by any notable increase in that demand. 
 Indeed, the attention of people is not generally drawn to the 
 fact that gold has changed in value, for there is little change 
 in the prices of articles made of gold. As gold rises in value, 
 therefore, since a given quantity satisfies a larger monetary 
 demand, the arts or industrial demand tends to absorb an 
 increasing proportion of the new supplies. 
 
 Effects' OF Seigniorage 
 
 125. A seigniorage charge, under a system of free coinage, 
 raises the value of the coin above that of the same weight of 
 uncoined bullion by an amount equal to the seigniorage per- 
 centage. There are two ways in which a government may exact 
 its seigniorage. It may coin only part of the gold, retaining a 
 certain proportion as seigniorage and not coining it, or it may 
 coin all the gold and retain part of the coins. In either case, 
 unless people disapprove of the seigniorage, the value of the 
 coins will be above that of the uncoined bullion by the amount 
 of seigniorage. The proviso, " unless people disapprove," is 
 necessary, for if the coins so issued are not generally acceptable 
 as money, the demand for money, and hence its value, will be 
 affected. The supply of money will be no greater, whether the 
 seigniorage is coined or uncoined, than it would be if no seign- 
 iorage were taken, so that the value of money, the demand for 
 it not having been affected, will be unchanged. 
 
 The truth of these propositions may be made clear by illus- 
 tration. Let us suppose that Congress provides for a seigniorage 
 of 10 per cent on gold coins. This could be done in four ways: 
 (i) the government could mint coins of the present weight, but 
 coin only 90 per cent of the bullion offered, retaining its 10 per 
 cent seigniorage in bullion; (2) it might mint into coins of the 
 present weight all the bullion offered and keep 10 per cent 
 of the coins, treating them like other money in its possession; 
 (3) it might debase the coins 10 per cent (i.e. make them con- 
 tain 10 per cent less gold) and coin only 90 per cent of the bul- 
 lion offered, retaining the rest as seigniorage; (4) it might debase 
 
l88 MONEY AND CURRENCY 
 
 the coins lo per cent, coin all the bullion offered, and retain 
 lO per cent of the coins. Let us see what effect each of these 
 methods would tend to have on prices and upon the value- 
 relation between gold bullion and gold coins. 
 
 The first plan would cause no change in the supply of money 
 and so would have no immediate effect upon prices, but men 
 would cease for a time to take gold to the mint, for in exchange 
 for an ounce of pure gold they would receive only ^ 18.60 instead 
 of ^20.67, the amount now given. , The supply of money not 
 increasing, its value would gradually rise as the demand for 
 money increased with the growth of the country. Sooner or 
 later gold coins would be worth 10 per cent more than the 
 same amount of uncoined bullion, and then men would be 
 under the same inducement as now to have their bullion con- 
 verted into coin. 
 
 Results under the second plan would be almost the same as 
 under the first. As the government, however, would coin all 
 bullion presented, a given amount of bullion taken to the mint 
 would have a greater effect upon the value of money than under 
 the first method. Less bullion, therefore, would be delivered 
 to the mint, and no bullion at all would be taken there until 
 gold coined was worth 10 per cent more than gold uncoined. 
 The permanent price level under this and the first plan would 
 be some 10 per cent lower than it would have been had no 
 seigniorage been exacted ; for prices, instead of reflecting the 
 value of gold, would reflect the value of coins worth 10 per cent 
 more than the gold they contained. The so-called " mint price " 
 of gold under the first and second methods would be $18.60 
 per ounce fine. 
 
 The third method involves a debasement of the coinage and 
 it would seem that the value of money should fall as a result, 
 but this would not happen so long as people were willing to use 
 the light-weight coins as money. Under this plan a man taking 
 100 ounces of gold to the mint would receive $2067, the same 
 amount now given, but the coins would be 10 per cent lighter 
 than those now in use; a gold eagle, now containing 258 grains 
 standard gold, would then contain only 232.2 grains. Men would 
 
COMMODITY OR METAL MONEY 189 
 
 surely not be more eager to get these light-weight coins in ex- 
 change for their gold than they are to get coins of the present 
 weight ; prices, therefore, could not rise on account of an increas- 
 ing supply of money. Nor would prices fall on account of a 
 diminution of the money supply. A fall of prices would seem 
 paradoxical, for it would mean that the light-weight coins had 
 greater purchasing power than full-weight coins. Since these 
 new coins would be worth as much as the coins now in use (for 
 we have seen that prices could not rise), the owners of bullion 
 would be under the same inducement as now to have it coined. 
 If they hesitated for any length of time about exchanging their 
 bullion for light-weight coins, the increasing demand for money 
 would lift the value of these coins above their present level and 
 prices would fall. It would not take bullion dealers long to 
 discover that the United States Mint was their best market 
 place. Thus a seigniorage under the third method, if the new 
 money were acceptable to the people, would have no effect what- 
 ever upon the prices of goods or upon the value of gold. 
 
 The fourth plan involves a like debasement of the coinage, 
 with the difference that all the bullion presented to the mint is 
 coined into money. Would not this cause a 10 per cent increase 
 of the supply and hence a rise of prices .' It would not. The 
 mint price of gold would be the same as now, namely $20.6j, and 
 men would get the same profit from having gold coined that 
 they get now. A given amount of bullion would be coined into 
 more money than at present, but no increase in the money 
 supply would result, for any tendency on the part of money to 
 fall in value would be instantly checked by the cessation of 
 coinage, since men would not take bullion to the mint unless it 
 were worth 10 per cent more when coined than when uncoined. 
 
 These conclusions with regard to the effects of seigniorage, 
 especially when a debasement of the coinage is involved, may 
 seem to run counter to the generally accepted statement that a 
 seigniorage, if it is coined, will cause prices to rise.^ That state- 
 ment is true only when the coinage is restricted, being under 
 
 1 See Walker's Political Economy (advanced course), p. 147. 
 
I go 
 
 MONEY AND CURRENCY 
 
 control of the government. Jf, for example, the free coinage of 
 gold in this country were stopped and the government should 
 recoin all our gold money, making the coins lO per cent lighter 
 than the present, the money supply would be increased lo per 
 cent and the value of money would correspondingly fall. If, how- 
 ever, the government recoined only 90 per cent of the existing 
 stock of gold money, holding the rest in the Treasury, the 
 money supply would not be increased and prices would not be 
 affected. Under a system of restricted coinage, therefore, it 
 is perfectly true to say that the coinage of a seigniorage tends 
 to raise prices ; but under a system of free coinage it can have 
 such effect only in so far as it lessens the demand for gold bul- 
 lion and so lowers the value of gold. 
 
 Seigniorage of 100 per cent 
 
 126. If the gold coins of the United States could lose 10 per 
 cent of their gold without losing any of their value, why not 
 50 per cent, or even 100 per cent ? Why should not the gov- 
 ernment keep all the gold and issue paper dollars in exchange 
 for gold brought to the mint .' Theoretically there is no reason 
 why a seigniorage of 50 or 100 per cent should not be exacted. 
 Ricardo stated the truth upon this subject as follows: 
 
 The whole charge for paper money may be considered as seigniorage. 
 Though it has no intrinsic value, yet, by limiting its quantity, its value in 
 exchange is as great as an equal denomination of coin, or of bullion in that 
 coin. On the same principle, too, namely by a limitation of its quantity, a 
 debased coin would circulate at the value it should bear, if it were of the 
 legal weight and fineness, and not at the value of the quantity of metal 
 which it actually contained. — Political Economy (Bohn's edition), p. 341. 
 
 If the people of the United States had no desire to see or 
 use any gold coins, and had implicit confidence in their govern- 
 ment, legislative and executive, a law providing that men who 
 take gold to the mint shall receive in new paper money ^20.67 
 per fine ounce would have no effect upon the value of money 
 or upon prices in this country. The new paper money need 
 
COMMODITY OR METAL MONEY 191 
 
 not even be a promise to pay gold ; it might merely be in- 
 scribed " one dollar," " five dollars," etc., and yet the value of 
 money would not be affected, for the amount of paper money 
 issued would not exceed the amount of gold coins that would 
 have been minted had the law not been changed. The country 
 would be on the gold standard practically as it is now, the value 
 of money corresponding with the value of gold bullion.^ 
 
 The result would be the same even if the law provided that 
 the government might sell or otherwise dispose of the gold 
 bullion that it received ; except that in this case, the govern- 
 ment not keeping a hoard of gold and none being used by the 
 people as money, a large quantity (about ^2,785,000,000 in 
 1 921) would be thrown upon the world's markets, its value 
 would fall, and prices in all gold-standard countries, including 
 the United States, would rise.^ 
 
 127. In France we may see the effects of seigniorage in 
 operation. According to the French law one kilogram of gold 
 is coined into 3100 francs, of which the government retains 
 seven as seigniorage. On account of this seigniorage charge the 
 so-called "mint price " of gold in France is not 3100 francs per 
 kilogram, but 3093 francs, for that sum of money is all that 
 a man can get from the government for a kilogram of gold. 
 Gold coins amounting to 31 00 francs weigh only one kilogram, 
 but no man would give them in exchange for their weight in 
 gold. On account of this difference between the value of coined 
 and uncoined gold, the gold coins of France are seldom melted 
 down or exported. The Bank of France, when it has occasion 
 to export gold, ships bars of bullion or the coins of some 
 
 1 Correspondence in value between the paper money and gold bullion would be 
 lacking whenever the latter was rising in value more rapidly than money, for the 
 supply of money could not then be reduced as now by the melting pot. 
 
 2 Ricardo in his Proposals for an Economical and Secure Currency suggested a 
 plan resembling that above outlined, but not so radical. He suggested that the 
 Bank of England be permitted to issue its notes for uncoined bullion, showing 
 that this plan would give England a paper currency regulated by the value of 
 gold. %&^ Political Economy^ chap, xxvii. "Currency is in its most perfect state," 
 said Ricardo, " when it consists wholly of paper money, but of paper money 
 of an equal value with the gold which it professes to represent." — Political 
 Economy, p. 339. 
 
192 MONEY AND CURRENCY 
 
 country, like the United States or England, in which gold is 
 minted without seigniorage. If it should ship French coins 
 abroad, it would send out something worth in France (but not 
 in other countries) about one fifth of i per cent more than the 
 same amount of gold uncoined. 
 
 The French government coins all the metal which it receives, 
 and all these coins finally get into circulation, for the govern- 
 ment uses the seigniorage tax for the payment of expenses 
 just as it does receipts from any other tax. Consequently a 
 given amount of gold in France makes for the country one fifth 
 of I per cent more money than it would make if no seignior- 
 age were exacted. So if the United States government should 
 levy a seigniorage of lo per cent on gold coinage, the existing 
 supply of money (and the present level of prices) would be 
 maintained with lo per cent less gold than is now necessary. 
 
 Advantages of Seigniorage 
 
 128. Difference of opinion exists as to the practical ad- 
 vantage of a seigniorage charge. Among English writers the 
 weight of authority opposes any charge for coinage in excess 
 of the actual expense, it being held that thus perfect inter- 
 changeability between coin and bullion is secured, so that the 
 supply of money is automatically regulated. This argument is 
 not valid, however, for a seigniorage tax, although it separates 
 the values of coin and bullion, does not destroy their inter- 
 changeability ; it merely changes the ratios of exchange. 
 
 Another objection to seigniorage is the profit it offers to 
 counterfeiters, but this objection holds only against an exces- 
 sive seigniorage, say 10 per cent or more. An illustration is 
 furnished by the silver dollar at the present time. Although 
 worth a dollar in gold, its constituent bullion is worth less 
 than fifty cents. The profit derived from making counterfeit 
 silver dollars out of standard silver necessitates constant 
 watchfulness on the part of the government. 
 
 The advantages of seigniorage are : (i) it is economical, for 
 a given quantity of metal makes a larger amount of money ; 
 
COMMODITY OR METAL MONEY 193 
 
 (2) it prevents the exportation or melting of coins. Inter- 
 national payments are made in bullion valued by its weight 
 in accordance with its mint price in the country receiving it ; 
 if seigniorage has been exacted the coins of a country will 
 remain at home, for a shipment of coins to a foreign country, 
 where they would be valued by weight as if they were bullion, 
 would involve a loss of value equal to the seigniorage. It may 
 be objected that the free movement of coins into and out of a 
 country is desirable, in order that a redundancy or scarcity of 
 money may be automatically corrected ; but this objection has 
 little force, for shipments of bullion would serve the same pur- 
 pose. The banks exporting bullion would be compelled either 
 to replace it in their vaults or to contract their credit ; and in 
 either case the effect upon the price level would be the same 
 as that produced by an exportation of gold coins from a coun- 
 try in which coinage is gratuitous. 
 
 The advantages of a seigniorage tax may be summed up in one 
 word, — economy, — and it is doubtful if they are great enough 
 ever to give the subject practical importance. Between 1792 
 and 191 5 the United States mints coined gold pieces amounting 
 to ^3,378,000,000, and of this sum over $2,500,000,000 was 
 coined after 1873 ; yet it is doubtful if over $1,600,000,000 in 
 gold coin has remained in the country. Much has been melted 
 for use in the arts, some has been lost, and many millions 
 of American eagles and double eagles now lie in the vaults of 
 European banks, where they figure as bullion. The expenses 
 of coinage, however, are not large enough to make these facts 
 a cause of much regret.^ 
 
 129. In the foregoing discussion more has been said of gold 
 than of silver. The reader must not imagine that the prin- 
 ciples elucidated apply only in the case of gold. They are 
 
 1 In the Report of the Director of the Mint for ig20 (p. 23) the earnings of 
 the mints and the assay office for the fiscal year 1920 are given as $12,900,000, 
 which includes $12,115,000 profits from seigniorage. The expenditures were 
 given as $2,214,000. This leaves a net profit from mint service of $10,500,000. 
 Seigniorage on silver dollars and minor coins is properly separated from regular 
 operating income of the mints, inasmuch as these coins are credit money and are 
 part of the government's debt. 
 
194 
 
 MONEY AND CURRENCY 
 
 equally applicable to silver or any other metal that is freely 
 coined for use as money. In Mexico^ prior to 1905 a book on 
 money would doubtless have made larger use of silver than of 
 gold in its illustrations, for in Mexico silver was money exactly 
 as gold is money here, the monetary unit being 377.139 grains 
 of pure silver. There was free coinage of silver and a seignior- 
 age tax of 5 per cent was levied, the government coining the 
 seigniorage. The people of Mexico thought of silver as their 
 measure of value. To them silver was money, and it seemed to 
 them far more stable than any other commodity. Prices in 
 Mexico showed the value of silver, for through the free coinage 
 of silver all changes in the value of silver bullion acted upon 
 the supply of Mexican money. The 5 per cent seigniorage 
 charge in Mexico made the value of coined silver 5 per cent 
 greater than the same amount of silver uncoined. For export 
 purposes, however, the two were identical in value, for the gov- 
 ernment levied a tax of 5 per cent on all silver bullion exported. 
 
 Gresham's Law 
 
 130. Since the use of coins is certain to cause a loss of 
 metal by abrasion, the laws of most nations fix limits of " toler- 
 ance," providing that a coin shall be legal tender even though 
 slightly under full weight. Gold coins of the United States, 
 for example, may lose one half of i per cent of their weight in 
 twenty years from the date of coinage (or a ratable proportion 
 in a shorter period) without losing their legal-tender quality ; 
 but if they lose more they cease to be money and are valued 
 by weight as bullion. 
 
 When occasion arises for the export of gold, exporters are 
 careful to pick full-weight coins, for these cost them no more 
 than the worn coins in circulation, but are worth more abroad 
 on account of the greater quantity of bullion they contain. The 
 principle here involved is commonly referred to as Gresham's 
 law, after Sir Thomas Gresham, an English merchant, banker, 
 
 ^ Mexico suspended the free coinage of silver in 1905, adopting the so-called 
 "gold-exchange standard," which is described in Chapter XII, Section 176. 
 
COMMODITY OR METAL MONEY 195 
 
 and statesman, who is credited with having impressed the truth 
 of this principle upon Queen Elizabeth in 1560, when the cur- 
 rency of England was in a chaotic condition. The principle, 
 however, had been recognized by writers upon money long 
 before the sixteenth century, and, indeed, is not difficult of 
 apprehension, being merely an application of the broader law 
 that all commodities tend toward those markets where their 
 values are highest. 
 
 The popular expression of the law, "bad or cheap money 
 drives out good," is not strictly true. In every country light- 
 weight and full-weight coins are constantly in concurrent cir- 
 culation, both having exactly the same value as money, and no 
 coins are exported from a country until the supply of both is 
 excessive, in which case prices rise, gold becomes more valu- 
 able abroad than within the country, and increased imports 
 create a balance of indebtedness requiring the export of gold. 
 Then it is that the full-weight coins are culled from the circu- 
 lation and exported ; for these, although worth no more at 
 home as money than the lighter coins, are worth more abroad 
 as bullion. The essential principle of the law may be simply 
 stated as follows : Whenever a coin is worth vtore as bullion than 
 as money, it will either be melted for use in the arts or be exported 
 as bullion to a foreign country. 
 
 In so far as the industrial demand for a metal is satisfied 
 by the melting of coins, the heavy coins are selected for the 
 purpose. In this country Gresham's law receives illustration 
 whenever gold coins are exported to Europe, for exporters are 
 careful to send only full-weight eagles and double eagles. The 
 light coins in circulation do not expel all those of full weight 
 simply because before the stock of heavy coins is exhausted the 
 industrial and export demand for bullion is satisfied, and there- 
 after the full-weight coins possess no greater value as bullion 
 than as money. 
 
 Gresham's law is commonly given the widest possible appli- 
 cation. It is used to explain not only the expulsion of heavy 
 by light coins, but also the expulsion of the underestimated 
 metal in a bimetallic system and the disappearance of the 
 
196 MONEY AND CURRENCY 
 
 standard metal when paper credit money is allowed to depre- 
 ciate. These latter cases are not exactly parallel or analogous 
 with the first, and cannot be adequately explained by reference 
 to a single principle or law. The operation of bimetallism and 
 of depreciated credit money involves other principles quite as 
 important as Gresham's law. Discussion of the law as applied 
 to bimetallism and credit money is deferred, therefore, until 
 these subjects are treated in detail. 
 
 History affords numerous illustrations of Gresham's law. 
 The phenomenon which it explains was familiar to the Greeks, 
 as is evidenced by the jeer of Aristophanes because their " old 
 and standard" coins. 
 
 Recognized in every realm for trusty stamp and pure assay. 
 Are rejected and abandoned for the trasli of yesterday. 
 
 A striking illustration of the law is given by Macaulay in his 
 History of England (chap. xxi). William III found England 
 full of clipped and sweated coins. A recoinage was ordered, 
 but the handsome new money vanished. " Great masses were 
 melted down ; great masses exported ; great masses hoarded; but 
 scarcely one new piece was to be found in the till of a shop, or 
 in the leathern bag which the farmer carried home after the 
 cattle fair." The country was abundantly supplied with money 
 in the shape of light and mutilated coins, which were accepted 
 at their nominal value by the government. As a result the new 
 coins were not needed as money and were worth more as bul- 
 lion. The light coins continued to monopolize the circulation 
 until the government, by declaring them no longer legal tender, 
 stripped them of the money utility or function. 
 
 Regulation of Supply 
 
 131. The supply of metal money is regulated automatically 
 through the medium of price and the rate of interest. Gold, 
 like any other commodity, always tends toward those markets 
 where its value is greatest. In the case of commodities in gen- 
 eral their obedience to this law is generally understood, for it 
 
COMMODITY OR METAL MONEY 197 
 
 means merely that they move to the markets where the highest 
 prices are offered for them. No man ever goes to the trouble 
 of exporting wheat from Chicago to Liverpool merely from a 
 desire to feed the people of England, or because he wishes to 
 reduce our national surplus. All shipments are made because 
 owners can get higher prices in Liverpool than in Chicago or 
 New York. Just as wheat, cotton, and other commodities go 
 to the markets where their values are highest, so does gold ; 
 but in its case value does not find expression in price. In the 
 United States and in Europe generally, low prices mean that 
 the value of gold is high, and high prices that the value of gold 
 is low. In no other way is the value of gold indicated, for it has 
 no price in these countries. In China silver is the standard of 
 prices and the value of silver is indicated by the prices of com- 
 modities in general, high prices meaning a low value of silver, 
 and low prices a high value of silver. Just as in the United 
 States and European countries gold, in seeking those places 
 where its value is highest, must move toward the places where 
 prices are lowest, so silver, in China and other countries upon 
 a silver basis, tends to go away from high prices and toward 
 low prices. 
 
 The relation of the rate of interest to the international move- 
 ment of the precious metals is obvious even to men who have 
 given little thought to the subject. Ordinarily it is said that a 
 high rate of interest attracts capital, and that a low rate repels 
 it. This form of statement, generally speaking, is true enough, 
 but without analysis it is liable to create the impression that 
 capital always comes to a country in the form of gold (or silver, 
 if silver is the money of the country). What happens is this : If 
 the supply of money in a country is temporarily inadequate to 
 maintain existing prices, bankers find their reserves declining 
 and raise their rate of discount. The higher rate of interest 
 has a double effect, — (i) it weakens the prices of stocks and 
 speculative commodities, and (2) it increases the earnings of 
 money as a basis of credit, that is, as a banking reserve. The 
 first effect naturally leads to increased exports and diminished 
 imports of goods and securities ; the second causes bankers to 
 
198 MONEY AND CURRENCY 
 
 seek to convert their foreign balances or credits into money, 
 while foreign bankers are at the same time prompted to increase 
 their balances in the country where the rate of interest is high. 
 The combined result is a flow of gold toward the country of 
 relatively low prices and high discount rate, and the move- 
 ment continues until the country's need for money is satisfied ; 
 in other words, until its price level and its rate of interest 
 (differences due to distance, amount of risk, etc., being left out 
 of account) are the same as those of other countries having 
 the same standard. 
 
 The price level in all countries using the same metal tends 
 to be uniform. It is impossible for prices in England long to 
 maintain a level at which an ounce of gold can buy less in 
 England than in France and Germany or in the United States. 
 A country in which the price level is above that of other gold- 
 standard countries will sell less to foreigners than usually and 
 will buy more until it is obliged to export some of its gold in 
 payment of the balance. This exportation of gold, reducing its 
 own money supply and increasing that in other countries, will 
 go on until an equilibrium is established and the price level in 
 all is uniform. Thus, through this automatic movement of gold 
 resulting from the fact that people like to buy goods where 
 prices are low and sell where prices are high, and to lend their 
 money at the highest rate of interest, the world's stock of gold 
 is evenly distributed among the countries using it as money, 
 each country getting its share without any conscious effort on 
 the part of its government or business interests. 
 
 Here we have one of the advantages of metal money. There 
 need be no concern about the supply ; that is self-regulated 
 and needs no attention from any authority. Indeed, any attempt 
 to regulate it is likely to work more harm than good. 
 
 132. A silver price level is unrelated to a gold price level. 
 A fall of prices in China indicates a rise in the value of silver, 
 but has no significance with regard to the value of gold. It 
 may lead to an exportation of silver from the United States to 
 China, but can have no more effect upon the flow of gold from 
 this country than a rise in the Liverpool price of wheat can 
 
COMMODITY OR METAL MONEY 199 
 
 have on our exports of cotton. Changes of prices in China 
 record changes in the value of silver and have no relation to 
 the value of gold. When prices in China decline silver is 
 growing more valuable in China, and importations of silver 
 will follow unless at the same time that metal has been rising 
 in value in other countries. 
 
 133. Credit money is often coined from metal, and the reader 
 should be careful not to confound it with metal or commodity- 
 money. Credit money is a promise to pay money which is 
 universally acceptable as a medium of exchange, and the 
 promise may be impressed upon a coin or upon a piece of paper. 
 Paper credit money is the more economical, but in certain 
 denominations coins are preferred. Thus in the United States 
 the silver dollar is a piece of credit money. The promise is 
 not stamped upon the coin itself, but is written in the law 
 which provides for its issue. The silver half dollars, quarters, 
 and dimes are also credit money ; so are the " nickels " and 
 bronze one-cent pieces. The fact that we use silver, nickel, 
 and bronze as material for credit money does not make those 
 metals money at all. The free coinage of gold gives it a new 
 utility, that of exchangeability, and makes the metal itself prac- 
 tically money ; but the use of silver, nickel, and bronze as the 
 material out of which credit money is made gives these metals 
 no new utility and does not bring to bear upon them any part 
 of the demand for money. 
 
 1 34. Gold and silver were first made money by custom, but the 
 law now forces their use by making them legal tender for the 
 payment of debt. As business operations became more involved 
 and important it was found convenient for both debtor and 
 creditor to have the law define exactly what was money ; at the 
 present time such a law is found on the statute books of every 
 civilized people. In the United States the law defines the 
 dollar for the same reason that it defines the yard and the 
 bushel, — in order that when these terms are used in contracts 
 there can be no doubt as to what they mean. The dictionary 
 is not the book in which to look for an authoritative definition 
 of the word "dollar"; it is to be found only in the Acts of 
 
200 MONEY AND CURRENCY 
 
 Congress.^ The definition of the pound sterling or of the shilling 
 is found in the Acts of Parliament. Custom and the common 
 law made gold legal tender in England even before an act of 
 Parliament so declared it, but English statesmen found it ex- 
 pedient to give the words "pound," "shilling," and "pence" 
 definite meanings ; so the law makes them signify certain quan- 
 tities of gold in order that there may be no dispute between 
 debtor and creditor. 
 
 Some writers have criticised the modern practice of naming 
 any definite thing as legal tender, or of making anything money 
 by law. They have urged that money, like language, should be 
 left entirely to the people; that business men, if left unham- 
 pered by law or legal-tender acts, would adopt the money best 
 suited to their needs. This objection to legal-tender legislation 
 does not seem to be well founded. The word "dollar," like 
 "bushel," or "acre," or "yard," ought to have a definite signifi- 
 cation, and it is difficult to see any good reason why Congress 
 should not be allowed to define it. The opposition to legal-tender 
 acts in this country springs largely from the unwise use which 
 Congress made of its privilege during the Civil War, when it 
 enacted that United States notes (greenbacks) should be "lawful 
 money and a legal tender in the payment of all debts, public and 
 private." ^ Since the greenbacks were not worth their face in 
 coin, injustice was done by this act in all cases of debt incurred 
 prior to its passage, when gold and silver alone were lawful 
 money. However, a legislative body should not be stripped 
 of its power to make laws merely because it may exercise that 
 power unwisely. The Congress of the United States can usu- 
 ally be relied upon to reject any measure that is condemned 
 by the sober judgment of the people ; its mistakes in monetary 
 
 1 In the Act of March 14, 1900, the meaning of "dollar" Is fixed as follows: 
 " That the dollar consisting of twenty-five and eight tenths grains of standard gold, 
 nine tenths fine, as established by section 351 1 of the Revised Statutes of the 
 United States (Act of February 12, 1873), shall be the standard unit of value." 
 Compare this with the vague definition in a standard dictionary: "A silver coin of 
 the United States, of the value of 100 cents, or rather above 4s. sterling. . The 
 value of a dollar, the unit employed in reckoning money in the United States." 
 
 ^ Act of February 25, 1862. 
 
COMMODITY OR METAL MONEY 201 
 
 legislation have almost always had their origin in ignorance. 
 What is needed is not a curtailment of its power but a better 
 understanding of the nature of money among bankers and 
 business men. 
 
 LITERATURE 
 
 White, Money and Banking, chaps, vi-viii ; Mill, Political Economy, 
 Book III, chaps, xix and xxi ; Walker, Money, Part I, chaps, v-xi ; The 
 Bullion Report (London, i8io), reprinted by the Sound Currency Com- 
 mittee, of the Reform Club, New York ; Carlile, The Evolution of 
 Money, Part II, chaps, iii and iv, and passim; Laughlin, The Principles 
 of Money, chap, ix ; J. F. Johnson, " A New Theory of Prices,'' Political 
 Science Quarterly, September, 1903 (a review of Laughlin) ; H. Parker 
 Willis, " The Controversy over Price Theories," Sound Currency, 
 March, 1904. 
 
 The annual reports of the United States Director of the Mint contain 
 much information concerning the monetary systems of foreign countries. 
 
CHAPTER X 
 
 PRODUCTION AND VALUE OF THE PRECIOUS METALS 
 
 135. Metal money lacks stability of value. 136. Importance of the conditions 
 governing the supplies of the precious metals. 137. The values of the precious 
 metals, like the values of other commodities, conform in the long run to the cost 
 of production. 138. The production of gold will tend to increase when its value 
 is rising. and to decrease when its value is falling. 139. The gold miner is more 
 interested in prices, though not consciously, than any other producer. 140. The 
 use of metal money results in cycles of rising and falling prices. 141. The value 
 of gold is not subject to sudden variations. 142. The present outlook for the 
 production of gold. 143. Statistics of the production of gold and silver since 1492. 
 144. Changes in production have been accompanied by corresponding changes in 
 the price level. 
 
 135. Since the value of metal money must fluctuate with the 
 value of the metal, metal money cannot be ideal or perfect. 
 In a country which uses gold as money, its free coinage 
 being permitted, the price of any good will tend to change 
 whenever its own value, or whenever the value of gold, changes. 
 In such a country prices are subject to variations from three 
 different causes: (i) because the value of a good changes on 
 account of changes in the demand for or supply of it ; (2) because 
 of a change in the relation between the demand for and supply 
 of money ; (3) because of a change in the relation between the 
 demand for and supply of gold bullion the world over, for a 
 change in the value of gold bullion immediately affects the 
 supply of money. 
 
 Metal money, therefore, must always lack stability of value, 
 and this lack is its only important defect. Any great increase 
 in the output of the world's mines causes a fall in the value of 
 the metal and a rise in the prices of goods ; on the other hand, 
 when the output is small the metal becomes more valuable and 
 the prices of goods fall. 
 
 Throughout the centuries during which gold and silver have 
 been used as money, prices have never been free from the 
 
VALUE OF THE PRECIOUS METALS 203 
 
 powerful influence exerted by changes in the available supply 
 of the precious metals. During the Middle Ages the mining 
 of gold and silver, an arduous and dangerous work which the 
 Romans had imposed upon slaves, practically ceased, and the 
 stock of the precious metals available for monetary use suffered 
 positive diminution. In addition to the losses from abrasion and 
 hoarding, much was absorbed by the church for decorative pur- 
 poses. The value of gold and silver rose and prices fell, until in 
 the tenth century pennies were prized almost as dollars are now. 
 
 136. Since the values of the metals which the civilized world 
 is using as money depend very much upon the supply of the 
 metals themselves, the conditions governing changes in their 
 supply are of the utmost importance. Gold is now the money 
 of Europe and the United States, of Japan, of Peru, of Mexico, 
 and of most of the European colonies. If the value of gold 
 should decline 50 per cent, prices in all these countries would 
 be doubled. Have we any assurance that something of the sort 
 will not happen.'' Do changes in the value of gold follow any 
 law, so that we may look into the future without fear that our 
 wealth in bonds and mortgages will dwindle and melt away 
 because of rising prices ^ Or are changes in the value of gold 
 independent of law and so capricious and arbitrary that we can 
 have no definite knowledge with regard to the future purchasing 
 power of our dollar ? The world's supply of gold is increasing 
 at an unprecedented rate, yet the mines of British Columbia, 
 Alaska, and South Africa seem only just touched. Is the out- 
 put of these mines to increase year after year until gold 
 becomes as plentiful as silver.' If so, then prices in gold-using 
 countries are destined to rise many hundredfold, and an era of 
 the wildest speculation and panic awaits us. 
 
 Cost of Production 
 
 137. The values of the precious metals, like the values of 
 other commodities, conform in the long run to the cost of pro- 
 duction. This law of value may strike the reader as in conflict 
 with the law of demand and supply, but if he will consider how 
 
204 MONEY AND CURRENCY 
 
 cost of production regulates the value of a commodity, he will 
 see that the two laws are in perfect harmony. If the value of 
 an article is such that its price is 60 cents, its supply will depend 
 upon the cost of producing it. If the cost is such that only a 
 fair profit can be made when it is sold at 60 cents, producers 
 will take care not to produce more than can be sold at that 
 price ; but if some improvement lowers the cost of production 
 and so increases the profit, the extraordinary profit will draw 
 capital from other fields of production, the supply of the article 
 will be increased, and its value and price will fall until only an 
 ordinary rate of profit can be secured from its production. On 
 the other hand, if the price of an article is depressed through 
 an accidental increase of the supply, or because of a falling off 
 in the demand, so that it sells for less than its cost of pro- 
 duction, certain producers will diminish their output and thus 
 reduce the supply until the price is restored to a figure which 
 represents the cost. It is in this simple way, through changes 
 in the supply of goods automatically effected by competition 
 among producers, that the values of most goods are made to 
 conform to their costs of production. Men are constantly seek- 
 ing to employ their capital and labor in those fields where 
 profits are greatest, — namely, where values are furthest above 
 costs. Hence the values of all goods, so far as they are freely 
 produced by men, tend to an equilibrium ; that is to say, the 
 exchange ratios of goods tend to represent the amount of capital 
 and labor which has gone into their production. 
 
 Gold and silver are no exception to this rule, but the fact 
 that they are used as money makes the application of the law 
 in their case less simple and evident. When the value of gold 
 or of silver is much above the cost of production, the same 
 thing happens that happens when the value of any other com- 
 modity rises above the cost ; when the profits of gold mining 
 are high, capital and labor are attracted to it from all quarters 
 of the globe. If the price of iron rises, the mining and smelt- 
 ing of iron increase. A high price of wheat increases the acre- 
 age of the next season ; a low price reduces it. It is only when 
 the law is applied to the precious metals that any one is puzzled. 
 
VALUE OF THE PRECIOUS METALS 205 
 
 138. The production of gold will tend to increase when its 
 value is rising, and tend to decrease when its value is falling. 
 This truth, so easily understood when applied to ordinary com- 
 modities, is obscured in the case of gold by the fact that gold 
 in this country and in Europe has no price. It is itself the 
 maker of prices and seems independent of the ordinary laws 
 governing price. As we have seen, its price seems fixed and 
 its value stable, so that it does not occur to the average man 
 that the profits of gold mining are affected in any way by 
 changes in the value of gold. He sees clearly enough that the 
 profits of iron mining depend upon the price of iron, or of 
 copper mining upon the price of copper ; but the profits of gold 
 mining seem to him to depend upon the quantity of gold mined 
 and to vary as that quantity varies. The owner of a copper 
 mine has his eye upon the price of copper ; the farmers of Min- 
 nesota are interested in the price of wheat : it is upon these 
 prices that their profits depend. But the gold miner studies no 
 market report. He will find the price of gold published in no 
 paper. Is he not, therefore, in a different position.' Is he not 
 engaged in a unique industry, in one the profits of which are 
 independent of market fluctuations ? 
 
 Gold Miners' Interest in Prices 
 
 139. Curiously enough, the gold miner is more interested in 
 prices, though not consciously, than any other producer. He 
 is interested in all prices, for the value of his product varies 
 with every change in the prices of goods in general. 
 
 The relation of the gold miner's income to general prices 
 can be made clear by illustration. Let us suppose that a man 
 owns a mine in Colorado from which he is getting an ounce of 
 pure gold a day. This gold, if we make a slight deduction for 
 the expenses of shipment, purification, etc., may be supposed 
 to yield him g20. How is he concerned about prices ? Let us 
 suppose that when he opened his mine the prices of food, 
 powder, tools, etc., were such that his expenses were ^10 a day. 
 His daily profit, therefore, was ^10. Suppose that during the 
 
2o6 MONEY AND CURRENCY 
 
 course of three years prices rise 50 per cent. His daily 
 expenses are now ^15 and his net income has been reduced 
 one half. If prices go on rising, his profits will go on decreas- 
 ing, until a time will come when he will abandon the gold mine 
 as no longer profitable, even though in any one day he is able 
 to get as much gold from it as before. A fall of general prices 
 would have produced the opposite effect upon the miner's 
 profits; he would find his expenses steadily growing less and, 
 therefore, his profit increasing. A rise of prices would lessen 
 the amount of gold which he could lay by, and also lessen its 
 value to him, for its purchasing power would be reduced. 
 
 A fall of prices would give him double satisfaction; it would 
 enable him to increase the daily addition to his store of gold, 
 and would also add to its purchasing power. 
 
 140. Falling prices lead to an increase in the production of 
 gold; rising prices lead to a decrease in the output. Since all 
 gold miners must be affected the same way as our single miner 
 by changes in the level of prices, it is clear that a rise of prices 
 must lessen the profits of gold mining, and that a fall of prices 
 must increase this profit. The industry of gold mining, like all 
 industries, is carried on under diverse conditions; some mines 
 are very profitable, while others barely pay the cost of operation. 
 At all times mines are being worked which yield only the. ordi- 
 nary rate of profit, and these are the ones first to be abandoned 
 when prices rise. These may be called the "marginal" mines, 
 and the cost of extracting gold from them is the cost with which 
 the value of gold tends to conform. As the value of gold falls, 
 that is, as prices rise, the expenses of gold mining increase 
 and certain marginal mines are abandoned. The world's output 
 of gold being thus diminished, the rate of increase in the world's 
 stock of gold receives a check, and the downward tendency of 
 its value is checked. On the other hand, when prices are falling 
 because the demand for gold is outrunning the supply, poorer 
 mines are brought within the field of profitable operation and a 
 gradual but steady increase of the annual output sets in. Fur- 
 thermore, since falling prices are often accompanied by depres- 
 sion in many industries, the attention of men is more than 
 
VALUE OF THE PRECIOUS METALS 207 
 
 ordinarily directed to the profits of gold mining, and prospectors 
 go out in unusual numbers in search of new mines. As a result, 
 a fall of prices is usually followed not only by an increased out- 
 put from old mines but also by the discovery of new fields of 
 gold, the yield from which finally so augments the supply that 
 the value of gold begins to fall and the prices of goods to rise. 
 
 Metal money, therefore, naturally results in cycles of rising 
 and falling prices. We have found that the value of gold obeys 
 a law common to all commodities. There need be but little fear 
 that changes in the prices of goods in the future are to be vio- 
 lent or arbitrary on account of changes in the value of gold. 
 Unless men find some new way of getting gold from the earth, 
 or discover mines where gold may be dug like iron or coal, the 
 course of prices in the future is destined to be like that in the 
 past, now falling for twenty or more years, and now rising. 
 
 141. Although the value of gold is fixed by the same law 
 that fixes the values of other commodities, its value nevertheless 
 is not so subject to sudden changes, for the stock of gold in the 
 world is so large that the annual additions bear a small pro- 
 portion to the whole. It was estimated by the United States 
 Director of the Mint in 1919 that the world possessed in a form 
 available for monetary uses enough gold to coin ^7,600,000,000. 
 How much gold exists in other forms it is impossible to con- 
 jecture, but it does not concern the student of money, for, 
 economically speaking, it has been consumed; that is to say, 
 an industrial use has been made of it, whereby it has acquired 
 a value that will prevent it from being melted and used as 
 money. In the same way, if we were to estimate the amount 
 of iron in the country available for manufacture into steel 
 rails, we should leave out of account all iron which has been 
 converted into agricultural implements, hardware, and beams 
 for bridges and buildings. 
 
 The world's output of gold in 1919 was sufficient to coin about 
 ^365,000,000, but of this at least 20 per cent was absorbed by 
 the arts, so that about ^3 5 0,000,000 was added to the world's 
 monetary stock. This increase is equal to only 4 per cent of 
 the total stock and can produce no great or sudden change 
 
2o8 MONEY AND CURRENCY 
 
 in the value of an ounce of gold. So long as the world uses 
 gold as money no sudden change in the price level need be 
 feared, but we must expect from generation to generation 
 cycles of rising and falling prices. 
 
 Methods of mining Gold 
 
 142. Since most of the civilized nations of the earth are now 
 using gold as money, the outlook for its production in the future 
 is a matter of extraordinary interest. When gold is found 
 mixed with earthy matter, as in the beds of rivers or the sands 
 of Cape Nome, Alaska, it is called "placer" gold. Miners partly 
 detach the gold from the dirt by "panning" it, or by "sluicing" 
 it with running water, and then by adding quicksilver obtain an 
 amalgam from which the pure gold is easily separated. Most 
 of the gold now in use has been obtained in this manner. The 
 metal is also found embedded in rock, sometimes in a pure state, 
 sometimes in chemical combination, and in this form is known 
 as quartz gold. The quartz is crushed and the pure gold ex- 
 tracted with quicksilver. When gold is found, as it often is, in 
 chemical combination with sulphur, it is extracted by the use of 
 either chlorine or cyanide of potassium, for both of which the 
 metal has great affinity. The cyanide process has been employed 
 since about 1890, and has been partly responsible for the recent 
 great increase in the earth's outp^it of gold, for the waste under 
 this process is much less than under any other. Gold is some- 
 times found in such close association with other metals that it 
 can be extracted only by smelting. Electricity has of late been 
 found most serviceable both in mining the ore and in extracting 
 the metal from the crushed quartz. 
 
 In the past the business of gold mining was more a lottery 
 than an industry; the owner of a mine never knew when his 
 "pay dirt" would be exhausted; and it was impossible to fore- 
 tell the production. But the improved processes invented dur- 
 ing the last quarter of the nineteenth century are believed 
 by experts and special investigators to have converted gold 
 mining into a stable industry, the sources of supply and costs 
 
VALUK OF THE PRECIOUS METALS 209 
 
 of operation being well known. If this is the case, the world need 
 not fear any great scarcity of gold in the future, or any long period 
 of falling prices and industrial depression, for any increase in the 
 value of gold should promptly lead to an increase of the supply. 
 However, prophecy as to the production of the precious metals has 
 so often in the past been confounded by events that we need not 
 take our modern scientific prophets too seriously. 
 
 The greatest gold-producing countries in the world to-day are 
 the United States, Australia, and the Transvaal in South Africa. 
 In the year 19 19 the Transvaal produced ^172,000,000, the 
 United States $60,000,000, and Australia $22,000,000, — these 
 three countries producing 70 per cent of the world's total out- 
 put of $365,000,000. In the United States, California was the 
 largest producer, its output being $17,400,000; Colorado mined 
 $10,200,000, Nevada $4,600,000, Alaska $9,960,000, and South 
 Dakota $5,300,000. The output of the Klondike region in 
 Canada was $15,859,000. Mexico produced $15,000,000, thus 
 ranking fifth in order of productivity. The sixth in order was 
 British India with a production of $14,000,000. The produc- 
 tion of practically all gold-producing countries fell off materially 
 in 1918 and 1919. 
 
 Statistics of Production 
 
 143. The thirst for gold and silver, quite as much as the 
 desire to find a new route to the East Indies, was one of the 
 compelling motives that led to the discovery and exploration of 
 the American continent. It is estimated that at the end of the 
 fifteenth century the world's monetary stock of precious metals 
 had dwindled to $175,000,000. The value of both gold and 
 silver was high, and the prices of commodities correspondingly 
 low. William Jacob, an Englishman who made about 1830 a 
 careful study of the meager data available, estimated that during 
 the twenty-five years following 1492 the annual production from 
 America (mainly gold) averaged $250,000. The output of Old- 
 World mines at this time he puts at about $500,000 a year. 
 The accidental discovery of the Potosi silver mines in 1546, 
 
2IO MONEY AND CURRENCY 
 
 which was almost coincident with the invention of a process 
 for extracting silver from ores by the use of quicksilver, was 
 followed by what seemed a fabulous production, the annual 
 average production of silver from 1546 to 1600 being estimated 
 at over ;^ 10,000,000. 
 
 Throughout the seventeenth century the supply of silver 
 increased more rapidly than that of gold, but in the eighteenth 
 century, after the discovery of gold in Brazil, the production of 
 that metal increased at the greater pace. Jacob estimated that 
 in 1492 the Old-World production was at the ratio of eighty-nine 
 ounces of silver to eleven of gold. For the sixteenth century 
 the production ratio was 3.1 gold to 96.9 silver; for the seven- 
 teenth century, 2.3 to 97.7; and for the eighteenth, 3.2 to 96.8. 
 The coinage value of the gold mined during those three centu- 
 ries was about $2,371,000,000, and of the silver about twice 
 that sum, namely, $4,863,000,000.1 
 
 During the first half of the nineteenth century there was a 
 marked decline in the output of gold and silver. Between 1760 
 and 18 10 the annual production of both metals had amounted 
 to some $45,000,000, whereas during the twenty years after 
 1810 it amounted to only $28,000,000. Gold discoveries in 
 California in 1848 and in Australia in 1851 were followed by a 
 sudden and great increase in the output of gold during the 
 next twenty years, the production averaging $1 33,000,000 a year 
 between 1850 and i860, and $125,000,000 between i860 and 
 1870. The production of gold thereafter declined a little until 
 1889, averaging during the eighteen years following 1870 only 
 about $109,000,000 a year. 
 
 During the great outpour of gold between 1850 and 1870 
 the production of silver made little gain; for the decade follow- 
 ing 1850 it averaged only $37,000,000 per annum. But after 
 1870, while the production of gold was slightly declining, that 
 of silver increased, the annual output for the period 1871- 
 1880 being $92,000,000, and during the next decade $129,- 
 000,000. 
 
 1 These figures are Soetbeer's estimates. See Preston's Precious Metals of the 
 United States, 1894, p. 113. 
 
VALUE OF THE PRECIOUS METALS 
 
 21 I 
 
 The next great cycle of gold production began in 1889, when 
 large supplies first came from the Transvaal in South Africa. 
 Soon afterward Alaska and the Klondike began to surrender 
 their treasures, and the mines of California and Colorado and 
 Australia became more productive. In 1896 the production of 
 gold had reached $202,000,000; in 1899, g 3 06, 000, 000 ; and in 
 1904, $358,000,000. War checked production in the Transvaal 
 in 1898 and 1899, but the South African mines are now in 
 operation again, and an increasing production is predicted. Dur- 
 ing this period (i 889-1 904) the production of silver has made 
 little advance, the annual average being $212,000,000 (coinage 
 value). 
 
 The following table sums up the figures since 1492. 
 
 
 Gold 
 
 Silver 
 
 
 Total 
 
 Annual 
 Average 
 
 Total 
 
 Annual 
 Average 
 
 1 500-1800 . 
 
 $2,371,000,000 
 
 $7,900,000 
 
 $4,863,000,000 
 
 $16,210,000 
 
 I80I-I850 . 
 
 798,000,000 
 
 I 5,960,000 
 
 1,359,000,000 
 
 27,180,000 
 
 I85I-I870 
 
 i, 596,000,000 
 
 129,800,000 
 
 879,000,000 
 
 43,900,000 
 
 I87I-I890 
 
 2,211,000,000 
 
 110,500,000 
 
 2,218,000,000 
 
 110,900,000 
 
 I89I-I900 
 
 2,101,000,000 
 
 210,100,000 
 
 2,089,000,000 
 
 208,900,000 
 
 I90I-I905 
 
 1,613,099,000 
 
 322,620,000 
 
 1,086,030,900 
 
 217,206,200 
 
 I906-I9IO 
 
 2,167,265,000 
 
 433453.000 
 
 1,275,150,900 
 
 255,030,180 
 
 19II 
 
 461,542,000 
 
 
 291,346,400 
 
 
 I9I2 . 
 
 466,000,000 
 
 
 
 
 I9I3 . . . 
 
 455,000,000 
 
 
 
 
 The statistics of production are presented in the table on 
 page 213, in the first four columns of which the figures rep- 
 resent millions. That table gives the production both in fine 
 ounces and in coinage value, an ounce of gold being valued 
 at $20.67 ^i^d an ounce of silver at $1.2929. This method 
 of calculating the coinage value is inaccurate, for it implies 
 that the value ratio of the two metals was 16 to i, whereas 
 that ratio, as shown in the table, varied from loi to i in the 
 
2 12 MONEY AND CURRENCY 
 
 year 1500 to 40 to i in 1900. The reader must bear in mind 
 that the figures for the sixteenth, seventeenth, and eighteenth 
 centur-ies are mere estimates, no reliable data of production 
 having been preserved ; and also that during the nineteenth 
 century and at the present time, from 5 to 10 per cent of the 
 gold and silver mined escapes the eye of the statistician. The 
 value ratio between gold and silver, given in the last column, 
 is that which prevailed at the beginning of the respective 
 periods. 
 
 Prices vary with Output 
 
 144. Let us briefly examine the effects of increasing and 
 decreasing production upon the values of the two metals. Dur- 
 ing the next three centuries after the discovery of America 
 both metals were in common use as money, silver probably 
 having the preference. During the nineteenth century down 
 to 1870, although England adopted the gold standard in 18 16, 
 the monetary demand was applied about equally to both metals. 
 Prices, therefore, from 1492 to 1870 reflected the values of 
 both gold and silver. 
 
 The new supplies of the precious metals from America first 
 caused a rise of prices in Spain, the country into which the 
 greater portion was first taken. The exportation of the precious 
 metals from Spain was made a capital offense, yet gradually 
 they were distributed over Europe. General prices in Europe, 
 however, were not affected until 1570. Adam Smith, indeed, 
 estimated that prior to that date the value of silver, the 
 leading monetary metal or standard of the sixteenth century, 
 rose a little ; but thereafter its value declined steadily and 
 rapidly until the end of the seventeenth century, when general 
 prices appear to have been between 200 and 300 per cent 
 higher than in 1492.^ 
 
 During the eighteenth century there was no great change in 
 the price level, but in the first half of the nineteenth century 
 
 ' Thorold Rogers, in his Six Cinturies of Work and Wages, maintains that 
 general prices were not affected until the end of the sixteenth century. 
 
VALUE OF THE PRECIOUS METALS 
 
 213 
 
 PRODUCTION OF GOLD AND SILVER (1492-1911) 
 (Six ciphers omitted) 
 
 
 Gold 
 
 Silver 
 
 Percentage of Production 
 
 
 
 Fine 
 Ounces 
 
 Coinage 
 
 Value 
 
 (Dollars) 
 
 Fine 
 Ounces 
 
 Coinage 
 
 Value 
 (Dollars) 
 
 By Weight 
 
 By 
 Coinage Value 
 
 Commercial 
 Value Ratio 
 
 
 Gold 
 
 Silver 
 
 Gold 
 
 Silver 
 
 
 1 6th cent. 
 
 24 
 
 502 
 
 734 
 
 949 
 
 31 
 
 96.9 
 
 34 
 
 66 
 
 10.5 to I 
 
 17th cent. 
 
 29 
 
 606 
 
 1 197 
 
 1548 
 
 2-3 
 
 97-7 
 
 28 
 
 72 
 
 II.8 ' I 
 
 i8th cent. 
 
 61 
 
 1263 
 
 1834 
 
 2371 
 
 3-2 
 
 96.8 
 
 34 
 
 66 
 
 15 " I 
 
 Total 
 
 
 
 
 
 
 
 
 
 
 1 500-1800 
 
 114 
 
 2371 
 
 3765 
 
 4863 
 
 2.9 
 
 97.1 
 
 33 
 
 67 
 
 
 1801-1840 
 
 21 
 
 434 
 
 801 
 
 1035 
 
 2-5 
 
 97-5 
 
 29 
 
 71 
 
 15.3 to r 
 
 1841-1850 
 
 18 
 
 364 
 
 251 
 
 324 
 
 6.6 
 
 93-4 
 
 52-9 
 
 47.1 
 
 15.7 " I 
 
 1851-1860 
 
 65 
 
 1333 
 
 288 
 
 372 
 
 18 
 
 82 
 
 78 
 
 22 
 
 15.5 " I 
 
 1861-1870 
 
 61 
 
 1263 
 
 392 
 
 507 
 
 134 
 
 86.6 
 
 71 
 
 29 
 
 15.3 " I 
 
 1871-1880 
 
 56 
 
 II51 
 
 710 
 
 919 
 
 7-3 
 
 92.7 
 
 55 
 
 45 
 
 15.6 •• I 
 
 1881-18S5 
 
 24 
 
 496 
 
 460 
 
 595 
 
 5 
 
 95 
 
 45 
 
 55 
 
 18.2 ■' I 
 
 1886-1890 
 
 27 
 
 564 
 
 544 
 
 704 
 
 4-7 
 
 95-3 
 
 44 
 
 56 
 
 20.7 " I 
 
 1891-1895 
 
 .39 
 
 814 
 
 788 
 
 1018 
 
 4-7 
 
 95-3 
 
 44 
 
 56 
 
 27 " I 
 
 1896-1900 
 
 62 
 
 1286 
 
 828 
 
 1071 
 
 7 
 
 93 
 
 54.6 
 
 45-4 
 
 33-5° 
 
 Total 
 
 
 
 
 
 
 
 
 
 
 1801-1900 
 
 373 
 
 7706 
 
 5072 
 
 6547 
 
 5 
 
 95 
 
 46 
 
 54 
 
 
 1901-1905 
 
 78 
 
 1613 
 
 840 
 
 ' 1086 
 
 8.5 
 
 91.5 
 
 59.8 
 
 40.2 
 
 36.30 
 
 1906 
 
 19 
 
 403 
 
 165 
 
 213 
 
 10.5 
 
 89-5 
 
 65-3 
 
 34-7 
 
 30-54 
 
 1907 
 
 20 
 
 413 
 
 184 
 
 238 
 
 9.8 
 
 90.2 
 
 63-4 
 
 36.6 
 
 31-24 
 
 1908 
 
 21 
 
 442 
 
 203 
 
 263 
 
 9-5 
 
 90.5 
 
 62.8 
 
 37-2 
 
 38.64 
 
 1909 
 
 22 
 
 454 
 
 212 
 
 274 
 
 9.4 
 
 90.6 
 
 62.3 
 
 37-7 
 
 39-74 
 
 1910 
 
 22 
 
 455 
 
 222 
 
 287 
 
 9 
 
 91 
 
 61.4 
 
 38.6 
 
 38.22 
 
 1911 
 
 22 
 
 461 
 
 225 
 
 291 
 
 9 
 
 91 
 
 61.3 
 
 387 
 
 38-33 
 
 Total 
 
 
 
 
 
 
 
 
 
 
 1901-1911 
 
 204 
 
 4241 
 
 2051 
 
 2652 
 
 9 
 
 91 
 
 61.4 
 
 38.6 
 
 
 1492-1911 
 
 692 
 
 14,308 
 
 10,880 
 
 14,067 
 
 6 
 
 94 
 
 50.4 
 
 49.6 
 
 
214 MONEY AND CURRENCY 
 
 the per capita production of the metals declined and their value 
 rose, prices falling some 50 per cent between 18 10 and 1850. 
 The Australia and California discoveries led to a fall in the 
 value of gold, prices rising some 30 per cent between 1850 and 
 1870. During the ten years following 1870, for reasons dis- 
 cussed in the next two chapters, silver as a standard of prices 
 was discarded in favor of gold by the United States and the 
 leading countries of Europe. Thus an additional monetary 
 demand for gold was created at a time when its production was 
 slightly decreasing; its value accordingly advanced and prices 
 in all gold-standard countries tended downward until 1896, 
 when the price level was some 50 per cent lower than in 1870, 
 indicating that the purchasing power of an ounce of gold 
 had doubled. 
 
 In 1896 prices, particularly in Europe, began to show the 
 stimulating effect of the fresh gold from South Africa, and 
 since that date the tendency has been upward. The Economist 
 index number rose from ^6 in 1897 to loi in 1900, a rise of 
 17.4 per cent; during 1901 it declined to 89, but then moved 
 up again, standing at 100 at the end of 1903 and at 97 at the 
 end of 1904. The Sauerbeck number rose from 61 in 1896 to 
 75 in 1900, an increase of nearly 23 per cent ; and the number 
 prepared by the United States Department of Labor rose from 
 89.7 in 1897 to 1 10.5 in 1900, a rise of over 23 per cent. Dun's 
 index number, which is weighted according to the relative 
 importance of commodities as articles of consumption in the 
 United States, shows the remarkable advance of 43 per cent 
 in the seven years following 1897, the number rising from 72.455 
 in July, 1897, to 103.615 in March, 1904. 
 
 Thus we find that the movement of prices in the past, as 
 theory would lead us to expect, has been in great cycles, — 
 now a period of increasing production of gold and silver and 
 rising prices, and then a period of falling prices consequent upon 
 a diminished output of the precious metals. The nineteenth 
 century furnished four such periods, — falling prices from 1810 
 to 1850 and from 1870 to 1896, and rising prices from 1850 
 to 1870 and from 1896 to 1900. That the present upward 
 
VALUE OF THE PRECIOUS METALS 
 
 215 
 
 tendency of prices will be continued indefinitely cannot be 
 expected ; for the time must come, if prices continue their 
 upward course, when gold mines now profitable will be aban- 
 doned and the yearly increment to the world's stock of gold 
 will grow relatively less and less, until the value of the metal 
 will increase and prices again tend downward. When that 
 change will come we can only conjecture. If the opinions of 
 mining experts are well founded, it would seem that the rise of 
 prices in gold-standard countries is destined to continue dur- 
 ing the first quarter of the twentieth century, for it is said 
 that at the present level of prices a large part of the world's 
 output of gold is mined at a cost of much less than §20 per 
 
 1 Evidently if we only knew what profits were now being made in all the gold 
 mines of the world, it would be an easy matter to discover the marginal mines and 
 determine how the production of gold would be affected by any further uplift of 
 the general price level. If we should discover that most of the gold now taken 
 from the earth was got out at a cost of |Sio an ounce, we should have reason to 
 expect a continuation in the present large output, even though present prices 
 nearly doubled. Unfortunately we have not the figures necessary for such an 
 estimate. 
 
 The following is from a memorandum kindly furnished in July, 1905, by Hon. 
 George E. Roberts, United States Director of the Mint. 
 
 The most important gold field in the world is that of the Transvaal, South Africa, and 
 for that the data as to product and working costs is quite complete. The total output for the 
 calendar year 1904 was §78,130,728 produced by seventy-four companies operating in the 
 Rand and outlying districts. Their working profits, exclusive of the 10 per cent tax on 
 profits, are reported at §26,402,168. Of these companies only thirty-five paid dividends, 
 which in all amounted to §19,114,784.70. The difference between working profits and divi- 
 dends is the total of sums carried forward on various accounts, expenditures for enlarged 
 operations, interest, taxes, etc. The dividend-paying companies produced 70 per cent of the 
 total yield. The cost of production per ton of rock handled was practically the same as in 
 1898, but the profits per ton were reduced from §4.26 to §3.46, owing to a lower average grade 
 of ore. As the companies have been hampered since the war by a lack of skilled labor, it is 
 evident that working costs would have been reduced but for this fact, and better results may 
 be lobked for this year. 
 
 Another field in which a large production is made by comparatively few companies, 
 and for which statistics are available, is that of West Australia. Its output in 1904 was 
 §40,997,002. Sixty-seven West Australian companies are listed in London, but I am not 
 informed as to how many contributed to the yield. Only sixteen paid dividends, amounting 
 to §5,007,046, equal to about 12^ per cent of the yield. The tendency of costs is still down- 
 ward in this field. 
 
 In the United States there are so many producers in scattered fields with varying condi- 
 tions that it is difficult to obtain satisfactory figures. The Cripple Creek district is the most 
 important one. Its total 0\i^nih23hQQTi&sXuaa.i&Ahy t\i% Engineering and Mining Journal 
 
2i6 MONEY AND CURRENCY 
 
 LITERATURE 
 
 White, Money and Banking, Book I, chaps, iv and v ; L. L. Price, 
 Money and its Relation to Prices; Adam Smith, Wealth of Nations, 
 Book I, chap, ix ; William Jacob, An Historical Inquiry into the 
 Production and Consumption of the Precious Metals (London, 1831) ; 
 Adolph Soetbeer, Materialen (translated from the German by Professor 
 Taussig, United States Consular Report No. Sy') ; Jevons, Investigations j 
 S. Dana Horton, Silver and Gold (Cincinnati, 1877); A. Del Mar, A 
 History of the Precious Metals (London, 1880); annual reports of the 
 United States Director of the Mint. 
 
 and the Colorado Springs Mining Stock Association at ^139,000,000 to January i, 1905. 
 These figures include the estimates of the State Bureau of Mines since 1897, when they 
 became available. The Mining Investor of Colorado Springs gives the amount carried by 
 publicly announced dividends of incorporated companies as approximately ^^35, 000,000. It 
 says that the profits of individual operators and leasers would raise this materially. 
 
 The information I have goes to show that while some factors in the cost of mining have 
 felt the general influence of rising prices since i8g8, improvements in machinery, in metal- 
 lurgical processes, and in the organization of working forces have been going on, and up to 
 date have fully overcome the advancing tendency. In all important fields I think the tend- 
 ency on the whole, to this time, has been toward lower costs per ton of ore handled. 
 
CHAPTER XI 
 
 MONOMETALLISM vs. BIMETALLISM 
 
 145. Shall one metal or two metals be freely coined ? How can there be two 
 standards of prices ? 146. The transference of the money demand is the essential 
 feature of bimetallism. 147. The money demand for the metal does affect its value. 
 148. Bimetallism dependent on the uncertain production ratios of the precious 
 metals. 149. The argument that bimetallism will yield a more stable standard. 
 150. The advantage claimed for bimetallism because of a common par of ex- 
 change. 151. The argument for bimetallism based on the experience of France. 
 152. The monometallist's criticism of this argument. 153. Critics have failed to 
 take into account the effect of the French seigniorage. 154. The experience of the 
 United States with bimetallism does not prove that international bimetallism 
 would be a failure. 155. Examination of fluctuations in the market ratio of gold 
 and silver during the nineteenth century. 156. The facts indicate that the French 
 monetary demand exerted a powerful influence upon the values of the two metals. 
 
 157. The fall of the gold price of silver after 1 870 was due to the appreciation of gold. 
 
 158. The value of silver did not decline greatly until after 1890. 159. The uncon- 
 scious bimetallism which prevailed before the nineteenth century. 160. Monomet- 
 allism in England is the outcome of unscientific efforts to establish bimetallism. 
 
 145. Monometallism is a monetary system in which only 
 one metal has the right of free coinage. Bimetallism signifies 
 the free coinage of two metals at a fixed ratio, the coins 
 of either being legal tender as the debtor may elect. Coins of 
 other metals may also be struck, and may be legal tender, but 
 these are credit money, not standard money. In a bimetallic 
 system the monetary unit consists of a certain weight of one 
 metal or a certain larger quantity of another metal. For ex- 
 ample, the first definition of a dollar in the United States, as 
 set forth in the law of 1792, described the dollar as being either 
 371.25 grains of pure silver or 24.75 grains of pure gold. The 
 law, of course, provided for an admixture of alloy, but a dollar 
 as then defined meant two separate and distinct things. Bimet- 
 allism, therefore, names two standards of value or price and is 
 on that account sometimes called the joint or double standard. 
 
 217 
 
2i8 MONEY AND CURRENCY 
 
 But how can there be two standards of value or price? Would 
 not bimetallism necessarily yield two sets of prices, one repre- 
 senting the value of one metal, the other that of the other 
 metal ? Is it not as absurd to say that a dollar may mean two 
 things as it would be to say that a yard may mean 36 inches or 
 39 inches? How can a double monetary standard be more prac- 
 ticable than a double standard of length or of capacity? These 
 questions will at once occur to the reader. 
 
 As various countries have already tried bimetallism, in our 
 discussion of it we shall be able to supplement theory with 
 the results of practical experience. Indeed, mankind has had 
 more experience with the joint standard than with the single 
 standard. Not until the nineteenth century did any nation 
 definitely adopt the policy of monometallism. In 18 16 the Eng- 
 lish Parliament defined the pound sterling as being 1 13 grains of 
 pure gold, and that definition still holds. Prior to 18 16 a pound 
 sterling had signified either a certain amount of gold or a cer- 
 tain other amount of silver. The example of England was not 
 followed by other nations in Europe, nor by the United States, 
 until after 1870. Prior to this date, in most of the countries of 
 the world, payments could be effected in either gold or silver. 
 However, before we study the world's actual experience with 
 bimetallism, let us consider the theoretical possibility and the 
 laws which must govern the values of two metals when either 
 may be used as money. 
 
 146. The theory of bimetallism rests upon the following 
 hypothesis : When two metals are freely coined at a fixed 
 ratio, the coins of either being legal tender, the demand for 
 money will keep the values of the two metals at the mint ratio; 
 for if one tends to fall under that ratio, the total money demand 
 will be transferred to it, so that its value will rise while the 
 value of the other metal will decline. 
 
 By the expression "mint ratio" is meant the ratio between 
 the quantity of the two metals which constitutes respectively 
 the monetary unit. Thus in 1792, as the reader can discover 
 by dividing 371.25 by 24.75, ^ silver dollar was fifteen times 
 heavier than a gold dollar. The statute assumed that one ounce 
 
MONOMETALLISM vs. BIMETALLISM 219 
 
 of gold was worth as much as fifteen ounces of silver, and so 
 made the mint ratio 15 to i. 
 
 The theory of bimetallism declares that the money demand 
 will be applied to that metal which happens to be overestimated 
 in the ratio. For example, if in this country in 1792 fifteen 
 ounces of silver had been worth less than one ounce of gold, 
 men would naturally have sought to pay their debts by the use 
 of silver. Silver would have been the cheaper money metal, 
 the increased demand for it would have caused its value to 
 rise; at the same time the falling off in the demand for gold, 
 since it would not have been wanted for use as money, would 
 have caused its value to decline. 
 
 According to the theory of bimetallism, the metals could 
 never widely depart from the mint ratio, for any tendency of 
 the one to fall in value would be checked by the increased de- 
 mand ; and any tendency of either metal to rise would be checked 
 by the lessening use of it. Thus, according to the theory of 
 bimetallism, two metals, if admitted freely to the mint, must 
 preserve a value ratio corresponding closely to the mint ratio, 
 their fluctuations in value being so slight that they will not be 
 noticed by people in general, although they may yield some 
 profit to dealers in bullion. 
 
 If we grant the validity of the law of bimetallism, it should 
 be noted that it does not, strictly speaking, yield a double 
 standard of value, but an alternating standard. At one time 
 gold would be the price denominator; at another time silver. 
 However, if experience should prove that the value ratio of the 
 two metals did not fluctuate appreciably, but corresponded 
 practically with the mint or coinage ratio, both would be money 
 so far as the people in general are concerned, and the standard 
 would be a double one. 
 
 147. The soundness of the bimetallic theory depends upon 
 two circumstances: (i) Does the money demand for a metal 
 have any effect upon its value ? (2) Can the supply of either 
 metal be so increased that, in spite of the increased demand 
 for it for use as money, its value will continue below the mint 
 ratio ? One of these questions is theoretical, the other practical. 
 
2 20 MONEY AND CURRENCY 
 
 The theoretical question we have already considered in the 
 chapter on Metal Money. The free coinage of a metal into 
 money undoubtedly does increase the demand for it and so 
 tends to increase its value. The opponents of bimetallism have 
 shown a disposition to deny this proposition, but there is no 
 escape from it. The money demand on which the bimetallists 
 harp is a real demand and does tend to increase the value of 
 any metal to which it is applied. If the world should decide to 
 use fiat money made of paper, based in no way upon gold, the 
 value of gold would undoubtedly fall, for all the monetary stock 
 would be thrown upon the market for use in the arts. Mining 
 operations would be adjusted to the art demand, as nt)w to the 
 combined art and money demand ; less gold would be needed 
 each year than is now needed, and its value would not be great 
 enough to keep in operation many of the mines that are now 
 worked. Nor can it be doubted that if several nations should 
 decide to admit silver as well as gold freely to their mints, 
 the demand for silver would be greatly increased and a rise 
 in its value would inevitably follow. 
 
 148. We cannot give so positive an answer to the practical 
 question. During the past the mining of gold and silver has 
 been a most uncertain occupation. We know that the produc- 
 tion of these two metals follows the same law as the production 
 of other commodities, tending to increase as their value rises ; 
 but it is not within the power of man to foresee the limit of 
 that increase, for the amount of gold and silver which the earth 
 contains is a matter of conjecture. 
 
 In favor of bimetallism, however, the fact should be noted 
 that at no time in the past has the supply of either metal 
 increased with such rapidity that either could have taken the 
 place entirely of the other if universal bimetallism had pre- 
 vailed, or even if half a dozen of the leading nations of the earth 
 had continued on the bimetallic basis down to the present day. 
 While we can know nothing about future possibilities in the 
 production of gold and silver, yet the world's experience in 
 the past is certainly on the side of the bimetallist in so far as 
 this point is concerned. If there were any certainty that the 
 
MONOMETALLISM vs. BIMETALLISM 221 
 
 production of gold and silver in the future w^ould proceed on 
 lines resembling those of the past, we should be justified in 
 the conclusion that bimetallism is theoretically and practically 
 feasible if maintained at a given ratio by several powerful 
 nations. 
 
 Furthermore it should be noted that no serious ill effects 
 would follow an attempt at international bimetallism, even 
 though the supply of one metal should increase so rapidly as 
 to drive the other entirely out of use. If a number of power- 
 ful nations should decide to permit the free coinage of silver 
 and gold, either real bimetallism would ensue, the two metals 
 remaining at a value corresponding to the mint ratio, or one 
 metal would entirely disappear and monometallism result. The 
 bimetallist is convinced that the second result would not take 
 place, and the monometallist could not complain if it did. 
 
 Advantages of Bimetallism 
 
 149. Bimetallists claim for their policy two distinct advan- 
 tages over monometallism, — (i) that it will yield a more stable 
 standard of value, and (2) that it will give the world a common 
 par of exchange. 
 
 The argument that bimetallism will yield a more stable 
 standard of value than monometallism is based on the proba- 
 bility that two metals will not change in value in the same 
 direction and in the same degree at the same time. A dis- 
 covery of new gold mines may increase the output of gold and 
 so give its value a downward tendency, but gold and silver 
 production are not related and there is no reason why at the 
 same time there should be an increased output of silver. The 
 decline in the value of gold, therefore, would be retarded some- 
 what by the reluctance of silver to follow. Under such circum- 
 stances the money demand would be transferred from silver to 
 gold, so that gold could not fall in value without dragging silver 
 down with it. Therefore, a rise of prices resulting from the 
 increased supply of gold would not be so great as it would be 
 if gold alone were the money metal. 
 
2 22 MONEY AND CURRENCY 
 
 On the other hand, if the output of either metal fell off so 
 that its value tended to rise because of a lessened supply, its 
 rise would be checked by the transfer of the money demand 
 to the other metal. The shifting of the money demand from 
 one metal to the other would make changes in the demand 
 and supply relations of each metal and so affect the values of 
 both. Consequently a fall of prices caused by the lessened 
 production of either metal would not be so great as under a 
 monometallic system. 
 
 A fall of prices under bimetallism would lead to an increased 
 search for both metals, for both would have increased value ; 
 furthermore a fresh discovery of either metal would tend to 
 check a decline of prices. On the other hand, prices are no 
 more likely to rise under a bimetallic system than under a 
 monometallic, for a rise of prices would mean a fall in the 
 value of both metals ^nd would discourage the production of 
 both alike. 
 
 Theoretically, therefore, since stability of the standard is the 
 most important quality it can possess, the argument is in favor 
 of bimetallism. 
 
 150. If gold and silver bimetallism were successfully main- 
 tained by a number of countries, the exchange relation between 
 the two metals would be practically unchanging, and the pay- 
 ment of balances between countries upon different monome- 
 tallic standards would be simplified. At present the exchange 
 relations of gold and silver are constantly fluctuating. In coun- 
 tries using silver as money the price of gold is changing from day 
 to day ; and the same is true of the price of silver in countries 
 using gold as money. If a man in the United States wishes to 
 buy goods in China, he must do considerable figuring before 
 he can find out just how much gold he must give for goods 
 quoted to him in Chinese money. If he sells goods to China, 
 he will be paid in silver, and he must take into account the 
 possibility of a decline in the gold price of silver before the 
 transaction is completed. 
 
 Trade between countries having different money standards 
 is not, however, so much hampered by fluctuations' in relative 
 
MONOMETALLISM vs. BIMETALLISM 
 
 223 
 
 money values as is often asserted. The risks of loss are coun- 
 terbalanced by chances of profit, and both are now assumed 
 by bankers and other dealers in foreign exchange ; so that a 
 New York exporter, before he ships a consignment of goods to 
 China, knows exactly how much gold or New York funds he 
 will receive for his draft on the silver country. Stability of 
 relationship between the value of gold and silver, while it would 
 not greatly increase the trade between gold and silver countries, 
 would, nevertheless, reduce the expenses of that trade some- 
 what and remove some of the inconveniences attending it. 
 
 A par of exchange between gold and silver is desirable, how- 
 ever, less because of its convenience to business men and 
 traders than because of the stimulus it would give to the flow 
 of capital between countries having different standards. Capi- 
 tal seeks the best rate of profit and cares very little about 
 geographical or political boundary lines. But men do not like 
 to invest capital in a country with whose monetary standard 
 they are not familiar. In the United States, for example, capi- 
 talists shrink from investments in a silver-standard country. 
 Since 1873 the gold value of silver has declined 50 per cent, 
 and men are fearful lest the decline may continue and their 
 investments come back to them in a " depreciated " money. 
 This fear, which discourages the investment of American capi- 
 tal in the countries of Central and South America, would 
 not exist if the exchange relation between gold and silver 
 were stable. 
 
 Furthermore the experience of countries on a silver basis 
 during the last twenty years has not been such as to encourage 
 in them a disposition to borrow from countries on a gold basis. 
 Under the English administration of India several hundred mil- 
 lion pounds sterling have been borrowed by the Indian gov- 
 ernment for internal improvements, so that for some thirty 
 years India has been obliged to send to England each year 
 the equivalent of ;£■ 16,000,000 in gold in payment of interest. 
 Until 1893 India was on the silver basis. As the gold price 
 of silver fell in England the silver price of gold rose corre- 
 spondingly in India, becoming in 1893 double what it was in 
 
2 24 MONEY AND CURRENCY 
 
 1873. India's remittance to England, consequently, represented 
 twice as much silver in 1893 as in 1873. Since silver was the 
 money of India, the debt to England called for twice as much 
 money and necessitated the imposition of higher money taxes. 
 It was comnvonly assumed in England that the value of silver 
 had fallen ; but to the people of India it seemed that the 
 value of gold had risen. Whatever caused the variations in 
 the value relations between gold and silver, these variations 
 made India's position as a debtor more difficult and tended to 
 discourage the negotiation of loans payable in gold. 
 
 The demand for indemnity from China by European nations 
 on account of the " Boxer " outrages is a more recent illustra- 
 tion of the disadvantage of a lack of parity between silver and 
 gold. Very soon after China had agreed upon the sum of 
 money to be paid, the gold value of silver fell and the amount 
 of silver necessary to make the payment in gold grew larger. 
 The Chinese government, since that country is on a silver 
 basis, estimated the amount of the indemnity in the money 
 of China, and naturally objected to the sum being increased 
 by what seemed to the Chinese mind a change in the value 
 of gold. 
 
 French Experience with Bimetallism 
 
 151. In favor of bimetallism it is urged that experience has 
 proved it practicable. The bimetallist points to the experience 
 of France with bimetallism from 1803 to 1873, and to the fact 
 that during that entire period the market values of gold and 
 silver, despite great disparity in their relative production, were 
 always near the ratio set by the French law of 1803, which 
 provided for the free coinage of gold and silver at 15.5 to i. A 
 kilogram of pure gold was coined into 3100 francs, of which 
 the government retained a seigniorage of nine francs before 1854, 
 and of six francs for some years thereafter ; a kilogram of silver 
 was coined into 200 francs, the government keeping as seignior- 
 age three francs until 1854, and thereafter one and a half francs. 
 For seventy years France coined all the gold and silver bullion 
 
MONOMETALLISM vs. BIMETALLISM 225 
 
 that was presented to its mint, and coins of both metals during 
 most of this period were in concurrent circulation. The market 
 values of the two metals did not always correspond with the 
 French mint ratio, but the variations were not great enough at 
 any time to cause France to lose all of its gold or all of its 
 silver. After 1864 France was in league v/ith several smaller 
 nations in Europe, for most of whom the French mint furnished 
 coins of gold and silver. This league, known as the Latin 
 Union, embraced France, Italy, Greece, Belgium, and Switzer- 
 land, and the money demand of these nations was applied with 
 equal force to both gold and silver. The nations now consti- 
 tuting the German empire in Europe were upon a silver basis, 
 so that all the German demand was applied to the white metal. 
 The money demand, however, of England and Portugal bore 
 upon gold. The French money demand acted as a sort of bal- 
 ance in Europe, bearing heaviest upon that metal which showed 
 a tendency to fall in value below the coinage ratio. 
 
 The bimetallist claims that the close correspondence of the 
 market ratio with the French coinage ratio was not fortuitous, 
 but was due to the fact that the money demand for the two 
 metals was kept in equilibrium by the bimetallic law of France. 
 Even after the great influx of gold from California and Aus- 
 tralia in the fifties, the market ratios between the two metals 
 fluctuated very little. In the year 1800 the earth was pro- 
 ducing fifty ounces of silver to every ounce of gold ; between 
 1852 and 1858 it produced only five ounces of silver for every 
 ounce of gold. Despite this great change in the product-ion 
 ratio, the value ratio of the two metals was only slightly affected. 
 The increased supply of gold after 1850 undoubtedly tended to 
 lessen its value, and for ten years the French mint was busily 
 coining the yellow metal ; large quantities of gold were imported 
 into France, and large quantities of silver were exported to 
 India and the East. Between 1850 and 1865 there happened 
 in France exactly what the theory of bimetallism would lead us 
 to expect, namely, an increased coinage of the cheaper money 
 metal, gold, and a lesser use of the other. However, France 
 did not lose all of her silver even under this great strain ; and 
 
226 MONEY AND CURRENCY 
 
 the two metals of the world retained during this period a value 
 ratio remarkably close to the ratio established by the law of 
 France. 
 
 152. The monometallist meets this argument from French 
 experience in various ways. He first makes an absolute denial 
 of the contention that the so-called "mint demand" has any 
 effect whatever on the value of the metal. No mint, he says, 
 can add the slightest value to any metal ; a mint merely puts 
 a stamp upon a coin to signify the quantity of metal it con- 
 tains, but if a coin is hammered on an anvil its value is not 
 lessened. This is true, but it does not prove that the value of 
 a metal is not due partly to the fact that the mint is open to 
 its coinage. Free coinage makes the value of the metal uncoined 
 practically the same as when coined, and so tends to cause an 
 increased demand for it, thereby increasing its value. A mint 
 does not add value to the metal, but the demand for it, grow- 
 ing out of the fact that it can be freely minted into money, does 
 give it a value which it otherwise would not possess. 
 
 The monometallist holds, furthermore, that the steadiness of 
 the value ratio of gold and silver between 1800 and 1870 was 
 due not to the French law but to the fact that there was very 
 little addition to the world's stock of either metal during that 
 period, and very little change in the market demand for either. 
 According to his view, it was a mere coincidence that the values 
 of the two metals remained comparatively stable. The mono- 
 metallist also points out that between 1803 and 1873 the mar- 
 ket ratio seldom, if ever, exactly corresponded with the French 
 coinage ratio. During the greater part of the period the market 
 ratio was higher than 15.5 to i, silver being slightly overvalued ; 
 but after 1850, on account of the cheapening of gold, the ratio 
 fell below 15.5 to i. 
 
 153. This lack of exact agreement between the market ratio 
 and the French coinage ratio is regarded by some writers as a 
 complete refutation of the bimetallic theory. The monometal- 
 list, however, fails to take into consideration a circumstance 
 which tended to keep the market ratio of gold and silver always 
 a little different from the French coinage ratio, namely, the 
 
MONOMETALLISM vs. BIMETALLISM 227 
 
 seigniorage exacted on French coins. Since a man who took a 
 kilogram of gold to the mint before 1854 received only 3091 
 francs, the government retaining nine francs as a tax, it is evi- 
 dent that the mint price of gold bullion in France could have 
 been only 3091 francs. No man in France could exchange a 
 kilogram of gold bullion for more than this sum of money unless 
 extraordinary scarcity of the metal caused a great increase in 
 the demand for it. A kilogram of silver bullion was coined into 
 200 francs, but since the government retained three francs, the 
 mint price was only 197 francs. The French mint, therefore, 
 should have forced not a ratio of 15.5 to i between gold and 
 silver bullion but a ratio of 197 to 3091, i.e. i to 15.69. This 
 is the ratio which the market values of gold and silver bullion 
 should have borne in France if the bimetallic law were the 
 all-important factor in establishing their value. The ratio of 
 15.5 to I was the coinage ratio; the ratio of 15.69 to i, on 
 account of the seigniorage charges, was the corresponding bul- 
 lion ratio. Curiously enough, the market ratio of gold bullion, 
 during the greater part of the period when bimetallism was in 
 force in France, hovered about this point. The fact, there- 
 fore, that it seldom stood at 15.5 to i favors the argument of 
 the bimetallist.i 
 
 Bimetallism in the United States 
 
 154. The experience of the United States between 1792 and 
 1873, when this country was legally upon a bimetallic basis, is 
 frequently cited as evidence that bimetallism is impracticable. 
 In 1792, following the recommendation of Alexander Hamilton, 
 
 1 It is worth noting that the seigniorage charges upon gold and silver rendered 
 possible comparatively wide fluctuations in value before any profit could arise 
 from the melting of coins of either metal. Since silver coins were normally 1.5 per 
 cent more valuable than silver bullion, the latter could increase 1.5 per cent in 
 value with respect to gold before the melting of silver coins for export in exchange 
 for gold would become profitable. Nor would any gold coins be exported unless 
 a kilogram of gold were worth more than 3100 francs. Thus there was possible 
 under the French law a fluctuation of the market ratio between 15.45 to i and 
 15.74 to I without any danger that the coins of either metal would be withdrawn 
 from circulation. 
 
228 MONEY AND CURRENCY 
 
 the first Secretary of the Treasury, Congress authorized the free 
 coinage of gold and silver at the ratio of 15 to i. It was soon 
 discovered, however, that gold was worth more than fifteen 
 times as much as silver. In 1803 the French law authorized 
 the coinage of the two metals at 15.5 to i. Since the French 
 law estimated gold more highly than did the law of the United 
 States, gold as money was more highly valued in France than 
 here, its coinage value with respect to silver being greater. So 
 gold was attracted from the United States to France and to 
 the rest of Europe, where the market ratio more nearly corre- 
 sponded with the French coinage ratio. The United States, as a 
 result, was unable to keep its new gold money in circulation. 
 The only gold coins that remained here were those of foreign 
 nations, which were so worn that they were worth less as bul- 
 lion than as coin. This attempt of the United States to main- 
 tain bimetallism, therefore, was a failure, but the bimetallist 
 can contend on good grounds that its failure was due to the 
 strength of bimetallism in France, and that it illustrates the 
 force of the bimetallic law rather than its weakness. It might 
 be argued that if the money demand of the United States had 
 been greater than that of France and the rest of Europe, our 
 bimetallic law of 1792 would have established the value relation 
 between the two metals and have drawn to this country as much 
 of both metals as was required. 
 
 In 1834 the coinage law of the United States was changed, 
 the gold dollar being debased some 7 per cent. The new 
 ratio of 16 to i, which was thus adopted, underestimated silver. 
 It then became more profitable to have gold coined in the 
 United States than to export it to Europe, but the coinage 
 of silver in this country became unprofitable, for it possessed 
 a higher purchasing power in France with respect to gold than 
 in the United States. After 1834, therefore, our silver was 
 exported to the Old World and we kept in circulation only 
 clipped and debased silver coins. 
 
 The failure of the United States to maintain bimetallism at 
 either of the ratios adopted cannot fairly be cited as an illustra- 
 tion of the impotence of the so-called law of bimetallism. The 
 
MONOMETALLISM vs. BIMETALLISM 229 
 
 United States has had no real experience with the law. It was 
 impossible that this country and France should both maintain 
 bimetallism upon different ratios at the same time; success in 
 France made failure here absolutely certain. If the money 
 demand of this country had been equal to the money demand 
 of France, i.e. if the same amount of metal had been required 
 in each country, the coinage of France would have been mainly 
 gold and the coinage of the United States mainly silver during 
 the first period; after 1834 the situation would have been 
 reversed. If the bimetallic law in this country had provided 
 for the same ratio that prevailed in France, there seems no 
 reason for doubting that bimetallism would actually have pre- 
 vailed in this country, or that the coins of both metals would 
 have been in concurrent circulation. 
 
 Relative Values of Gold and Silver 
 
 155. Chart I on page 230 presents graphically the value rela- 
 tion maintained between gold and silver throughout the nine- 
 teenth century. An upward movement of the chained line 
 indicates a rise in the value of silver with respect to gold, and 
 a downward movement a decline in the relative value of silver. 
 The figures at the left indicate the gold price of silver in the 
 United States at the coinage ratio of 16 to i, and the value 
 ratios of the two metals. The dotted line at 15.69 marks the 
 ratio at which the French law tended to hold the two metals. 
 As the French seigniorage charges were reduced in 1854 from 
 nine to six francs per kilogram of gold, and from three to one 
 and a half francs per kilogram of silver, the bullion ratio corre- 
 sponding to the coinage ratio after that year was 15.59. The 
 heavy black line and the heavy dotted line show respectively 
 the production of gold and silver throughout the century. 
 
 It is impossible for an unprejudiced person, it would seem, 
 to consider the facts represented graphically on this chart 
 without coming to the conclusion that between 1800 and 1870 
 some extraordinary force was at work upon the values of gold 
 and silver, tending to hold them at a fixed relation, and that 
 
230 
 
 MONEY AND CURRENCY 
 
 t06I 
 
 --^ 
 
 
 J_ 
 
 
 
 \ 
 
 
 
 
 
 
 
 
 0061 
 
 g 
 
 
 1 , 
 
 ~— . 
 
 
 < 
 
 
 
 
 
 
 
 
 0691 
 
 S 
 
 
 J 
 
 
 
 1 
 
 ?^=^ 
 
 
 ,1----' 
 
 ! - 
 
 
 
 
 
 
 ! § 
 
 
 g 
 
 «= 
 
 
 
 1- 
 
 ll-l 
 
 
 ^ 
 
 J-* 
 
 "^ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 » 
 
 
 ,-•- 
 
 
 r-* 
 
 '^ir 
 
 1 
 
 
 
 0881 
 
 
 
 
 
 
 
 V 
 
 o 
 
 
 , r 
 
 
 
 
 
 
 
 
 
 
 
 
 o 
 
 
 i_ 
 
 ■ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 '-t 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 c 
 
 
 
 i r 
 
 
 
 OiSI 
 
 
 1 
 
 k* 
 
 
 
 
 
 5 
 
 
 J-". 
 
 
 ■i-, 
 
 
 
 
 
 
 
 
 
 
 
 
 e 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 J 
 
 
 
 
 
 
 
 
 h " 
 
 
 
 '! 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 4 
 
 
 
 
 
 
 
 
 * 
 
 
 
 1 
 
 0981 
 
 
 i 
 
 
 
 
 1 
 
 
 
 
 
 
 -^ 
 
 
 
 
 
 \ 
 
 i 
 
 
 
 
 
 
 
 
 o 
 
 
 
 
 
 1 
 
 
 
 
 ■3 
 
 
 
 
 
 
 s 
 
 
 
 
 
 i^ 
 
 ij 
 
 
 
 ? 
 
 
 
 
 
 
 ^ 
 
 
 
 0S8I 
 
 
 < 
 
 
 
 
 la 
 
 
 
 
 
 
 
 
 
 
 
 
 V 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 i> 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 K 
 
 
 
 > 3 <= 
 
 
 
 
 
 
 
 
 
 0t>81 
 
 
 
 l! 
 
 
 
 W= fe 
 
 
 
 
 
 
 
 
 
 
 
 
 ^ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 s 
 
 \ 
 
 
 
 °<s « 
 
 
 
 
 
 
 
 
 
 
 
 1* 
 
 
 
 »^ — 
 
 
 
 
 
 
 
 
 
 
 
 
 «( 
 
 
 
 ^S4S 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 0G8I 
 
 
 
 1 
 
 
 
 
 r»I- t- 
 
 
 
 
 
 
 
 
 
 
 • 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 ' 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 0881 
 
 
 
 
 
 
 
 
 ! 
 
 
 
 
 
 
 
 
 
 0I8I 
 
 
 < 
 
 < 
 
 ■» 
 
 
 
 
 
 
 
 
 
 
 1 ** 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 » 
 
 y 
 
 8 
 
 
 i 
 
 5 
 
 
 s 
 
 
 o 
 
 
 
 
 
 
 '1 
 
 3 
 
 
 rj 
 
 00 
 
 
 £■ 
 
 
 s 
 
 
 
 
 0081 
 
 
 ^ 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 |g 
 
 r^ 
 
 
 g 
 
 
 a 
 
 ? 
 
 
 00 
 
 
 R 
 
 
 ? 
 
 
 
 ". 
 
 
 K 
 
 
 
 
 
 =1 
 
 
 
 
 
 5 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 a-s 
 
 « 
 
 
 
 
 » 
 
 »► 
 
 
 9 
 
 1 
 
 «: 
 
 
 « 
 
 t» 
 
 
MONOMETALLISM vs. BIMETALLISM 231 
 
 this force ceased to operate after 1870. Throughout most of 
 the first period the value ratio fluctuated betwreen 15 to i and 
 16 to I. Between 1820 and 1850 it was pretty constantly a 
 little above 1 5.69, the bullion ratio corresponding to the French 
 coinage ratio, a fact indicating that the total demand for gold 
 (including the monetary demand of France) was a trifle greater, 
 in proportion to supply, than the total demand for silver. 
 
 The production of silver between 1800 and 1850, although 
 not large, considerably exceeded that of gold. We should nat- 
 urally expect, therefore, that silver would tend to be relatively 
 the cheaper metal, and that under a bimetallic system the larger 
 monetary use would be made of it. The statistics of the French 
 mint (see table on page 232) show that during this period the 
 coinage of silver amounted to ^855,600,000, and of gold to only 
 ^267,200,000, and that no year passed without the coinage of 
 both metals. Even during the three years when the ratio was a 
 fraction above i6toi(i8o8, 1812, and 1813) the coinage of gold 
 fell off but little, — a fact explicable undoubtedly by the seignior- 
 age charges, which made French coins more valuable than bul- 
 lion. The view of some writers that the statistics of coinage in 
 France " do not always tell the story of the operation of the 
 compensatory law " of bimetallism,^ because the coins might 
 have been hoarded or sold upon the bullion market, is errone- 
 ous, for French coins throughout this period were usually worth 
 more as money than as bullion and were not sold upon the 
 bullion market. 
 
 The decline in the relative value of silver after 18 16, when 
 the ra^io moved toward 16 to i, undoubtedly reflects an increase 
 in the value of gold consequent upon England's adoption of 
 the gold standard, which caused a heavy drain upon the world's 
 stock of gold. 
 
 After 1850, for twenty years, silver was relatively the dearer 
 metal, and when one notes the great change in the relative 
 production of the two metals, one can only marvel at the com- 
 parative stability of their value ratio. Between 1800 and 1850 
 the production ratio ranged between 1.9 to 98.1 and 6.6 to 93.4, 
 
 1 W. A. Scott, Money and Banking, p. 326. 
 
232 
 
 MONEY AND CURRENCY 
 
 the average for the first forty years of the century being 2.5 to 
 97.5, while between 1850 and i860 it averaged 18.3 to 81.7, 
 and during the next decade 13.5 to 86.5. Despite the great 
 outpour of gold, its value with respect to silver declined but 
 little, the ratio never falling to 15 to i. 
 
 156. The cause of this wonderful stability in the value ratio 
 of gold and silver we find in the French statistics of coinage. 
 The following table gives in dollars the coinage of the French 
 mint by decades, 1803 to 1870.^ 
 
 COINAGE OF THE FRENCH MINT 
 
 • 
 
 Gold 
 
 Silver 
 
 I 803-18 10 
 
 I8II-I820 
 
 I82I-I830 
 
 1831-1840 
 
 I84I-IS50 
 
 ;?43,8oo,ooo 
 
 131,000,000 
 
 19,000,000 
 
 35,200,000 
 
 38,200,000 
 
 #63,200,000 
 I 54,800,000 
 213,800,000 
 240,400,000 
 183,400,000 
 
 Total, 1803-1850 .... 
 
 #267,200,000 
 
 #855,600,000 
 
 1851-1860 
 
 1861-1870 
 
 #856,600,000 
 430,200,000 
 
 #52,200,000 
 89,400,000 
 
 Total, 1851-1870 .... 
 
 #1,286,800,000 
 
 #141,600,000 
 
 During the first half of the century, it will be noticed, the 
 coinage of silver was more than three times that of gold. This 
 fact is sometimes cited by zealous monometallists as evidence 
 that the bimetallic law was not operative and did not influence 
 the values of the two metals. Silver, it is said, was overvalued ; 
 the French coinage ratio was not the market ratio, and hence, 
 
 1 Dr. Pierson, the Dutch economist, comments on these coinage statistics as 
 follows: "From 1803 to 1820 there were nine years in which the ratio was 
 greater and nine years in which it was less than 15.5; one would, therefore, 
 expect that the quantities of both kinds of coin minted would be about equal ; 
 and so they were. . . . From 1821 to 1847 gold was constantly getting dearer; 
 the bulk of the money coined during that period should therefore have consisted 
 of silver; and so it did." — Economics, p. 417. 
 
MONOMETALLISM vs. BIMETALLISM 233 
 
 in obedience to Gresham's law, gold flowed away from France 
 and cheap silver crowded into its place. That seems a one- 
 sided view of the matter. The true explanation is that gold 
 between 1800 and 1850, for reasons already noted, tended to 
 rise in value with respect to silver, but the French monetary 
 demand, being applied mainly to silver, checked that tendency 
 and held the value ratio close to the coinage ratio. The market 
 values of the two metals, instead of being independent of the 
 French monetary demand, as is often tacitly assumed, were 
 largely the product of that demand. As a principle operative 
 at this time, Gresham's law was subordinate to the law of 
 bimetallism. 
 
 This conclusion is confirmed by the events of 1851-1870. 
 During this period gold tended downward in value, but the 
 bimetallic law operating in France would not suffer it to decline 
 except as it dragged silver with it. The coinage of silver, 
 except for small change, almost ceased in France, the entire 
 monetary demand of that country bearing upon the yellow 
 metal, the coinage of which amounted during this period to 
 $1,286,800,000. As a result, the market values of the two 
 metals fluctuated but little with respect to each other. The net 
 exports of silver from France between 1850 and 1870 equaled 
 ;$34S, 000,000, and the net imports of gold $1,073,200,000. The 
 people began to suffer inconvenience from lack of silver coins, 
 and France would doubtless have been forced to debase its 
 subsidiary silver coins, as did the United States in 1853, ^ had 
 the large production of gold continued a few years longer. 
 
 In so far as facts can establish any principle governing human 
 affairs, the French experience with bimetallism seems to estab- 
 lish the law of bimetallism and demonstrate the practicability 
 of the joint standard. It also proves, however, that bimetallism 
 cannot be successfully maintained by a small group of nations, 
 their monetary demand not being sufficient to offset the demand 
 of other nations or to absorb without inconvenience all the 
 stock of either metal that may be offered. 
 
 1 See Chapter XVI, Section 234. 
 
234 
 
 MONEY AND CURRENCY 
 
 Fall of Silver after 1870 
 
 157. Turning again to the chart on page 230, how shall we 
 account for the great and rapid decline in the gold value of 
 silver after 1870? This question has been during the last 
 twenty years the cause of a controversy almost as hot as that 
 waged over slavery before the Civil War ; and even now, although 
 the battle has ended in irretrievable defeat for one set of dis- 
 putants, it is doubtful if an impartial review can be written or 
 if such a review would receive unprejudiced hearing. In this 
 and the next chapter the reader will find a statement of the facts 
 involved and a brief examination of the arguments employed on 
 both sides. 
 
 According to the monometallist, the ardent advocate of the 
 single gold standard, the fall in the gold price of silver after 
 1870 represented a fall in the value of silver due to increased 
 production and lowered cost. To the retort that the decline 
 began before the world's stock of silver had been greatly 
 increased, the output of gold being still much greater than that 
 of silver, the monometallist has usually replied that the value of 
 silver fell because of an anticipated increase of the supply, 
 transcontinental railroads in the United States having made 
 many new mines accessible. 
 
 By the bimetallist the fall of silver was explained by a single 
 word, "demonetization." In 1871 the new German empire sus- 
 pended the free coinage of silver, taking as its monetary unit 
 the mark of 5.53 grains of gold. France and her allies of the 
 Latin Union, fearing lest they should be flooded with Germany's 
 silver, as they had been between 1850 and 1870 with Australian 
 and Californian gold, suspended the free coinage of silver in 
 1874, their standard of prices thereby becoming the gold franc 
 of .2903 grams (4.4799 grains). In 1873 Holland suspended 
 the free coinage of silver, which had been her standard since 
 1847, and in 1875 definitely adopted the gold standard, the unit 
 being the gulden of 9.332 grains of gold. In 1873 the United 
 States, although then on a paper basis, passed from legal bimet- 
 allism to legal monometallism, the right of free coinage being 
 
MONOMETALLISM vs. BIMETALLISM 
 
 235 
 
 withdrawn from silver; and in 1875 a law of Congress ordered 
 the resumption in 1879 of specie payments, "specie" meaning 
 gold. Spain adopted the gold standard in 1874, and Sweden, 
 Norway, and Denmark in 1875. The transference of the mone- 
 tary demand of all these countries from silver to gold, the 
 bimetallists hold, accounted for the fall in the gold price of 
 silver ; it increased the demand for gold and lessened the de- 
 mand for silver, and corresponding changes of value resulted. 
 
 That the fall of silver from $1.30 per fine ounce in 1873 to 
 ;$i.i5 in 1880 was caused by the disuse of silver as standard 
 money, i.e. by its demonetization, will probably be admitted 
 now by many persons who denied it a few years ago in the heat 
 of political controversy. The contention that silver was not 
 demonetized because all these nations continued to coin silver 
 is not sound. Silver is not standard money unless it is freely 
 coined ; when coined on government account or when the coin- 
 age is restricted, silver coins are mere token or credit money, 
 ranking in the same class with coins of copper and nickel. 
 
 The notion that silver began to fall in value because of low- 
 ered cost of production, or because of an anticipated increase 
 of supply, must be rejected. So long as a metal is freely coined 
 into money only actual changes in its supply can cause its value 
 to fall. An increasing supply, by leading to a rise of prices, 
 may cause an expansion of credit and so bring about a fall 
 of value out of proportion to the increase, but before this can 
 happen there must have been an actual increase. 
 
 Between 1880 and 1889 the gold price of silver fell from 
 ;^I.I5 to ^.935 per ounce. ^ This decline undoubtedly repre- 
 sented, not a fall in the value of silver, but a rise in the value 
 of gold, due to what has been called the "scramble for gold" by 
 the nations of Europe. During this period Italy, Austria, and 
 
 1 When the value ratio of gold is 16 to i the gold price of silver is $1.2929 4- per 
 ounce ; that sum being one sixteenth of $20.67, the .sum into which an ounce of 
 pure gold is coined. If the ratio rises to 17 to 1, the gold price of an ounce of 
 silver is found by dividing 20.67 liy i? ; a-nd so on. Taking silver as the base, we 
 reach the same result as follows: since 371.25 grains of pure silver are coined into 
 $1.00, an ounce of silver (480 grains) can be coined into 480 divided by 371.25, 
 or $1.2929 -I-. 
 
236 MONEY AND CURRENCY 
 
 Russia, which had been for many years on a paper or fiat basis, 
 began preparing for the adoption of the gold standard, and pur- 
 chased several hundred million dollars' worth of gold. European 
 nations already on the gold standard added to their stocks of gold, 
 and the United States increased its stock from ^352,000,000 in 
 1880 to ;^68o,ooo,ooo in 1889 (^26,000,000 less than in 1888). 
 The monetary demand of Europe and the United States increased 
 more rapidly during the period 1 880-1 890 than ever before 
 because of the expansion of trade and industry made possible 
 by the construction of great railway systems during that and 
 the preceding decade. That the supply of gold, the production 
 of which was declining, did not keep pace with the increasing 
 demand for it, and that its value rose in consequence, is demon- 
 strated by the downward trend of prices in all gold-standard 
 countries, beginning in, 1873 and continuing until 1896. 
 
 158. During the decade 1890-1900 the demand for silver 
 twice received artificial interference. In 1878 the United States 
 began the coinage of two million dollars' worth of silver per 
 month under the provisions of the Bland- Allison law; in 1890 
 the law was changed, the monthly purchases of silver being 
 increased to 4,500,000 ounces (coinage value, ^5,818,000). 
 It was generally supposed that the law of 1890, under which 
 the government would absorb nearly all the silver output of the 
 United States, would permanently raise the value of that metal. 
 The result was disappointing. The gold price of silver rose for 
 a few months in 1890, but soon began to decline, and in 1892 
 stood at 87 cents as against 93 cents in 1889.^ The second artifi- 
 cial cause affecting the value of silver after 1890 was the suspen- 
 sion of its coinage by India in 1893. In the same year the 
 United States ceased to purchase silver, the act of 1890 being 
 repealed. The effect on the gold price of silver was great and 
 immediate, the price falling from 78 cents in 1893 to 63 in 
 1894. In 1902 the gold price of silver had fallen to 52 cents 
 per ounce. By 1906 the price had risen again to 6^ cents ; the 
 average for 19 14 was 55 cents. 
 
 ' The silver legislation of 1878 and 1890 is considered in more detail in 
 Chapter XVI. 
 
MONOMETALLISM vs. BIMETALLISM 237 
 
 Unconscious Bimetallism before 1800 
 
 159. Prior to the nineteenth century what might be called 
 unconscious bimetallism prevailed in most of the countries of 
 the world. Silver and gold were both regarded as precious 
 metals, and either was employed for coinage purposes according 
 to the whim or convenience of sovereigns. It was imperfect 
 bimetallism, for trade in the precious metals was greatly restricted 
 by law, and their coinage was not free, as at present. Not until 
 1666 did English law grant the right of free and gratuitous coin- 
 age to the people ; previously it had been a prerogative of the 
 sovereign. Coins were frequently worth more than the metal of 
 which they were composed, yet there was constant tendency 
 toward equivalence of value, for the coins of one country, as a 
 rule, were current in other countries, so that the supply of money 
 was in the long run regulated by the value of the metals. 
 
 Great looseness of ideas prevailed with respect to the nature 
 and value of money. Prior to the nineteenth century the com- 
 pensatory action of the law of bimetallism does not appear to 
 have been understood or even discussed ; nor was there any ap- 
 preciation of the fact that the value of the precious metals was 
 affected by their use as money. The simple principle known 
 as Gresham's law, which explains only certain phenomena of 
 bimetallism, seems to have been the only bimetallic principle 
 that had been grasped by students or finance ministers. ^There 
 was no recognition of the necessity for a common ratio for the 
 coinage of gold and silver, and consequently two neighboring 
 states would coin the metals at different ratios and then attempt 
 by law to keep both metals in circulation. Frequent debasement 
 of the coinage by the petty rulers of Europe, who in this way 
 robbed their people, added to the confusion. 
 
 160. England's monetary evolution furnishes a good illustra- 
 tion of unconscious cerebration in finance. The law definitely 
 establishing bimetallism in 1666 fixed a ratio which undervalued 
 silver as compared with the ratios prevailing upon the conti- 
 nent. England was therefore unable to keep any of her new 
 silver coins in circulation. In spite of a law providing capital 
 
238 MONEY AND CURRENCY 
 
 punishment for any person melting or. exporting coins, all the 
 new silver was sent across the Channel. The hardship suffered 
 by the shopkeepers and people of England generally on account 
 of the scarcity of small change is picturesquely described in 
 chap, xxi of Macaulay's History of England. In 1696 Par- 
 liament sought to remedy the monetary evils by a recoinage. 
 At that time the only silver coins in circulation were the old 
 coins of the realm, which were so clipped and worn that their 
 bullion value was no greater than their money value. The 
 question at once arose, Shall the recoinage of silver be upon the 
 basis of these light-weight silver coins, the average depreciation 
 of which was estimated at 25 per cent, or upon the basis of the 
 law of 1666, which provided for the heavier coin.' This question 
 excited a memorable controversy, in which the two most impor- 
 tant figures were John Locke, the distinguished philosopher, 
 and Sir William Lowndes, Secretary of the Treasury. Lowndes 
 recommended 1 that the denomination of all silver coins should 
 be raised 25 per cent; that the shilling, for example, should be 
 equal to 15 pence instead of 12. His proposal was tantamount 
 to the adoption of the continental coinage ratio, but in his argu- 
 ment he did not take advantage of this fact. His recommenda- 
 tions were rejected, and those of Locke, who advised strongly 
 against any debasement of the coinage, were adopted. 
 
 It has been commonly assumed that the weight of the argu- 
 ment lay with Locke and that the adoption of his plan was 
 a triumph for honest money. It is not clear, however, that 
 Lowndes was in the wrong, or that his plan involved debase- 
 ment. Since the new silver coins, if rated with gold as he 
 recommended, would have had a money value corresponding 
 with their bullion value, they would have remained in circu- 
 lation ; and since business contracts had been made on the 
 basis of the old silver currency, creditors would not have been 
 defrauded when compelled to take the new coins at a higher 
 ratio. 
 
 1 Lowndes' proposals are found in his Reports containing an Essay for the 
 Amendment of the Silver Coins, London, i6g6. Locke's reply is entitled Further 
 Considerations concerning the Raising the Value of Money. 
 
MONOMETALLISM vs. BIMETALLISM 239 
 
 The outcome of the recoinage was not encouraging. At great 
 expense England put her mint to work to provide the country 
 with a new stock of silver money, but there was no power in 
 England strong enough to keep it there, for silver with respect 
 to gold had a higher value as money on the continent than it 
 had in England. 
 
 In 1717 England again changed the coinage ratio between 
 gold and silver, but did not give silver the rating which it had 
 at the continental mints. Thus England, although nominally 
 upon a bimetallic basis during the eighteenth century, was really 
 upon a gold basis ; and the English Parliament, when it form- 
 ally adopted the gold standard in 18 16, merely put into law 
 what had been the custom for over a hundred years. Gold had 
 become the money of England, not because of any reasoned or 
 conscious preference in the beginning, but because of the inability 
 of English financiers to comprehend the laws governing the use 
 of two metals as money. 
 
 Attention has been called to the chaotic condition of the 
 European money systems prior to the nineteenth century, and 
 to the apparent lack of any conscious systematic effort to 
 attain real bimetallism, because the opponents of bimetallism 
 seem to draw unfair conclusions from the monetary confusion 
 which then prevailed. Anything like real bimetallism must 
 have been impossible prior to the nineteenth century; for dif- 
 ferent nations were coining gold and silver at different ratios, 
 and thus the nations in which the money demand was weakest 
 were certain to be stripped of one or the other of these metals. 
 The advantages of bimetallism can never be attained unless a 
 group of the most powerful nations agree to coin gold and sil- 
 ver at the same ratio. That such an agreement would bring to 
 bear upon these metals a demand strong enough to keep them 
 at the ratio agreed upon is morally certain. The value rela- 
 tion between the two would be linked by a bond that could not 
 be broken except by an increase in the supply of the metals far 
 beyond anything the world has ever yet seen. 
 
 Since 1900, however, these theoretic considerations have pos- 
 sessed no practical importance, for the increase in the output 
 
240 MONEY AND CURRENCY 
 
 of gold has given gold-using nations such an abundance of 
 money, and caused such a rise of prices, that international 
 bimetallism as a political issue is dead. In igi6 the problem 
 is, not how to keep prices from falling, but how to guard 
 against the intoxicating influence of rising prices. 
 
 LITERATURE 
 
 Supporting monometallism : Horace White, Money and Banking j 
 R. GiFFEN, The Case against Bimetallism ; J. L. Laughlin, History of 
 Bimetallism in the United States and Pacts about Money j T. H. Farrer, 
 Studies in Currency ; A. B. Hepburn, History of Coinage and Currency 
 in the United States j H. D. Macleod, Bimetallism j J. Schoenhof, 
 History of Money and Prices; W. A. Shaw, History of Currency, 12^3- 
 i8g4.j Sound Currency (publications of New York Reform Club). 
 
 Supporting bimetallism: E. Helm, The Joint Standard j F. A. Walker, 
 International Bimetallismj A. Dana Horton, Silver and Gold, The 
 Silver Pound, and Silver in Europe; J. S. Nicholson, A Treatise on 
 Money ; L. L. Price, Money and its Relation to Prices ; Wharton 
 Barker, Bimetallism ; E. B. Andrews, An Honest Dollar. 
 
 General treatises: L. Darwin, Bimetallism (London, 1897); W. S. 
 Jevons, Money and the Mechanism of Exchange ; H. P. Willis, A His- 
 tory of the Latin Monetary Union. 
 
CHAPTER XII 
 
 THE SILVER QUESTION 
 
 i6i. Events that led to the agitation for the free coinage of silver in 1896. 
 162. The argaments presented by the champions of silver. 163. The gold stand- 
 ard held responsible for the evil of falling prices. 164. Fundamental defects of 
 the theory of money upon which the case for silver was based. 165. Falling 
 prices quite as probable under silver monometallism as under gold monometal- 
 lism. 166. A statistical inquiry into the value variations of gold and silver after 
 1870. 167. It would appear that silver did not decline in value between 1873 and 
 1893, and that, therefore, it was more stable than gold. But during this period 
 special causes were at work. 168. Fluctuations in the gold price of silver do not 
 prove that it lacks stability of value. 169. The silver partisan magnified the 
 burden imposed on debtor classes by an appreciating standard. 170. Inconsist- 
 ent arguments advanced by the defenders of the gold standard. 171. Why 
 the free coinage of silver would have caused a large importation of silver. 
 172. The contention that the free coinage of silver would increase the foreign 
 trade of the United States will not bear analysis. 173. The free coinage of silver 
 would probably have worked injury to the laboring classes. 174. The argument 
 based on India's apparent control of the wheat market after 1873. '75- When 
 two countries are using different metals as money a fall in the value of either 
 temporarily affects the trade of both. 176. Present outlook for the use of silver 
 as standard money. 
 
 161. During the last twenty-five years of the nineteenth 
 century the sharp fall in prices which followed the general 
 suspension of the free coinage of silver in the United States 
 and Europe made the money question a political issue in almost 
 every country whose monetary unit was gold. The "silver 
 question " now possesses no political importance, for the rise 
 of prices since 1897 has destroyed the main argument upon 
 which the movement for the free coinage of silver was based. 
 An examination, however, of some of the arguments that were 
 advanced for and against the remonetization of silver is worth 
 while, for it serves to show the student of the money question 
 how theoretical principles may be applied in the solution of a 
 practical problem. 
 
 241 
 
242 
 
 MONEY AND CURRENCY 
 
 We will briefly review the admitted facts. As explained in 
 the last chapter, after 1870 the United States and most of the 
 nations of Europe suspended the free coinage of silver. In 
 this country the act of 1873, by which the demonetization of 
 silver was effected, attracted no public attention at the time ; 
 it was primarily intended as a codification of our coinage laws, 
 and was not generally regarded as having far-reaching signifi- 
 cance. ^ The country vi^as then upon a fiat-money basis, the 
 depreciated greenback — then at a discount of 14 per cent as 
 compared with gold — being the standard of prices. No metal 
 money was in circulation. Even before the greenback period, 
 silver having been underestimated in the bimetallic law of 
 1834, there were few silver dollars in the country .^ Naturally, 
 therefore, the failure of the act of 1873 to mention the silver 
 dollar attracted no general notice and caused little discussion. 
 
 In 1873 the gold price of silver averaged ^1.297, and a sil- 
 ver dollar of 371.25 grains was worth a little more than a gold 
 dollar. After 1873 the gold price of silver almost steadily 
 declined, until in 1896 it sold at 6"] cents, a price represent- 
 ing a value ratio of 31 to i. At the same time the prices of 
 commodities also fell. The Falkner index number of prices in 
 the United States in 1872 stood at 127 figured in gold. In 1891 
 this index number stood at 92, and between 1891 and 1896 
 there was a further fall of prices of about 25 per cent. The 
 total change in the price level between 1873 and 1896 amounted 
 to nearly 50 per cent in all countries using gold as the basis of 
 their monetary systems. For example, in 1873 the greenback 
 
 1 The act of 1873 declares that the gold dollar of 25.8 grains standard "shall 
 be the unit of value." After enumerating the various gold coins that may be 
 minted, it provides for the free coinage of silver " trade dollars," to contain 420 
 grains standard silver, and for the coinage by the government of subsidiary silver 
 coins, all these to be legal tender only for amounts not exceeding $5.00. The old 
 silver dollar of 412.5 grains standard is not mentioned ; its coinage, therefore, was 
 prohibited by the following : " That no coins, either of gold, silver, or minor coin- 
 age, shall hereafter be issued from the mint other than those of the denomina- 
 tions, standards, and weights herein set forth." 
 
 2 Only 8,031,238 silver dollars were coined between 1792 and 1873, and most 
 of these, for reasons explained in Chapter XVI, were Immediately melted or 
 e.xported. 
 
THE SILVER QUESTION 243 
 
 price of wheat averaged ^1.73 per bushel, -which made the 
 gold price about 1^1.52 ; in 1894 its average price in gold was 
 61 cents. The prices of other agricultural commodities suf- 
 fered a corresponding decline. The prices of manufactured 
 articles also fell, but the reduction here was by no means uni- 
 form, the prices of many manufactured articles being sustained 
 by combinations among manufacturers, by patents, and by 
 tariff changes. 
 
 The rate of interest during these years also declined, as 
 shown in a preceding chapter. The rates charged upon farm 
 mortgages were less affected than those paid by business men 
 and by large corporations which sold bonds to the investing 
 public. For example, the average rate on double-name paper 
 in New York in 1872 was 6 per cent, while in 1895 it was 2 
 per cent ; and railroads which borrowed money at 7 and 8 per 
 cent in the seventies were able to refund their indebtedness 
 at 4 and 5 per cent in the eighties. 
 
 The Argument for Silver 
 
 162. Let us first hear the case of the silver man. His theory 
 of money was simple and easily understood. He held that the 
 value of money varied with its quantity, and that the value had 
 risen and prices fallen after 1873 because the law, by the 
 demonetization of silver, had reduced the country's money 
 supply by one half. The fall in the gold price of silver he 
 attributed entirely to the demonetization of silver, and he held, 
 therefore, that if silver were again admitted freely to the 
 mints, its price would immediately rise to a parity with gold at 
 the ratio of 16 to i. The demand for money he regarded as 
 practically infinite in strength ; as being strong enough to lift 
 any metal to the value given it by a bimetallic law. In support 
 of this position he was able to quote the great philosopher, 
 John Locke, who had declared that the "vent," or market, for 
 money was infinitely great; and also John Stuart Mill, the 
 leading English political economist, who had said that all 
 the goods in the market constituted the demand for money. 
 
244 MONEY AND CURRENCY 
 
 The silver man showed that throughout all the centuries during 
 which its free use as money had been permitted silver had 
 maintained a comparatively stable value relation with gold. 
 Some of the more enthusiastic silver agitators, pointing to the 
 fact that the mines of the earth had for several centuries 
 yielded about sixteen times as much silver as gold, con- 
 tended that the two metals existed in the bowels of the earth 
 in this ratio, and that the country in abandoning this natural 
 ratio was flying in the face of Providence. Although the gold 
 price of silver in 1896 was only 67 cents an ounce, which 
 made an ounce of gold worth thirty-one ounces of silver, it 
 was claimed that the remonetization of silver would bring 
 upon it such a powerful demand that its value would rise to 
 $1.29 per ounce, the price which represents parity at 16 to i. 
 
 163. The single gold standard was attacked in several differ- 
 ent ways. It was held to be altogether responsible for the fall 
 of prices which set in after 1873. The silver men made the 
 most ingenious and effective use of the evil results of this fall 
 of prices. They caused discontent among the farmers by tell- 
 ing them that it had been brought about by conspiracy among 
 their "gold-bug creditors ", in New York and London in order 
 that the value of the gold they received upon their bonds and 
 mortgages might be increased. A western farmer struggling 
 to lift a mortgage was easily made to see that the burden of 
 his debt had been increased by the decline in the price of farm 
 products. "The crime of 1873," as the law of that year was 
 called, was injuring him, he was told, in the same way that an 
 enlargement of the bushel would hurt him if he were under 
 contract to deliver through a series of years a certain number 
 of bushels of wheat. 
 
 The farmer was also invited to consider how difficult the 
 payment of the national debt was becoming. At the end of the 
 Civil War it amounted to ;^ 2, 8 00, 000, 000 and might then have 
 been paid with 1,400,000,000 bushels of wheat, which was worth 
 at that time ^2.00 a bushel. This national debt was mainly in 
 the form of bonds which the government had sold for green- 
 backs worth only fifty cents on the dollar in gold. Owing to the 
 
THE SILVER QUESTION 245 
 
 conspiracy among the "gold bugs" of the East, Congress had 
 enforced the payment of these bonds in gold, so that the gov- 
 ernment was paying back to its creditors twice as much as it 
 had received. 
 
 But this was not all, for that same conspiracy had increased 
 the value of gold itself. The real wealth of the country lies in 
 such commodities as wheat. The gold payments already made 
 on account of the national debt had been sufficient to buy, at the 
 prices prevailing when the payments were made, 4,000,000,000 
 bushels of wheat, an amount nearly three times as great as the 
 original debt when figured in wheat. Nevertheless the debt had 
 not been paid, for there remained still due ^1,500,000,000, 
 which represented, at the then low price of wheat, 3,000,000,000 
 bushels, or over twice as much as was owed in the beginning. 
 
 It is not strange that this reasoning, which made the debt in 
 goods grow in spite of the fact that it had been twice paid, 
 should have a powerful influence upon the agricultural popu- 
 lation. Wheat was not the only agricultural product that had 
 fallen in price. The price of almost everything that the farmer 
 could raise for the market had been cut in two. The advocates 
 of silver held that its free coinage would cause a tendency of 
 prices upward, and that this would atone for the injustice 
 worked by the fall of prices after 1873. It was only fair, they 
 argued, that the debtor who had been robbed should now get 
 back some of his due. 
 
 A different argument was addressed to the laboring classes 
 of large cities. The three years following the panic of 1893 
 had been marked by great industrial depression. - The chari- 
 table societies of all the large cities of the United States 
 had been taxed to the utmost to provide food and shelter for 
 men who could get no work. The silver men attributed the 
 panic of 1893 to the scarcity of money and held that the 
 depression of industry was a direct result of the fall of prices. 
 A government report in 1891 had stated that the rate of wages 
 was as high in 1891 as it was in 1873. "Of what advantage," 
 asked the silver man, "is a high rate of wages to a laboring 
 man out of a job? Industry is starving for lack of money. 
 
246 MONEY AND CURRENCY 
 
 Nothing will open the factories and mills but an increase in the 
 money supply, which will set capital in motion and give work 
 to the people." 
 
 To business men, as well as to farmers and producers gener- 
 ally, the silver advocate addressed an argument based upon the 
 apparent prosperity of India. India had become our chief com- 
 petitor in the wheat markets of the world. Until 1893 her 
 money had been silver, and the friend of silver held that the 
 wheat growers of India, on account of the falling price of silver, 
 had been able to undersell the farmers of the United States at 
 Liverpool year after year, without themselves making any 
 change whatever in the price of their wheat. The Indian 
 exporter of wheat, who sold it at from three to four rupees ^ 
 per bushel in 1873, had averaged the same price during the full 
 twenty years, and with the money he had received he had each 
 year been able to buy about the same quantity of goods or pay 
 the same amount of debt, for general prices did not rise in 
 India prior to 1893. But four rupees of silver after 1873 rep- 
 resented a lessening amount of gold, so that an American 
 farmer, in order to compete with the Indian producer, had been 
 obliged to lower his price year after year. Thus, when the 
 price of silver had fallen until a rupee of 165 grains of pure 
 silver was worth only 30 cents in gold, the American farmer 
 in order to compete with Indian wheat at three rupees was 
 obliged to sell his wheat at 90 cents. The advocates of the 
 free coinage of silver, using illustrations of this sort, argued 
 that the adoption of the silver standard would give us a tre- 
 mendous advantage over foreign nations using gold as money. 
 The free coinage of silver would not only have the effect of a 
 protective tariff, lessening our imports of foreign goods, but 
 would also stimulate our exports by giving our producers an 
 advantage like that which the producers of India had enjoyed. 
 
 Various other arguments were employed by the partisans of 
 silver, but they were not important, although they made some 
 
 ^ The rupee contains 165 grains of pure silver and in 1873 was equivalent to 
 44 cents. After 1873 its gold value declined, until in 1893 it was worth only 
 26 cents in gold. India's experience with the rupee is described in Chapter XIV, 
 
THE SILVER QUESTION 247 
 
 impression upon voters. It was urged, for example, that silver 
 was the poor man's money and gold the rich man's, and that 
 free coinage of silver would put more money into the pockets 
 of the people. A good deal of emphasis was also laid upon the 
 possibility of cornering the world's supply of gold. It was 
 pointed out that all the gold in the world could be got into a 
 room of small dimensions, and that a number of wealthy men, 
 by getting control of the supply of gold, could force the poor 
 people to sell their products at any prices the rich might name. 
 
 Review of the Argument 
 
 164. Some of the above arguments are hardly worth consider- 
 ing. Neither metal can be called the poor man's money. Since 
 he has but little purchasing power he is able to use but little 
 money of any kind, and he needs pieces of small denominations. 
 These in the form of credit money can be furnished him under 
 the gold standard quite as well as under the silver standard. 
 
 As for the possibility of cornering money, the difficulty is 
 commensurate not with its quantity but with its value. If 
 the United States were using silver as money, even though 
 its value with respect to gold were as 16 to i, the total 
 value of the money supply in the country would be no greater 
 than it is at present, although its bulk would be sixteen times 
 greater. A syndicate of rich men, if there were any motive for 
 so doing, could corner the world's stock of silver as easily as 
 they could the world's stock of gold. Furthermore, if the world 
 were using gold and silver as money on a basis of international 
 bimetallism, the total value of the world's money supply would 
 be no greater than it is at present,^ and the task of getting 
 possession of any large part of it would be no greater than it is 
 at present. 
 
 We need not give much space to the peculiar theory of 
 money advanced by the champions of silver. The idea that the 
 demand for money is infinite, comparing with the demand for 
 
 1 It was shown in Chapter II that the supply of money value does not depend 
 on the quantity of money, i.e. the supply of money units. 
 
248 MONEY AND CURRENCY 
 
 other goods as the hand of Providence does with the hand of 
 man, — a comparison made by Mr. Harvey in his Coins Finan- 
 cial School, — we have already considered in Chapter IV, where 
 it was shown that this demand is as limited and definite as the 
 demand for any tool which men use. The strength of the money 
 demand which could have been brought to bear upon silver if 
 the United States mints had been opened to it in 1896 can be 
 approximately estimated. At that time the total circulation or 
 supply of currency in the United States, of which only about 
 one third was gold, amounted to ^1,500,000,000. Five hundred 
 million silver dollars might have been coined and substituted 
 for the gold without causing any inflation of the currency and 
 without changing the level of prices, if we assume that general 
 confidence in the standard would not have been disturbed. But 
 if more silver had been added, the supply of currency would 
 have been increased and prices would have risen above the 
 level of gold prices. 
 
 The contention that the free coinage of silver was suspended 
 as a result of a conspiracy is absurd. The practical financiers 
 of the world have only recently begun to show any apprecia- 
 tion of the influence exerted on the value of the precious 
 metals by their use as money. 
 
 165. When advocates of silver criticised the gold standard 
 on the score of falling prices, they called attention to a defect 
 that is common to all kinds of metal money. As we have seen, 
 the values of gold and silver are never stationary but are 
 always either rising or falling through long cycles of years. 
 The silver man assumed that gold was destined always to 
 increase in value, and that prices, therefore, were bound to 
 continue downward. 
 
 Yet even while he was making this argument forces were at 
 work to bring about a change in the value of gold and cause 
 prices to rise. The increase in the value of gold after 1873 was 
 due to extraordinary circumstances, the demand for it having 
 been so greatly increased by its adoption as the standard of prices 
 in most of the civilized countries of the world. That gold will 
 ever again be subjected to such a strain is not possible. 
 
THE SILVER QUESTION 
 
 249 
 
 
 
 
 
 
 
 
 t<l6l 
 
 eo6i 
 Z06I 
 
 1061 
 
 0061 
 
 
 
 I 
 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 L 
 
 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 1 
 
 
 
 
 
 
 
 
 j 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 
 ■ 
 
 
 
 
 S68l 
 
 
 
 1 
 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 1 
 
 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 , 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 j 
 
 
 
 
 
 068I 
 
 
 1 
 
 
 
 
 
 
 
 
 ; 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 ! 
 
 
 
 
 
 
 
 
 
 
 
 
 
 , 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ! 
 
 
 
 
 
 
 
 
 S88I 
 
 
 
 
 
 
 
 
 1 
 
 ■ 
 
 
 
 
 
 
 
 
 
 . 1 
 
 
 
 
 ' 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 
 
 ! 
 
 
 
 
 
 
 
 
 
 
 
 1 , 
 
 
 1 
 
 
 
 
 
 
 
 
 
 0881 
 
 
 
 
 1 
 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 : 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1, 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 ! 
 
 
 
 
 
 
 
 SiSI 
 
 
 
 
 
 1 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 1 
 
 
 
 ii 
 
 ■ 
 
 i 
 
 
 
 
 
 
 
 
 
 1, 
 
 1 
 
 
 
 
 
 
 
 
 
 
 I 
 
 i 
 
 
 
 
 
 
 
 
 
 
 1 
 
 J 
 
 
 
 
 0Z81 
 
 
 
 
 
 
 
 
 1 ; 
 
 
 
 
 
 
 
 
 
 
 
 
 ! 
 
 
 
 
 
 
 
 
 
 
 , 1 
 
 
 
 
 
 
 
 
 
 
 
 ! 
 
 
 
 
 
 
 
 
 
 
 1! 
 
 
 
 
 
 
 
 
 
 
 sC 
 
 
 
 
 
 
 2 
 
 
 
 est 
 
 
 
 
 
 s 
 
 S 
 
 R 
 
 s 
 
 E 
 
 
 
 
 
 
 
 
 
 X 
 D 
 
250 MONEY AND CURRENCY 
 
 Value Changes of Gold and Silver 
 
 166. Chart II, on page 249, shows the divergent paths trav- 
 eled by gold and silver after 1870. The heavy black line shows 
 the value of gold as computed from Sauerbeck's index number. 
 The dotted line shows the value of silver, calculated by com- 
 parison of its gold price with changes in the value of gold. The 
 chart is derived from the last two columns of the table printed 
 on page 251. 
 
 Column I gives the Sauerbeck index number from 1870 
 to 1903, that is, the average prices of forty-five commodities, 
 the base line of 100 being the average prices for the period 
 from 1 8^7 to 1877. Column II shows changes in the gold 
 price of silver, the base line of 100 being 60.84 pence, which 
 was the average London price of an ounce of silver during the 
 period from 1867 to 1877. The numbers in column III, show- 
 ing changes in the value of gold, are the reciprocals of those in 
 column I. The numbers in column IV, showing changes in the 
 value of silver, are derived from the data supplied by columns I 
 and II. For example, in 1885 the average gold price of the 
 forty-five commodities was 72, and the gold price of silver was 
 79.9 ; hence the value of silver with respect to the forty-five 
 commodities, as compared with that prevailing during the 
 period from 1867 to 1877, had risen in proportion as 79.9 
 exceeds 72, or 1 1 per cent.^ 
 
 The decline in the values of both metals for three years after 
 1870 represents the general rise of prices before the panic of 
 1873. During the years 1874 and 1875 both rise sharply, but 
 silver parts company with gold, increasing less in value. Gold, 
 continues to rise after 1875 until 1879, when the revival of 
 industry led to an expansion of credit and a fall in the value of 
 gold, its efficiency as money being increased. After 1880 the 
 value of gold rose quite steadily, from 1 13 in 1880 to 147 in 1887, 
 but declined during the next two years to 139. There was little 
 change during 1 889, 1 890, and 1 89 1 , but after that it began a rapid 
 
 ' I am indebted for the suggestion of this table and chart to Helm's Joint 
 Standard, p. 84. 
 
THE SILVER QUESTION 
 
 251 
 
 VALUE CHANGES OF GOLD AND SILVER 
 
 
 I 
 
 II 
 
 III 
 
 IV 
 
 
 Sauerbeck Index 
 
 Gold Value of 
 
 
 
 
 No. (Average 
 Gold Price of 
 
 Silver in London 
 (60.84 pence 
 
 Value of Gold 
 
 Value of Silver 
 
 
 45 Commodities) 
 
 Assumed as 100) 
 
 
 
 1867-77 
 
 100 
 
 1 00.0 
 
 1 00.0 
 
 1 00.0 
 
 1870 
 
 96 
 
 99.6 
 
 104.0 
 
 J037 
 
 IS7I 
 
 100 
 
 99-7 
 
 lOO.O 
 
 99-7 
 
 1872 
 
 109 
 
 99.2 
 
 91.7 
 
 91.0 
 
 1873 
 
 III 
 
 974 
 
 90.0 
 
 88.7 
 
 1874 
 
 102 
 
 95.8 
 
 98.0 
 
 93-9 
 
 1875 
 
 96 
 
 93-3 
 
 104.0 
 
 97.2 
 
 1876 
 
 95 
 
 86.7 
 
 105.2 
 
 91-3 
 
 1877 
 
 94 
 
 90.2 
 
 106.3 
 
 96.0 
 
 I87S 
 
 87 
 
 86.4 
 
 1 1 5.0 
 
 99-3 
 
 1879 
 
 83 
 
 84.2 
 
 120.5 
 
 104.4 
 
 1880 
 
 88 
 
 85.9 
 
 1 13.6 
 
 97.6 
 
 I88I 
 
 85 
 
 85.0 
 
 117. 6 
 
 1 00.0 
 
 1882 
 
 84 
 
 84.9 
 
 119.2 
 
 101.2 
 
 1883 
 
 82 
 
 83.1 
 
 122.0 
 
 101.3 
 
 1884 
 
 76 
 
 83-3 
 
 I3I-5 
 
 101.6 
 
 1885 
 
 72 
 
 79-9 
 
 139.0 
 
 III.O 
 
 1886 
 
 69 
 
 74.6 
 
 145.0 
 
 108.0 
 
 IS87 
 
 68 
 
 73-3 
 
 147.0 
 
 107.7 
 
 1888 
 
 70 
 
 70.4 
 
 142.8 
 
 100.6 
 
 1889 
 
 73 
 
 70.2 
 
 138.8 
 
 98.9 
 
 1890 
 
 72 
 
 78.4 
 
 138.8 
 
 108.9 
 
 1891 
 
 72 
 
 74.1 
 
 138.8 
 
 102.9 
 
 1892 
 
 68 
 
 65.4 
 
 147.0 
 
 96.0 
 
 1893 
 
 68 
 
 58-3 
 
 147.0 
 
 85.7 
 
 1894 
 
 63 
 
 47.0 
 
 158.7 
 
 74.6 
 
 1895 
 
 62 
 
 49.0 
 
 161.0 
 
 79.0 
 
 1896 
 
 61 
 
 50.6 
 
 163.9 
 
 83.0 
 
 1897 
 
 62 
 
 45-3 
 
 161.0 
 
 73-0 
 
 1898 
 
 64 
 
 44.2 
 
 156.2 
 
 69.0 
 
 1899 
 
 68 
 
 4S-0 
 
 147.0 
 
 66.0 
 
 I goo 
 
 75 
 
 46.5 
 
 133-3 
 
 62.0 
 
 1901 
 
 70 
 
 44-7 
 
 142.8 
 
 64.0 
 
 1902 
 
 69 
 
 39-6 
 
 145.0 
 
 57.0 
 
 1903 
 
 69 
 
 40.7 
 
 145.0 
 
 59.0 
 
252 MONEY AND CURRENCY 
 
 ascent, averaging 147 in 1892 and 1893, 158 in 1894, 161 in 
 189s, and 164 in 1896. Since then the trend has been down- 
 ward, the average being 16 1 in 1897, 156 in 1898, 147 in 1899, 
 and 133 in 1900. Thus gold rose in value between 1873 and 
 1893 from 90 to 147, an increase of 63 per cent ; and between 
 1873 and 1896, the year in which its rise of value was checked, 
 it rose from 90 to 164, an increase of 82 per cent. 
 
 167. With respect to silver the chart brings out three facts 
 of interest, (i) The value of silver did not decline after 1873, 
 as is commonly supposed, but for twenty years was above the 
 level of 1873. This means, assuming the Sauerbeck index num- 
 ber to represent fairly the course of commodity prices, that the 
 average purchasing power of an ounce of silver between 1873 
 and 1893 was greater than in 1873. We should expect, there- 
 fore, if we could obtain a correct index number of prices in 
 silver-standard countries during that period, to find that prices 
 did not rise before 1893 but rather tended downward. (2) The 
 chart shows that the value of silver in 1892 was very nearly 
 what it was in 1873; and (3) that the suspension of free coin- 
 age in India and the repeal of the purchase clause of the Sher- 
 man Act in the United States, both happening in 1893, were 
 followed by a rapid and great decline in the value of the metal. 
 
 As regards the relative stability of the two metals, the chart, 
 superficially viewed, indicates that silver is the more stable, for 
 prior to 1893 it departed from the base line less than gold. 
 But we can draw no conclusion in favor of silver, for we cannot 
 ignore the fact that special causes were operating upon the 
 values of both metals, one tending to lift gold, the other tending 
 to depress silver. If bimetallism had not been abandoned after 
 1870, and if Germany had continued the free coinage of silver, 
 it is probable, but not certain, that silver would have risen in 
 value at an equal pace with gold, and that the rise of both 
 metals would have been considerably less than the advance 
 made by gold under the influence of the combined money 
 demand of Europe and the United States. 
 
 168. The fact that the gold price of silver after 1873 was 
 subject to monthly fluctuations cannot be regarded as evidence 
 
THE SILVER QUESTION 253 
 
 that silver lacks stability of value over short periods ; it proves 
 merely that the demand for it in Liverpool and New York 
 was variable, but does not prove that the price level in silver- 
 standard countries was quickly shifting from month to month. 
 The adjustment of prices to the value of the standard, as we 
 have seen, is a slow process. An index number of Mexican 
 prices would doubtless show that between 1873 and 1893 the 
 price level in Mexico varied from month to month no more than 
 the price level in the United States. An analogous case is fur- 
 nished by our experience with the greenback between 1861 and 
 1879 ; changes in the price level during this period by no means 
 corresponded with changes in the gold value of the greenback. 
 We shall consider this point more fully in the chapter on Fiat 
 Money. 
 
 169. We need not consider in much detail the silver argu- 
 ment which was enforced by an analysis of the public debt. 
 The silver partisan was quite right in his statement that the 
 burden of our national debt had been increased by the fall of 
 prices, but he exaggerated the increase. He failed to mention 
 that the productive capacity of the people during the two 
 decades following the Civil War had increased at a marvelous 
 pace, that several thousand miles of new railroads in the west- 
 ern states had lowered the cost of producing wheat, and that 
 great improvements in agricultural machinery had practically 
 doubled the productive capacity of the average farmer. A 
 bushel of wheat did not represent as much labor in 1896 as in 
 1873. Throughout the entire domain of industry great cheap- 
 ening forces had been at work, and debtors were able without 
 any increasing effort to give increasing quantities of goods to 
 their creditors in the payment of each dollar of debt. 
 
 Nevertheless there was some truth in the position taken by 
 the bimetallist. The fall of prices had exerted a depressing 
 influence upon industry and had added to the burdens of long- 
 time debtors a weight not counterbalanced by their increased 
 power of production. But for the rapid increase in the value 
 of gold in the seventies and eighties it is quite possible that 
 the railroads of the country would have found their mortgage 
 
254 MONEY AND CURRENCY 
 
 indebtedness a lighter load, and that some of the numerous 
 foreclosures and receiverships would have been prevented. It 
 is reasonable to believe also that combinations of capital into 
 " trusts " would have been less notable in the eighties had not 
 the markets for goods been under an influence which business 
 men failed to comprehend and wrongly attributed to over- 
 production and excessive competition. 
 
 Fallacious Arguments for Gold 
 
 170. The defenders of the gold standard argued that the fall 
 of prices did not injure the farmer or any one else, because peo- 
 ple, although forced to sell their products at lower prices, were 
 nevertheless able to buy correspondingly more with every 
 dollar they received. This argument is not sound, for it 
 ignores the fact that a fall of prices is never uniform. This 
 aspect of the subject has been covered in Chapters VI and VIII 
 and need not be reconsidered here. 
 
 It was generally assumed by the partisans of gold that the 
 free coinage of silver would yield a fifty-cent dollar, for the 
 bullion in the silver dollar was at that time worth only 50 cents, 
 In this assumption they were mistaken. The free coinage 
 of silver would have increased the demand for silver and would 
 have caused its value to rise. There would have been a less- 
 ened demand for gold, so that the value of gold would have 
 tended downward. The United States would have taken from 
 the markets of the world several hundred million dollars' worth 
 of silver and would have thrown upon those markets some five 
 hundred million dollars' worth of gold. This disuse of gold and 
 increased use of silver must have caused a change in the value 
 relation between the two metals. As to how great that change 
 would have been we can only speculate. 
 
 The fallacy in the position taken by the defender of the gold 
 standard was shown by an argument which he advanced almost 
 in the same breath with the other. He held that this country 
 would be "deluged by a flood" of silver from all countries of 
 the world. It is quite probable that large quantities of silver 
 
THE SILVER QUESTION 255 
 
 would have come to the United States had our mints been 
 opened to it, but it certainly would not have come here unless 
 drawn by some rise in its value. If our silver dollar were to 
 remain a fifty-cent dollar, silver being no more valuable under 
 free coinage than before, there would be no reason why more 
 silver should come to the United States. 
 
 171. The partisan of silver had a ready reply to the objec- 
 tion that his plan would deluge the United States with silver. 
 " Where," he asked, "will this silver come from ? Mexico has 
 none to spare, nor India, nor China. France and Germany 
 have a lot of silver, but all of it is coined at the ratio of 15.5 
 to I, and that silver could not be sent here to be coined at 
 16 to I without loss. How would it be possible, then, to increase 
 our money supply at the rate which the gold men predict ? " 
 This reply was plausible but fallacious. It is true that Mexico, 
 India, and China needed all the silver they had and were using 
 it all as money ; but if the free coinage of silver in the United 
 States were going to double its value, as was claimed, then 
 Mexico and other countries on the silver basis would no longer 
 need all their silver for use as money, for the level of prices 
 would be lowered 50 per cent and only one half as much 
 money would be needed for the transaction of their business. 
 These countries, therefore, if the silver man's own prediction 
 had been realized, could have exported half their silver to this 
 country. 
 
 As for the silver in use by France, Germany, and Russia, it 
 is all credit money, and these governments, like the United 
 States, have more of it than they are able to keep in circula- 
 tion. The value of a credit instrument does not depend upon 
 the material upon which the promise to pay is stamped but 
 upon the confidence which is felt in the government or person 
 that makes the promise. The finance ministers of Germany, 
 France, and Russia are well aware that silver is an expensive 
 material out of which to make credit money, and would doubt- 
 less be glad to sell their silver coins as bullion if something 
 approximating the old price could be obtained. They could 
 then substitute gold or bank notes for them. 
 
256 MONEY AND CURRENCY 
 
 172. The contention that the free coinage of silver would 
 increase the foreign trade of the United States, stimulating our 
 exports especially, was based on the assumption that prices 
 would continue to rise after the free coinage of silver had been 
 adopted. Although the first effect of this free coinage might 
 possibly have been a rise of prices, it is impossible to say with 
 certainty what would have happened. It is quite probable that 
 panic and monetary chaos would have been the first result, 
 no man knowing how much money he was worth or what price 
 he should ask for what he had to sell. But if we assume that 
 the country did finally pass from the gold basis to a silver basis, 
 or to a joint basis of gold and silver, a sharp rise of prices must 
 have occurred. The value of silver would have risen until the 
 monetary demand of the United States for that metal had 
 been satisfied.-^ There would, however, be no reason for believ- 
 ing that prices in this country would continue to rise after the 
 new level had once been attained. On the contrary, the increased 
 demand for silver for monetary use in the United States might 
 have given its value a constant upward tendency, so that 
 prices in this country, after the change, might have tended 
 downward. The free coinage of silver, therefore, was quite as 
 likely to continue our fall of prices as to check it, only the fall 
 would have started from a higher level than that prevailing 
 in 1896. 
 
 The free coinage of silver in this country would have been 
 almost certain to cause a rise of prices in all the countries 
 of Europe, for the lessened demand for gold in this country, 
 taken together with the increased supply of that metal in 
 Europe, would have tended to reduce its value. So England, 
 the country most hated by the silver party, would have received 
 greater benefit from the free coinage of silver here than the 
 United States itself, for prices in England would have shown a 
 marked upward tendency, whereas prices in the United States, 
 
 ^ This rise in the value of silver would have produced a period of falling prices 
 in all countries already upon the silver basis. General bankruptcy and ruin would 
 quite possibly have been brought about in Mexico and Central and South America 
 by a rapid fall in the prices of all goods. 
 
THE SILVER QUESTION 257 
 
 after the chaos of the change of standards was over, would 
 have been more likely to tend downward than upward. 
 
 173. The argument which the silver man addressed to the 
 laboring classes was not altogether unsound. It cannot be con- 
 tended that the panic of 1893 was caused by the appreciation 
 of gold. Panics come during periods of rising prices as well as 
 during periods of falling prices, and their causes are complex, 
 most important among them being the undue expansion of credit 
 and unwise use of capital in the production of goods. Nor could 
 the gold standard properly be held responsible for the existence 
 of the large army of unemployed in the years following the 
 panic, for all panics are followed by several years of industrial 
 stagnation. Nevertheless, as we saw in the chapter on The 
 Importance of Price, an appreciating standard does tend to 
 discourage the entrepreneur and to lessen the demand for both 
 labor and capital. If the advocate of silver could have guaran- 
 teed to the workingman a period of rising prices as a result of 
 the free coinage of silver, his assault upon the gold standard 
 would have been justified. But, as we have seen, he offered only 
 a change to silver monometallism, and there was no more cer- 
 tainty of rising prices under that standard than there had 
 been under gold monometallism. There would indeed have been 
 at first a sharp rise of prices, but this would have hurt the 
 laboring man instead of helping him, for the rate of wages would 
 have risen much more slowly than the prices of goods. The 
 free coinage of silver, therefore, meant for the workingman a 
 cheapening of the dollar in which his wages were paid and no 
 immediate advance in the rate of wages. 
 
 Silver and Wheat 
 
 174. As for the argument based on India's apparent com- 
 mand of the wheat markets of the world after 1873, that also 
 contained several grains of truth. If two competing countries 
 are using different monetary standards, say silver and gold, a 
 change in the value relation between the two metals will give a 
 temporary stimulus to the exports of that nation whose money 
 
258 MONEY AND CURRENCY 
 
 metal is falling in value with respect to the other. This stimu- 
 lus is due to the maladjustment of prices that always accom- 
 panies a change in the value of a money metal. Whenever the 
 value of silver falls in Europe or the United States because of 
 an increasing supply or diminished demand, the decline is indi- 
 cated by a fall of the gold price of silver before the general 
 price level in silver-standard countries has been much affected. 
 Before 1893, for example, a decline in the price of silver in 
 Europe could not affect prices in India until additional silver 
 had been added to India's money supply and put into circula- 
 tion among the people. Consequently, when the gold price of 
 silver fell because of a fall in the value of that metal, the 
 producers of India were under no inducement on that account 
 to charge higher prices for their goods, for their money costs of 
 production had not increased. An ounce of silver meant as 
 much to them as it had meant before the decline of the London 
 or New York quotation for silver ; but since it now took less 
 gold to buy an ounce of silver, it was possible for Europeans 
 to buy a given quantity of India's products with less gold than 
 formerly. In consequence American and European producers 
 who were competing with Indian producers were obliged to 
 lower their prices, although the only cause therefor seemed to 
 be a change in the relation between gold and silver. 
 
 Such a condition would of course be temporary unless the 
 fall in the value of silver were continuous. India would increase 
 her exports until a balance had been created requiring an impor- 
 tation of silver sufficient to raise her price level to parity with 
 the value of silver in Europe and the United States. Thus when 
 the value of silver was falling India's exports of goods were 
 always a little larger than they otherwise would have been, the 
 excess representing the value which India gave to the world 
 in payment for the additional silver required in her circulation. 
 
 When the gold price of silver fell because of a rise in the 
 value of gold, as most commonly happened between 1873 and 
 1893, the effect upon India's export trade was more apparent 
 than real or permanent, and was due to the maladjustment of 
 prices in gold-using countries. When the gold price of silver 
 
THE SILVER QUESTION 259 
 
 changes, exporters and importers are usually unaware of the 
 cause and do not seek to discover it ; it is commonly assumed 
 in gold-using countries that the value of silver has fallen, and 
 in silver countries that the value of gold has risen. So when- 
 ever the gold price of silver fell after 1873, whatever the cause, 
 the first effect was always the same, namely, importers in gold 
 countries were able to get goods from India by the expenditure 
 of less gold man before the fall, and consequently American 
 and European producers in competition with India were obliged 
 to lower their prices. But when the change was due to a rise 
 in the value of gold, the value of silver not declining, there was 
 no reason why India should import an unusual amount of silver, 
 for India did not then need any addition to her money supply. 
 Nevertheless the exporters of India had a temporary advan- 
 tage in the world's markets. Without any sacrifice they were 
 able to cut under the gold price which had prevailed for the 
 same goods. But their advantage could be only temporary, 
 for prices in the gold countries, since gold was increasing in 
 value, soon fell to a level which placed the European and the 
 American exporter on a par with the Indian exporter. Any 
 long delay in the adjustment of prices in gold countries would 
 continue India's advantage and give her an unusual balance of 
 trade, but the resultant importation of silver would lift her 
 price level and so deprive her exporters of their advantage over 
 exporters in gold countries. In fact such an importation of 
 silver, after prices in gold countries had become adjusted to the 
 new value of gold, would put Indian exporters at a disadvantage 
 for a time and perhaps cause an exportation of silver. 
 
 175. So when two countries are using different metals as 
 money a fall in the value of one causes the country using it to 
 increase its exports by an amount sufficient to pay for the addi- 
 tional quantity of metal needed in its money supply. If the 
 value of one rises, the exports of the country using the other 
 metal as money will apparently be stimulated but will not in 
 the long run be increased in quantity. The free coinage of 
 silver could have given the United States no advantage in the 
 markets of the world unless silver had continued to depreciate, 
 
26o MONEY AND CURRENCY 
 
 in which case the United States would simply have increased 
 its exports by an amount sufficient to pay for the additional 
 silver which it needed as money. It is doubtful if such an 
 increase of exports could be called advantageous, for we should 
 have been giving to the world larger and larger quantities of 
 wheat, cotton, etc., in exchange for a cheapening metal. There 
 was no certainty, however, that even this doubtful advantage 
 would have been gained, for silver, if we coined it freely, would 
 have been quite as likely to rise in value as to fall. 
 
 The student must not imagine that the changes in price 
 levels which lead to changes in the exports or imports of various 
 countries are ever so large as-to attract general attention. He 
 may not be able by studying the statistics of prices in different 
 countries to discover any noticeable effect of changes in the 
 value relation of gold and silver, for a fractional variation of 
 price is sufficient to give a new trend to international trade 
 movements. Between 1873 and 1893, when the gold price of 
 silver was declining, the export trade of India did not always 
 show a gain. This is what we should expect, for the fall in 
 the gold price of silver during most of that period was due to 
 an increase in the value of gold rather than to any decline in 
 the value of silver. The value of silver did not begin to fall 
 until the closing of India's mints in 1893, and after that date 
 changes in the value of silver ceased to have any effect upon 
 the prices of India and so ceased to have any influence upon 
 India's trade. 
 
 176. Since 1893 the use of silver as money has steadily 
 declined. The gold standard has been adopted by Russia, Aus- 
 tria, Japan, India, Peru, Costa Rica, Ecuador, and Siam. The 
 "silver question" is dead, and the use of silver as standard 
 money, it now seems probable, will soon be everywhere discon- 
 tinued. In 1905 Mexico suspended the free coinage of silver 
 and adopted what is known as the "gold-exchange standard." 
 By limitation of the supply of currency and by the sale of 
 foreign exchange at a fixed rate it is proposed to keep the 
 Mexican dollar, or peso, at par with 50 cents in the money of the 
 United States. It is hoped that China and other silver-standard 
 
THE SILVER QUESTION 261 
 
 countries may be persuaded to adopt the same policy so that 
 all countries may have a common par of exchange. In this 
 movement the United States has taken prominent part, having 
 sent an expert commission to Mexico and China to urge the 
 advantage of keeping silver coins at a fixed value relation with 
 gold.i 
 
 The Mexican experiment will be watched with much interest 
 by students of the money question. The peso contains about 
 377 grains of pure silver, and at the price of that metal prevail- 
 ing in 1905 (about 60 cents per ounce) was worth about 47 cents 
 in gold. In order to maintain it at par with 50 cents in gold 
 the government will not only regulate the coinage and so con- 
 trol the supply but will also sell exchange on New York and 
 London at the rate of one gold dollar for two pesos plus the 
 cost of gold shipments. As there are in circulation outside of 
 Mexico large quantities of Mexican dollars whose value for 
 several years has been less than 50 cents in gold, their impor- 
 tation into Mexico at a profit is prevented by a customs duty. 
 If the plan is successfully carried out, Mexico will practically 
 be on the gold basis, prices rising and falling with changes in 
 the value of gold. The currency will consist of silver coins and 
 of bank notes redeemable in silver, but all will in reality be 
 credit money indirectly redeemable in gold. The reform has 
 the advantage of not requiring any change in the customs of 
 the people ; they will continue to use the silver coins to which 
 they are accustomed, but these will no longer fluctuate in value 
 with respect to gold. To the common people gold will appear 
 to have suddenly acquired stability of value, for the price of 
 gold in Mexico will not change. 
 
 Should silver rise in value with respect to gold until its price 
 in the United States is above 64 cents an ounce, the bullion 
 
 ' An American commission, consisting of Professor J. W. Jenks, C. A. Conant, 
 and H. H. Hanna, at the request of Mexico and China, and accompanied by a 
 Mexican commission, visited Europe in 1903, meeting commissioners from Great 
 Britain, France, Holland, Germany, and Russia. Professor Jenks, as commis- 
 sioner of the United States, also visited China. The reader will find an interest- 
 ing discussion of this subject in the Report of the Commission on International 
 Exchange (government publication, Washington, 1903). 
 
262 MONEY AND CURRENCY 
 
 value of the Mexican peso will exceed 50 cents in gold, and 
 a certain quantity of pesos will in consequence be melted or ex- 
 ported. The resultant contraction of the currency will raise the 
 value of the peso as a coin to a par with its value as bullion. ^ 
 
 LITERATURE 
 
 Several hundred books and pamphlets for and against the free coinage 
 of silver were published in the United States during the political contro- 
 versy in 1895 and'1896. Few of these possess any value. The following 
 are typical pro-silver books : W. H. Harvey, Coin's Financial School; 
 Wharton Barker, Bimetallism. The arguments most used by the oppo- 
 nents of silver will be found in the following : Horace White, Coin's 
 Financial Fool ; J. L. 'LhVGYi'Lm, Facts about Mojiey. 
 
 Historical works: F. W. Taussig, The Silver Situation in the United 
 States (New York, 1896); G. M. Coffin, Silver from i84g to j8g2j 
 A. B. Hepburn, History of Coinage atid Currency in the United States; 
 report of Director of the Mint for 1896. 
 
 ^ In 1906 the price of silver rose above 64 cents per ounce fine, and the expor- 
 tation of silver pesos began. As the law permitted the free coinage of gold 
 pesos (one gold peso equaling the Japanese yen of 750 milligrams of pure gold, 
 or about 50 cents), Mexico was being rapidly supplied with gold coins, and would 
 probably now be firmly established on the gold basis if its monetary system had 
 not been deranged by a series of revolutions. 
 
CHAPTER XIII 
 FIAT MONEY: ILLUSTRATED BY THE GREENBACK 
 
 177. Supply of fiat money regulated artificially. 178. Erroneous view that 
 money must derive its value from that of the material constituting it. 179. Fiat 
 money may be made out of a material possessing value as a commodity. 180. If 
 Congress should suspend the free coinage of gold, the gold eagle would become 
 fiat money. 181. Depreciated credit money is the kind of fiat money with which 
 the world has had most experience. 182. Confidence is only one of several factors 
 in the value of depreciated credit money. 183. When credit money has depreci- 
 ated and become the fiat standard of prices its value is not the result of any con- 
 scious comparison with the old standard. 184. Fiat money has real value and 
 performs all the functions of money. 185. The issue of depreciated government 
 notes during the Civil War. 186. Four facts to be taken into account in a study 
 of prices during the greenback period. 187. Demand for the greenback as money 
 during the Civil War. 188. A comparison of the course of prices with changes in 
 the money supply during the greenback epoch. 189. During the War Period 
 doubt about the redemption of the greenback was an important factor in its value. 
 190. Between 1865 and 1875 the greenback was fiat money, possessing no credit- 
 money characteristics. 191. During the resumption period the greenback gradu- 
 ally lost its fiat characteristics. 192. The course of prices compared with changes 
 in the total circulation. 193. Examination of the view that the value of the green- 
 back was determined by its gold price. 194. Greenback prices of all imported 
 commodities must have closely followed fluctuations in the price of gold. 195. The 
 greenback price of gold embodied expert estimates as to the future value of the 
 greenback. 196'. The gold price of greenbacks cannot be explained on the ground 
 that it was the product of an investment demand. 
 
 177. Fiat money is money the supply of which is regulated 
 artificially. Its value is determined solely by the demand for 
 and supply of money, and is independent of the value of the 
 commodity or material out of which it is made. The material 
 for fiat money may be a comparatively valueless substance like 
 paper or a valuable metal like gold or silver. Money made of 
 paper inscribed " This is a dollar " or " This is a pound ster- 
 ling " would be pure fiat money. Fiat money may perform all 
 the services of money ; through its use as a medium of exchange 
 it may become the standard of prices (or value so called), the 
 basis for credit, and the standard of deferred payments. 
 
 263 
 
264 MONEY AND CURRENCY 
 
 No country has ever consciously adopted fiat money. All 
 nations, so far as we know, have employed as money something 
 having value apart from its use as money, — something possess- 
 ing so-called intrinsic ^ value. The shells which we assumed in 
 Chapter I to have been the first money used by primitive man 
 were so employed because of the value they possessed as orna- 
 ments. Their value in the beginning was due entirely to their 
 utility for personal adornment, but as they came into use as 
 money they gained a new utility and became subject to an addi- 
 tional demand, and their value tended to increase as a result. 
 They were commodity money so long as their use as money 
 was free and unrestricted. 
 
 If we suppose that after a certain people had become habitu- 
 ated to the use of shells as money they should cease to care for 
 shells as ornaments, having found a more beautiful or more novel 
 substitute, the shells would then possess value only because of 
 their use as money. They would, however, still be commodity 
 money if the free use of shells as money were permitted. 
 
 B.ut suppose that the tribe using these shells, finding that 
 the supply was increasing too rapidly, decided to put a caba- 
 listic mark upon each shell in their stock on hand and to refuse 
 thereafter to accept any as money unless so marked. If this 
 were done, a distinction would at once arise between marked 
 and unmarked shells. The marked ones would be wanted on 
 account of their convenience as a medium of exchange ; the 
 unmarked would be wanted by nobody and would have no 
 value. The marked shells would be pure fiat money. Their 
 value would no longer be dependent upon the abundance of 
 shells in general or upon the difficulty of finding them, but 
 would be due entirely to the demand for money among that 
 primitive people, and would vary as their demand for money 
 varied. If the people, fascinated by the mysterious purchasing 
 power of these marked shells, and not understanding its cause, 
 
 1 An incorrect use of this adjective. Value, being dependent on human wants, 
 cannot be an intrinsic or inherent property of anything. When men say that the 
 gold dollar possesses "intrinsic" value they mean that it has a commodity value 
 apart from its use as money. 
 
FIAT MONEY: THE GREENBACK 265 
 
 should increase their quantity on the ground that thus each 
 man would have more shells and so all would be enriched, such 
 an increase in the number of marked shells would have an 
 immediate effect upon their exchange power. If these people 
 employed credit in no form whatever, the purchasing power of 
 the shells would decline in proportion as their quantity grew ; 
 if the number of shells were doubled, each would buy only 
 half as much as before. The purchasing power of the total 
 number of shells could not be made greater by any addition to 
 their quantity, for the value of each shell would fall in proportion 
 as the number increased. 
 
 178. Some writers on money appear to doubt the possibility 
 of fiat money, insisting that money always derives its value 
 from that of the commodity or material constituting it. It is 
 asserted, for instance, that in the case of a people using shells 
 as money, if they possess no value as ornaments, there will be 
 no reason why a man who has found a new stock of shells 
 should begin to use them as money, since by so doing he would 
 lessen the purchasing power of those already in use. It is 
 claimed that he would hold the shells back and so prevent their 
 having any effect upon the prices of goods. ^ This objection 
 assumes that men understand the nature of money and that 
 they will, therefore, voluntarily refrain from doing anything 
 which will lessen its value. We will not pause to discuss this 
 assumption, for it makes no difference in the argument. Since 
 the shells, according to the hypothesis, possess no value except 
 as a medium of exchange, what selfish advantage would a man 
 find in holding back the new stock which he has found ? There 
 is only one way that he can make them serve him, and that is 
 by getting rid of them in exchange for what he wants. So long 
 as he keeps them in his possession or buries them in a cave 
 for fear of depressing the value of money, they are of no more 
 account to him than so much sawdust. If he should understand 
 the effect that his shells would have on prices, he might en- 
 deavor to exchange them so adroitly as to minimize his loss 
 
 1 See Annals of the American Academy, March, 1897, "The Quantity Theory 
 of Money," by W. A. Scott. 
 
266 MONEY AND CURRENCY 
 
 from the rise of prices, but that he would get rid of them 
 is certain. That is exactly what men do with money at the 
 present time when they have more of it than they want. 
 
 179. We assumed in the preceding illustration that the shells 
 had lost their utility as ornaments and that therefore they 
 would be valueless but for their use as money. This supposi- 
 tion was not a necessary one. Let us assume that the shells 
 retained their charm as ornaments but that on account of their 
 increasing abundance it was found desirable to limit the number 
 that could be used as a medium of exchange. The shells so 
 marked would be fiat money, and their value would rise as the 
 demand for money increased. The potential utility of the 
 marked shells as ornaments would not be the cause of their 
 value except under one condition, namely : if their value as 
 money tended to fall below the value of the unmarked shells, 
 some of them would be used as ornaments and thus the down- 
 ward tendency of their value would be checked. In a case of 
 this sort we might say that such money combined in some 
 measure the properties of both fiat and commodity money, for 
 while the supply could be diminished automatically it could 
 only be increased artificially. 
 
 180. That fiat money may be made out of material possess- 
 ing value may be shown by an illustration that will perhaps 
 tax the reader's imagination less than our hypothetical shell 
 money. Let us suppose that the world's output of gold 
 increases so rapidly that a great fall in the value of gold is 
 imminent, and that Congress, to prevent a formidable rise of 
 prices, repeals the law permitting its free coinage. The gold 
 coins of the United States would immediately become fiat 
 money, for no matter how great the increase in the world's 
 stock of gold, the quantity of gold coins would remain unchanged, 
 and their value would tend to rise as the demand for money 
 increased on account of increasing business and population. 
 The relation that would then exist between gold and money is 
 shown by Diagram VI (page 267). 
 
 Here we have on the left a square representing 258 grains of 
 standard gold, and on the right a circle representing a gold 
 
FIAT MONEY: THE GREENBACK 
 
 267 
 
 eagle, a coin containing 258 grains of standard gold. The only 
 connection between the two is by way of the melting pot, and 
 it is evident that no coins will be melted unless the value of 
 uncoined gold tends to rise above that of coined bullion. The 
 value of the coin depends upon the demand for money in the 
 United States ; as that increases the value of the coin must 
 rise, for the supply, we have assumed, cannot be increased by 
 the free coinage of gold. The rise in the value of the coin 
 would not affect that of the bullion, for the latter could not be 
 
 WORLD DEMAND FOR USE 
 IN ARTS AND AS MONEV 
 
 DEMAND FOR MONEY IN 
 UNITED.STATES 
 
 COLD BULLION 
 
 258 CHAINS 
 
 MELTING POT •*- 
 
 WORLDS SUPPLY OF COLD 
 
 SUPPLY OF MONEY (N 
 UNITED STATES 
 
 Diagram VI 
 
 converted into coin. Money of this kind, even though made 
 of gold, would be fiat money, for its supply would be artificially 
 regulated and its value would be independent of the value of 
 gold. If for any reason the value of gold should rise until 258 
 grains were worth ^10, this money would then be only semi- 
 fiat, for any further advance in gold would result in the melting 
 down of coins, so that coins and bullion would rise in value 
 together. 
 
 The world has had experience with gold and silver fiat money. 
 Indeed, during the Middle Ages the coins of various European 
 
268 MONEY AND CURRENCY 
 
 countries possessed fiat characteristics ; for as the free and 
 unlimited coinage of gold and silver was not permitted, the 
 supply of money was not automatically regulated by the abun- 
 dance or scarcity of the precious metals.-' An interesting illus- 
 tration of silver fiat money was furnished by India between 
 1893 and 1897, an account of which is given in Chapter XIV. 
 
 Depreciated Credit Money 
 
 181. The fiat money with which the world has had most ex- 
 perience has been irredeemable and depreciated credit money, 
 either bank notes or government notes. Credit money, if 
 redeemed on demand, and if the people have confidence in the 
 issuing bank or government, enjoys the same exchangeability 
 as money itself, in lieu of which it serves as a common medium 
 of exchange. But if it is irredeemable and is issued in excess 
 of the monetary need, credit money falls in value, losing some 
 degree of its acceptability and being quoted at a discount.^ In 
 the same way a man's promissory note or the mortgage bond 
 of a railroad is discredited and brought below par by any 
 doubt as to its final payment. 
 
 In this respect credit money and other forms of credit are 
 alike ; all sink to a discount when there is fear that the promise 
 on their face will not be kept. But after depreciation has 
 begun, the forces governing the value of credit money, if it is a 
 legal tender, are quite different from those governing the value 
 of other forms of depreciated credit. The demand for mortgage 
 bonds, promissory notes, etc., comes from investors who are 
 seeking interest on their capital. There is, as a rule, no such 
 demand for credit money, for it does not commonly bear 
 interest. Credit money is wanted by men not as an invest- 
 ment but as a medium of exchange. The value of a bond on 
 which interest is in default reflects the judgment of investors 
 with regard to the prospects of ultimate payment ; the value of 
 
 ^ See Pierson, Economics-, p. 416. 
 
 ''■ The forces preserving credit money from depreciation are considered more 
 fully in Chapter XVI. 
 
FIAT MONEY- THE GREENBACK 269 
 
 depreciated credit money, if it is legal tender and can be made 
 to serve as money, is born of the general demand for it as a 
 medium of exchange and basis of credit. 
 
 When legal-tender credit money is depreciated it becomes 
 the common medium of exchange and the standard of prices. 
 Since it is worth less than the money it has represented, 
 debtors evidently profit by its use. Bankers, who are the 
 largest single class of debtors in any country, are obliged to 
 accept it in payment of loans and so are forced to pay it out to 
 depositors ; hence depreciated credit money quickly gets into 
 every channel of the circulation, effectually driving out the old 
 standard and becoming itself a new standard of prices. All 
 business is before long done in terms of the depreciated money. 
 It becomes not only the standard of prices but also the basis 
 of credit, for promissory notes, checks, drafts, etc., are canceled 
 by its payment. As a result it becomes the object of the coun- 
 try's monetary demand and acquires a value of its own quite 
 independent of its relation to the old standard. It becomes, in 
 short, fiat money, its value being due to the monetary service it 
 performs rather than to its promissory relation to the old money. 
 
 182. It must not be inferred from the foregoing analysis 
 that confidence is not a factor in the value of depreciated credit 
 money. A little reflection will show that the element of con- 
 fidence must underlie all forms of fiat money. If people posi- 
 tively distrust the issuing government or bank, if there is no 
 feeling of certainty with regard to the amount of such money 
 already issued or to be issued, if there is fear of national bank- 
 ruptcy or dissolution, men will withhold goods from sale or 
 resort to barter rather than accept money which is liable to 
 become worthless overnight. Under such circumstances depre- 
 ciated credit money or any form of fiat money loses all its 
 acceptability and ceases to be money. To the extent that there 
 is doubt or fear about the future value of fiat money its 
 acceptability is lessened, the demand for it to serve as money 
 is reduced, and its value is lowered. 
 
 This point is not always clearly made in books on money. 
 Because the initial depreciation of credit money is due to loss 
 
270 MONEY AND CURRENCY 
 
 of confidence, further fluctuations in its value are commonly 
 attributed to the same cause, the influence of the monetary 
 demand being ignored. Some writers even take the view that 
 the value of depreciated credit money hinges altogether on its 
 prospects of redemption, varying with every shift of popular 
 confidence. Increasing issues, according to this view, cause 
 further depreciation, not because of a new relation between 
 the demand for and supply of money but because the people 
 have less faith that the money will be redeemed. This view is 
 inadequate, for it takes into account only one of several cir- 
 cumstances which affect the value of such money. 
 
 183. Nor is it true, as is sometimes held, that men arrive at 
 the value of depreciated credit money by consciously compar- 
 ing it with the old standard. When selling goods men consider, 
 as a rule, only two things, namely, the value of the goods and 
 the value or purchasing power of the money offered. Their 
 estimate of the money's purchasing power is not a product of 
 conscious comparison with any single commodity ; it is forced 
 upon them, without conscious calculation on their part, by the 
 prevailing prices of commodities in general. These show what 
 the money is worth in goods, and that is all men want to know. 
 If there is no doubt as to the immediate future of the depre- 
 ciated credit money, the credit and stability of the issuing gov- 
 ernment or bank not being threatened, men soon get to regard 
 it as possessing a value of its own, and unconsciously attribute 
 changes of prices to changes in the values of things. When 
 this condition prevails the depreciated credit money loses its 
 credit characteristics and becomes pure fiat money, its value 
 depending upon its supply in relation to the monetary demand. 
 
 During a transition from a metal to a fiat standard of 
 depreciated credit money there is always a period of uncer- 
 tainty, during which time commodities have two prices, one in 
 metal and one in paper; but the use of two standards of prices 
 is so inconvenient that this period is usually short. Experience 
 has proved that people soon get so familiar with the value of 
 the fiat money that they base all their calculations upon it, the 
 abandoned metal becoming a commodity like other metals. 
 
FIAT MONEY: THE GREENBACK 271 
 
 184. On account of the importance of this subject we shall 
 now examine in considerable detail several illustrative examples 
 of fiat money. Before entering upon this task it would be well 
 for the reader to review the points thus far made in this chap- 
 ter and get as clear an idea as possible of the nature of fiat 
 money. He must notice that such money has real value and 
 that it serves all the purposes of money. Its value is the prod- 
 uct solely of the demand for money, and there can be no doubt 
 about the reality of that demand. People do not easily grasp 
 the nature of fiat money, for the average man's ideas about 
 money are altogether derived from the use of gold and silver as 
 commodity money, and here money and the metal seem to be 
 the same thing. Fiat money will not be a puzzle to the stu- 
 dent if he clearly understands the principles governing the use 
 of gold as commodity money. As we have seen, even under a 
 system of free coinage the coin and the bullion are not abso- 
 lutely identical in value ; sometimes the bullion is the more 
 valuable, and then coins are melted down.^ In all fundamental 
 respects fiat money is exactly like commodity money ; the only 
 difference between the two is in the regulation of the sup- 
 ply, the one being automatic, the other artificial. The value 
 of commodity money is linked to the value of its -material ; 
 the value of fiat money is independent of the value of its 
 material. 
 
 All the propositions with regard to the nature of money set 
 forth in Chapter II apply to fiat money as well as to commodity 
 money. It may serve as a standard of prices, as a so-called 
 measure of value, as a store of value, and as a standard of 
 deferred payments. It should not be inferred from this state- 
 ment that it performs all these functions as satisfactorily as 
 commodity money, — that is a subject still to be discussed, — 
 but that it is real money, possessing real value and capable of 
 doing all the work of money, there cannot be the slightest 
 doubt. 
 
 1 The greater value of gold as bullion than as coin is shown either by rising 
 prices of gold ornaments, etc., or by relatively lower prices of goods and securities 
 in foreign countries. 
 
272 MONEY AND CURRENCY 
 
 Greenbacks as Fiat Money 
 
 185. In the United States the greenback era, extending 
 from 1862 to 1879, furnishes an interesting illustration of fiat 
 money. During this period the standard money of the United 
 States was the government's promise to pay, which was worth 
 less than the coin in which it was nominally redeemable. In 
 the summer of 1861, the money of the country then being gold, 
 the Secretary of the Treasury negotiated with the banks of 
 New York City a loan of ^150,000,000. By December of that 
 year Confederate successes on the field of battle and financial 
 indecision or incapacity at Washington had so weakened 
 northern credit that these bonds were practically unsalable. 
 Depositors, alarmed by the outlook, withdrew so much gold 
 from the New York banks that they were forced to suspend 
 specie payments December 30, 1861. The stopping of specie 
 payments in New York necessarily led to general suspension 
 throughout the country, except in California, where the banks 
 continued on a specie basis throughout the war. Bank notes 
 at once became the only kind of cash easily obtainable. 
 
 It being clear that the government could no longer obtain 
 gold from the banks, the paper-money advocates in Congress 
 met with little opposition. On February 25, 1862, the first 
 so-called legal-tender act was passed by Congress. It provided 
 for the issue of ^150,000,000 United States notes promising 
 payment in coin to bearer, no date for payment being fixed. 
 These notes were issued in denominations convenient for use 
 as currency. In the following June another issue of the same 
 amount was authorized, and on January 13, 1863, an issue of 
 ^100,000,000, making the total issue ^400,000,000. In June, 
 1864, Congress authorized an additional issue of ^50,000,000, 
 but provided that this issue should be temporary, so that at the 
 end of the war $400,000,000 of these notes were outstanding. 
 
 These United States notes, payable to bearer at an indeter- 
 minate date, and popularly called greenbacks because of their 
 color, were legal tender for all payments, but from the first 
 were worth less than their face value in gold coin, and soon 
 
FIAT MONEY: THE GREENBACK 273 
 
 became the standard money of the North. As the war pro- 
 gressed and successive issues were put forth they rapidly 
 depreciated with respect to gold. Their depreciation was 
 greatest in 1864, when $100 in greenbacks was worth only 
 ;^40 in gold. There was of course a corresponding rise in the 
 prices of goods. All business within the country was done 
 upon a greenback basis, gold and silver having disappeared 
 from circulation. After 1865, peace being restored, the green- 
 back began to appreciate, but it did not reach parity with gold 
 until just before January i, 1879, when in accordance with a 
 law passed in January, 1875, the government began the redemp- 
 tion in gold of all greenbacks presented. 
 
 Prices and the Supply of Money 
 
 186. In comparing the course of prices during the greenback 
 period with changes in the supply of money we must take into 
 account four important facts : (i) the supply of money during 
 part of this period included other legal-tender paper besides the 
 greenback ; (2) bank notes, fractional currency, etc., although 
 part of the currency supply, were not part of the money supply; 
 
 (3) depreciated credit money was issued by the Confederacy; 
 
 (4) the demand for money was subject to great changes. 
 
 I. March 3, 1863, Congress authorized the issue of $400,000,- 
 000 legal-tender Treasury notes, which were to bear interest at 
 not over 6 per cent. They were intended for use as a medium 
 of exchange, but no denominations under $10 were permitted. 
 The total issues under this law were as follows : $44,520,000 in 
 one-year notes, $166,480,000 in two-year notes, and $266,595,- 
 000 in three-year compound-interest notes. All these notes, 
 since they were legal tender, belong in the same category as 
 the greenbacks and must be reckoned as part of the country's 
 supply of money. They were not a convenient medium of 
 exchange, for their interest feature gave them increasing value 
 from day to day ; but in the reserves of banks they were as 
 serviceable as the greenback itself. As a basis of credit, there- 
 fore, these notes had almost the same effect upon prices as 
 
2 74 MONEY AND CURRENCY 
 
 would have been exerted by an equal quantity of greenbacks. 
 There is no means of ascertaining what proportion of them was 
 held by banks or how many were held as an investment by 
 private persons ; hence no exact estimate can be made of the 
 quantity of fiat money in existence during this period. In 1864 
 the outstanding issues of these notes amounted to 1^178,000,- 
 000, and in 1865 to 1^242,000,000. Thereafter there was a 
 steady decline in the amount outstanding until 1872, when all 
 had been retired. Although we cannot be certain of the extent 
 to which these notes performed the function of money, it would 
 manifestly be an error not to treat them as part of the supply. 
 
 Another element of uncertainty, especially during the first 
 three years of the period, relates to the use of gold. After 
 1 86 1 coins of this metal ceased to circulate, the greenback 
 being the cheaper money. Very little gold, however, was 
 exported from the United States until 1865, and it is quite 
 probable that between 1862 and 1865 many bankers, although 
 they paid out no gold over their counters, based their credits 
 to some extent on their holdings of this metal, for it was easily 
 and quickly convertible into greenbacks. There is no reason 
 for believing that this was the general practice among bankers, 
 but that it prevailed to some extent cannot be doubted. Never- 
 theless after 1862 we cannot properly consider the stock of 
 gold in the country as part of the money supply. In the vaults 
 of banks it was regarded very much as government bonds are 
 at the present time, that is, as an asset easily convertible into 
 lawful money. 
 
 2. It is important to distinguish clearly between money and 
 currency. The money supply, as has been seen, consisted of 
 greenbacks and other forms of legal-tender paper. The cur- 
 rency included these and all kinds of non-legal-tender credit 
 money, such as bank notes, subsidiary silver, and fractional cur- 
 rency. Until 1865 most of the country's credit money consisted 
 of the notes of state banks, which were redeemable in green- 
 backs. After 1865 these were withdrawn from circulation on 
 account of a prohibitory tax, the notes of national banks taking 
 their place. 
 
FIAT MONEY- THE GREENBACK 275 
 
 As bank notes were not legal tender they could not serve as 
 a banking reserve and hence could not exert as much influence 
 upon prices as the same quantity of greenbacks. As " hand-to- 
 hand money " these bank notes were a substitute for green- 
 backs and so rendered more greenbacks available for use in 
 banking reserves than would have been available had the notes 
 not been issued. These notes, therefore, contributed to the 
 maintenance of the level of prices. However, since they were 
 themselves redeemable in greenbacks, their issue not only 
 necessitated a reserve of greenbacks but was limited in volume 
 by the difficulty of obtaining this necessary reserve. It is evi- 
 dently wrong to treat the bank note as if it possessed the same 
 potency as the greenback ; it was only one of many forms of 
 credit, all of which were contributing to the support of prices. 
 We cannot consider bank notes part of the money supply, nor 
 should we expect to find any correspondence between their 
 quantity and the course of prices. The supply of bank notes 
 always tends to increase when the need for currency increases. 
 Generally speaking, therefore, we may infer from an increasing 
 volume of bank notes not that a rise of prices will result but 
 that a fall of prices has been prevented. While we may expect 
 to find that the course of prices will in general be affected by 
 changes in the supply of money, there is no reason to expect 
 that it will correspond with changes in the supply of currency, 
 or, as it is often called, the " total circulation " of the country. 
 
 3. In a study of the value of the greenback we must not 
 ignore the fact that while the war lasted the people of the 
 South had a money of their own. The Treasury notes of the 
 Confederacy, although not a legal tender, were receivable for 
 all public dues. They never possessed perfect acceptability as 
 money, yet in some parts of the South they became the com- 
 mon medium of exchange. Throughout the war the South was 
 practically without a recognized standard. The people used 
 greenbacks to some extent, and sometimes their exchanges 
 were effected by the use of gold. Strictly speaking, the ^500,- 
 000,000 of paper money issued by the Confederacy constituted 
 a part of the country's money supply during the Civil War. 
 
276 MONEY AND CURRENCY 
 
 We cannot, however, class the Confederate note with the green- 
 back. It can be given recognition merely as one of the factors 
 lessening the demand for greenbacks, for to some extent it 
 satisfied the South's demand for money. ^ 
 
 4. The monetary needs of a country are not the same in war 
 as in peace. When half the men of a country go out of its 
 factories and business houses into military camps, prepared to 
 destroy wealth instead of to create it, their wages cut to a pit- 
 tance, it is evident that the production of wealth must decrease 
 and that the volume of exchanges must decline. As a result 
 there should be a lessened demand for money and a tendency 
 of prices to rise if the supply of money is not reduced. If, 
 however, the issue of a war is doubtful, and the people fear 
 hostile invasion and the violation of business contracts, a con- 
 traction of credit is likely to result, business is brought more 
 and more to a cash basis, and the demand for money, instead 
 of being lessened by war, may be increased and prices fall. But 
 if credit is not disturbed, a war which draws a large part of the 
 male population away from trade and industry will work a 
 decrease in the demand for money and a corresponding rise of 
 prices. The common notion that war increases the demand for 
 money grows out of the confusion of money with capital. Gov- 
 ernments borrow immense sums during a war and the rate of 
 interest usually rises in consequence ; but, as was pointed out 
 in Chapter VII, the demand for capital is not a demand for 
 money. 
 
 Question of Demand and Supply 
 
 187. The demand for the greenback as money in 1862 must 
 certainly have been much less than had been the demand for 
 gold in preceding years, for the country had been split in two, 
 so that the monetary demand brought to bear upon the green- 
 back came, for the most part, from only one section. There is 
 no evidence that the people of the North lost confidence in 
 
 1 The greenback never became the money of the South. From 1865 to 1879, 
 while the North was on a greenback, fiat-money basis, in many sections of the 
 South business was conducted upon a specie basis. 
 
FIAT MONEY: THE GREENBACK 277 
 
 their banks or that the use of credit instruments was to any 
 large extent curtailed. Inasmuch as the need for money was 
 reduced by the withdrawal of several hundred thousand men 
 from gainful occupations, it seems reasonable to say that the 
 war caused in the North a lessening of the demand for money. 
 Even, therefore, if the money supply of the North had not been 
 increased, prices would naturally have been higher. 
 
 In 1 865 the armies of the North and the South were disbanded. 
 There were two reasons why the demand for money should 
 then increase, (a) Several hundred thousand men returned to 
 the paths of industry and business, greatly increasing the 
 volume of exchanges, (d) In so far as the people of the South 
 made use of the greenback, a new and additional demand for it 
 arose, and this demand tended to increase as time passed and 
 the prejudice against the greenback wore away. We should 
 naturally expect, therefore, on account of this enlarged mone- 
 tary demand, that the close of the war would be followed by a 
 rise in the value of greenbacks and by a fall of prices. 
 
 188. We cannot get exact data with regard either to the 
 supply of money or to the forces governing the demand. The 
 data presented in the following tables are estimates and can be 
 only approximately correct. The reader must beware of think- 
 ing that positive conclusions can be drawn from a study of the 
 statistics and charts which follow. They suggest inferences 
 and explanations when viewed in the light of sound theory, and 
 it is for that reason they are presented. 
 
 The table on page 278 shows the constituent elements of the 
 supply of money and currency from i860 to 1879. During i860 
 and 1 861 the money supply consisted entirely of gold; thereafter 
 of greenbacks and other legal-tender paper.^ The supply of 
 
 1 This " other legal-tender paper " included the one- and two-year notes of 
 March 3, 1863, the compound-interest notes of June 30, 1864, and the 3 per cent 
 certificates of March 2, 1867. The government issued other forms of certificates 
 which doubtless did some service as money, for public creditors were obliged to 
 accept them. The figures for the amount of gold in the country (column I) are 
 taken from Muhleman's Monetary Systems of the World, pp. 60-61, except that 
 the estimate of $100,000,000 in gold in use as money in 1862 is my own. After 
 1862 gold is left out of account; the Pacific coast states, where its use was con- 
 tinued, were from the monetary point of view a foreign country. 
 
278 
 
 MONEY AND CURRENCY 
 
 greenbacks increased steadily until 1865, then declined until 
 1873, after which date there was little change. The supply of 
 currency also increased in the same proportion until 1865, and 
 
 STATISTICS OF GREENBACK PERIOD 
 (In Millions of Dollars) 
 
 
 1 
 
 Gold 
 
 II 
 
 Green- 
 backs 
 
 III 
 
 Other 
 
 Legal 
 
 Tender 
 
 IV 
 
 Total 
 Money 
 
 V 
 
 Bank 
 Notes 
 
 VI. 
 Other 
 Credit 
 Money 
 
 VII 
 To'al 
 Credit 
 Money 
 
 VIII 
 
 Total 
 Currency 
 
 i860 
 I86I 
 
 250 
 
 
 
 235 
 25° 
 
 207 
 202 
 
 
 207 
 202 
 
 442 
 452 
 
 IS62 
 1863 
 
 100 
 
 150 
 
 
 250 
 
 39' 
 
 184 
 239 
 
 20 
 
 184 
 259 
 
 434 
 650 
 
 1864 
 1865 
 
 
 447 
 43' 
 
 178 
 242 
 
 625 
 673 
 
 210 
 289 
 
 23 
 
 25 
 
 233 
 314 
 
 858 
 987 
 
 1866 
 IS67 
 
 
 401 
 372 
 
 180 
 
 '35 
 
 58. 
 5°7 
 
 301 
 303 
 
 27 
 28 
 
 328 
 331 
 
 909 
 83S 
 
 1 868 
 1869 
 
 
 356 
 356 
 
 105 
 55 
 
 461 
 411 
 
 303 
 303 
 
 33 
 32 
 
 335 
 
 335 
 
 797 
 746 
 
 1870 
 1871 
 
 
 356 
 356 
 
 48 
 32 
 
 404 
 388 
 
 302 
 320 
 
 40 
 41 
 
 342 
 361 
 
 746 
 749 
 
 1872 
 1873 
 
 
 356 
 356 
 
 12 
 
 368 
 356 
 
 340 
 
 347 
 
 4' 
 47 
 
 3S' 
 391 
 
 749 
 750 
 
 1874 
 1S75 
 
 
 382 
 376 
 
 
 382 
 376 
 
 352 
 354 
 
 56 
 
 402 
 410 
 
 784 
 786 
 
 1S76 
 1877 
 
 
 370 
 360 
 
 
 370 
 360 
 
 333 
 3'7 
 
 61 
 
 67 
 
 39' 
 3S4 
 
 764 
 744 
 
 1878 
 1879 
 
 
 347 
 347 
 
 
 347 
 347 
 
 323 
 329 
 
 88 
 "7 
 
 411 
 446 
 
 758 
 793 
 
 then declined somewhat but not in the same proportion as the 
 supply of money ; for after 1865 there was a gradual increase 
 in the quantity of bank notes and other credit money. 
 
 The figures in this table include cash in the United States 
 Treasury. The amount of this was not large and did not greatly 
 
FIAT MONEY: THE GREENBACK 
 
 279 
 
 vary, so that the general result would not be much affected 
 even if it were deducted from the totals. But it should not be 
 deducted; the United States Treasury is one of the largest 
 business organizations in the country, and its need for a cash 
 balance is legitimately a part of the country's monetary demand. 
 
 VALUE OF THE GREENBACK 
 
 
 Falkner Index Number 
 
 (Greenback Prices 
 
 after 1861) 
 
 Greenback Price of 
 Gold Dollar 
 
 Gold Price of Green- 
 back Dollar 
 
 i860 
 I86I 
 1862 
 1863 
 1864 
 
 lOO.O 
 
 100.6 
 117.8 
 148.6 
 190.5 
 
 i'3-3 
 
 142.2 
 
 2°3-3 
 
 8S.3 
 68.9 
 49.2 
 
 1865 
 1866 
 1867 
 1868 
 1869 
 
 216.S 
 191.0 
 172.2 
 160.5 
 153-5 
 
 157-3 
 140.9 
 138.2 
 139-7 
 '33-0 
 
 63.6 
 71.0 
 72.4 
 71.6 
 75-2 
 
 1870 
 
 I87I 
 
 1872 
 
 '873 
 1874 
 
 142-3 
 136.0 
 138.8 
 137-S 
 133-0 
 
 1 14.9 
 IU.7 
 112. 4 
 113.8 
 III. 2 
 
 S7.0 
 
 89-5 
 89.0 
 
 87.9 
 89.9 . 
 
 1875 
 1876 
 1877 
 I87S 
 1879 
 
 127.6 
 
 118.2 
 
 1 10.9 
 
 • I0I-3 
 
 96.6 
 
 "4-9 
 111.5 
 
 1 043 
 100.8 
 1 00.0 
 
 87.0 
 89.S 
 95-4 
 99-2 
 
 ICO.O 
 
 The above table, covering the same period, gives the Falkner 
 index number, the greenback price of a gold dollar, and the 
 gold price of the greenback dollar. The Falkner index num- 
 ber, although imperfect in some respects, undoubtedly corre- 
 sponds in a general way with the actual course of prices. For 
 this period it is the only index number available. The price of 
 gold is the average for each year. 
 
28o MONEY AND CURRENCY 
 
 Chart III, on page 281, enables t"he reader at a glance to 
 compare the general movement of prices with changes in the 
 supply of money and currency. The heavy black line shows 
 changes in the supply of money. (From 1863 to 1872 this 
 included various forms of legal-tender paper. Changes in the 
 volume of greenbacks alone during this period are indicated by 
 a crossed line.) The linked line shows changes in the volume 
 of currency, including all forms of money and credit money. 
 The dotted line shows the rise and fall of commodity prices in 
 greenbacks. 
 
 The chart shows a surprising tendency on the part of the 
 commodity price line to parallel that of the money supply. In 
 the four years following July, 1861, the money supply increased 
 from ^250,000,000 to $673,000,000, a gain of over 170 per 
 cent; in the same period prices rose from 100 to 217. After 
 1865 the money supply decreased and prices fell. The lines 
 keep together until 1874, after which date the price line 
 declines, although the supply of money remains stationary. 
 
 Analysis of Price Changes 
 
 It is worth while to examine these movements in some detail. 
 For convenience we will divide the epoch into three periods: 
 {a) the War Period, 1861 to 1865; {b) the Fiat Period, 1865 to 
 187s; (c) the Resumption Period, 1875 to 1879. The first 
 and third were essentially periods of transition from one stand- 
 ard to another. 
 
 189. {a) In i860 the country was upon a gold basis, and 
 according to official estimates was using as money about $250,- 
 000,000 in gold. Free coinage of silver was permitted, but only 
 subsidiary silver was in use, silver dollars having a higher value 
 as bullion than as coin. The transition year of 1862 was one of 
 monetary chaos. Not until toward the end of the year had the 
 people become accustomed to the greenback. The people of 
 the South were beginning to use their own paper money. 
 What the real supply of money was throughout 1862 it is 
 impossible to determine. We know only that the volume of 
 
FIAT MONEY: THE GREENBACK 
 
 2SI 
 
 
 
 
 
 
 
 
 
 
 
 o 
 
 CM 
 
 O 
 
 o 
 
 o 
 
 00 
 
 o 
 
 o 
 
 o 
 
 IN 
 
 o 
 
 
 
 p; 
 
 *r 
 
 UBp psmii 
 
 ^ s;u3iti^ 
 
 ia 3o3ds 
 
 
 
 
 
 
 1 
 1 
 
 1 
 
 ?s 
 
 
 
 'V 
 
 
 
 
 
 
 
 / 
 < 
 
 
 
 
 y 
 
 
 
 
 
 / 
 / 
 
 
 iS 
 
 
 
 / 
 
 
 
 
 
 / 
 
 
 ?:^ 
 
 
 +1 -uPf 
 
 'pV \io 
 
 idmnsoy 
 
 
 
 / / 
 
 
 
 ^ 
 
 iUB- 
 
 ^^l P30 
 
 1% iiig 
 
 lOUBIJUI 
 
 
 
 (^/ 
 
 
 
 r^ 
 
 
 
 V 
 
 
 
 
 
 
 
 
 K 
 
 
 
 \ 
 
 
 
 
 
 1 / 
 
 
 
 
 F^ 
 
 
 
 
 
 
 
 
 
 
 
 
 R 
 
 
 
 
 
 
 
 / 
 
 
 1 
 
 
 
 s- 
 
 
 91 M3JBf 
 
 J 
 
 i"p 
 
 jr, olfin,} 
 
 
 / / 
 
 
 ? 
 
 
 
 
 msj pad 
 
 do](; syog- 
 
 liBSjr) ;o 
 
 lU3Uraili9J{ 
 
 .s 
 
 ^ 
 
 ^ 
 
 6 
 
 
 
 IS 
 
 
 yi^ 
 
 
 c-*' 
 
 i^^ 
 
 a 
 
 i^ 
 
 
 
 :S 
 
 / 
 
 ' 
 
 
 ^^'A 
 
 N-)°' 
 
 ^ 
 
 <0 
 
 
 
 ^ 
 
 < 
 
 
 •C^" 
 
 
 
 / 
 
 
 
 
 S 
 
 
 ^*%r7 
 
 "■ 
 
 -^^ 
 
 .^ 
 
 \ 
 
 
 
 
 S 
 
 
 
 '•3^H 
 
 W^ 
 
 ^-- 
 
 ^^^^ 
 
 ■-«^. 
 
 
 
 ts 
 
 
 
 
 
 
 
 :^-~^ 
 
 ^ 
 
 
 3 
 
 
 
 
 
 
 f 
 
 
 1 
 
 
 58 
 
 
 
 
 
 
 i 
 
 
 1 
 
 
 
 O 
 
 1 
 
 o 
 
 4=) 
 
 1 
 
 o 
 
 § 
 
 g 
 
 1 
 
 s 
 
 o 
 
 o 
 "^ 
 (ft 
 
 1 
 
 o 
 
 i 
 
 i 
 
 
 
 
 
 
 
 
 
282 MONEY AND CURRENCY 
 
 greenbacks was greatly increased in that year and that the 
 greenback prices of commodities immediately began to rise. 
 The rapid decline in the value of the greenback between 1862 
 and 1865 can properly be attributed to three causes : (i) their 
 increasing quantity; (2) the lessening demand for money on 
 account of the war and on account of the fact that the South 
 had a money of its own; (3) the fluctuating acceptability of 
 the greenback, its future being uncertain as long as the war 
 was undecided. 
 
 190. (b) During the second period (1865-1875) the greenback 
 had practically lost its credit characteristics and become pure 
 fiat money. While no one knew when it would be redeemed, 
 there was no longer any general doubt about its future. A 
 large proportion of the people liked the greenback so well that 
 they opposed its retirement. A strong political faction de- 
 manded that it be made the permanent money of the country, 
 and had sufRcient influence in 1868 to obtain the passage of an 
 act of Congress suspending its further retirement and cancel- 
 lation. The effect of this act upon national credit was so bad 
 that a year later Congress passed what is known as the Public 
 Credit Act, in which the pledge was made that the obligations 
 of the government would ultimately be redeemed in coin. 
 Neither of these acts had any noticeable effect upon the appre- 
 ciating tendency of the greenback as revealed by the prices of 
 commodities. In the four years after 1865 both the price level 
 and the money supply declined almost as much as they had 
 risen in the preceding four years. 
 
 This appreciation of the greenback, or fall of prices, was to 
 be expected ; not only was the money supply decreasing but 
 the demand for money was increasing enormously, for all the 
 people of the country were now engaged in gainful occupations. 
 Except on the Pacific coast and in parts of the South all buy- 
 ing and selling was done upon a greenback basis, and except 
 in import and export circles all price lists were in greenbacks. 
 To the average business man the greenbacks possessed a value 
 of their own. When pricing his goods he no longer thought 
 of their value in gold ; knowing what they had cost him in 
 
FIAT MONEY: THE GREENBACK 283 
 
 greenbacks and what were the prices of other goods, he knew 
 the real value or purchasing power of the greenback and priced 
 his goods accordingly. Only to the importer and exporter was 
 the gold value of the paper money of prime importance, for 
 the one was necessarily a buyer and the other a seller of gold 
 exchange. 
 
 The reduction of the money supply during this period was 
 mainly due to the retirement of the legal-tender compound- 
 interest notes. To what extent these had been used as money 
 is not known. In the construction of the chart it is assumed 
 that all of these notes performed a money function. In so far 
 as this is beyond the facts the chart exaggerates changes in 
 the money supply between 1863 and 1872. 
 
 191. (c) The third period begins with the act of Congress, 
 January 14, 1875, which ordered that the Secretary of the 
 Treasury should take the necessary steps for the resumption 
 of specie payments January i, 1879. This Resumption Act 
 authorized an issue of bonds to any amount necessary to 
 accomplish the purpose, and provided that the volume of green- 
 backs, then ^382,000,000, should be reduced to ^300,000,000. 
 Three years later (May, 1878) Congress stopped the further 
 retirement of greenbacks ; their volume was then 1^346,68 1,016, 
 and it has not since been changed. 
 
 Thus it happened that during the Resumption Period the 
 supply of money varied but little. Commodity prices, however, 
 continued to decline. There was every reason why they should 
 decline. In the first place, the acceptability of the greenback 
 as money was firmly established. No man with anything to 
 sell had the slightest doubt about the greenback's future pur- 
 chasing power. Indeed, such doubt had practically disappeared 
 long before the Resumption Act was passed. In the second 
 place, depression ruled in the business world, the panic of 
 1873 having given a severe shock to both capital and credit. 
 Between 1874 and 1878 the total deposits of national banks 
 made no increase, and the clearings of the New York banks 
 declined from ^33,000,000,000 in 1872 to ^23,000,000,000 in 
 1878. This contraction of credit necessarily meant a lessened 
 
284 MONEY AND CURRENCY 
 
 monetary demand for goods and consequently a fall of prices. 
 A similar phenomenon was observed after the panic of 1893. 
 Furthermore, during the ten years prior to 1879 there had been 
 a normal growth of population, the railroad builder had opened 
 up large sections of new territory, and numerous new industries 
 had been established. In spite of these developments, all of 
 which increased the demand for money, the supply of money in 
 1879 was less than in 1869. That prices should be lower was 
 natural and inevitable. 
 
 During the Resumption Period the greenback gradually lost 
 its fiat-money characteristics. The practical certainty of its 
 redemption in gold gave it almost perfect acceptability as 
 money and made its value relation to gold of considerable 
 importance as a factor in determining its value relation to 
 goods. This factor, however, was not all important ; it merely 
 prevented the depreciation of the greenback below a certain 
 point. So long as men believed that the greenback would be 
 redeemed in 1879 they would naturally refuse to exchange it 
 for goods at prices very much above the level of gold prices. 
 
 192. A comparison of the course of prices with the supply 
 of currency would, as already explained, possess little or no 
 significance. However, even if the " total circulation " were 
 an important factor in the determination of prices, the varia- 
 tions in its volume during the greenback era would lead to no 
 conclusions antagonistic to those we have already reached, for 
 those variations correspond very closely with contemporary 
 variations in the money supply. The total currency in the 
 country in 1878 was no greater than in 1869, although the 
 population had increased 30 per cent. There cannot be any 
 doubt that the demand for money and currency was greater in 
 1878 than in 1869, or that the supply of currency and money 
 in 1878 was not sufficient to consummate the increased volume 
 of exchanges at the old high level of prices. The amount of 
 " hand-to-hand money " that a country will absorb depends very 
 much on the prosperity of the people, being undoubtedly larger 
 in good times than in dull. Additional issues of credit monej 
 satisfy an increasing demand for cash but not for money. 
 
FIAT MONEY: THE GREENBACK 285 
 
 Greenbacks and the Price of Gold 
 
 193. In view of the fact that many writers have either tacitly or 
 expressly indorsed the opinion that the purchasing power of the 
 greenback, or value in goods, was determined by its gold price, a 
 brief analysis of this matter is worth while. When the greenbacks 
 were first issued ini 862, gold payments having then been suspended, 
 a gold dollar was worth more than a dollar in greenbacks. Gold be- 
 came a commodity like other metals,' and its greenback price was 
 regularly quoted in New York City. As the greenback depreciated, 
 the price of gold rose, as did the prices of other commodities. 
 After 1865, when the greenback was appreciating, the price of 
 gold followed the general tendency of prices. Did the greenback 
 appreciate after 1865 because the price of gold was falling, or 
 did the price of gold fall because the greenback was appreciating .' 
 These questions bring out the point at issue. 
 
 Chart IV, on page 286, will enable the reader to compare the 
 movements of general prices with changes in the greenback price 
 of gold. The dotted line represents commodity prices in green- 
 backs ; the black line, the price of gold in greenbacks ; the chained 
 line, the supply of money. For the years 1862 to 1865 these lines 
 represent quarterly averages.^ After 1865 the lines indicate only 
 the annual average prices of both gold and commodities. The 
 reader will notice that there is a general correspondence through- 
 out the chart between the gold line and the commodity line. The 
 price of gold reached its maximum in 1864 and commodity prices 
 touched their highest point in 1865. Both lines fall sharply during 
 1865, but the fall in the price of gold is much greater than in the 
 prices of commodities. After 1865 the gold line remains consider- 
 ably lower than the commodity line until 1878. 
 
 194. In considering the relation between gold and com- 
 modity prices during this period we must first note that the 
 prices of all imported commodities must have closely followed 
 
 1 The index number for " Greenback Prices of Commodities " is taken from 
 the Report of the Indianapolis Monetary Commission, p. 463. 
 
286 
 
 MONEY AND CURRENCY 
 
 
 
 
 
 
 
 oo 
 1^ 
 
 
 
 
 g 
 
 1 
 
 i 
 
 1 
 
 
 
 ,' 
 
 
 
 
 
 
 £ 
 
 
 
 
 fl 
 
 A 
 1 1 
 / / 
 
 
 fe 
 
 
 
 
 
 
 
 
 
 / / 
 
 
 
 
 
 tllBf 1 
 
 /uoildum 
 
 sa 
 
 
 
 1 / 
 
 4 / 
 
 
 
 s 
 
 
 limo 
 
 SH joola^ 
 
 m ""RE 
 
 w 
 
 
 
 / 
 
 4/ 
 
 
 
 ?2 
 
 
 
 
 
 
 
 
 A ?/ 
 
 
 p; 
 
 
 
 
 
 
 
 
 ;/ 1 
 
 
 ?i 
 
 
 
 
 
 
 
 
 7 ~ 
 
 ; ( 
 
 
 s 
 
 
 
 
 
 
 
 « A 
 
 ,/ 
 
 / 
 
 
 S£ 
 
 
 8U 
 
 WBMBV 
 
 ipaio ijii 
 
 nj 
 
 
 #7 
 
 f^ 
 
 
 
 S 
 
 t-qsj pa 
 
 Wo;s sip 
 
 !<I03aig j( 
 
 iuatil34 
 
 =)1 
 
 4/ ^ 
 
 f 
 
 
 
 15 
 
 
 
 
 
 ,*> 
 
 r-'i 
 
 i <^ 
 
 \ 
 
 
 
 :g 
 
 
 
 
 --• 
 
 ^-; 
 
 
 -< 
 
 > 
 
 > 
 
 
 
 S 
 
 
 
 
 
 ^__ 
 
 ■^^ 
 
 
 _3 
 
 
 
 
 S 
 
 "? 
 
 X 
 
 
 
 
 
 
 
 
 
 
 
 
 — 
 
 ■"•*> 
 
 52 
 
 
 
 
 
 
 ~~7, 
 
 ^ 
 
 >" 
 
 
 
 -N^ 
 
 •^^ 
 
 i 
 
 
 
 
 
 
 
 
 ,,j^-> 
 
 ^ 
 
 
 
 § 
 
 S 
 
 § 
 
 1 
 
 § 
 
 s 
 
 ? 
 
 <s> 
 
 1 
 
 
 ' ■ ■_■■ 
 
 
 
 
 
FIAT MONEY: THE GREENBACK 287 
 
 the fluctuations in the price of gold. Purchasers paid for them 
 with gold, and were compelled, therefore, when selling their 
 goods for greenbacks, to take into account the value of gold in 
 greenbacks. The prices of all imported goods therefore rose 
 and fell with gold. So also the greenback prices of leading 
 articles of export must have been affected by changes in the 
 gold value of the greenback. Exporters to countries upon a 
 gold basis received gold (or gold exchange) in payment, and 
 this they sold for greenbacks ; hence a rise in the greenback 
 price of gold, since it increased the greenback profits of 
 exporters, stimulated the export demand for certain articles 
 and caused their prices also to rise. 
 
 But the fact that the prices of leading articles of import and 
 export must have been influenced by fluctuations in the green- 
 back price of gold by no means proves that the value or pur- 
 chasing power of the greenback hinged upon its value relation 
 to gold. It could as easily be proved that the value of the 
 greenback depended on its value relation to silver, for the 
 prices of all articles exported to or imported from countries 
 upon a silver basis must have reflected changes in the green- 
 back price of silver, a fall in that price stimulating imports 
 until the prices of the imported articles had fallen correspond- 
 ingly, while a rise in that price would necessarily have stimu- 
 lated the export demand for such of our goods as were wanted 
 in countries on a silver basis. 
 
 Since the bulk of our foreign trade was with Europe, which 
 was upon a gold basis, the greenback prices of many commodi- 
 ties tended to follow pretty closely variations in the greenback 
 price of gold. If our largest trade had been with Mexico, India, 
 and the Orient, our prices would have been influenced rather 
 by the greenback value of silver.^ 
 
 195. In the second place, it should be noted that the green- 
 back price of gold was in the main the product of expert 
 
 ^ The influence of world forces upon the prices of certain articles is tersely 
 expressed by Mr. Roberts, Director of the Mint: "Goods in every country are 
 attached to the world's standard whether the money is or not " (Report for i8g8, 
 p. 168). 
 
288 MONEY AND CURRENCY 
 
 estimates as to the future value of the greenback. Gold was 
 a subject of speculation. It was bought and sold like corn, 
 wheat, and cotton. Its greenback price reflected the judgment 
 of experts as to the future value of greenbacks. A buyer of 
 gold was a seller of greenbacks, and a seller of gold a buyer 
 of greenbacks. Any condition that promised an increase in the 
 value of the greenback caused a fall in the price of gold ; any 
 circumstance that threw doubt upon the greenback caused 
 a rise in the price of gold. For example, between 1866 and 
 1869 the greenback price of gold did not decline,^ yet the value 
 of the greenback with respect to commodities in general rapidly 
 advanced during this period. In these years the expert judg- 
 ment of the country was in doubt about the future of the green- 
 back ; hence its value with respect to gold did not advance. 
 A strong political faction was opposed to its retirement, and 
 there was a possibility that the supply might be indefinitely 
 increased. Early in 1869 Congress passed the Public Credit 
 Act pledging the ultimate redemption of the greenback in coin. 
 This act had no effect upon commodity prices, i.e. upon the 
 value of the greenback, but did cause an immediate fall in 
 the price of gold. These facts indicate that fluctuations in the 
 price of gold, instead of being the cause of changes in the prices 
 of commodities, were rather the effect of such changes. 
 
 In the same way prices in Wall Street reflect the expert 
 judgment of the country in regard to industrial prospects. 
 Railroad earnings do not decline because stocks fall ; on the 
 contrary, stocks fall because a decline of railroad earnings is 
 anticipated. When conditions warrant the expectation of larger 
 dividends the stock market is buoyant ; when an opposite state 
 of affairs prevails it is depressed. The speculation in gold was 
 in every way analogous to speculation in stocks. The green- 
 back was the real subject of speculation, and its value as 
 revealed by general prices was determined by the demand for 
 it as money. After 1865 it steadily appreciated because this 
 money demand increased with the growth of the country. 
 During the five years following the close of the war there 
 
 1 The average price of gold in April, 1866, was 127 ; in May, 1869, it was 139. 
 
FIAT MONEY: THE GREENBACK 289 
 
 was considerable uncertainty about its future status ; a strong 
 sentiment developed in favor of its permanent retention as the 
 money of the country ; Congress stopped its retirement in 1868, 
 but in 1869 declared that it must some day be redeemed. All 
 these uncertainties were recorded with great sensitiveness by 
 the fluctuations in the greenback price of gold. They seem, 
 however, to have had no effect whatever upon prices in general. 
 The Public Credit Act of 1869 evidently convinced expert judg- 
 ment that the greenback was destined to appreciate. On no 
 other hypothesis can the fact be explained that the price of 
 gold during the next ten years was constantly far below the 
 average of general prices. 
 
 196. Finally, it is impossible to explain the greenback price 
 of gold on the hypothesis that it represented an investment 
 demand for the greenbacks. After the Public Credit Act of 
 1869 the price of gold fell to 115. This meant that in the 
 opinion of experts a dollar in greenbacks was worth about 90 
 cents in gold. There was certainly no reason for believing that 
 the greenback would be redeemed in gold within two years ; 
 yet an investment demand strong enough to make it worth 90 
 cents in gold could not have existed without a confident belief 
 that it would be redeemed within that period. In the seventies 
 5 per cent was the rate of interest which satisfied investors in 
 bonds. Hence, as the result of an investment demand born of 
 confidence in its redemption, the greenback dollar on January i, 
 1877, — even though there prevailed absolute confidence in the 
 success of resumption two years later, — should not have been 
 worth over 90 cents in gold; yet ^100 in greenbacks was then 
 worth ^94.40 in gold. In January, 1875, the present worth of 
 $100 in greenbacks as an investment was only $80 in gold, yet 
 their actual gold value was ;^89. 
 
 The greenback was much more than a mere government 
 bond bearing no interest and maturing in 1879. It was legal 
 tender for the payment of all debts and was in universal demand 
 for that purpose. For five years before 1875, when the date of 
 resumption was uncertain, the gold price of the greenback 
 ranged from 87 to 90. It is impossible to account for this high 
 
290 MONEY AND CURRENCY 
 
 valuation on the supposition that it was due to an investment 
 demand or to increased confidence in the ultimate redemption 
 of the greenback as a government obligation. The greenback's 
 value was due not to an investment demand but to the service 
 which it performed as money. The definite promise of redemp- 
 tion in 1875 merely increased its acceptability and marked a 
 minimum below which its value could not fall. 
 
 LITERATURE 
 
 The subject of fiat money has not received the independent scientific 
 treatment that it deserves. The reader will find some discussion of the 
 subject in the following : F. A. Walker, Money; J. S. Mill, Political 
 Economy, Book III, chaps, vii, viii, and xiii ; N. G. Pierson, Economics, 
 passim; J. A. Nicholson, A Treatise on Money; White, Money and 
 Banking, Book II. 
 
 The use of fiat money is advocated in the following: A. J. Fonda, 
 Honest Money (New York, 1895) ; B. A. Hill, Absolute Money (St. Louis, 
 1875) ; A. Del Mar, The Science of Money. 
 
 An excellent brief story of greenback issues is given in White's Money 
 and Banking, Book II, chap. iii. Other books treating of greenbacks: 
 W. C. Mitchell, A History of the Greenbacks (Chicago, 1903) ; j. J. 
 Knox, United States Notes (New York, 1892) ; A. B. Hepburn, History 
 of Coinage and Currency in the United States (New York, 1915). 
 
CHAPTER XIV 
 
 FIAT MONEY IN FOREIGN COUNTRIES 
 
 197. England's experience with depreciated bank notes from 1797 to 182 1 illus- 
 trates the use of fiat money. 198. Austria's experience with fiat money from 1848 
 until 1900. 199. History of the credit ruble in Russia. 200. Russia's transition 
 from a fiat to the gold standard. 201. British India's involuntary experience with 
 fiat money from 1893 to 1899. 202. The erroneous view that gold became the 
 standard of India as soon as the free coinage of silver was suspended in 1893. 
 203. A comparison of changes in the value of the rupee after 1893 ^'^^ changes 
 in gold and silver. 204. For two or three years India was practically upon a 
 joint standard, the fiat rupee and the commodity gold being both legal tender. 
 205. Brief reference to other fiat systems. 206. The advantages claimed for fiat 
 money: (i) Economy; (2) Stability of value; (3) No "cornering" possible. 
 207. Three objections to so-called ideal money : (i) Doubt as to its practicability ; 
 (2) Danger of inflation ; (3) Its fluctuating relation to other standards. 208. The 
 agitation for paper money in the United States has not been based on scientific 
 principles. 209. The evils of paper money based on property illustrated by the 
 French assignat. 210. In no country could pure fiat money have a firmer basis 
 than the caprice of a single generation. 
 
 197. England's experience with depreciated bank notes a 
 century ago will be found on analysis to confirm the conclusions 
 reached in the last chapter. In 1797, when England and her 
 allies were at war with Napoleon, there was fear lest the coun- 
 try might lose all its gold. To prevent this an unwise act of 
 Parliament forbade the Bank of England to redeem its notes. 
 This so-called Restriction Act remained in force until 182 1, 
 when specie payment, or redemption of bank notes in gold, was 
 resumed. 
 
 During this period the inconvertible notes of the Bank of 
 England were the standard of prices. Although nominally 
 credit money, they were in reality fiat money. For a few years 
 they maintained their face value in gold, but excessive issues 
 soon brought them to a discount. In 1810 the premium on 
 gold was about 16 per cent. The steady rise of prices had 
 
 291 
 
292 MONEY AND CURRENCY 
 
 stimulated imports and so brought about the export of all the 
 gold in the country. ^ 
 
 In 1810 a parliamentary commission, of which the economist 
 Ricardo was a member, put forth the famous " Bullion Report," 
 in which the currency disorders were clearly analyzed and the 
 resumption of specie payments was strongly recommended. As 
 this BuUion Report pointed out, the depreciation of the bank 
 notes was due to their excessive quantity, not to a scarcity of 
 gold nor to any distrust of the bank note. Indeed, as money 
 the English people apparently liked the notes better than gold. 
 Nobody ever questioned their value or their prospects, for there 
 was never any doubt about the intention of Parliament to com- 
 pel ultimate redemption or about the ability of the Bank to 
 redeem. Confidence in the bank note was practically complete 
 and unchanging, yet its gold value was a matter of daily fluctua- 
 tion. The notes of the Bank of England were fiat money, and 
 their value with respect to goods depended not on the prospects 
 of redemption but on the relation between their supply and the 
 need for money in England.^ 
 
 Fiat Money in Austria 
 
 198. Austria has had a long and unhappy experience with 
 fiat paper money. During the Hungarian revolution of 1848, 
 when the monetary unit was the florin (or gulden) of 171.449 
 grains of pure silver, the state bank suspended the redemption 
 of its notes. From that time until the end of the century 
 the only money of the country consisted of the state bank 
 notes and imperial treasury notes, both legal tender and only 
 nominally redeemable in coin. One attempt to resume specie 
 payments in 1859 was blocked by war with Italy, and another 
 
 1 When depreciated credit money is issued to excess the prices of commodities 
 in general rise before the price of gold, for the latter is not affected until the 
 decrease of exports has created an international balance to be settled with gold. 
 This natural order may be reversed, of course, whenever a speculative demand for 
 gold is added to that of importers. 
 
 ^ The value of the notes was indicated by the prices of goods; their value in 
 gold, by the premium on gold. The latter, but not the former, was influenced 
 by England's fortune in war. 
 
FIAT MONEY IN FOREIGN COUNTRIES 293 
 
 in 1866 by war with Prussia. Until 1870 both gold and silver 
 were at a premium of from 12 to 25 per cent. After 1870, 
 when the gold value of silver began to fall, the value of 
 Austrian paper money with respect to silver steadily rose until 
 in 1878 it reached parity with silver. As the law permitted 
 the free coinage of silver, new coins at once came into circu- 
 lation ; but in 1879 the free or private coinage of silver was 
 stopped, the silver coins being thereby made fiat money. It 
 was generally understood at the time that the government 
 would some day adopt the gold standard, but it was not known 
 what weight of gold would be adopted as the monetary unit 
 or in what value of gold the paper florin would ultimately be 
 redeemed. Owing to measures strictly limiting the issues the 
 value of the paper currency steadily rose after 1878 until it 
 became worth more than the silver bullion in the coins by 
 which it could be legally redeemed. After 1879 Austria was 
 without even any pretense to a metal standard. Its money 
 consisted of inconvertible paper and fiat silver guldens, the 
 latter being worth more than the silver they contained. The 
 general expectation that the paper money would some day be 
 redeemed in a gold coin worth more than 171.449 grains of 
 silver undoubtedly had something to do with the increase in the 
 value of the paper money, for its acceptability as a medium of 
 exchange was thereby increased ; but that this was an impor- 
 tant factor in determining its value cannot be maintained, for 
 no man knew in what weight of gold the bank note would be 
 finally redeemed. The Austrian paper and silver money during 
 this period was fiat money, and its value was the result of 
 Austria's monetary demand. 
 
 In 1892 a law was passed providing for the adoption at an 
 early date of the gold standard and naming as the monetary 
 unit the crown ^ (krone), a coin containing 4.705 grains pure gold 
 (.304878 grams). A silver or paper florin was rated as equal 
 
 ' One kilogram of pure gold is coined into 3280 crowns. The crown is 
 divided into 100 heller. The old florin or gulden contained 100 kreutzer. The 
 halving of the monetary unit in 1894 was done in deference to the popular notion 
 that a small unit works advantageously to the poor. 
 
294 
 
 MONEY AND CURRENCY 
 
 to two gold crowns, although at the time the paper florin was 
 worth 6 per cent less than this amount of gold. Theoretically 
 the adoption of this new monetary unit involved a debasement 
 of the standard equal to about 1 5 per cent. At the ratio of 
 
 15.5 to I, which prevailed when the paper money became incon- 
 vertible, the silver florin (171.449 grains pure silver) was worth 
 
 11.06 grains of gold, whereas two crowns contain only 9.51 
 grains. This debasement with reference to gold was evidenced 
 in 1892 by the different rates of premium commanded by the 
 old gold florins and the new gold crowns, the florins being at 
 25 per cent premium in paper money, the crowns at 6 per cent. 
 The old eight-florin gold piece exactly equaled a French napo- 
 leon (21 francs), whereas 20 of the new gold crowns equaled 
 only 21 francs.^ A comparison with American money shows 
 the same differences; the old silver florin in 1848 equaled 
 about 47 cents, but the florin of to-day (two crowns) is worth 
 only 40.6 cents. 
 
 The real standard of Austria, however, was not debased by 
 the law of 1894; ,on the contrary, it was raised 6 per cent. 
 The real standard was the paper florin, which had a value of 
 its own independent of either silver or gold. The law, having 
 named a new unit of gold, properly gave the paper florin such a 
 rating with respect to the new crown that the transition could 
 be effected without disturbance of the price level or injustice to 
 either debtor or creditor. There was no scaling of obligations, 
 for the paper florin was converted into gold at a ratio close to 
 its average gold value during the preceding ten years. 
 
 During the ten years following 1892 the Austro-Hungarian 
 Bank, aided by the government, accumulated some ^200,000,000 
 in gold, and the premium on that metal gradually fell to a 
 fraction of i per cent. At the present time (1905) the country 
 is practically upon a gold basis, although the state bank is not 
 under compulsion to redeem its notes in gold.^ 
 
 ' It was ordained in the law that 100 of the new crowns should be equal to 42 
 of the old gold florins and to 50 paper florins, a difference of 16 per cent. 
 
 ^ In November, 1903, the Austro-Hungarian Bank held ;?226,ooo,ooo in gold and 
 $59,000,000 in silver. Its note circulation amounted to $350,000,000. See Monthly 
 Summary of Commerce and Finance^ November, 1903, p. 1636. 
 
FIAT MONEY IN FOREIGN COUNTRIES 295 
 
 The Credit Ruble in Russia 
 
 199. Russia has just extricated its finances from the chaos 
 of a century's experience with fluctuating fiat money. Paper 
 credit money was first used in Russia in 1768, at which time 
 the unit or standard was the silver ruble (divided into 100 
 kopecks), which was exactly equivalent to four francs. Excess- 
 ive issues of paper rubles in 1786 caused their depreciation, 
 and from that date until 1897, a few years excepted, the mone- 
 tary unit of Russia, despite several efforts to return to a metal 
 standard, was a piece of government paper discredited and 
 unredeemed. The volume of paper rubles, which were known 
 as " assignats," rose in 1817 to 800,000,000 (^600,000,000), and 
 paper with respect to silver was at a discount of 75 per cent. 
 
 In 1839, by a compulsory conversion into new paper money 
 called "bills of credit," at the rate of three and one half of the 
 old paper for one of the new, the volume of paper money was 
 reduced and a metal standard was almost achieved. ^ The 
 Crimean War led to increased issues and rapid depreciation. 
 Between 1845 ^"^d 1857 the volume of paper increased from 
 170,000,000 to 735,000,000 rubles. An unsuccessful effort at 
 redemption in 1863, when the paper ruble advanced nearly to 
 par in silver, was followed by another era of inflation and depre- 
 ciation, until in 1877 the paper was at a discount of 41 per cent 
 with respect to gold, French exchange being quoted at 234 
 francs for 100 rubles, par being 400. Fresh issues on account 
 of the war with Turkey had raised the total to over 1,000,000,- 
 000 rubles. The amount was reduced about 150,000,000 rubles 
 during the next ten years. ^ 
 
 During all this period the legal monetary unit was the silver 
 ruble, but after 1873, when the gold price of silver began to 
 
 1 The new bills of credit, or " credit rubles,'' as they are commonly called, 
 appear to have been at par with silver most of the time between 1840 and 1854. 
 
 2 Following is a translation of the words on one side of the paper ruble : 
 " Imperial Credit Note. On presentation there will be paid at the Exchange Cash 
 room of the Imperial Bank one ruble (or more) in silver or gold." The other side 
 contained a statement that the notes were guaranteed by the whole property of 
 the realm ; also this legal-tender manifesto : " These credit notes enjoy the right 
 of circulation throughout the empire on an equality with silver coin." 
 
296 MONEY AND CURRENCY * 
 
 fall, a sentiment gradually formed in Russia in favor of the 
 gold standard. In 1876 customs duties were made payable in 
 gold, and a few years later Russia's foreign loans were drawn 
 in terms of gold. Nevertheless, that there was no definite 
 purpose to adopt the gold standard was shown by a decree in 
 1885 declaring the legal unit to be the silver ruble of 17.996 
 grams of pure silver, and permitting the coinage of gold at a 
 ratio of i to 15.4958. 
 
 200. After 1887, owing to reduction in the quantity of credit 
 rubles and to improving industrial conditions, the value of the 
 ruble steadily rose until 1890, when it was worth 72 kopecks in 
 gold (par being 100). Then it weakened and its average gold 
 value in 1892 was only 63 kopecks. It rose to 65 in 1893 and 
 to Q'] in 1894. Meantime two significant events had happened. 
 In 1893 the decline in the value of silver, caused by the closing 
 of the Indian mints and the repeal of the Sherman Act in the 
 United States, suddenly made the credit ruble worth more than 
 the quantity of silver which it legally represented. The Rus- 
 sian government, not desiring the silver standard, promptly 
 closed its mints to the coinage of silver rubles in July, 1893. 
 The paper ruble, which was worth 97 kopecks in silver in 1892, 
 rose to 105 in 1893 and 145 in 1894. The second important 
 event was the adoption by the government of a policy intended 
 to prevent wide fluctuations in the gold price of the ruble, 
 which had risen from 63 in 1892 to ^y in 1894. The govern- 
 ment, having accumulated a hoard of gold amounting in 1894 
 to ^450,000,000, entered the markets as a seller of foreign 
 exchange, that is, of gold. In this manner for three years it 
 prevented the gold value of the ruble from rising above 67, thus 
 holding the ruble to a fixed relation with gold. This policy, 
 which was a practical maintenance of the gold standard, was 
 given formal recognition by law in 1897, the paper ruble being 
 made convertible into gold at the rate of 66\ kopecks per ruble. 
 
 In order that the transition from a fiat to the gold standard 
 might cause no disturbance of prices, the law named as the 
 new monetary unit a gold ruble containing one third less gold 
 than the old. Since the paper ruble had for three years been 
 
FIAT MONEY IN FOREIGN COUNTRIES 297 
 
 kept equal in value to between 66 and 6"] kopecks gold, it was 
 evidently at par with the new ruble. Gold rubles of the old 
 coinage, of which some were in existence, were made exchange- 
 able for one and a half of the new.^ This was about the aver- 
 age value which the credit ruble had maintained in gold during 
 a period of twenty-five years. 
 
 The paper ruble was pure fiat money from 1857 until 1893. 
 Legally and nominally it was linked with silver, but actually its 
 value was dependent upon the monetary demand and supply. 
 After 1887 the growing belief that it would some day be re- 
 deemed in gold increased its acceptability as money and tended 
 to raise its value ; but this could not have been a decisive factor, 
 for redemption had not been promised nor had the probable 
 ratio of exchange between the paper and gold ruble been even 
 discussed. Even in 1895, when the drawing of contracts pay- 
 able in gold was authorized, it was officially announced that 
 this step " did not furnish any ground upon which to predict 
 the adoption of a gold standard, or commit the state to any 
 particular method of redeeming the bills now outstanding." 
 
 The establishment of the gold standard was made possible 
 by the large holding of gold accumulated by the Bank of Rus- 
 sia, a government institution. The stock of gold in Russia, 
 according to estimates of the United States Director of the 
 Mint, increased from ^455,000,000 in 1894 to $756,000,000 in 
 1897, when the new monetary system was legally adopted. 
 Silver is now coined only on government account and is credit 
 money like the silver coins of the United States. Imperial 
 credit notes (the old credit ruble) have been retired, the notes 
 of the Imperial Bank having taken their place. 
 
 Fiat Money made of Silver 
 
 201. British India has just passed through a novel though 
 brief experience with fiat money. From 1835 till 1893 India's 
 monetary unit was the rupee of 165 grains of pure silver. 
 
 1 The old gold ruble was equal to 77 cents of our money; the new ruble is 
 equal to 51 cents. 
 
298 MONEY AND CURRENCY 
 
 As free coinage was permitted, the value of the rupee never 
 differed widely from that of 165 grains of silver bullion. Hence 
 prices in India reflected variations in the value of silver. 
 
 The fall in the gold value of silver after 1873, although not 
 caused by any great decline in its real value, and so not attended 
 by a great rise of Indian prices, was a source of positive loss 
 to the people of India and of considerable embarrassment to 
 the government. For the development of its resources India 
 had borrowed capital in England by the sale of gold bonds, the 
 interest on which amounted to about ;£i6,ooo,000 or ^80,000,- 
 000 gold. This interest fund was raised by taxation, the rupees 
 thus obtained being converted by the government into gold or 
 sterling exchange. As the gold price of silver fell in Europe 
 the silver price of gold rose correspondingly in India, so that 
 ;£ 1 6,000,000 in gold represented increasing sums of Indian 
 money. As a result the annual remittance to England absorbed 
 a larger and larger proportion of India's revenues. It increased 
 from 170,000,000 rupees in 1873 to 270,000,000 rupees in 
 
 1892. To the people of India gold seemed to be a commodity 
 of rising value, and their view was nearer the truth than that 
 of the average Englishman or American, to whom silver seemed 
 to be a depreciating metal. 
 
 The depreciation of the rupee as measured in gold, besides 
 proving a burden to the Indian government, seriously inter- 
 fered with India's trade and investment relations with England. 
 It also caused much complaint from the English civil officers 
 in India, whose salaries, paid in rupees, were exchangeable for 
 diminishing sums in pounds sterling. 
 
 In order to check the decline in Indian exchange, that is, 
 in the gold value of the rupee, the government on June 26, 
 
 1893, foreseeing the probable repeal of the Sherman Act in 
 the United States and its depressing effect on the value of 
 silver, ordered that the mints of India be closed to the further 
 coinage of rupees. At the same time notice was given that the 
 government would give rupees in exchange for sovereigns at 
 the rate of 15 rupees for a sovereign (i rupee for 16 pence), 
 and that public dues might be paid in sovereigns at this rate. 
 
FIAT MONEY IN FOREIGN COUNTRIES 299 
 
 As the rupee at this time was worth only about 14 pence in 
 gold, it was evident that no sovereigns would be offered to the 
 government for exchange into rupees at 16 pence per rupee. 
 It was hoped, however, that the cessation of coinage, since it 
 would prevent further increase of the money supply, would 
 lead to a rise in the value of the rupee as the monetary demand 
 of the country increased; and this hope, which was based on 
 sound monetary principles, was realized. The bond uniting the 
 rupee and silver having been broken, their values immediately 
 moved in different directions ; the gold price of silver declined 
 from. 35 pence in 1893 to 26 pence in 1898, while the rupee, 
 fluctuating at first between 13 and 14 pence, finally began a 
 gradual advance, until in 1898 it reached the desired gold valua- 
 tion of 16 pence. In September, 1899, gold was declared full 
 legal tender at 15 rupees per sovereign, or 16 pence per rupee. 
 Thus the gold standard was introduced, although the govern- 
 ment did not agree to redeem rupees in gold. 
 
 For the student of money the transition from silver to gold 
 monometallism in India illustrates certain fundamental prin- 
 ciples with the definiteness of a laboratory experiment. It 
 deserves, therefore, careful examination. 
 
 It should be noted, in the first place, that between 1893 and 
 1899 the rupee was fiat money, its value being the product 
 solely of the need for it to serve as money. Prior to 1893 it 
 had been commodity money, its value subject to world forces 
 acting upon the demand for and supply of silver; but after 
 1893 the rupee was independent of silver, for an increase in 
 the supply of the world's silver could not lead to an increase in 
 the quantity of rupees. Only under two contingencies could the 
 value of silver bullion after 1893 have impressed itself upon 
 the rupee : (i) if silver had risen in value more rapidly than 
 the rupee ; or (2) if the rupee, on account of a decreasing mone- 
 tary demand, had fallen in value more rapidly than silver 
 bullion. In either event rupees would have been melted into 
 bullion and their value kept at par with 165 grains of silver. 
 
 Such a change of values, however, did not take place, nor 
 was it to be expected. From a business and monetary point of 
 
300 MONEY AND CURRENCY 
 
 view India is a developing country, each year bringing addi- 
 tional needs for currency. Furthermore, the national penchant 
 for hoarding cuts into the monetary stock each year. For these 
 two reasons — increase in the demand and reduction of supply 
 — the rupee steadily rose in value after its free coinage was 
 suspended in 1893, and the prices of goods in India corre- 
 spondingly declined. Meantime silver was depreciating, the 
 large coinage demand from India and from the United States 
 having ceased in the same year. 
 
 Gold not the Standard in 1893 
 
 202. The theory that gold became the standard of India as 
 soon as the free coinage of silver was suspended in 1893, and 
 that the silver rupee became a piece of credit money deriving 
 its value from its prospects of redemption in gold, is not 
 tenable.^ The government in 1893 made no declaration as to 
 its intentions with regard to the rupee. It announced that it 
 would accept sovereigns in payment of taxes at the rate of 1 5 
 rupees per sovereign, but it gave the public no ground for 
 expecting that it would redeem the rupee in gold at that rate. 
 
 If the events of 1893 had given rise to a belief that the 
 rupee would be redeemed in gold, and if the rupee had derived 
 its value from that hope or belief, it should have at once risen 
 in value with respect to gold. The rupee, however, was worth 
 less in gold in 1894 and 1895 than it was in 1893 ; its average 
 exchange rate in 1893 was 14.55 pence, whereas in 1894 it was 
 13. 1 pence; in 1895, 13.65 pence; in 1896, 14.45 pence. On 
 the assumption that the rupee was mere credit money, it is diffi- 
 cult to account for this decline in its gold value, for during 
 
 1 This view has been advanced by some writers. Indeed, Mr. W. W. Carlile, 
 writing in the Economic Review for March, 1901, holds that gold was the real 
 standard of value in India after 1873. Such a view would make gold the real 
 standard of value in China at the present time. The only possible ground for 
 Mr. Carlile's position is the fact that the prices of commodities imported from 
 Europe must have tended after 1873 '"^ follow the course of gold prices. For that 
 matter, however, the prices of articles in England which are imported from silver- 
 standard countries tend to follow the variations of prices in the countries from 
 which they are imported, but that fact does not give England the silver standard. 
 
FIAT MONEY IN FOREIGN COUNTRIES 
 
 301 
 
 these years there was no lack of confidence in the government 
 and no inflation of the money supply, the coinage of rupees 
 having ceased. 
 
 203. In order that the reader may have a clear view of the 
 phenomena of this interesting period we give on this page a 
 table which presents the most pertinent statistics. Columns I 
 and II show the gold value of the rupee and of 165 grains of 
 
 THE INDIAN RUPEE AND ITS VALUE 
 
 
 I 
 
 Gold Value 
 of Rupee 
 in Pence 
 
 (Exchange 
 Rate; 
 
 II 
 
 Gold Value 
 
 165 Grains 
 
 Pure 
 
 Silver 
 
 III 
 Gold Price 
 I oz. Silver 
 (Eng. Stand- 
 ard = 444 
 grains) 
 
 IV 
 
 Sauer- 
 beck 
 Index 
 Number 
 
 V 
 
 Coinage 
 
 of Rupees 
 
 (000 omitted) 
 
 VI 
 
 Net Imports 
 
 of Gold in 
 
 Pounds 
 
 Sterling 
 
 (000 omitted) 
 
 VII 
 
 Atkinson 
 
 Index 
 Number 
 
 1890 - 
 
 IS9I 
 
 1892 
 
 18.09 
 16.73 
 
 1477 
 
 17-74 
 16.70 
 14.98 
 
 47-75 
 45.0 
 
 39-75 
 
 72 
 
 72 
 
 68 
 
 131,164 
 
 55.539 
 126,915 
 
 3.954 
 1.653 
 1.770^ 
 
 125 
 
 I 28 
 
 141 
 
 1893 
 
 1894 
 
 1895 
 
 14-55 
 13.10 
 13.64 
 
 13.20 
 
 10-73 
 II. 10 
 
 35-5 
 28.9 
 30.0 
 
 68 
 
 63 
 62 
 
 48,125 
 6382 
 2,II02 
 
 374 
 2,687 •■ 
 1,684 
 
 138 
 
 131 
 128 
 
 1896 
 1897 
 1898 
 
 14.45 
 
 15-35 
 15.98 
 
 11.50 
 10.25 
 10.03 
 
 31.0 
 27.5 
 27.0 
 
 61 
 62 
 64 
 
 3.156^ 
 4,864 
 
 4.179 
 
 1.527 
 3.272 
 4.335 
 
 
 1899 
 
 1900 
 I90I 
 
 16.0 
 16.0 
 16.0 
 
 10.25 
 10.40 
 10.03 
 
 27.5 
 28.0 
 27.0 
 
 68 
 75 
 
 13,018 
 
 171.479 
 49,520 
 
 6,294 
 561 
 
 1,291 
 
 
 pure silver from 1890 to 190 1. The third column gives the gold 
 value of one ounce of silver (English standard 444 grains pure) 
 for the same period. Column IV gives the Sauerbeck index num- 
 ber, the reciprocal of which shows approximately the fluctua- 
 tions in the value of gold ; column V gives the annual coinage of 
 rupees ; column VI, the net imports of gold ; column VII gives 
 Mr. Atkinson's index number computed from prices in India. 
 
 ■■ Net exports of gold. 
 
 2 Coinage in 1894-1897 was mainly of half rupees, which were full legal tender 
 
302 MONEY AND CURRENCY 
 
 The reader will notice the following points : (i) that prior 
 to 1893 the figures in the first two columns are nearly identical, 
 the value of the rupee tending to coincide with that of 165 
 grains of pure silver; (2) that after 1893 the gold value of the 
 rupee was greater than the gold value of 165 grains of silver; 
 (3) that the value of gold between 1893 and 1896 steadily 
 increased, as shown by the decline of the Sauerbeck index 
 number from 68 to 61 ; (4) that the coinage of rupees between 
 1893 and 1898 was hardly sufficient to compensate for the 
 loss from hoarding, abrasion, etc., so that during this period 
 the available stock of rupees probably decreased ; (5) that the 
 importation of gold was uncommonly large in 1897, 1898, 
 and 1899. 
 
 The decline in the gold value of the rupee after 1893, at a 
 time when the rupee itself should not have been falling in 
 value, is explained by reference to column IV, in which gold is 
 shown to be increasing in value. The decline in the gold price 
 of the rupee resulted from the increase in the value of gold. 
 If we assume that the Sauerbeck index number fairly reflects 
 the value of gold, we find that the rupee, between 1893 and 
 1896, when its gold price was declining, was really rising in 
 value or purchasing power. Continuing the comparison, we 
 find that the purchasing power or value of the rupee began a 
 rapid upward movement in 1894. This advance in its real value 
 is roughly indicated by the decline in the Atkinson index num- 
 ber from 138 in 1893 to 128 in 1895. 
 
 Principle of Bimetallism Illustrated 
 
 204. The large influx of gold in 1898 and 1899 illustrates the 
 operation of the principle of the joint standard or bimetallism. 
 In 1899 the government made the sovereign the legal-tender 
 equivalent of 15 rupees, and even before that date it had been 
 willing to accept sovereigns at this rate, which reckoned the 
 rupee as equivalent to 16 pence. Evidently all debts to the 
 government would be paid in sovereigns the moment the value 
 of the rupee was a fraction above 16 pence. During several 
 
FIAT MONEY IN FOREIGN COUNTRIES 303 
 
 months of 1898 it rose above 16 pence, and the importation of 
 gold accordingly became profitable. In 1899, when gold was 
 legal tender for all payments, large quantities of it were im- 
 ported, for it was the cheaper medium of payment. 
 
 Theoretically India still has this double standard, the rupee 
 and the sovereign, the one fiat money, the other commodity 
 money ; but practically, since the government has adopted the 
 policy of exchanging gold for rupees, as well as rupees for gold, 
 the value of the rupee is held at 16 pence, and gold is the 
 actual standard. 
 
 After 1893 considerable fear was expressed in England lest 
 the government of India would not be able to accumulate a gold 
 reserve sufficient for the maintenance of the gold standard. 
 Our analysis shows that the situation itself necessarily led to 
 the automatic accumulation of a gold reserve. The people of 
 India have little use for gold coins ; their favorite money is 
 the silver rupee. Under present conditions rupees will be 
 supplied to the people in sufficient quantities if the government 
 merely adheres to its policy of giving 1 5 rupees in exchange for 
 a sovereign ; and this process, on account of the difference in 
 value between the rupee and 165 grains of silver, — a so-called 
 seigniorage, — will result in the gradual accumulation of a gold 
 reserve. If rupees are coined only under these conditions, and 
 if no bank-note inflation is permitted, no run upon the gold 
 reserve is probable, for that could result only from an excessive 
 supply of currency. Of course, if the monetary need of India 
 should suffer a great decline, as it might on account of depressed 
 industries or famine, the money supply would be redundant 
 and the resultant gold exports might lead to an embarrassing 
 call for rupee redemption. This contingency, however, is little 
 to be feared. 
 
 Chart V, on page 305, gives the reader a graphic view of the 
 value of the rupee after 1893 as compared with 16 pence gold 
 and 165 grains of pure silver. The purchasing power of 16 
 pence gold (indicated by the crossed line) is assumed to be 
 100 in 1892, and subsequent variations are calculated from the 
 Sauerbeck index number. The value of the rupee in 1892, 
 
304 MONEY AND CURRENCY 
 
 when it was coequal with 165 grains of silver, was equivalent 
 to 14.77 pence, or 9 per cent less than 16 pence ; on the chart, 
 therefore, the line indicating its value (black line) begins at 91. 
 The subsequent variations in the value of the rupee are calcu- 
 lated by a combination of the Sauerbeck index number and the 
 gold price of the rupee ; it is of course only a rough approxi- 
 mation, yet it coincides in general with the movement indicated 
 by the Atkinson index number of Indian prices. The fluctua- 
 tions of Indian exchange, i.e. changes in the gold price of the 
 rupee, are shown by the chained line, reference being made to 
 the figures at the right of the chart. The value of 165 grains 
 of silver is shown by the dotted line ; until 1893 it was of 
 necessity practically coincident with the black line showing the 
 value of the rupee. 
 
 The chart shows that the rupee rose in value during 1894 
 and 1895, although during these years its gold price was declin- 
 ing, and that it reached parity with 16 pence in 1898. Any 
 further advance was impossible, for the reason that even a 
 fractional advance above 16 pence caused a transference of the 
 monetary demand from the rupee to gold. The fall in the value 
 of silver after 1893 is a striking illustration of the influence 
 which the monetary demand for a metal exerts upon its value ; 
 and the whole experience of India from 1893 to 1899 illustrates 
 the concurrent use of a double standard. 
 
 205. Our analysis of fiat-money systems by no means exhausts 
 the material afforded by the world's experience. The student 
 will find in history numerous instances of fiat money originating 
 in the depreciation of credit money. Perhaps the best-known 
 illustrations are John Law's paper money issued about 1720 in 
 France and the assignat of the French Revolution. ^ American 
 colonial history also furnishes instructive and interesting experi- 
 ments. But the student need not look to history for illustra- 
 tions, for several foreign countries, notably Spain and Brazil, 
 are upon a fiat basis at the present time. 
 
 1 Some details concerning the issue of assignats are given in Section 209 ; 
 see also A. D. White's Fiat Money Infiation in France. Law's money is well 
 sketched in Nicholson's Aloney and Monetary Probhnis, 
 
FIAT MONEY IN FOREIGN COUNTRIES 
 
 305 
 
 a. 
 a: 
 
 
 2'S uj s 
 <u 8 2 fejS 
 
 
 
 
 1 
 
 ;s 
 
 ir« 
 
 s 
 
 2 
 
 w 
 
 3 
 
 
 
 0^ 
 
 QO 
 
 1 
 
 
 
 
 
 
 
 
 
 ^ 
 
 
 i 
 
 
 
 \ 
 
 
 
 
 
 
 c 
 
 § 
 
 
 
 vN 
 
 
 
 
 
 
 ^^* 
 
 ^ 
 
 i 
 
 
 
 N 
 
 \ 
 
 
 
 
 • 
 
 V 
 
 
 t 
 
 
 
 
 ^ 
 
 k 
 
 
 
 
 \ 
 
 \ 
 x 
 \ 
 \ 
 
 
 1 
 
 1 
 
 \ 
 
 
 r:^ 
 
 
 
 ^■- 
 
 .J 
 
 
 1 
 
 
 
 x^ 
 
 / » 
 
 r 
 
 --' 
 
 
 
 
 
 1 
 
 
 
 w 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 1^ 
 
 
 
 00 
 
 s 
 
 R 
 
 
 
 s 
 
 < 
 s 
 u 
 
306 MONEY AND CURRENCY 
 
 Advantages claimed for Fiat Money 
 
 206. We are now ready for a consideration of certain theo- 
 retical advantages which are claimed for fiat money, and for the 
 discussion of various plans proposed for their realization. This 
 task, which now seems to be of academic interest only, may at 
 any time become a live issue, for in the United States there 
 exists as an evil heritage of the greenback era a latent antipa- 
 thy to metal money, which any sudden emergency, whether 
 born of war or industrial depression, may convert into a. real 
 peril. 
 
 Some theorists upon money, deeply impressed by the imper- 
 fections of commodity money, have advocated the deliberate 
 adoption of a fiat standard. They have called it by various 
 names, such as scientific money, ideal money, absolute money. 
 Stability of value, that is, a uniform price level, is to be 
 secured by artificial regulation of the supply. It is proposed, 
 for example, that a government board of statisticians shall con- 
 struct an official index number of prices and that the supply of 
 paper money shall be inflated when this index number tends 
 downward, and contracted when it tends upward. Fiat money 
 issued under such conditions, it is held, would be superior to 
 metal money in three respects : (i) it would be more econom- 
 ical ; (2) its value would be more stable ; and (3) its supply could 
 not be "cornered." 
 
 If the feasibility of a stable fiat money be granted, the first 
 advantage cannot be denied. Gold and silver are costly materials 
 for money. Every year large sums of capital and the labor of 
 many thousand men are devoted to the production of these 
 metals. If they were not used as money, their value would fall, 
 smaller quantities would then be mined, and considerable labor 
 and capital would be set free for the creation of other utilities. 
 In other words, if the world could safely employ fiat paper 
 money, its wealth would increase more rapidly than it does at 
 present, for many of the men engaged in digging for gold and 
 silver could then be employed in producing the necessaries and 
 comforts of life. 
 
FIAT MONEY IN FOREIGN COUNTRIES 307 
 
 If it be granted that fiat paper money can be maintained at a 
 stable value, then its use would save the business world from 
 the alternating periods of fictitious prosperity and unnecessary 
 depression now caused by the inevitable fluctuations of gold 
 and silver. Since no commodity would decline in price except 
 as it fell in value, one of the causes of perplexity and failure in 
 the business world would be removed. Money would then be 
 a real standard of value, for value and price would practically 
 be synonymous. It cannot be denied that such an ideal money, 
 if it were attainable, would possess great advantages over gold 
 and silver, for stability of value is the most desirable character- 
 istic of money. 
 
 As for the "cornering" of money, only among the ignorant 
 has there ever been any fear of such a feat being attempted. 
 No speculator or clique of speculators has ever tried to corner 
 the money of a country. Such an undertaking would react dis- 
 astrously upon the conspirators. In order to acquire a "con- 
 trolling interest " in the money supply they would be compelled 
 to sell their own property upon a descending scale of prices, so 
 that every step they took would result in a tremendous reduc- 
 tion of their resources. The cornering of money would prove a 
 Sisyphean task, for each abstraction from the supply would lift 
 the value of the remainder to the level first held by the total 
 supply. Wise speculators would not plan such a coup, and 
 foolish ones would ruin only themselves. Furthermore, gold 
 flows from country to country with the greatest possible free- 
 dom, so that any attempt to depress prices in a single country 
 by the segregation of a large quantity of gold would inevitably 
 be futile. 
 
 Defects of Fiat Money 
 
 207. Three strong objections must be urged against a so- 
 called ideal money. In the first place, it is not clear how the 
 supply of such money can be effectively regulated without dam- 
 age to business. The power of artificial expansion and con- 
 traction should be lodged only with men who are in touch with 
 business operations. The establishment of a government bank 
 
3o8 MONEY AND CURRENCY 
 
 having branches in all parts of the country, doing a general 
 business in deposit and discount and having power to issue fiat 
 money at will, would seem to be necessary. Such a bank, by the 
 contraction of its loans and discounts, could depress or inflate 
 prices at will. But within what limits should fluctuations be 
 confined.'' Should a rise of prices due to a legitimate expansion 
 of credit be summarily checked .■• At a time when conditions 
 warrant industrial activity and a natural expansion of credit 
 would not a curtailment of the money supply act like a wet 
 blanket upon enterprise and weaken the productive energy of 
 a people .-' How shall the official statisticians determine whether 
 a rise of prices is due to credit or to an excess of money.'' The 
 idea of a scientific fiat money suggests numerous questions like 
 these. Perhaps they can be answered, but as yet they have not 
 even been discussed. 
 
 Granting, however, that a practicable scheme can be devised, 
 its adoption at the present time or in the near future would 
 be attended by a risk more than offsetting the accruing bene- 
 fits. There is no nation on earth in which the conditions exist 
 that are essential to the stability of fiat money, for there is no 
 nation in which the nature of such money and the circumstances 
 governing its value are understood by the masses of the people. 
 There could be no confidence with regard to the future value 
 of such money, for there could be no certainty that the plan of 
 restriction would be adhered to. Since every expansion would 
 afford relief to the business community and every contraction 
 would be attended by financial stringency, by high rates of 
 interest, and by more or less industrial strangulation, the weight 
 of public opinion would evidently be in favor of expansion and 
 opposed to contraction. In the United States, for example, an 
 act of Congress providing for the restricted issue of such money 
 might be amended or even repealed by the next Congress. 
 Indeed, the next Congress might be composed of men honestly 
 convinced that the supply of money was too small, and that 
 if it were doubled the nation's prosperity would be greatly 
 increased. No one who has followed the newspaper and maga- 
 zine discussion of the money question during the last twenty 
 
FIAT MONEY IN FOREIGN COUNTRIES 309 
 
 years can be in doubt about the dangerous qualities of the 
 " isms " to which this country would be exposed were it to 
 attempt to realize the dreams of the "scientific" money theo- 
 rists. 
 
 A third objection to any form of fiat money is found in the 
 foreign exchanges. No matter how stable the money might be 
 in value, its relation to the standards of other countries would 
 be constantly fluctuating. So long as other countries continued 
 to use gold or silver as their standard of prices, the United 
 States, by the adoption of fiat money, would put itself at a 
 disadvantage in foreign commerce. A change in the value of 
 gold or silver would work artificial and mischievous interference 
 with the country's imports and exports. Importers would never 
 be certain of their costs measured in the money of this country, 
 and exporters would never be sure of the value of their receipts. 
 Since dealers in foreign bills of exchange would incur specula- 
 tive risks, merchants would be compelled to buy exchange at 
 prices high enough to provide, as it were, an insurance fund to 
 cover these risks. 
 
 Furthermore, this fluctuation in the rates of exchange would 
 tend to retard the development of a country, for it would dis- 
 courage the investment of foreign capital. At a time when 
 gold was rising in value our fiat money would seem to foreigners 
 to be depreciating, and they would be averse to sending their 
 capital here, just as they shrank from investing in Mexico and 
 India while the gold price of silver was declining. The evils 
 caused by exchange fluctuations were the real cause of the 
 adoption of the gold standard by Russia and Austria. Finan- 
 ciers in those countries were convinced that the funds needed 
 for internal development would not be advanced by foreigners 
 so long as there was uncertainty about the gold value of the 
 Russian ruble or the Austrian florin. Events justified this 
 view. As soon as the gold policy was definitely decided upon 
 by Russia and Austria foreign capital poured in. Indeed, the 
 influx of foreign capital into Austria in 1892, the date of the 
 gold-standard law, caused a boom in Austria's industries and 
 securities which came near ending in panic, so quickly and 
 
3IO 
 
 MONEY AND CURRENCY 
 
 powerfully had the stimulus been applied. Russia experienced 
 similar effects. Since 1890 more foreign capital has found 
 employment in Russia in the building of railroads and factories 
 than had been invested in that country during the entire cen- 
 tury preceding. This sudden burst of prosperity in Russia and 
 Austria is sometimes pointed to as evidence of the superior 
 qualifications of gold as a money metal. This view is a mistake. 
 The industrial revival in Austria and Russia proves not that 
 gold is the best money possible but that any country is at a 
 disadvantage if its monetary standard differs from that of its 
 rich and prosperous neighbors. 
 
 Paper-Money Advocates in the United States 
 
 208. Political agitators who have clamored for paper money in 
 the United States have not had in mind ideal fiat money. They 
 want no limitation of the supply. They hold that if the vast 
 wealth and credit of the United States were back of paper 
 money there could be no depreciation, for there could never 
 be too much money. A common proposal is that the govern- 
 ment shall issue paper money in such abundance that it can be 
 advanced at a low rate of interest to every man who can deposit 
 as security either farm produce or a mortgage on land. Since 
 money of this kind would have genuine value back of it, how, 
 asks the demagogue, could it depreciate .' Would it not always 
 be worth its face value .-' A man who has no grasp of the prin- 
 ciples upon which the value of money depends might find it 
 difficult to answer these questions. Nevertheless there cannot 
 be the slightest doubt that paper money freely issued and 
 loaned in this way would rapidly depreciate. 
 
 Let us suppose that the plan were adopted by Congress and 
 that paper money amounting to $2,000,000,000 were issued 
 and loaned to people depositing the proper security at Wash- 
 ington. The result would be a doubling of the money supply 
 of the United States without any corresponding increase in the 
 volume of wealth to be exchanged. Since double the old 
 amount of money would be offered for goods, prices would be 
 
FIAT MONEY IN FOREIGN COUNTRIES 311 
 
 lifted 100 per cent and all gold would be exported or withdrawn 
 from circulation. A farmer who had been worth ^10,000 would 
 before long be worth ^20,000. Each of the borrowers could go 
 to the government and, by showing the increased "value" 
 of his property, could double his loan, thus adding another 
 $2,000,000,000 to the money of the country and causing another 
 lift of prices. The farmer originally worth $10,000 would 
 become worth $30,000, and would have security for a loan 
 three times as large as in the beginning. So with every increase 
 of the money supply prices would rise and the power to borrow 
 money would increase. This might go on ad infinitum. Many 
 people would think they were getting rich because the money 
 value of their possessions was increasing, but it must be evi- 
 dent to the reader that a rise of prices caused in this manner 
 would indicate no increase whatever in the real value of goods. 
 Men would be no better off on account of their greater supply 
 of money, for the purchasing power of each dollar would be 
 steadily on the decline. The adoption of such a plan would 
 necessarily lead to wild speculation and a general suspension 
 of industrial operations. 
 
 French Experience with the Assignat 
 
 209. The foregoing hypothetical description, exaggerated 
 though it may seem, is paralleled by the experience of France 
 with fiat money after the revolution in 1789. The new republic 
 was poor in specie but rich in real estate confiscated from the 
 church. These church lands were made the basis for an issue 
 of paper money known as the " assignat." Nominally these assi- 
 gnats were credit instruments — promises to pay coin — and 
 were secured by pledge of the lands of the republic. They con- 
 stituted, so to speak, a general mortgage upon the property of 
 the republic, and were convertible into land at the option of 
 the holder. Although they were not redeemable in coin they 
 seemed abundantly secured, and many people were unable to 
 understand why specie should command a premium. As fresh 
 issues of the assignats were put forth, however, the premium 
 
312 MONEY AND CURRENCY 
 
 on gold and silver steadily rose, and great popular indignation 
 was manifested against the bullion dealers, who were believed 
 to be discriminating with no good reason against the assignat. 
 Men who offered their goods at two prices — a high price for 
 paper money, a low price for specie — were denounced as ene- 
 mies of the republic. The Assembly even declared it illegal for 
 a seller to make any distinction between assignats and specie. 
 Nevertheless the assignat steadily declined in value and gold 
 and silver entirely disappeared from circulation. From about 
 2,000,000,000 fr. in 1793 the issues increased in 1796 to 45,- 
 000,000,000 fr. (about ;^9,ooo,ooo,ooo). Prices rose to dazzling 
 heights. The masses for a time thought that their dreams of 
 wealth were being realized. A Parisian laundress after empty- 
 ing her basket of fresh linen at the house of a customer went 
 home with it full of paper money. 
 
 In 1796 the assignats were made convertible at a great dis- 
 count into mandats, a new kind of paper money which was also 
 exchangeable for land. The mandats, although their quantity 
 was not large, possessed little value, the people having lost all 
 confidence in money of that kind. 
 
 Since the assignat and the mandat were a lien upon real 
 estate, why should they have depreciated ? The security pos- 
 sessed ample value and the government freely permitted 
 conversion of paper money into land. They depreciated, never- 
 theless, because the price at which land was convertible kept 
 rising constantly, so that the land value of the assignat 
 steadily declined. The assignat was not a mortgage upon any 
 particular piece of real estate ; it was a mortgage upon property 
 in general. In pledging the property of the republic as security 
 the government could do no more than agree to accept the 
 assignat in payment for this land. Evidently steady value 
 could not be given to it by such an agreement unless the prices 
 at which the land would be sold were fixed in the beginning for 
 all time. Its value was due entirely to its services as money, 
 and necessarily declined as the quantity was increased. Such 
 must be the fate of any kind of money based upon property 
 unless the supply is strictly limited. 
 
FIAT MONEY IN FOREIGN COUNTRIES 
 
 313 
 
 210. Even though we grant the theoretical advantages of 
 fiat money and leave open the question of its practicability, we 
 could not favor its adoption, for under present conditions or 
 any likely to exist for many years to come fiat money would 
 lack the important element of permanence, would hamper inter- 
 national trade, and would make the country adopting it an alien 
 in the loan markets of the world. However scientific its incep- 
 tion might be, fiat money could have no firmer base than the 
 caprice of a single generation. The advocates of " ideal " money 
 fail to see that it presupposes an ideal community. They fail, 
 furthermore, like the advocates of volapiik and spelling reform, 
 to recognize the fact that certain human institutions, of which 
 money and language are conspicuous illustrations, are the prod- 
 uct of a long evolutionary process in which the reason of man 
 has played little part. The phonetic and linguistic idealists, 
 although their arguments are unanswerable, make no impact 
 on the vernacular or its orthography ; but they do no harm. 
 Unfortunately the arguments of money idealists are not equally 
 futile or harmless. To the ignorant man money is the myste- 
 rious symbol of universal wealth, and he is easily fascinated by 
 any scheme which promises him a larger supply. The fact that 
 ideal money can be made by a printing press appeals to him 
 strongly. When theorists tell him that such money is better 
 than gold or silver, and politicians assure him that his wages 
 will be advanced, his vote is won. Votes won in this fashion 
 — an ever-present peril in a democracy — would open not the 
 portals of Utopia but the flood gates of financial chaos. 
 
 LITERATURE 
 
 The " Restriction Period " in England, when bank notes became fiat 
 money, is described in the following : W. G. Sumner, History of Ameri- 
 can Currency (New York, 1878); C. A. Conant, Modern Banks of Issue ; 
 H. D. MacLeod, History of Banking in England (published by the 
 Journal of Cotnmerce, New York). 
 
 Readers not familiar with German or French can get data about Austrian 
 and Russian paper money from the following : The History of Banking in 
 All Nations (published by the Journal of Comtnerce, New York) ; reports 
 
314 MONEY AND CURRENCY 
 
 of the United States Director of the Mint, especially for the years follow- 
 ing 1892 ; C. A. CoNANT, Modern Banks of Issue. See also Money and 
 Prices in Foreign Countries (publication of the State Department, Wash- 
 ington). A good account of the Russian monetary reform is given in the 
 Report of the Director of the Mint for i8g8, and additional information in 
 the reports for 1896 and 1899. 
 
 Concerning India, the reader must rely on articles in economic period- 
 icals (especially the London Economic Review, 'Ca.^ Journal of the Royal 
 Statistical Society, and the London Economic Journal^ and in government 
 publications. F. J. Atkinson's index number of Indian prices is given in 
 is\^ Journal of the Royal Statistical Society, March, 1897. 
 
 Other references : Andrew D. White, Fiat Money Inflation in France; 
 John Low, .(1/o«^y awi/ 7>arf« (Glasgow, 1750); J. "Ukr-Ven, Paper Money 
 the Money of Civilization (London, 1877); A. M. Davis, Currency and 
 Banking in the Province of Massachusetts Bay (New York, 1900-1901); 
 Cheap Money Experiments in Past and Present Times (reprinted from 
 Century Magq^zine, New York, 1 892) ; J. Phin, Common Sense Currency; 
 N. G. PiERSON, Economics, Part II. 
 
CHAPTER XV 
 
 CREDIT MONEY 
 
 211. The value of credit money depends upon the value of money and not at 
 all upon the value of the material out of which it is made. zi2. An increase of 
 the supply of credit money tends to lower the value of money within a country. 
 213. The arbitrary issue of credit money in a gold-standard country tends to cause 
 an exportation of gold and to lower the value of gold in all countries. 214. Con- 
 vertible credit money does not depreciate by an amount exceeding the expense of 
 redemption. 215. Inconvertible credit money depreciates when there is doubt 
 about its future purchasing power or when its supply is excessive. 216. Credit 
 money economizes the use of money, and when properly issued it makes the cur- 
 rency elastic. 217. Elasticity of the currency prevents abnormal changes in 
 prices and the rate of interest. 21S. Credit alone can render the currency elastic. 
 219. An elastic element in the currency reduces to a minimum the importation 
 and exportation of gold. 220. Credit money is now issued by governments and 
 by banks. 221. Two serious defects of government credit money : (3) inelasticity; 
 (d) difficulties of redemption. 222. The issue of government credit money is 
 attended by a risk psychological in its nature. 223. It is impossible to fix a safety 
 limit of Issue. 224. Why inconvertible government credit money does not depre- 
 ciate. 225. Should credit money be a legal tender.' 226. The bank note, if issued 
 under proper conditions, is ideal credit money. Points of resemblance between 
 the bank note and a bank deposit. 227. A consideration of the legal restrictions 
 placed upon the issue of bank notes. 228. Various plans to secure the converti- 
 bility of bank notes. 229. The currency school and the banking school. 230. Re- 
 demption should be as easy and as certain as issue. 231. The question of banking 
 reform in the United States. 
 
 211. Any promise to pay money which all the people of a 
 country are willing to accept in lieu of money is called credit 
 or representative money. Some forms of credit money are 
 made legal tender by law and some are not. Credit money 
 must be a form of credit payable on demand, and should not 
 bear interest, for the accrued interest would give it a different 
 value from day to day. The promisor in case of credit money 
 must be a person or institution in whom all people have confi- 
 dence, otherwise it would not be universally acceptable as a 
 means of payment. 
 
 Credit money is designated "token money " by some writers. 
 This expression, however, is commonly restricted to credit 
 
 315 
 
3i6 MONEY AND CURRENCY 
 
 money of small denominations, which possesses limited or no 
 legal-tender quality. It was first applied in England to small 
 coins issued by private persons without authority of the govern- 
 ment. In the United States token money includes the so-called 
 subsidiary coins, namely, pennies, nickels, silver half dollars, 
 quarters, and dimes. 
 
 The value of credit money, as of any credit instrument, 
 depends upon the value of the thing promised, that is, upon 
 the value of money itself. The value of credit money rises 
 when the value of money rises. It cannot be said to have value 
 in itself any more than the image in a mirror can be said to 
 have substance. As the mirror reflects what is before it, so 
 credit money reflects or represents the value of real money. 
 Since credit money is popularly called money, the latter by way 
 of distinction is often styled standard money. Standard money 
 may be either commodity or fiat money, and credit money may 
 be a promise to pay either of these. 
 
 The value of credit money hinges in no way upon that of the 
 material out of which it is made. In this respect it is like fiat 
 money, but that is their only point of resemblance. Fiat money 
 gets its value altogether from its possession of money utilities, 
 from the demand for and supply of money ; whereas credit 
 money has only a borrowed or reflected value varying with that 
 of the money which it promises to pay. 
 
 212. The use of credit money tends to lessen the value of 
 money and so causes prices to be higher than they would be if 
 it were not used. This proposition is true with regard to all 
 forms of credit. As was shown in Chapter IV, credit is to be 
 regarded as a circumstance lessening the demand for money and 
 having the same effect upon prices as an increase in the supply 
 of money. While credit money constitutes no exception to this 
 general rule, its close resemblance to money makes some further 
 analysis necessary. 
 
 Since credit money is a universally acceptable medium of 
 exchange, any increase in its supply without a corresponding 
 growth in the demand for money immediately tends to lower 
 the purchasing power of money by causing prices to rise. While 
 
CREDIT MONEY 317 
 
 credit, as has been shown, should properly be regarded not as 
 a substitute for money but rather as a device for increasing 
 the efficiency of money, nevertheless credit money within a 
 country does come very near being a complete substitute, for 
 as a medium of exchange, and as a banking reserve if it is legal 
 tender, it is capable of doing all that money itself does. So any 
 increase in the supply of legal tender credit money is practi- 
 cally the same as an increase in the supply of standard money, 
 and the first effect upon prices is the same. 
 
 213. When several countries use the same metal as money, 
 gold for example, an increase in the supply of credit money in 
 any one of these countries must tend to affect prices in all, for 
 it will tend to lessen the value of gold. Since credit money is 
 acceptable only within the country of its issue, it can evidently 
 have no direct effect upon prices in other countries, for it will 
 in no way increase the apparent purchasing power of people in 
 these countries. It will, however, render unnecessary a certain 
 amount of gold within the country in which it is issued, and that 
 gold will be exported, increasing the supply in other countries 
 and so tending to lift prices there. 
 
 This exportation of gold will take place automatically as a 
 result of differences in price levels and discount rates. No 
 nation ever thinks it has too much money and none ever 
 exports gold with the conscious intention of reducing its money 
 supply. The movement is always automatic. The issue of 
 credit money in any country causes prices to rise above the 
 level prevailing elsewhere. It thus becomes a good market for 
 sellers but a poor one for buyers. As a result its exports 
 tend to decrease and its imports to increase. In this way a 
 so-called balance of trade is brought about and an exportation 
 of gold made necessary. Assuming that the demand for money 
 has undergone no change whatever in any of the countries con- 
 cerned, this exportation of gold would equal the amount of 
 credit money which had been issued less the small percentage 
 of additional currency made necessary by the higher prices. 
 The conditions here assumed of course never exist, for the 
 money demand is subject to constant fluctuations; yet it is 
 
3l8 MONEY AND CURRENCY 
 
 perfectly true that an issue of credit money, unless made in 
 response to a greater demand, always tends to expel an approx- 
 imately equivalent amount of gold from circulation. Likewise, 
 if a country using silver as money makes an arbitrary increase 
 of its supply of credit money, such increase will tend to cause 
 the exportation of a nearly equal amount of silver. 
 
 The exportation of gold caused by an issue of credit money 
 is sometimes incorrectly referred to as an application of 
 Gresham's law. This law as originally formulated relates 
 only to coins of the same metal the weights of which differ on 
 account of clipping and abrasion. When the money supply of 
 a country consists of gold coins, if any occasion arises for the 
 exportation of these coins, the heavier will always be selected by 
 the exporter, for these will have a higher bullion value abroad, 
 whereas at home they are worth no more as money than the 
 worn and clipped coins. 
 
 Convertible Credit Money 
 
 214. Credit money is called convertible when it is redeemed 
 on demand, and inconvertible when not so redeemed. Under 
 certain conditions both convertible and inconvertible credit 
 money circulate at par with the money they represent ; under 
 other conditions both tend to depreciate. 
 
 Convertible credit money so long as its convertibility is 
 maintained will not depreciate by an amount exceeding the 
 expense of redemption. If it is issued in excess of the monetary 
 demand, a stimulus is given to prices, an export demand for 
 gold is created, and credit money is presented for redemption 
 by persons desiring gold. If the expense of redemption amounts 
 to 2 per cent, then the credit money will be at a discount of 
 2 per cent, but that will be the limit of its depreciation. The 
 result would be the same even in a country which had no 
 foreign trade relations. In such an isolated country an artifi- 
 cial increase of the supply of convertible credit money would 
 tend to raise prices, but such tendency would be almost instantly 
 checked by the desire of people, especially bankers, to obtain 
 
CREDIT MONEY 319 
 
 the gold which the credit money represented. At a given level 
 of prices a certain amount of hand-to-hand money is needed ; 
 if the amount in circulation is increased arbitrarily by an issue 
 of credit money exceeding the demand, the excess quickly 
 finds its way into the banks and is by them sent home for 
 redemption. 
 
 When convertible credit money is legal tender, larger quanti- 
 ties of it may be kept in circulation than when it is not legal 
 tender, for it may then be counted in the reserves of banks. 
 An artificial increase in the supply of legal-tender credit money, 
 by causing an upward tendency of prices, will usually lead to 
 an exportation of gold or to its larger use in the arts, the new 
 credit money permanently displacing it in banking reserves. 
 The issue of such credit money, if it is to remain convertible, 
 must evidently cease before all the gold has been withdrawn 
 from the monetary stock. 
 
 The effect of an artificial issue of legal-tender convertible 
 credit money was forcibly illustrated in the United States 
 between 1890 and 1893, when new United States notes to the 
 amount of ^155,000,000 were issued in payment for silver bul- 
 lion purchased under the law of 1890. These so-called Treasury 
 notes of 1890 were legal tender and were redeemable in gold^ 
 on demand. Their issue inflated the currency and caused a 
 large exportation of gold. The government's credit money did 
 not depreciate, for redemption was maintained. 
 
 Causes of Depreciation 
 
 215. Inconvertible credit money may depreciate because its 
 supply is excessive or because its future purchasing power is in 
 doubt. The extreme limit to which such currency, if legal 
 tender, might be issued under the most favoring conditions 
 conceivable would be the amount of money that would be in 
 use were no credit money in existence. For instance, suppose 
 that a country having no kind of credit currency is using a 
 
 1 Technically they were redeemable in " coin," but this was interpreted as mean- 
 ing gold. 
 
320 MONEY AND CURRENCY 
 
 billion dollars of gold as money. If the people have absolute 
 confidence in their government, it is conceivable that a billion 
 dollars credit money might be issued without any depreciation 
 or rise of prices. A credit dollar would merely take the place 
 of each real dollar, but any further issue of credit money 
 would necessarily cause depreciation and a rise of prices. 
 
 Practically, however, depreciation would begin before the 
 limit theoretically possible had been reached, for long before 
 all the gold had been expelled from circulation doubt would 
 arise about the future value or purchasing power of the credit 
 money. Credit currency begins to lose acceptability as a 
 medium of exchange the moment people begin to fear it may 
 decline in value. The supply may not be excessive and the 
 question of ultimate redemption may not be raised ; it is enough 
 if the people fear that the credit dollar will not to-morrow buy 
 a dollar's worth of goods. For a time the monetary situation 
 in such a country would be abnormal. Some exchanges would 
 doubtless be made with gold and some with the depreciated 
 credit money. Under such conditions business operations in 
 general would be greatly reduced. There would not be gold 
 enough in the country to carry on the usual business exclusively 
 in gold, nor enough credit money to satisfy the whole of the 
 old demand for money. As in the early days of our Civil War, 
 men would be at a loss what price to ask for their goods and a 
 financial and industrial panic would doubtless result. After the 
 panic one of two things would probably happen : Either the 
 people would regain confidence in the credit money and resume 
 its use on a par with gold, or the government might increase its 
 supply, force its use upon the people, and drive all the gold out 
 of the country, as Russia did after the Crimean War. Depreci- 
 ated credit money so forced into circulation becomes fiat money. 
 
 In the United States the silver dollar is a good illustration 
 of inconvertible credit money. It circulates at par with gold 
 because of limitation of the supply and because of popular 
 confidence in the government. Redemption of the silver dollar 
 in gold is not guaranteed, yet the average creditor, if offered 
 his choice between a gold coin and a silver certificate, will take 
 
CREDIT MONEY 321 
 
 the paper. But this confidence in the future value of the silver 
 certificate would quickly disappear if Congress should manifest 
 a disposition to purchase more silver or issue fresh supplies of 
 credit currency. 
 
 216. Credit money, when properly issued, serves two useful 
 purposes: (i) it economizes the use of money; (2) it makes 
 the supply of currency elastic. 
 
 The first service needs little comment. Gold, which is the 
 money of the civilized world to-day, is a most valuable com- 
 modity, produced only by an outlay of much labor and capital. 
 Its use as hand-to-hand money is attended with considerable 
 loss from abrasion. In large transactions it is less convenient 
 than paper credit money. Less gold being needed when credit 
 money is in existence, its value is lower and less is mined, so 
 that more of man's energy may be devoted to the satisfaction 
 of other wants. These considerations alone justify the exist- 
 ence of a certain volume of credit money. 
 
 The second service is by far the more important. As was 
 pointed out in Chapter III, an ideal credit system is one in 
 which the supply of credit automatically adjusts itself to varia- 
 tions in the need for a medium of exchange. If the volume of 
 business is growing and the conditions are such as give rise to 
 an increased need for the use of checks, drafts, and bills of 
 exchange, then there should be no artificial restriction upon the 
 creation of credit instruments possessing limited acceptability, 
 each man being left free to judge whom he can safely trust. 
 Then business will move smoothly and prices will not suffer 
 from a scarcity of exchange media. On the other hand, when 
 the growing volume of business is of a kind calling for more 
 hand-to-hand money, then the power to write checks and drafts 
 is unavailing, and an increase in the supply of credit of un- 
 limited acceptability, i.e. credit money, is necessary to prevent 
 financial stringency and depression. A credit system which 
 does not under such circumstances provide for the issue of 
 more credit money as it is needed, and for its automatic with- 
 drawal from circulation when the extraordinary need is over, is 
 seriously defective. 
 
32 2 MONEY AND CURRENCY 
 
 To English readers the importance of this point can hardly 
 be exaggerated, for the credit systems of both England and the 
 United States are in this respect defective. A complete dis- 
 cussion of the subject, reinforced by the facts of experience, 
 belongs to a book on credit and banking. In this chapter we 
 can do little more than state the general principles. 
 
 Elasticity of the Currency 
 
 217. An elastic credit element in the supply of currency is 
 important for two reasons : (i) because an excess or scarcity 
 of cash abnormally affects prices and the rate of interest ; 
 (2) because the supply of money (gold) cannot be increased or 
 diminished except slowly and after business interests have 
 suffered. 
 
 The reader who understands the exposition given in Chap- 
 ter V of the laws governing the international movements of 
 currency will need no extended discussion of these two points. 
 At present, when the United States as a whole needs more 
 cash it can be obtained only by an importation of gold ; but 
 before it becomes profitable to import gold the prices of 
 American goods and securities must be lowered until foreigners 
 are induced to increase their purchases, and usually our rate of 
 discount must be raised until the holders of gold in Europe 
 are tempted to increase their investments in the United States. 
 This means that in order to enlarge the volume of our currency 
 we are forced to sell goods at a sacrifice and to hire capital at 
 an exorbitant rate. The reader must bear in mind that this 
 whole process takes place automatically, no man engaged in it 
 being conscious of the part he plays. 
 
 In like manner, since our supply of domestic currency is 
 rigid, movements of cash from one part of the United States 
 to another are usually the result of distress already felt in the 
 place to which it goes and the cause of distress in the place 
 from which it is taken. In the autumn, for instance, the West 
 and the South are exchanging their agricultural products, and 
 the sellers want cash, not checks and drafts. The eastern cities 
 
CREDIT MONEY 
 
 323 
 
 cannot escape the consequences. Western and southern banks, 
 in order to keep their reserves unimpaired, are obliged to con- 
 tract their loans and draw on their deposits in eastern banks. 
 As a result, currency flows from New York to the West and the 
 South, — sometimes ;f 100,000,000 in amount, — discount rates 
 rise in New York, prices weaken, and gold is imported. In the 
 winter, the special need for cash in agricultural sections being 
 past, a reversal of the process begins. Currency is shipped 
 back to New York, and the gold which had been wrested from 
 Europe at great cost in October and November is exported in 
 March and April. 
 
 These fluctuations of prices and interest rates are not an 
 insignificant matter. They mean positive loss to the country, 
 unnecessarily high rates of interest to the manufacturer and 
 merchant, and unnaturally low prices to the farmer and planter. 
 
 218. Credit alone, in the form of credit money, can sup- 
 ply the elastic element which is needed in the currency of a 
 country, and this is the most important service which credit 
 money can perform. When properly issued it should not cause 
 prices to rise ; it simply should prevent a fall of prices, for it 
 should be put forth only in response to a growing need for 
 currency and to an amount not exceeding the increase in the 
 demand. And when withdrawn from circulation it should not 
 cause a fall of prices, for the amount taken away should corre- 
 spond with the reduction in the need for currency. Such is the 
 service to be performed by ideal credit money, and it is one 
 that can be performed by no other instrument or device. 
 
 It has sometimes been argued that an elastic credit money is 
 not needed, on the ground that sufficient elasticity is furnished 
 by so-called deposit currency, i.e. by checks and drafts. Those 
 who take this position do not understand the problem. An 
 increasing need for hand-to-hand money cannot be met by the 
 writing of more checks and drafts. What is wanted is more 
 cash, and that can be supplied quickly and without cost only by 
 credit of general acceptability, i.e. credit money. 
 
 219. An indirect benefit of ideal credit money remains to be 
 noted, namely, that it will reduce to a minimum the importation 
 
324 MONEY AND CURRENCY 
 
 and exportation of gold. Readers of English and American 
 newspapers know how business interests are disturbed by a 
 threatened outflow of gold, and we have seen that the alarm 
 on this score is not without good cause. A country in which 
 credit is permitted to satisfy temporary needs for currency 
 will export gold only when it has, so to speak, a permanent 
 surplus, so that benefit rather than harm will result from the 
 exportation ; and it will import gold only when there is need 
 for a permanent addition to its stock. 
 
 These propositions are abundantly confirmed by the experi- 
 ence of different countries. England and the United States, 
 the two countries most disturbed by gold exports, have almost 
 absolutely inelastic monetary systems, the credit money in each 
 being issued under conditions that forbid an automatic expansion 
 and contraction in response to a varying demand for money. 
 On the other hand, France and Canada, each with a credit 
 money almost perfectly elastic, are never embarrassed by the 
 movements of gold. In these two countries the rate of interest 
 hardly varies from season to season, but represents, as it should, 
 the real demand for and supply of capital ; whereas in England 
 and the United States the rate is almost constantly moving 
 up and down, being kept from its normal level by scarcity or 
 by overplus of money. 
 
 Government Credit Money 
 
 220. Let us examine the different kinds of credit money in 
 use and determine their fitness for the important services which 
 this form of credit can render. A hundred years ago the prom- 
 issory notes of individuals were often used as credit money, 
 but in most countries, on account of the importance of credit 
 money, the law now forbids the issue of notes for this use 
 except by institutions duly organized. At the present time 
 credit money is issued only by governments or by banks. In 
 the United States we have both kinds of credit money. Sub- 
 sidiary coinage excepted, that being always issued in civilized 
 countries by governments, England has only bank notes ; 
 
CREDIT MONEY 325 
 
 Germany and France have bank notes and silver credit money 
 issued by the government. Russia and Austria have recently 
 supplanted government notes with bank notes. 
 
 Issues of credit money by governments, with some slight 
 exceptions, have never been in response to a need for currency 
 on the part of the people but have been the result of fiscal 
 necessities. Government credit money is a forced loan from 
 the people. Governments in need of funds, when unable to 
 sell bonds to advantage, have often forced into circulation their 
 own promises to pay and compelled the people to accept these 
 in lieu of gold and silver. These issues of credit money always 
 drive out a corresponding amount of metal money, but the 
 equivalent of that metal in the form of purchasing power passes 
 over to the government. A government which issues demand 
 notes for use as money really borrows from its people as much 
 as if it sold bonds to them and took gold in payment. Such an 
 issue compels the people to send some of their gold abroad in 
 the purchase of foreign goods and at the same time deprives 
 some of them of the foreign markets in which they have been 
 selling goods. The fact that no man attributes to the new 
 credit money the subtle change in prices and the mysterious 
 advantage given to the foreign exporter makes it possible for 
 governments to borrow in this way without protest from the 
 people. Nevertheless such an issue of credit money is always 
 a loan from the people and they alone carry the burden. 
 
 A forced loan from the people by the issue of government 
 credit money is bad from both the financial and the monetary 
 point of view. It is an unwise financial policy, for the burden 
 of the loan falls upon rich and poor alike. When a government 
 borrows by the sale of bonds it borrows from men who are 
 able to lend and glad of the investment ; then it takes only 
 that capital which can best be spared from the country's wealth. 
 But when it borrows by an issue of credit money it lays its 
 hand on all classes of capital alike and temporarily disturbs the 
 normal conditions of every industry. 
 
 221. As currency, government credit money possesses two 
 inherent defects : (i) being inelastic, it does not prevent price 
 
326 MONEY AND CURRENCY 
 
 fluctuations ; (2) its redemption imposes a task on the govern- 
 ment for the proper performance of which it lacks natural 
 facilities. 
 
 Government credit money necessarily lacks what is called 
 elasticity, for its quantity cannot be varied to meet changes in 
 the demand for money. Finance ministers and parliaments are 
 not in touch with business and cannot forecast or measure 
 monetary needs. For this reason, even though they made the 
 attempt, — which they seldom do, — they could not by arbitrary 
 measures make the volume of credit money conform to a coun- 
 try's needs. In this important respect government credit 
 money must always fail. 
 
 For the redemption of credit money a government must make 
 special and artificial provision. Normally credit is the out- 
 growth of a business transaction, of a sale or purchase of goods, 
 and something of value, exchangeable for money, is always in 
 the hands of the debtor, so that the credit is easily redeemed. 
 A government, however, is not engaged in business. It does 
 not issue credit money in exchange for live assets. For the 
 redemption of its credit it must rely on its taxing power and 
 on the arbitrary massing of gold in its treasury. This latter 
 is expensive and is fraught with danger. The amount of the 
 gold reserve is known to the public and every demand upon it 
 is a matter of common knowledge. It may be granted that the 
 government has the power to maintain a reserve large enough 
 for the purpose, and that this need not equal the full amount 
 of credit money in circulation ; the people, nevertheless, natu- 
 rally regard the gold reserve as being very significant and 
 important, and any extraordinary redemption of credit money 
 is certain to provoke discussion and alarm. Since everybody 
 knows that the gold reserve is not equal to the possible 
 demand upon it, there is apt to arise an unreasoning fear lest 
 it may be exhausted and the credit money in consequence 
 depreciate. The government, if the gold reserve is depleted, 
 can replenish it only by the sale of bonds or by appeal to 
 bankers for assistance, and such steps are liable to increase 
 popular distrust. 
 
. CREDIT MONEY 327 
 
 The United States is the only great nation in the world which 
 in normal times assumes responsibility for redeeming a great 
 amount of credit money. In all other countries credit money, 
 when it is redeemed at all, is taken care of, for the most part, 
 by banking institutions more or less related to the government. 
 These banking institutions, on account of their important place in 
 business affairs, are able to influence the market rate of interest 
 and so can attract gold in a natural way by raising their rate of 
 discount. In the same way it is possible for them to discourage 
 the export of gold by raising the interest rate, for the profit which 
 the owners of gold can get from it within the country is thus in- 
 creased. The United States, however, is unable to adopt these 
 measures either to increase its gold reserve or to prevent its deple- 
 tion. It can maintain the parity of its credit money only by the 
 adoption of measures which attract public attention and tend to 
 augment the danger, for people easily grow suspicious and 
 present credit money for redemption, not because they need 
 the gold for international uses but simply to be on the safe 
 side. 
 
 222. Still another risk, especially in a republic, attends the 
 use of government credit money. This risk is psychological in 
 nature. The money is so easily issued and costs so little that 
 people get the impression that it is the best possible kind. 
 Since goods are exchanged with credit money as readily as 
 with gold, the average man is unable to understand why credit 
 money should not be used altogether ; so when the government 
 needs money in any emergency he is inclined to favor the use 
 of more credit money rather than the imposition of higher taxes 
 or the sale of interest-bearing bonds. Taxes attack his pocket 
 directly, and the bonds he knows must be paid in the future; 
 whereas by the issue of credit money the government seems to 
 get the same result without imposing a burden on anybody. 
 People do not understand the effect which the issue of credit 
 money has upon the value of money, and hence are prone to 
 clamor for its issue beyond the point of safety. After the Civil 
 War, for example, many people were convinced that the green- 
 back was better "money" than gold. 
 
328 MONEY AND CURRENCY 
 
 Proper Limit of Issue 
 
 223. It is impossible at any time to fix the safety limit for 
 the issue of government credit money. A stable government 
 in which people have full confidence can evidently issue a larger 
 quantity than one in whose stability or financial power there is 
 little confidence. The quantity of credit money which a govern- 
 ment can maintain at par must evidently vary at different times. 
 When peace prevails and taxes are easily collected a larger 
 quantity of credit money can be kept at par than in time of war 
 or in times when the poverty of the people is reducing the tax 
 receipts. Credit money can be made to serve its true purpose 
 only so long as the people have faith in the power and pur- 
 pose of the government to redeem it; the moment that faith 
 wavers the credit money will depreciate on accounc of a lessen- 
 ing demand for it. 
 
 Theoretically it is possible for a nation in which the people 
 have absolute confidence to keep at par an issue of credit money 
 equal to the total amount of gold which would be in circulation 
 if no credit money were issued. No country could do this, of 
 course, unless it constantly redeemed its credit money upon 
 demand. Such a government would be obliged to maintain a 
 gold reserve for redemption purposes, and experience alone could 
 decide how large this reserve ought to be. If people had abso- 
 lute confidence in the ability and will of the government to 
 redeem the credit money, and preferred it to gold as a medium 
 of exchange and as a store of value, so that the banks of the 
 country kept their reserves in credit money, then it would be 
 presented for redemption only by people who desired gold for 
 international payments. What this demand would amount to 
 would depend upon the country's position as a producer and 
 consumer of gold and upon the extent to which its need for 
 currency varied from season to season. 
 
 224. A certain amount of government credit money may be 
 kept at par with gold even though no provision is made for its 
 redemption. The monetary systems of Germany, France, and 
 the United States evidence the truth of this proposition. About 
 
CREDIT MONEY 329 
 
 one fifth of Germany's money consists of silver coins which the 
 government does not undertake to redeem in gold. Nearly one 
 third of the money of France is silver which cannot be exchanged 
 for gold except at the pleasure of the Bank of France. The 
 United States has long maintained at par with gold five hun- 
 dred million dollars of silver money, although the law does not 
 provide for its redemption. 
 
 Why does this irredeemable credit money not depreciate.' 
 There are several reasons. First, because the governments of 
 these countries have made this credit money legal tender for 
 the payment of all debts, including public dues, and thus have 
 given it a large field of usefulness. But this alone would not 
 keep the credit money at par. There is another force at work, 
 namely, the confidence of the people in the good faith of their 
 rulers, who in making this credit money legal tender have given 
 the people an implicit pledge that it shall be kept at par with 
 gold. If any one of these nations should increase the supply 
 of its irredeemable credit money to such an extent as to arouse 
 doubt with regard to its future purchasing power, there would 
 be danger of immediate depreciation, for business men would 
 begin to discriminate against it. Something of the sort hap- 
 pened in the United States with regard to the silver dollar 
 after its coinage began in 1878. The banks of New York, for 
 example, refused to count silver as part of their reserve, and 
 many business men when making contracts running over a 
 period of years inserted a clause guaranteeing payment in gold. 
 
 A third reason why this unredeemed credit money is kept at 
 par with gold is the fact that it is in small denominations and 
 so forms the pocket money of the people. It is needed by the 
 people every day and is never held in large quantities by any 
 one person or institution. A man who wishes gold for export 
 would not think of getting together silver dollars in order to 
 have them exchanged for gold, even though they were directly 
 redeemable. 
 
 We may conclude, therefore, that any country with an honest, 
 stable government may safely have in circulation credit money 
 of small denominations — say ^10 and under in the United 
 
330 MONEY AND CURRENCY 
 
 States — to an amount not exceeding the sum required by the 
 people as pocket and till money. If more than this amount is 
 issued, the surplus is likely to accumulate in the hands of some 
 person or bank and to give rise to dangerous conjecture as to 
 its value. 
 
 225. Should credit money be a legal tender.? To this question 
 no general or positive answer should be offered, for much de- 
 pends on the conditions of issue and on the security provided 
 for redemption. When credit money is simply a certificate of 
 gold deposited, as are the notes of the Bank of England and the 
 gold certificates of the United States, there is no reason why its 
 acceptance should not be compelled by legal-tender enactment. 
 In the United States ^1,000,000,000 in gold certificates are in 
 circulation, and these certificates are a title to ;^ 1,000,000,000 in 
 gold coin and bullion held in trust by the national Treasury. 
 They may be treated, therefore, as being practically gold itself, 
 and might safely be made legal tender. Under the law, however, 
 they are merely "lawful money" in the reserves of banks, so 
 they serve as a basis for credit exactly as would a like amount 
 of gold. The notes of the Bank of England, which represent 
 for the most part gold deposited in the Bank, are a legal ten- 
 der throughout the United Kingdom, it being assumed that the 
 notes are a good title to gold actually in the Bank's possession. 
 
 The case is different with credit money unsecured by a 
 deposit of real money, such, for instance, as our greenbacks 
 and silver dollars. These are not titles to money deposited or 
 to property of any kind ; they are mere promises. To be sure, 
 the government holds a gold reserve of g 1 50,000,000 for redemp- 
 tion purposes, but this fund is only about one fourth of the 
 outstanding greenbacks and silver dollars.^ These are now 
 legal tender and lawful money. Hence in the banks they may 
 be made the basis for an expansion of bank credits amounting 
 to four or five times their amount ; in other words, to ^4,000,- 
 000,000 or $5,000,000,000. Practically this is what has taken 
 place, so that we have one credit system based upon another, 
 
 1 The quantity of greenbacks in existence is estimated at $347,000,000 ; of silver 
 dollars, about $270,000,000 (1921). 
 
CREDIT MONEY 33 1 
 
 the whole mass resting, hke an inverted pyramid, upon a rela- 
 tively slight foundation of gold. 
 
 A proposal to deprive any part of our fiduciary circulation of 
 its legal-tender property would doubtless meet with no popular 
 or political favor at the present time ; yet if gold and gold cer- 
 tificates were the only form of lawful money, so that banks on 
 demand could be compelled to redeem their note and deposit 
 credits in gold, our monetary system would be much more 
 secure than it now is. This radical change, however, should 
 not be made unless provision has first been made for a safe 
 and elastic bank-note circulation. 
 
 Bank Credit Money 
 
 226. The bank note, which is a bank's promise to pay money 
 to bearer, is bank credit money. Under the proper conditions 
 of issue and redemption it is ideal credit money, • — an inexpen- 
 sive substitute for gold as hand-to-hand money and perfectly 
 elastic in volume. 
 
 Unfortunately, as a practical matter, it is not always easy to 
 determine what are the proper conditions of issue and redemp- 
 tion ; hence the subject is a cause of much dispute and dis- 
 agreement. In this chapter only certain general principles can 
 be stated. A thorough discussion of the subject would be pos- 
 sible only in a complete treatise on banking. 
 
 Let us first notice the points of difference and resemblance 
 between the bank note and bank deposit, (i) Both alike are the 
 bank's debts, — its promises to pay money, — the note being 
 payable to bearer, the deposit to an individual ; and (2) both are 
 redeemable on demand. Here we have the only pqints of resem- 
 blance. The points of difference are four : (i) The deposit gives 
 rise to checks and drafts, an exchange medium of limited accepta- 
 bility; whereas the notes possess general acceptability and pass 
 current as money. (2) The deposit is a debt to an individual 
 who voluntarily puts trust in the bank ; whereas the note, since 
 it passes current as money, often gets into the hands of persons 
 who have no knowledge of the bank. (3) The so-called deposit 
 
332 MONEY AND CURRENCY 
 
 currency, growing out of a deposit, i.e. checks and drafts, is 
 negotiable and current, even to a limited degree, only after 
 indorsement by the payee, and usually the indorsement is 
 required of every person through whose hands it passes, so 
 that this currency is a combination of bank and personal credit; 
 whereas the bank note is pure bank credit, no indorsement by 
 holders being required. (4) Bank checks and drafts, since they 
 possess only limited acceptability, have a short life and do not 
 get wide circulation, being promptly sent in for redemption; 
 but bank notes, being easily passed on from hand to hand, are 
 liable to remain long in circulation and to cover a broad field, 
 holders preferring to pass them on rather than to bear the 
 slight expense incident to redemption. 
 
 227. Because of these important differences it is generally 
 admitted that banks should not be allowed the same freedom 
 in the issue of notes that they enjoy in the creation of deposit 
 liabilities. It may fairly be said that there is no dispute with 
 regard to the necessity for the following general precautions : 
 (i) that the maximum issue of notes permitted to a bank should 
 at a given time be definitely fixed, it being possible to raise this 
 limit when conditions warrant ; (2) that certain special provi- 
 sions should be made to secure the convertibility and redemption 
 of bank notes. 
 
 With regard to the limit of issue advisable there is some 
 difference of opinion. The usual practice is to limit the note 
 issues to the amount of a bank's capital stock. In some coun- 
 tries, as in Germany, the limit is variable, being in proportion 
 to the amount of money reserve. The note issues of the Bank 
 of France have an arbitrary limit, — 5,000,000,000 fr., — but it 
 is known that this limit will be raised as the country grows and 
 its need for currency increases. 
 
 Convertibility of Bank Notes 
 
 228. Of the various special provisions urged to secure the 
 convertibility of bank notes the following are the most impor- 
 tant : (i) that the notes constitute a first lien on the assets 
 
CREDIT MONEY 333 
 
 of the bank ; (2) that the stockholders in case of a bank failure 
 be liable to an assessment equal to the par value of their stock, 
 and that note holders have a first lien on the proceeds of such 
 assessment ; (3) that banks of issue maintain a common " safety 
 fund," in the possession of the government, to be used if neces- 
 sary in the redemption of the notes of any failed bank ; (4) that 
 banks shall deposit with the government bonds or stocks equal 
 in value to the face value of the notes which they issue ; (5) that 
 banks be required to keep in reserve a stock of money equal to 
 the amount of notes issued. 
 
 In weighing the merits of these measures we need keep only 
 this one question in mind : Will this proposed provision inter- 
 fere with the elasticity of the bank note? That is the test. 
 If an affirmative answer is necessary, the measure should be 
 rejected. For if bank notes are to be fixed in volume, not 
 responsive to changing monetary needs, there is no good reason 
 why their issue should be permitted. They would have all the 
 faults of government credit money and their volume would not 
 be so easily regulated. 
 
 Let us briefly examine the measures proposed. The first two 
 would certainly have no hurtful effect. The depositor, since he 
 is a voluntary creditor of a bank, cannot justly complain if a 
 prior lien is given the note holder. The objection that deposi- 
 tors really have no choice, since men must use banks, does not 
 hold, for banks of deposit which issue no notes exist in all 
 countries, and others would be quickly organized should people 
 show reluctance to deposit in note-issuing banks. Both these 
 measures are part of the Canadian banking system. 
 
 The safety-fund provision is unobjectionable. That it is an 
 effective measure is shown by the test of experience in the 
 United States as well as by its present operation in Canada. 
 From its use flows indirectly this important advantage : it 
 makes the solvency of each bank a matter of pecuniary impor- 
 tance to all its competitors and stimulates among bankers an 
 alert and beneficial scrutiny of all banking interests. Should 
 a Canadian bank extend its credit to the point of hazard, it 
 would quickly hear from its neighbors ; and a speculating or 
 
334 
 
 MONEY AND CURRENCY 
 
 immoral bank officer must dodge the eyes of all bank employees 
 in the Dominion. 
 
 The requirement of a bond deposit, while it may provide an 
 adequate security, introduces an investment element which 
 effectually prevents banks from issuing notes in response to 
 monetary needs. National banks in the United States have 
 been issuing notes in accordance with this system ever since 
 the Civil War, and their experience furnishes abundant evidence 
 that notes thus issued perform no useful service. They are 
 elastic enough, but their elasticity is perverse, even vicious, 
 for they expand in volume when contraction is needed and 
 contract when expansion is called for. In dull times, when the 
 supply of currency is already excessive and the rate of discount 
 low, banks are tempted to increase their investments in bonds 
 and to enlarge their circulation. This is exactly what they did 
 in 1894 and 1895, although the redundancy of the currency in 
 those years, as will be shown in the next chapter, was causing 
 gold exports that nearly bankrupted the national Treasury. On 
 the other hand, in good times, when banks are able to lend all 
 their credit at high rates of interest, they are prone, no matter 
 what the need for currency, to reduce their circulation and sell 
 their bonds in order to increase their money reserve. 
 
 The currency needs of the United States, for example, are 
 some ;^ 100,000,000 larger in the autumn than in the summer. 
 This increase is expected every year, and the cause of it — the 
 harvesting and selling of the crops — is well understood, yet 
 the national banks never on this account increase their issues 
 of notes. A national bank which increases its circulation in 
 September assumes an investment risk ; it may have to sell 
 the bonds in January at a lower price than it pays for them in 
 September, and so may incur loss instead of profit. A second 
 risk is involved, although this is not an essential fault of the 
 bond-deposit requirement. The law places a limit upon the 
 amount of national bank notes which may be retired in any one 
 month by the deposit of lawful money with the Treasurer of the 
 United States. This limit was originally fixed at ^3,000,000, 
 but in February, 1907, it was raised to ^9,000,000. On account 
 
CREDIT MONEY 335 
 
 of this restriction upon the retirement of notes, a bank cannot 
 always promptly recover possession of its deposited bonds when 
 the condition of the government bond market makes the sale of 
 bonds advisable. 
 
 The fifth measure, requiring a bank to hold a reserve of 
 money equal to the amount of the notes issued, is in operation 
 in the Bank of England. It destroys elasticity, and indeed was 
 first recommended by a school of writers and bankers who 
 argued that elasticity is not a desirable element in the currency. 
 They are commonly known as the " currency school," their 
 chief tenet being the theory that bank notes cannot be a 
 harmless substitute for gold unless they represent, sovereign 
 for sovereign, gold held in the vaults of the issuing bank. 
 Bank notes thus secured are merely a warehouse receipt for 
 gold and are not bank credit in any proper sense of the word. 
 
 Two " Schools " of Banking 
 
 229. In the discussion prior to the Bank Act of 1844, which 
 now regulates the operations of the Bank of England, the 
 adherents of the currency school held the view that bank 
 notes, unless merely representative of an equal amount of gold, 
 inflated prices and led to speculation. They were opposed by 
 adherents of the "banking school," who held that notes 
 would not be issued to excess and would not inflate prices if 
 bankers, unhampered by artificial restrictions, were left free to 
 use their own judgment. 
 
 Banking experience in England and in the United States 
 affords some justification for each of these opposite views. 
 Prior to 1844 England had suffered from an unscientific issue 
 of bank notes. As a heritage of the Restriction Period, briefly 
 described in Chapter XIV, the notes of the Bank of England 
 retained their legal-tender characteristic and were used as the 
 reserve for note issues by innumerable small banks. Thus 
 credit was based on credit. The one thing most essential to 
 the soundness of a banking circulation, a system insuring 
 swift and certain redemption, was entirely lacking. The Bank 
 
336 MOXEV AND CURRENCY 
 
 of England alone redeemed in gold. The small banks scattered 
 their notes as widely as possible and, there being no redemp- 
 tion centers, were able to postpone payment and keep in cir- 
 culation more notes than otherwise would have been possible; 
 and when they did redeem their notes they did so in notes 
 of the Bank of England. Undoubtedly bank notes issued under 
 such conditions are a dangerous element in the currency of a 
 country, and the view of the currency school was in that case 
 justified. 
 
 But the adherents of the banking school had another 
 situation in view, and they also were right. They held that if 
 banks were compelled to redeem their notes in gold, and that 
 if redemption were made easy and inexpensive, banks might be 
 given perfect freedom of issue and yet not be able to issue 
 notes in excess. That this view is essentially sound is proved 
 to-day by the successful operation of the banks of Canada and 
 the Bank of France, which are good illustrations of the so- 
 called banking principle. 
 
 Ease of Redemption Necessary 
 
 230. That ease of redemption is essential to sound banking 
 circulation is a point too often ignored. No matter how ade- 
 quately the notes are secured or how strictly their volume 
 is limited, if the holder of a note cannot without friction or 
 expense exchange it for money, it will be liable to remain in 
 circulation after the need creating it has been satisfied, and so 
 will induce inflation if not depreciation. 
 
 To secure ease of redemption and prevent inflation the fol- 
 lowing measures, some of them positive and some negative, are 
 essential. 
 
 1. Banks should be obliged to redeem their notes in gold. 
 This requirement would insure the presence of an abundance of 
 money and its proper distribution throughout the country. 
 
 2. Banks should be required to redeem their notes not only 
 over their own counters but in redemption centers conveniently 
 situated in different parts of the country. In Canada, for 
 
CREDIT MONEY 337 
 
 instance, a redemption center in each province is found suffi- 
 cient. In the United States a dozen redemption centers would 
 probably be necessary. Through its subtreasuries the govern- 
 ment might do some of this work for the banks with less cost 
 than it could be done by the banks. 
 
 3. Bank notes should possess no legal-tender quality and 
 have no forced circulation. The government should be free to 
 reject them, and no bank should be obliged to accept the notes 
 of other banks. The notes should represent bank credit and 
 should be current as such. To the extent that they are legal 
 tender the motive impelling redemption is weakened. ^ 
 
 4. If a limit is placed upon the total issue permitted, it 
 should be above the maximum attained at any season of the 
 year; otherwise the banks would be debarred from satisfying 
 extreme needs of the country for currency. Furthermore, it is 
 not desirable that a bank should ever have in circulation all the 
 notes it is permitted to issue, for then it might pay out the 
 notes of other banks instead of sending them home for redemp- 
 tion, since it would be unable to replace them with its own. 
 Any condition which impedes redemption must be avoided. 
 
 If bank notes were issued under these conditions and their 
 ultimate convertibility were properly safeguarded, their volume 
 would vary in most sensitive response to the needs of business 
 and would never be in excess of these needs. An issue of such 
 bank notes would not inflate prices ; it would simply prevent 
 a fall of prices. Any increase of confidence in a community 
 which led to an increased use of credit of all kinds would natu- 
 rally cause a rise of prices and so make room for more bank 
 notes in the circulating medium ; but the bank notes them- 
 selves would not cause the rise. Bank A would pay out its 
 own notes when depositors asked for cash and would strive to 
 keep as many out as possible ; but all other banks, when their 
 depositors turned in the notes of Bank A, would immediately 
 send them to the latter for redemption, for each of the other 
 banks would be seeking to get its own notes into circulation 
 
 1 National bank notes are legal tender in certain payments. The particulars 
 are given on page 365. 
 
338 MONEY AND CURRENCY 
 
 and to convert the notes of other banks into gold in order to 
 strengthen its reserve. 
 
 Thus under this natural system of note issue two forces 
 automatic and independent of law would continually be at 
 work, the one tending to scatter bank notes over the land, the 
 other drawing them surely and swiftly to their sources. Canada 
 has a banking system very much like the one here outlined, 
 and judged by results it is one of the best in the world. The 
 smooth operation of that system should not, as is sometimes 
 attempted, be ascribed merely to the wisdom and shrewdness 
 of the bankers who administer it ; the system is itself the father 
 of the keen Canadian banker. 
 
 231. It is not necessary that the United States should imitate 
 all the features of the Canadian system. Many reformers seem 
 to think that the branch bank is an essential feature of the 
 system, and so seek to have it incorporated in that of the 
 United States.^ This is a mistake. The branch bank has done 
 good service in Canada and is always useful in a new and 
 sparsely settled country, but the need for it in the United 
 States is fast disappearing. At any rate it is not essential to 
 a good system of bank notes. The essential thing is ease of 
 redemption. Branch banks contribute toward this, but it can 
 be attained without them if redemption agencies are properly 
 distributed. In the United States these redemption agencies 
 might be allowed the rights of a branch bank, but a general 
 system of branches would not be necessary.'^ 
 
 ' In 1921 Canada had eighteen banks and there were over 4,500 branches. 
 
 2 The reader should note that various classifications of credit money are pos- 
 sible. We have discussed convertible and inconvertible credit money, govern- 
 ment and bank credit money, legal-tender and non-legal-tender credit money, 
 also metallic and paper credit money. The classification depends entirely on the 
 point of view ; the principles underlying the value of credit money are the same 
 no matter what the classification, and it is with principles that we are chiefly con- 
 cerned. The following classification the reader may find helpful: (i) pure credit 
 money, — that which is unsecured by a deposit of money, such as the Canadian 
 bank notes; (2) representative money, — that which is secured by a deposit of an 
 equal amount of money, such as the Bank of England notes and the gold certifi- 
 cates of the United States Treasury ; and (3) token money, being credit money of 
 small denominations and limited legal-tender power, such as silver half dollars, 
 
CREDIT MONEY 339 
 
 LITERATURE 
 
 Horace White, Money and Banking, Books II and III ; Report of the 
 Indianapolis Monetary Cotnmission j N. G. PlERSOX, Principles of Econom- 
 icsj H. R. Seager, Introduction to Economics j C. F. Dunbar, Chap- 
 ters on the History and Theory of Banking; C. A. Conant, A History of 
 Modem Banks of Issue, and Principles of Money and Banking; F. A. 
 Cleveland, The Bank and the Treasuiy ; R. M. Breckinridge, The 
 Canadian Banking System ; D. R. Dewey, Financial History of the U?iited 
 States ; David Kinley, Money, chaps, xvi and xvii ; J. L. Laughlin, 
 Principles of Money, chaps, xiii-xv ; The Currency, Report of Special Cur- 
 rency Committee of the New York Chamber of Commerce, 1906; J. F. John- 
 son, The Canadian Banking System, National Monetary Commission. 
 
 quarters, and dimes, and nickels and pennies. According to this classification the 
 greenback and the silver dollar, being only partially secured by a deposit of money, 
 would properly be classed as pure credit money. The national bank note is pure 
 credit money, but since it is practically guaranteed by the government and is 
 secured by a deposit of government bonds, it is more government credit than 
 bank credit. 
 
CHAPTER XVI 
 
 MONEY IN THE UNITED STATES 
 
 232. The period of bimetallism with gold undervalued at the mint, 1792 to 
 1834. (a) Why bimetallism was not maintained. (6) The loss of silver dollars 
 through the operation of Gresham's law in the Orient, (c) The monetary con- 
 fusion during the War of 1812. 233. Change of ratio in 1834 to 16 to i, gold 
 thereby becoming the standard. Gold coins were debased 6 per cent, but this did 
 not mean a corresponding debasement of the standard. 234. Subsidiary silver 
 coins debased in 1853 to prevent their exportation. 235. The act of 1873 suspend- 
 ing the free coinage of silver. 236. The unsuccessful experiment with trade 
 dollars. 237. The "limping standard" from 1879 to 1890, legal-tender silver 
 dollars being coined under the Bland-Allison Act. 238. The Bland-Allison dollar 
 was an anomaly ; it could be regarded either as fiat money or as implied credit 
 money. 239. Why the act of 1878 disappointed the friends of silver. 240. Why 
 the evils predicted by its opponents were not realized. 241. The issue of silver 
 certificates was necessary because of the limited demand for silver dollars. 
 242. Why the act of 1878 resulted in the coinage of more than two million silver 
 dollars per month. 243. Analysis of the monetary system as it existed in 1890. 
 244. The Sherman Act of 1890, ordering the purchase of 4,500,000 ounces of silver 
 per month, contained the first legislative recognition of the silver dollar as credit 
 money. 245. It failed to raise the price of silver or to increase the supply of 
 currency; inflation caused exportation of gold. 246. Bond issues to protect the 
 gold reserve made necessary in 1894, 1895, and 1896 by redundancy of the cur- 
 rency. 247. The greenback not primarily responsible for the operation of the 
 " endless chain." 248. The national Treasury should not be permitted to inflate 
 or contract the currency. 249. Leading provisions of the act of March 14, 1900, 
 which explicitly declares the gold dollar to be the "standard unit of value." 
 250. Analysis of the currency supply of February i, 1905. 
 
 232. It would be difficult to name any kind of money or credit 
 money, whether bank note or government paper, with which 
 the people of the United States have not had experience. It 
 is the purpose of this chapter not to give the monetary history 
 of this country in detail, but to sketch the evolution of our 
 present system, dwelling at length only upon those changes or 
 experiences, which throw light upon fundamental principles. 
 Our present monetary system is not the product of a carefully 
 planned legal enactment ; it has come to us as an inheritance 
 
 340 
 
MONEY IN THE UNITED STATES 
 
 341 
 
 from the fathers of the republic, but so trimmed and amended 
 by succeeding generations, to meet temporary exigencies, that 
 its framers would not recognize it. 
 
 Our monetary history can for convenience be divided into 
 five epochs: (i) 1792-1834, the period of bimetallism with 
 gold undervalued at the mint; (2) 1834-1861, the period of 
 bimetallism with silver undervalued; (3) 1862-1879, the green- 
 back period; (4) 1879-1890, the period of the "limping 
 standard" ; (5) 1890 to date, the period of positive gold stand- 
 ard. We have already had occasion to refer to several impor- 
 tant events marking these different periods, and in Chapter XIII 
 have told the story of the greenback era in as much detail as 
 space permits. In this chapter we will examine the salient 
 features of the four remaining epochs. 
 
 First Bimetallic Period 
 
 In 1792, in conformity with a plan drafted by Alexander 
 Hamilton, the first Secretary of the Treasury, Congress adopted 
 the dollar as the monetary unit, and provided that it should 
 consist either of 371.25 grains of pure silver, or of 24.75 grains 
 of pure gold. This was bimetallism at the ratio of 15 to i, 
 for both gold and silver coins were made legal tender and the 
 free coinage of each was permitted. The monetary circulation 
 at the time consisted of many different varieties of coin and 
 bank notes. The most common silver coin was the old Spanish 
 dollar ; the most common gold coin, the English sovereign. 
 Congress provided that these should be legal tender in propor- 
 tion to the weight of pure metai they contained. 
 
 The law of 1792 did not yield actual bimetallism. It was 
 soon discovered that gold had been undervalued in the law, 
 and that gold coins in consequence would not remain in circu- 
 lation. Silver was the real standard of prices. As explained 
 in the chapter on bimetallism, it was impossible for the United 
 States to maintain bimetallism at the ratio of 15 to i at the 
 same time that France was freely coining the two metals at 
 15.5 to I, for the French demand for gold, combined with the 
 
342 MONEY AND CURRENCY 
 
 monetary and industrial demand of other nations, gave gold a 
 market value above that of our coinage ratio. 
 
 Although silver was the monetary standard of this period, 
 yet very few silver dollars were in circulation. Gresham's law, 
 operating in other countries in a manner that could not have 
 been foreseen, drew them away from the United States. The 
 old Spanish dollar, which contained about seven grains more of 
 silver than ours, was in general use in South America and 
 the East Indies. When our new silver dollar appeared traders 
 discovered that it passed by tale (that is, by count) in the East 
 and in South America as the equal of a Spanish dollar. Con- 
 sequently an opportunity for profit arose through the exchange 
 of American for Spanish dollars. Bullion dealers shipped new 
 American dollars to the Indies and received in return an equal 
 number of Spanish dollars, which were sent to the United 
 States Mint for coinage into American dollars. As each turn- 
 over resulted in an increase of the number of American dol- 
 lars, which in their turn were exchanged for Spanish dollars, 
 an endless chain was started which might have kept in motion 
 until the lighter American coin had expelled the last Spanish 
 dollar from the Orient. In 1806, however, President Jefferson 
 broke the chain by the arbitrary suspension of the free coinage 
 of silver dollars, no more being coined in this country until 
 1836. , 
 
 Thus it happened that during this epoch (1792- 18 34) the 
 American people were forced to use foreign coins almost exclu- 
 sively. Subsidiary silver units, the free coinage of which was 
 permitted, were the only American coins that remained in cir- 
 culation. The inconvenience resulting from the heterogeneous 
 character of the currency would have been much greater than 
 it was but for the operation of the United States Bank, a 
 semigovernmental institution chartered by Congress in 1791. 
 Bank notes constituted the bulk of the country's circulating 
 medium. These were secured by reserves of foreign gold and 
 silver in the vaults of banks, and were redeemable in coin on 
 demand. We cannot stop here to point out the beneficent 
 effect of these bank-note issues. It is enough to say that the 
 
MONEY IN THE UNITED STATES 
 
 343 
 
 country at this time was saved from much annoyance, if not 
 positive distress, by this most useful form of bank credit. 
 
 The War of 1812 threw the country for a time into a state 
 of monetary disorder. The charter of the United States Bank 
 expired in i8i i, and was not renewed. The government, there- 
 fore, in the negotiation of loans was obliged to rely upon the 
 assistance of state banks, and these institutions, free from the 
 controlling influence of the federal bank, indulged in a riot of 
 speculation which ended in their suspension of specie payments 
 in 18 14. The government itself was seriously embarrassed, 
 and only the early termination of the war saved it from an 
 issue of irredeemable legal-tender paper money, the fate of 
 which would undoubtedly have been like that which subse- 
 quently befell the greenback. In 18 16 a second Bank of the 
 United States was chartered, the operations of which brought 
 the country back to a specie basis in 18 19. 
 
 The suspension of specie payments during and after the War 
 of 1 8 12 cannot be said to have resulted in the adoption of a 
 fiat standard. Many different kinds of bank notes were in cir- 
 culation, and at many different rates of discount, but none 
 of them became the accepted standard of prices. The metal 
 standard was in no sense abandoned by the people; it was ever 
 present in their calculations, and their estimate of the value 
 of a bank note was based almost wholly upon its redemption 
 prospects. If the government had issued legal-tender Treasury 
 notes, it is quite probable that these would have become the 
 standard, just as the greenback did after 1861 ; but such notes 
 were not issued, and among the heterogeneous mass of bank 
 notes no possible substitute for the metal standard, possessing 
 acceptability throughout the entire country, could be found. ^ 
 
 From the resumption of specie payments after the War of 
 1 8 12 until 1834 the country was upon the silver standard, 
 although the basis was nominally bimetallic. 
 
 1 Under five different acts of Congress, Treasury notes amounting to $36, 000,000 
 were issued, but most of these bore interest and none were legal tender. They 
 were utilized by the banks as a basis for note issues, but as a medium of exchange 
 they had practically no circulation. 
 
344 MONEY AND CURRENCY 
 
 Second Bimetallic Period 
 
 233. By acts of Congress in 1834 and 1837 the coinage 
 ratio of silver and gold was changed from 15 to i, to 16 to i. 
 The country, as a result, passed from the silver to the gold 
 standard, for the new ratio undervalued silver as much as the 
 old ratio had gold. Various circumstances were responsible for 
 this change. Our largest trade connections at the time were 
 with Great Britain. From that country, also, we were drawing 
 the capital needed for the development of our natural resources. 
 The English sovereign meant a definite quantity of gold, and 
 there was a growing belief in this country that the financial 
 and commercial supremacy of England was in large measure 
 attributable to its maintenance of the gold standard. On 
 account of our financial and commercial relations with England 
 it seemed desirable that both countries should be upon the 
 same money basis. The discovery of gold mines in South 
 Carolina, the owners of which wished to make a better market 
 for gold bullion, also seems to have had some effect upon 
 Congress. 
 
 The change of ratio was effected by a debasement of the 
 gold dollar, the amount of pure gold in it being reduced from 
 24.7s to 23.22 grains. This change, it will be seen, made the 
 silver dollar of 371.25 grains 16 times heavier than the gold 
 dollar.^ At the same time the present sta.fidard of fineness 
 (nine tenths) was adopted for both gold and silver coins. 
 
 This debasement of the gold coins by 6 per cent did not 
 mean a corresponding debasement of the standard. Just prior 
 to the change of ratio in 1834 the prices of goods represented 
 the purchasing power of 371.25 grains of pure silver. In the 
 current silver money 24.75 grains of pure gold were worth 
 $1.03, a rate of exchange which made 23.22 grains of pure gold 
 (the new gold dollar) equal to about 97 cents in silver. The 
 real depreciation of the standard, therefore, was only about 3 
 per cent. Logically this should have caused a corresponding 
 rise in the prices of commodities, but as a matter of fact its 
 
 ^ The exact ratio is 15.9884 to i. 
 
MONEY IN THE UNITED STATES 345 
 
 effect was not noticeable. This is explained by the fact that 
 gold and silver were steadily increasing in value at the time, 
 the annual output of the world's mines being very small, so 
 that the 3 per cent depreciation of the dollar, instead of caus- 
 ing a rise of prices, merely checked for a time the downward 
 tendency. 
 
 The monetary system established by the legislation of 1834- 
 1837 continued in force until 1861, gold throughout this period 
 being the real standard of prices. The country soon possessed 
 an abundance of gold coin. Silver dollars were coined to some 
 extent, but most of them were melted or exported. 
 
 234. The new situation was not without its inconveniences. 
 Not only were silver dollars worth more as bullion than as coin, 
 but all the smaller silver coins likewise had a higher value as 
 bullion than as money. Under the law of 1792 two silver half 
 dollars, four quarters, or ten dimes contained as much silver as 
 a dollar. As the law of 1834 made no change in the constituent 
 elements of subsidiary coins, it became profitable to "export all 
 of these that were full weight. Thus a scarcity of small change 
 arose, only worn and light-weight coins remaining in circulation. 
 In order to remedy this state of affairs Congress in 1853 passed 
 a law changing the character of subsidiary silver coins. Before 
 this date the free coinage of these had been permitted, and they 
 had possessed full legal-tender power, creditors being obliged 
 to accept them to any amount. By the act of 1853 the amount 
 of metal in all fractional silver coins was reduced about y^ per 
 cent, the half dollar being reduced from 185.625 grains pure 
 silver to 172.8 grains, and smaller coins in the same proportion. 
 The law also provided that these coins should be minted only 
 on government account, freedom of coinage being thus sus- 
 pended ; and that they should be legal tender for not more 
 than $5.00. This change made the ratio between silver and gold 
 14.88 to I, whereas the market ratio at the time was 15.23 to i. 
 The law accomplished the purpose desired. As small silver 
 coins thereafter possessed a value as money in excess of their 
 value as bullion, it was unprofitable to melt or export them. 
 The fractional silver now in use is of the weight and fineness 
 
346 MONEY AND CURRENCY 
 
 provided by the act of 1853. Prior to 1853 subsidiary silver 
 coins were standard money ; since that date they have been 
 mere credit or token money. 
 
 As a result of the act of 1853 the United States, for the first 
 time in its history, was supplied with an abundance of small 
 silver coins of its own minting. Accordingly in 1857 Congress 
 repealed all laws giving a legal-tender quality to foreign silver 
 coins. 
 
 Law of 1873 
 
 235. The next change in our coinage law was made in 1873. 
 At this time, as already shown, the country was upon a fiat- 
 money basis, but the dominant sentiment favored a return to 
 specie payment ; and since all the business of the country had 
 been done upon a gold basis for two generations, few silver 
 dollars having been in circulation, a rather strong sentiment 
 in favor of the gold standard existed. The question of stand- 
 ards excited little popular interest in this country, but in 
 Europe it had been for some time a matter of general dis- 
 cussion. At an international monetary conference in Paris in 
 1867, held ostensibly for the purpose of securing monetary 
 uniformity among the leading nations of the world, bimetallism 
 had proved a stumbling-block, the prevailing opinion being in 
 favor of the single gold standard. Accordingly no opposition 
 was excited in this country when our Secretary of the Treasury 
 presented to Congress a bill for the revision of our coinage 
 laws, in which all silver coins were made legal tender for only 
 ^5.00, the monetary unit being declared to be the gold dol- 
 lar of 23.22 grains fine. The bill was prepared by Mr. John 
 J. Knox, Comptroller of the Currency, and sent to Congress in 
 1870. By most congressmen and by the public generally it 
 was regarded merely as a revision or codification of existing 
 coinage laws. Gold was not the money of the time. People 
 were buying and selling goods with greenbacks, and the aver- 
 age man was interested only in legislation which affected 
 the standing of the greenback. The bill, therefore, although 
 the subject of some debate in Congress, aroused no general 
 
MONEY IN THE UNITED STATES 347 
 
 interest and passed both houses practically without opposition, 
 becoming a law February 12, 1873. The law as passed made 
 no mention whatever of the silver dollar ; instead of specifically 
 prohibiting its free coinage, the law simply failed to include 
 it among the coins which might be minted. Thus the United 
 States from a condition of legal bimetallism passed to a condi- 
 tion of legal monometallism, which became actual in 1879. 
 
 236. The act of 1873, although it suspended the free coin- 
 age of a legal-tender silver dollar, provided for the free coinage 
 of a silver coin known as the "trade dollar," to contain 420 
 grains of standard silver and to be legal tender for ;^5.oo. This 
 dollar was intended for use in our trade with the Orient, and 
 was worth at the time about four cents more than a gold dollar. 
 The decline in the gold price of silver, which began in 1873, 
 produced results not contemplated by the framers of the act, 
 for the conversion of silver bullion into trade dollars soon 
 became a profitable business. Instead of going to the Orient, 
 they remained at home, people being compelled to accept them 
 in payments not exceeding ^5.00. In 1876 Congress deprived 
 them altogether of their legal-tender quality and gave the Secre- 
 tary of the Treasury authority to restrict their coinage. In 1887 
 Congress provided for their redemption at par in standard silver 
 dollars. The total coinage was $36,000,000, but only $7,700,000 
 were presented for redemption. 
 
 "Limping Standard" (1879-1890) 
 
 237. Under the terms of the coinage act of 1873, which 
 made the gold dollar the unit of price in the United States, the 
 resumption of specie payments in 1879 meant the adoption of 
 the single gold standard. The word " dollar " thereafter was to 
 n^ean 25.8 grains of standard gold, and under the law the word 
 "specie" could be interpreted only as meaning gold. Silver 
 was no longer a money metal, and no silver dollars were to 
 be coined. 
 
 In 1878, however, a few months before the resumption of 
 specie payments, Congress passed a bill, commonly known as 
 
348 MONEY AND CURRENCY 
 
 the Bland-Allison Act, which threw some doubt upon the 
 nature of our monetary unit. This act, which was a compromise 
 with the advocates of the free coinage of silver, provided for 
 the monthly purchase of between ^2,000,000 and ;jS4,ooo,ooo 
 worth of silver bullion, and its coinage into dollars of 412^ 
 grains standard. In the act these dollars were called " standard 
 silver dollars," and were declared legal tender for all debts, 
 public and private, principal and interest of government bonds 
 excepted. The law remained in force until July 14, 1890, the 
 total coinage of silver dollars amounting to 1^378, 166,793. For 
 the first time in the country's history there was an abundance 
 of silver dollars in circulation. Indeed, after a few years it was 
 found impossible to get the fresh supplies into circulation, the 
 country's need for currency in the form of a silver dollar being 
 satisfied during the eighties with less than ^60,000,000. 
 
 238. The Bland- Allison silver dollar was a monetary anom- 
 aly. Although called a standard silver dollar to propitiate the 
 friends of silver, it was in no sense standard money ; nor was 
 it recognized as credit money, for no provision whatever was 
 made for its redemption in gold. Its status was very much like 
 that of the Indian rupee after 1898, — theoretically and legally 
 fiat money, susceptible of depreciation if issued to excess ; but 
 practically credit money, the people having confidence that 
 somehow it would be kept at par with gold. Inasmuch as the 
 law made it legal tender, the people certainly had a right to 
 expect that the government would keep it equal in value to 
 gold. There was no direct promise to pay gold, but the im- 
 plied obligation was tantamount to an explicit declaration. Two 
 things were essential to the maintenance of its value : first, 
 limitation of the supply ; and second, confidence among the 
 people in the purpose and ability of the government to prevent 
 its depreciation. These two conditions were necessarily inter- 
 twined. Theoretically the supply of silver dollars might increase 
 until all the country's gold had been displaced, and no deprecia- 
 tion result, for there would be no increase in the supply of cur- 
 rency; but such an increase would have destroyed confidence 
 in the ability of the government to redeem silver dollars, and so 
 
MONEY IN THE UNITED STATES 349 
 
 would have led to depreciation, the country thereby passing from 
 a gold standard to a fiat standard. 
 
 Our monetary system at this time, being neither bimetallic 
 nor explicitly monometallic, was said to be upon a "limping 
 standard." This expression was borrowed from Germany, 
 which at the time was in a similar position. When Germany 
 adopted the gold standard in 1871, with the mark as the mone- 
 tary unit, some 300,000,000 silver thalers were in existence. 
 Over one half of these were sold as bullion before 1879, when 
 sales were suspended on account of the decline in silver. Over 
 100,000,000 are still in existence and have legal-tender power as 
 the equivalent of three marks, although not legally redeemable. 
 France also had, and still has, the "limping standard." The 
 silver five-franc pieces are legal tender for all debts, but are not 
 legally redeemable in gold. The Bank of France has the right 
 to pay them out in redemption of its notes. Nevertheless, in 
 France, as in Germany, gold is the real standard of prices. The 
 United States, as we shall see later, has definitely, by legal 
 enactment, placed itself upon a gold basis, but Germany and 
 France are still, theoretically, on the " limping standard." 
 
 239. The act of 1878 failed to accomplish any of the pur- 
 poses desired by the friends of silver. It did not increase the 
 money supply, it had little effect on the value of silver, and 
 it did not check the fall of prices. The notion that it would 
 increase the money supply seems to have been commonly held, 
 yet any such effect was impossible so long as any gold coin 
 remained in circulation. Every silver dollar put into circulation 
 after 1878 merely took the place that would have been filled by 
 a gold dollar had no silver dollars been coined. The demand 
 for currency in the United States greatly increased between 
 1878 and 1890. If this demand had not been met by the coin- 
 age of 378,000,000 silver dollars, gold would have been im- 
 ported in larger quantities, and in place of an abundance of 
 silver we should have had an abundance of gold. Our exports 
 of merchandise would have been larger, and possibly our im- 
 ports might have been smaller. The gold standard, in short, 
 would have been firmly established. The law of 1878 made our 
 
350 MONEY AND CURRENCY 
 
 supply of money — that is, gold — less than it otherwise would 
 have been, and had very little effect upon the total supply of 
 currency. 
 
 Nor did this law of 1878 affect the value of silver bullion as 
 a free coinage act would have done. It was in no sense a 
 remonetization of silver. It gave to the metal no money utility 
 and did not increase the general demand for it. Free coin- 
 age would have done that, but the limited coinage of silver 
 dollars, which merely made the metal the material for credit 
 m.oney, tended to raise its value only in so far as it reduced 
 the available market supply. The gold price of silver in 1878 
 was $1.15. It averaged 4 cents lower in 1879, then rose to 
 ^1.14 in 1880, and thereafter declined steadily to 93 cents in 
 1889. This decline of the gold price, as shown in a previous 
 chapter, was due to a rise in the value of gold rather than to 
 a fall in the value of silver. 
 
 There was a popular notion that the Bland-Allison Act, by 
 increasing the supply of "money," would check the downward 
 tendency of prices. This idea had no foundation in reason. As 
 we have seen, the act could not have led to an increase in the 
 supply either of money or of other currency so long as gold 
 remained the standard. Prices varied inversely with the value 
 of gold, and that was fixed by world forces upon which an act 
 of Congress could exert very little influence. The coinage of 
 ^30,000,000 in silver every year lessened this country's need 
 for gold by that amount and so was a credit influence tending 
 to cheapen gold and raise prices ; but it was slight and in- 
 effective in comparison with all the world influences acting 
 upon the demand for and supply of gold. 
 
 240. The opponents of the act of 1878 predicted dire con- 
 sequences, — inflation, gold exports, panic, and a change to the 
 silver standard. Fortunately, however, the coinage of Bland- 
 Allison dollars was begun at a time when the need for currency 
 wis greatly increasing, and the predicted evils did not material- 
 ize. The year 1879 marked the end of the depression following 
 the panic of 1873, and the beginning of a period of great indus- 
 trial activity. During the next eleven years eighty thousand 
 
.MONEY IN THE UNITED STATES 351 
 
 miles of new railroad doubled the country's mileage. Despite 
 the monthly outflow of silver dollars from the United States 
 Mint, the demand for currency easily absorbed them all, and, in 
 addition, led to large imports of gold. During the ten years fol- 
 lowing 1878 the net imports of gold into this country amounted 
 to $224,000,000. In only two years, 1884 and 1886, were the 
 exports in excess of the imports. At the same time this coun- 
 try was producing annually about $60,000,000 worth of gold, 
 of which at least 80 per cent was added to the money supply. 
 According to estimates made by the Director of the Mint, the 
 monetary stock of gold in the United States increased from 
 $230,000,000 in 1879 to $690,000,000 in 1890. During the 
 same period 378,000,000 new silver dollars were coined. This 
 growth in the monetary stock was offset to some extent by a 
 decline in the quantity of national bank notes from $323,000,- 
 000 in 1878 to $186,000,000 in 1890, the improved credit of the 
 nation having raised the prices of government bonds to fig- 
 ures which tempted the banks to reduce their circulation to the 
 lowest possible limits. The net increase of the currency in circu- 
 lation between 1878 and 1890 was about $600,000,000, or nearly 
 80 per cent. 
 
 241. All this addition to the country's monetary stock was 
 absorbed by the increasing demand for currency, but not with- 
 out difficulty. It was very soon discovered that the public had 
 no use for silver dollars beyond a limited amount. ^ The law 
 of 1878 had provided for the issue of silver certificates against 
 the deposit of silver dollars, no certificate to be of a denomina- 
 tion under $10. Of these certificates $88,000,000 were in cir- 
 culation in 1886, but they were not very much liked by the 
 banks, for according to the law of July 12, 1882, they were not 
 legal tender, although they were receivable in payment of all 
 dues to the government and could be counted by national banks 
 as part of their "lawful money" reserves. 
 
 In order to popularize silver certificates Congress provided 
 by act of August 4, 1886, for their issue in denominations of 
 
 1 In 1884 only 40,000,000 silver dollars were in circulation. By 1901 the num- 
 ber had increased to 70,000,000. 
 
352 MONEY AND CURRENCY 
 
 ^i.oo, $2.00, and ^5.00. As the national banks were not allowed 
 to issue bank notes of small denominations, and as the Secretary 
 of the Treasury adopted the policy of retaining all greenbacks of 
 small denominations, the silver certificate necessarily became 
 the pocket money of the people, and their volume rapidly in- 
 creased, rising to ^142,000,000 in 1887 and $297,000,000 in 
 1890. These certificates are promises to pay silver dollars to 
 the bearer, and are issued only against the deposit of silver dol- 
 lars. Only by their issue was the government able to utilize 
 the silver dollars coined under the act of 1878. 
 
 242. The act of 1878 necessarily resulted in the coinage 
 of more than 2,000,000 dollars per month. It required the 
 purchase of at least $2,000,000 worth of silver ; and since 
 the price of this metal throughout this period was less than 
 $1.29 per ounce, $2,000,000 worth was sufficient to coin con- 
 siderably more than 2,000,000 dollars.^ In 1883, for example, 
 the average price of silver per ounce was $1.11. At this price 
 the government with $2,000,000 could buy enough silver to 
 make 2,325,000 dollars. The apparent profit made has been 
 improperly called a seigniorage. The total cost of the silver 
 bullion purchased under the act of 1878 was $308,000,000. 
 It amounted to 291,000,000 ounces, or sufficient to coin $378,- 
 000,000. The so-called profit, or seigniorage, therefore, was 
 $70,000,000. This sum, however, was not a profit or gain, and 
 cannot properly be called a seigniorage. This latter word is 
 applicable only in the case of a metal freely coined, when it 
 implies the assumption of no debt or obligation on the part of 
 the governme-nt. These silver dollars constitute a government 
 debt as truly as does the greenback. In 1890 the government 
 was under obligation to maintain at par with gold 378,000,000 
 silver dollars, just as it was to maintain the parity of $346,000,- 
 000 in greenbacks. Both were government debts, the only dif- 
 ference being that in the case of one the promise to pay was 
 expressed, while in the other it was implied. In 1890 the 
 value of the bullion contained in the silver dollars, the market 
 
 ' No Secretary of the Treasury ever bought more than the minimum amount 
 prescribed by the law. 
 
MONEY IN THE UNITED STATES 353 
 
 price of silver being ^1.04, was ^302,000,000. If it is granted 
 that the government could have sold this bullion at the market 
 price, although such a sale could not have been made, the 
 government's net debt on account of these silver dollars was 
 at that time ^76,000,000. At the price of silver prevailing in 
 1903 (about 53 cents), the government's net debt on account of 
 the 378,000,000 Bland- Allison dollars was about $225,000,000. 
 It is evidently wrong to speak of the difference between the 
 bullion and the coinage value of silver dollars as a profit. 
 
 243. Before describing the legislation of 1890 let us briefly 
 analyze the monetary system of the United States as it existed 
 in the beginning of that year. The supply of currency or 
 "money," as estimated by the Secretary of the Treasury, was 
 as follows : 
 
 Gold coin and bullion . I695, 000,000 
 
 Silver dollars .... . 386,000,000 
 
 Subsidiary silver . 76,000,000 
 
 National bank notes . ... 186,000,000 
 
 Greenbacks .... 347,000,000 
 
 Total . . . . J 1, 690, 000,000 
 
 Of the gold, $177,000,000 belonged to the Treasury and was 
 known as "free gold," to distinguish it from the gold which 
 had been deposited in the Treasury against the issue of gold 
 certificates. This free gold was known as the "gold reserve" 
 for the redemption of greenbacks. No law prescribed a mini- 
 mum below which this reserve must not fall, but custom had 
 fixed the figure at $100,000,000. The only law in any way 
 referring to the matter was passed in 1882; it directed the 
 Secretary to suspend the issue of gold certificates when the 
 free gold in the Treasury fell below $100,000,000. Thus Con- 
 gress expressed its opinion that the gold reserve should not 
 be less than $100,000,000. Gold certificates, the issue of which 
 against deposits of gold was authorized by act of Congress 
 in 1863, were a convenient paper representative of gold, a sort 
 of warehouse receipt. They were popular with bankers, being 
 more easily stored and counted in banking reserves than gold 
 
354 MONEY AND CURRENCY 
 
 coin. A suspension of their issue, it was hoped, would lead to 
 a larger use of greenbacks by bankers, so that fewer of these 
 would be taken to the Treasury for redemption. The vicissi- 
 tudes of this gold reserve became, as we shall see, a very impor- 
 tant matter before the end of the century. 
 
 Of the 386,000,000 silver dollars, 8,000,000 had been coined 
 out of the old "trade dollars" and 378,000,000 out of silver 
 bought under the act of 1878. These silver dollars were not 
 redeemable in gold. The law declared them standard dollars. 
 
 The national bank notes were redeemable in " lawful money," 
 which included greenbacks, silver and silver certificates, and 
 gold and gold certificates. The bank notes were secured by 
 government bonds deposited at the Treasury, a national bank 
 being then permitted to issue notes equal in amount to 90 
 per cent of the par value of the bonds it deposited. 
 
 Sherman Act of 1890 
 
 244. The nonfulfillment of the pessimistic prophecies of the 
 gold or so-called "sound money" men encouraged the friends 
 of silver to demand more legislation, and in 1890 (July 14) a 
 second silver-purchase law was enacted. Like the act of 1878, 
 this was a compromise between the " sound money " men 
 and the advocates of free coinage. It is generally known as 
 the Sherman Act, John Sherman having been chairman of the 
 Senate committee by which it was drafted. It ordered the Sec- 
 retary of the Treasury to purchase monthly 4,500,000 ounces 
 of silver at the market price, and to pay therefor by the issue 
 of new Treasury notes, legal tender and redeemable in coin ; 
 the purchases to cease whenever the market price equaled 
 $1.29 per ounce, the price at which the ratio of silver to gold is 
 16 to I. The silver bullion purchased was to be stored in the 
 Treasury as a sort of reserve or security for Treasury notes. 
 This act remained in force until July, 1893, and under it the 
 government purchased 169,000,000 ounces of silver at a cost of 
 ^156,000,000. It provided for the coinage of 2,000,000 ounces 
 of silver per month until July i, 1891, and for such further 
 
MONEY IN THE UNITED STATES 355 
 
 coinage thereafter as might be necessary for the redemption of 
 the Treasury notes. 
 
 The new Treasury notes were made redeemable on demand 
 in either gold or silver coin, at the discretion of the Secretary 
 of the Treasury. To increase their acceptability the following 
 important clause was inserted : 
 
 ... it being the established policy of the United States to maintain 
 the two metals on a parity with each other upon the present legal ratio, or 
 such ratio as may be provided by law. 
 
 This so-called "parity clause" was the first legislative recog- 
 nition of the silver dollar as credit money for the value of which 
 the government was responsible. The act as a whole threat- 
 ened the subversion of the gold standard ; yet this parity clause 
 was an important move toward the more secure establishment 
 of that standard. In the troublous times that followed no 
 Secretary refused to redeem the Sherman notes in gold. They 
 were treated as the equal of greenbacks. 
 
 245. The Sherman Act was confidently expected to "do 
 something " for silver, for the purchases it ordered would 
 absorb nearly the whole silver output of the United States. 
 These expectations were doomed to disappointment. There 
 was a brief speculative boom in silver in 1890, the price rising 
 from ^1.04 per ounce July i to ;^i.2i September 3 ; but then 
 it steadily declined, the average price in 1891 being 98 cents 
 and in 1892 87 cents. 
 
 It was also expected that the Sherman Act would exert a 
 beneficial influence upon business and industry. It seemed to 
 promise more money, high prices, better times. Mr. Windom, 
 Secretary of the Treasury, expressed a quite common opinion 
 when he wrote in his annual report for 1890: "One thing is 
 certain, that it has been the means of providing a healthy and 
 much-needed addition to the circulating medium of the United 
 States." 
 
 The act, however, soon brought disaster. During the next 
 three years ^156,000,000 new credit money was issued, but 
 events showed that it was not needed, for an equal amount of 
 
356 MONEY AND CURRENCY 
 
 gold was crowded out of circulation and exported to foreign 
 countries. During the first six months of 1891 our gold exports 
 amounted to ^74,000,000. The bountiful harvests of that year, 
 resulting in large exports of grain, turned the foreign exchanges 
 in our favor during the latter half of the year, but in 1892 
 gold exports were renewed and the amount of free gold in the 
 Treasury rapidly declined. By April, 1893, the gold reserve 
 had dwindled to ^97,000,000. The situation gave rise to much 
 alarm among business men, for the fear was felt that the gov- 
 ernment might not be able to continue the redemption of the 
 greenbacks and Sherman notes. This fear, which was felt in 
 Europe as well as in the United States, precipitated the disas- 
 trous panic of 1893. In the midst of that panic President 
 Cleveland called a special session of Congress. It met August 7, 
 and after much debate in the Senate a bill was passed (Octo- 
 ber 30) repealing the silver-purchase provisions of the Sherman 
 Act. The parity clause was not repealed, but was reiterated 
 with emphasis, although linked with a declaration in favor of 
 international bimetallism. 
 
 246. The evil effects of the Sherman Act, and of the result- 
 ing inflation, did not end with the panic of 1893. During the 
 next three years the industries of this country were numb, 
 as with paralysis, and the demand for money was in conse- 
 quence greatly reduced. Redundant cash, accumulating in the 
 vaults of the city banks, stimulated unhealthy speculation in our 
 stock and produce markets, and thus, by raising our price level 
 above that of Europe, caused a steady export movement of gold. 
 The operations of the Treasury, from which the gold was taken, 
 tended to accelerate the movement, for its receipts from cus- 
 toms and internal revenue were less than its expenditures. The 
 Secretary of the Treasury, although embarrassed by the infla- 
 tion of the currency, was himself obliged to contribute to it, 
 for the situation compelled him each month to pay out more 
 currency than he took in. In January, 1894, the gold reserve 
 had shrunk to ;^6s, 000,000, and the total cash balance of the 
 Treasury, including this gold reserve, amounted to only ;^84,- 
 000,000. The Secretary of the Treasury appealed to Congress 
 
MONEY IN THE UNITED STATES 357 
 
 for power to issue bonds, but Congress declined to give assist- 
 ance. Accordingly, under authority conferred by the Resump- 
 tion Act of 1875, the Secretary of the Treasury, in January, 
 
 1894, advertised for sale $50,000,000 5 per cent bonds ma- 
 turing in ten years. The price was fixed at 117.223, which 
 made the interest rate equal to 3 per cent. The bonds were 
 taken mainly by the banks of New York City, the proceeds 
 amounting to $58,189,500. The gold reserve was thereby 
 raised to $107,000,000. 
 
 This bond issue, however, could not counteract the forces 
 that were compelling the exportation of gold. On account of 
 the deficit the Treasury continued to inflate the currency; 
 gold exports were continued, and the Treasury gold holdings 
 rapidly reduced. In August the gold reserve amounted to 
 only $52,000,000. A second bond issue for $50,000,000, sold 
 at 117.077, brought the gold reserve up to $105,000,000 in 
 November. This issue had a bad effect upon the public, giving 
 rise to the impression that the Treasury was in distress and 
 might not be able to maintain gold payments. As a result 
 timorous people began to withdraw gold from the Treasury by 
 the redemption of greenbacks, not because they needed gold 
 for export, but because they feared national bankruptcy. In 
 the last three months of 1894 the Treasury lost $80,000,000 
 in gold, although less than half this sum was exported. 
 
 In January, 1895, the reserve having shrunk to $44,700,000, 
 the Secretary arranged for a third issue of bonds. The previous 
 issues had been sold after public advertisement. The third issue, 
 however, was made under a forgotten clause of the Revised 
 Statutes (Section 3700), which gave the Secretary authority to 
 sell bonds upon such terms as he should deem most advan- 
 tageous to the public interest. Under this section, in January, 
 
 1895, he entered into a contract with a syndicate of bankers, 
 according to the terms of which it was agreed: (i) that the 
 syndicate should deliver $65,117,500 in gold (3,500,000 ounces); 
 (2) that one half of this gold should be brought from Europe 
 at the rate of 300,000 ounces per month ; (3) that for six 
 months the syndicate should use all its influence to prevent 
 
358 MONEY AND CURRENCY 
 
 the withdrawal of gold from the Treasury ; (4) that the gold 
 should be paid for with 4 per cent thirty-year bonds at 104.49. 
 The low price paid for the bonds has subjected this contract 
 to much criticism, but the contract appears to have been jus- 
 tified by the exigency. The syndicate accomplished all that 
 was asked of it. Through the cooperation of foreign bankers, 
 who were interested in the syndicate, the rate of foreign ex- 
 change was for six months kept below the gold export point, 
 the gold reserve of the Treasury was raised above $100,000,000, 
 the exportation of gold ceased for several months, and public 
 alarm was quieted. 
 
 The syndicate was not held to its agreement to import 
 part of the gold. This was wise, for the real though not osten- 
 sible purpose of the bond issue was to contract the supply of 
 currency in this country; if the syndicate had imported the 
 gold from Europe and paid it over to the Treasury, no con- 
 traction of our money supply would have resulted, and there 
 would have been strong pressure for the reexportation of the 
 metal. 
 
 Gold exports were not resumed until August, 1895, and by 
 December the gold reserve had fallen to $79,000,000. In this 
 month President Cleveland's message regarding the boundary 
 line between Venezuela and British Guiana, which seemed 
 to breathe a threat of war against Great Britain, threw Wall 
 Street into a panic, and large withdrawals of gold from the 
 Treasury ensued. In January, 1896, the gold reserve having 
 fallen to $49,000,000, the Secretary of the Treasury sold $100,- 
 000,000 4 per cent thirty-year bonds at an average price of 
 1 1 1. 166. Exports of gold did not cease until August, but the 
 reserve did not again fall below $100,000,000. 
 
 A summary review of the events following the passage of the 
 Sherman Act in 1890 will be found instructive. The act led 
 to the issue of $156,000,000 new Treasury notes within three 
 years, and to the exportation of $160,000,000 worth of gold in 
 the same period. In 1893, therefore, the country held at least 
 $150,000,000 less gold than it would have had if the Sherman 
 Act had not been passed ; the gold reserve, while the act was 
 
MONEY IN THE UNITED STATES 359 
 
 in force, declined from ^184,000,000 to {884,000,000 (October, 
 1893). The depression following the panic of 1893 was accom- 
 panied by a shrinkage in the need for currency, while at the 
 same time continuous inflation was resulting from the Treasury 
 deficit, the excess of expenditures from July i, 1893, to Decem- 
 ber I, 1895, amounting to $130,000,000. Continuous inflation 
 gave rise to a continuous demand for gold for export. The 
 Treasury, having lost most of its gold during the preceding 
 three years, was obliged within three years to add $262,000,000 
 to the funded debt, receiving in cash thereby $293,000,000. 
 During the six years 1890 to 1896 the country's net imports 
 of gold amounted to $269,000,000, and the total exports of gold 
 to $497,000,000. 
 
 247. While the Treasury was going through this exciting 
 time the greenback was quite generally held responsible for 
 all the mischief. Greenbacks were the agents used for the 
 withdrawal of gold from the Treasury, and as the Secretary 
 was forced to pay them out as fast as they were redeemed, 
 the same greenbacks were presented over and over again for 
 redemption. What was called an "endless chain" of green- 
 backs passed into and out of the Treasury, carrying gold with 
 it. In consequence a strong sentiment was created in favor 
 of the permanent retirement of the greenback, and an agitation 
 having this object in view was accordingly begun. 
 
 The greenback, however, was not the real cause of the Treas- 
 ury's embarrassment during this period. The force which 
 kept this endless chain in motion was inflation, (i) from the 
 issue of Sherman notes and (2) from the Treasury deficit. The 
 most important lesson to be learned from the events of this 
 period is this: that an artificial increase of the currency of a 
 country, from whatever source, is always liable to cause an 
 exportation of gold. Even if the greenbacks at this period had 
 not been in existence, or if they had not been redeemable in 
 gold on demand, there would have arisen the same demand for 
 gold for export, and if it had not been supplied by the Treas- 
 ury, it would have been bought at a premium in open market. 
 In other words, if there had been no greenbacks, and if the 
 
36o MONEY AND CURRENCY 
 
 government had refused to give gold in exchange for silver dollars, 
 depreciation of our credit money would have resulted. 
 
 248. Another lesson taught by these events relates to the man- 
 agement of the Treasury. Its operations should never have been 
 permitted, unless for good reasons, to increase or diminish the 
 country's supply of currency. When the receipts were less than 
 the expenditures, the deficit should have been covered instantly 
 by a sale of bonds. If the Treasury at such a time had money on 
 deposit in the national banks, no bond sales would be necessary, 
 but these deposits should be reduced by an amount equal to the 
 deficit. If the Secretary of the Treasury had sold bonds in 1894 
 whenever the rates of foreign exchange approached the gold-export 
 point, he would have corrected the redundancy of the circulation 
 and rendered the export of gold unnecessary. It would not have 
 been necessary that the bonds should be paid for in gold. The 
 gold movement was the result of an excess of currency ; a per- 
 manent reduction of any part of the supply, whether gold, silver, 
 or greenbacks, would have checked the movement ; but a tem- 
 porary reduction, followed again by inflation, could do no good. 
 
 Whenever the Treasury receipts exceeded the expenditures, so 
 that a surplus was accumulating, an artificial contraction of the 
 country's currency resulted. In order to avoid this evil the Secre- 
 tary of the Treasury could increase the deposits of public moneys 
 in the national banks. 
 
 Law of March 14, 1900 
 
 249. The presidential campaign of 1896, although it resulted 
 in a victory for the friends of the gold standard, disclosed the 
 startling fact that nearly one half of the people of the United 
 States were in favor of the free and unlimited coinage of silver 
 dollars. The friends of the gold standard, therefore, resolved 
 not to rest until it had been firmly and explicitly established in 
 the law. In 1897 representative bankers and business men held 
 a convention in Indianapolis and appointed a commission to con- 
 sider plans for the improvement of the monetary system. A bill 
 prepared by this commission was laid before Congress in 1898. 
 
MONEY IN THE UNITED STATES 361 
 
 It provided for a freer issue of bank notes, for the gradual 
 retirement of the greenback and Sherman notes, and for the 
 direct redemption of silver dollars in gold. Congress did not 
 pass this bill, but drafted one of its own, which became a law 
 March 14, 1900. 
 
 The law of 1873 made 25.8 grains of standard gold the legal 
 monetary unit of the United States, and the Resumption Act 
 of 187s provided for the practical adoption of this unit in 
 1879. We have seen, however, that the full realization of the 
 gold standard in 1879 was prevented by the coinage of fiat 
 silver dollars under the Bland- Allison Act of 1878. For twelve 
 years the country was upon a "limping standard," — a joint 
 standard of gold and fiat money; yet the price level was deter- 
 mined by the value of the gold dollar, for depreciation of the 
 fiat silver dollars was prevented by limitation of their supply 
 and by the increasing demand for currency. 
 
 The Sherman Act of 1890 both strengthened and weakened 
 the gold standard ; it made the silver dollar credit money to be 
 maintained at par with gold, but at the same time it ordered 
 larger purchases of silver and further inflation. During the 
 next six years the gold standard was several times near dissolu- 
 tion, but the presidential campaign of 1896 ended in a triumph 
 for its friends, and immediately a thorough discussion of plans 
 for its safeguarding began. 
 
 The outcome of this discussion was the so-called Gold Stand- 
 ard Act of March 14, 1900. The full text of this law is printed in 
 the Appendix. Its most important provisions are the following. 
 
 1. The gold dollar shall be the "standard unit of value," and 
 it shall be the duty of the Secretary of the Treasury to main- 
 tain " all forms of money coined or issued by the United States " 
 at a parity of value with this standard. 
 
 2. United States notes and Treasury notes of 1890 shall be 
 redeemed in gold coin, and such notes when redeemed shall 
 not be reissued except in exchange for gold. 
 
 3. The Secretary of the Treasury shall maintain a reserve 
 fund of ^150,000,000, and whenever the gold in this fund falls 
 under ^100,000,000 he shall "restore the same to the maximum 
 
362 MONEY AND CURRENCY 
 
 sum of ^150,000,000" by the sale of bonds. When notes are 
 taken from the reserve fund in exchange for gold thus obtained, 
 the Secretary may use them for any lawful purpose, " except 
 that they shall not be used to meet deficiencies in the cur- 
 rent revenues." 
 
 4. There shall be established in the Treasury Department a 
 division of issue and a division of redemption, in which shall 
 be kept the accounts relating to the issue and redemption of 
 United States notes. Treasury notes, gold certificates, silver 
 certificates, and currency certificates; the funds representing 
 these accounts to be held as trust funds. 
 
 5. The Treasury notes of 1890 shall be retired and canceled 
 by the substitution therefor of silver certificates as fast as the 
 silver bullion bought under the act of i8go is coined. 
 
 6. Silver certificates shall, for the most part, be in small 
 denominations (j^io and less), and greenbacks in large denomi- 
 nations (^10 and upward). 
 
 7. The following United States bonds, the s's of 1904, 4's 
 of 1907, and 3's of 1908, may be exchanged for new 2 per 
 cent bonds payable in gold after thirty years. 
 
 8. National banks may issue notes equal in amount to the 
 par value of the bonds deposited as security, and the tax on 
 the notes issued against the deposit of 2 per cent bonds shall 
 be only ^ of i per cent per annum. 
 
 The act expressly declares that greenbacks and Treasury notes 
 shall be redeemed in gold coin. Until 1890 the greenback had 
 been a coin obligation and was legally redeemable in either silver 
 or gold. The law of 1890, while leaving it still a coin obliga- 
 tion, had made its redemption in gold compulsory whenever 
 such redemption was necessary to maintain its parity with gold. 
 
 Elaborate provision is made to enable the Secretary to main- 
 tain the gold redemption of the greenback. The gold reserve 
 is raised from ^100,000,000 to ^150,000,000, but one third of 
 this fund may consist of greenbacks which have been redeemed. 
 Whenever the gold in the fund falls below ;^ 100,000,000, and 
 cannot be increased by exchanges of greenbacks for gold in the 
 general fund of the Treasury, the Secretary must obtain gold by 
 
MONEY IN THE UNITED STATES 
 
 363 
 
 the sale of bonds. He is left without discretion in the matter. 
 When the gold fund is depleted bonds must be sold. 
 
 The establishment of the division of issue and redemption 
 was important only from the bookkeeper's point of view, and is 
 an imitation of the organization of the Bank of England. 
 
 The restriction of the issue of silver certificates to small denom- 
 inations was intended to make these the pocket money of the 
 people, and such has been the result. Since the law was passed 
 almost all the Treasury notes of 1890 have been retired, silver 
 certificates having taken their place.' The Revenue Act of 1898, 
 passed when this country was at war with Spain, authorized the 
 coinage of the silver bullion bought under the act of 1890. The 
 silver certificates that have supplanted the Treasury notes of 1 890 
 represent the dollars which have been coined from this bullion. 
 
 250. The following table shows the different kinds of currency 
 in the United States. 
 
 CURRENCY SUPPLY OF THE UNITED STATES, 
 JANUARY I, 1921 
 (In Millions of Dollars) 
 
 
 In Circu- 
 lation 
 
 In Treasury 
 (Belonging to it) 
 
 In Treasury 
 (In trust) 
 
 Totals 
 
 Gold coin and bullion 
 Gold certificates ... 
 
 Silver dollars 
 
 Silver certificates . . . 
 Subsidiary silver . 
 U. S. notes (greenbacks) . . 
 Treasury notes of 1890 
 National bank notes . 
 Inderal reserve notes . 
 
 1818 
 
 533 
 
 gS 
 
 152 
 
 266 
 
 341 
 2 
 708 
 3961 1 
 
 434 
 18 
 
 5 
 6 
 
 IS 
 17 
 
 533 
 154 
 
 2785 
 
 533 
 270 
 152 
 271 
 
 347 
 2 
 
 723 
 3978 
 
 Totals . . 
 
 7877 
 
 495 
 
 687 
 
 8712 
 
 Total money (gold) . . . 
 
 Total credit money ^ 
 Total currency 
 1 Includes federal reserve bank notes. 
 
 $2,785,000,000 
 
 5,588,000,000 
 
 $8,373,000,000 
 
 2 Does not include gold or silver certificates. These are merely representatives 
 of coin or bullion held in trust by the government. 
 
364 MONEY AND CURRENCY 
 
 The bullion included under "gold coin and bullion " consisted 
 chiefly of bars of varying degrees of fineness, which are made by 
 the mint for the convenience of jewelers and gold exporters. Of 
 the ^434,000,000 in gold belonging to the Treasury, ^150,000,000 
 was held in the reserve fund for the redemption of greenbacks and 
 maintenance of the gold standard ; the remainder was part of the 
 Treasury's general cash balance. 
 
 The gold certificates ($533,000,000) are paper representatives 
 of gold, either coin or bullion, which the Treasury holds in trust. 
 That gold belongs to the holders of these certificates and can be 
 claimed by them at any time. The certificates are not legal tende r, 
 but are receivable by the government in payment of any dues, 
 and are " lawf ul money " in banking reserves. Their smallest 
 denomination is $10. 
 
 The $154,000,000 in silver held by the Treasury in trust 
 belonged to the holders of the outstanding silver certificates and 
 Treasury notes of 1890. Silver dollars are legal tender for all 
 payments, public and private, the principal and interest of gov- 
 ernment bonds excepted. They are credit money, but not redeem- 
 able in gold on demand. However, in ordinary times the holder 
 has no difficulty in exchanging them for gold ; and in extraor- 
 dinary times, if nonredemption should threaten depreciation, the 
 Secretary of the Treasury would be obliged to redeem them. 
 The s ilver certifi cat es are not legaltender, but are receivable 
 by the government in payment of all dues. They are "lawful 
 money." 
 
 The $2,000,000 in Treasury notes was all that remained un- 
 canceled of the $156,000,000 issued under the act of 1890. The 
 silver bullion bought under that act has been coined into dollars, 
 and the Treasury will henceforth substitute silver certificates for 
 Treasury notes as fast as the latter can be obtained from the 
 public. The Treasury notes have all the legal-tender qualities of 
 gold, except in payment of principal and interest of government 
 bonds. They are redeemable in gold. 
 
 The United States notes, or greenbacks, are full legal tender 
 except for the payment of import duties and principal and interest 
 of the public debt. The $341,000,000 represented as in circulation 
 
MONEY IN THE UNITED STATES 365 
 
 is an estimate and is undoubtedly excessive, for no allowance is 
 made for the greenbacks that must have been lost by fire and 
 otherwise. Greenbacks are redeemable in gold on demand. 
 
 The subsidiary silver coins (half dollars, quarter dollars, and 
 dimes) are le gal tend er for payments not exceeding $10. They 
 are coined on government account as needed. Until 1903 the 
 law fixed the maximum limit at ^100,000,000, but this limit has 
 since been raised. 
 
 The bank notes are not le gal tender, but must be accepted 
 by all national banks and by the government for all public dues 
 except duties on imports, and may be paid out by the govern- 
 ment for all dues to individuals except interest and principal of 
 the public debt. Bank notes are not " lawful money." 
 
 Nearly 80 per cent of the country's currency in circulation is 
 credit money, and much of this is both lawful money in banks 
 and full legal tender in payment of debts. The legal-tender con- 
 stituents of the currency are gold coin, silver dollars, United States 
 notes, and Treasury notes of 1890. Lawful money includes the 
 foregoing and gold and silver certificates. 
 
 LITERATURE 
 
 White, Money and Banking, passim; J. L. Laughlin, History of 
 Bimetallism in the United States ; F. W. Taussig, The Silver Situation 
 in the United States (New York, 1896); W. G. Sumner, A History of 
 American. Curreiicy ; G. M. Coffin, Silver from i84g to i8g2; A. B. 
 Hepburn, History of Coinage and Currency in the United States ; W. M. 
 Gouge, A Short History of Paper Money and Banking in the United 
 States (Philadelphia, 1833); C. Raguet, A Treatise on Currency and 
 ^aw/J'zw^- (Philadelphia, 1839); M. L. Muhleman, Afonetary Systems of the 
 World ; Report of the Indiajiapolis Monetaiy Commission ; C. F. Dunbar, 
 Laws of the United States relating to Currency, Finance, and Banking 
 frotn lySg to i8gi j C. J. Bullock, Essays on the Monetary History 
 of the United States ; A. D. NoYES, Thirty Years of American Finance; 
 D. K. Watson, History of A!7ierica7i Coinage; J. K. Upton, Money ifi 
 Politics ; F. A. Walker, Money; W. A. Scott, Money and Banking; 
 David Kixley, Money j annual reports of Director of the Mint, and of 
 Comptroller of the Currency. See especially the Reports of the National 
 Monetary Commission. 
 
CHAPTER XVII 
 
 PANIC OF 1907 AND WAR INFLATION 
 AND CRISIS 
 
 251. The banking system of the United States unequal to the strain in 1907. 
 252. The Aldrich-Vreeland Act of 1908 provided for the issue of emergency cur- 
 rency. 253. Serious defects of the currency system prior to 1914. 254. Bankers 
 were helpless before an approaching panic. 255. Bank assets were nonliquid 
 and rediscounting was not in favor. 256. National bank .notes secured by 
 government bonds were inelastic. 257. Trade was handicapped by the domes- 
 tic exchange system. 258. The position of the Federal Treasury as redemp- 
 tion agent was perilous. 259. The plan of the National Monetary Commission. 
 260. The Federal Reserve Act of 1913. 261. The federal reserve banks are 
 bankers' banks. 262. Various powers and functions of reserve banks. 263. The 
 cutting of reserve requirements makes credit expansion possible. 264. Under 
 good management the federal reserve system will protect the Federal Treasury 
 as redemption agent. 265. The World War threw the belligerent nations of 
 Europe off the gold basis, causing depreciation of the French franc and English 
 pound sterling. 266. The great rise of prices in the United States during and 
 after the war was caused by gold inflation. 267. Causes of the buying fever and 
 rise of prices which culminated in 1920. 268. Thus wars always cause high prices 
 and an inflated bonded debt. 
 
 251. In 1907 the United States underwent the strain of a 
 serious panic. It was the culmination of a brief period of great 
 prosperity and credit expansion such as every country is Hkely to 
 have when its money is steadily depreciating because of an increas- 
 ing supply. Between 1904 and 1907 the general level of prices in 
 the United States rose 14 per cent. The rise in 1906 alone was 
 6 per cent.^ The rate of interest on capital also rose both in the 
 United States and in Europe. The abounding prosperity and large 
 money profits of business greatly stimulated the desire of men to 
 enlarge the scale of their operations, and gave rise to most eager 
 
 ' See "Wholesale Prices, 1890 to 1912," Bulletin iVo. 114. of U.S. Bureau of 
 Labor Staiisties. 
 
 366 
 
PANIC OF 1907 367 
 
 bidding for loanable capital.^ There were present nearly all the 
 phenomena of good times which are described hypothetically in 
 sections 1 01 and 102 of Chapter VII. 
 
 The reaction in 1907 was world-wide. Early in the year the 
 market prices of securities began to sag in Europe as well as in 
 the United States. The great banks of Europe and Canada, seeing 
 clearly the peril in the situation, gradually adopted measures for 
 checking further inflation and expansion. In the United States, 
 however, for reasons that we will discuss in this chapter, the proper 
 corrective was not and could not be applied. Throughout the first 
 eight months of the year, despite a great decline in stock-market 
 prices, the general business throughout the country continued very 
 active, and most business men and bankers seemed convinced that 
 prosperity was on a sound and permanent basis. But in the third 
 week of October panic came. It started with a run on a New 
 York trust company, causing its suspension. Within a week the 
 majority of the banks in the country had suspended cash pay- 
 ments, declining to give depositors more currency than was abso- 
 lutely needed as pocket money. Each bank sought to protect 
 itself by building up as large a cash reserve as possible, and none 
 could feel entirely secure unless its cash holdings equaled the 
 demand liabilities. 
 
 252. As a result of the panic of 1907 the subject of banking 
 and currency immediately became one of great interest. In 1908 
 Cohgress enacted a law known as the Aldrich-Vreeland Act, which 
 authorized the national banks of any community to organize a cur- 
 rency association with power to issue currency certificates for use 
 as a medium of exchange. These certificates were to be issued to 
 any member bank on pledge of satisfactory collateral, and were to 
 bear the guaranty of all the banks belonging to the association. 
 The act was to remain in force six years. This legislation merely 
 made legal what had been a common practice of clearing houses 
 
 1 The Bank of England, for instance, advanced its rate to 7 per cent in Decem- 
 ber, 1906. Normally its rate is between 3 per cent and 4 per cent. Railroads and 
 industrial corporations in the United States, being unable to market their bonds 
 except at great sacrifice, were forced to borrow money at high rates of interest 
 on short-term notes. 
 
368 MONEY AND CURRENCY 
 
 during the panic of 1907, when the clearing houses of many cities 
 issued certificates without authority of law.^ 
 
 It should be noted that the Aldrich-Vreeland Act provided only 
 for the issue of what is commonly known as emergency currency. 
 As the banks were required to pay a tax on any certificates which 
 they obtained from a currency association, it is evident that in 
 ordinary times no use would be made of the privilege. The 
 act could serve no good purpose except during a panic, when it 
 would enable the banks to supply the people with a medium of 
 exchange in substitution for the lawful money either withdrawn 
 and hoarded by depositors or stored in needlessly large amounts in 
 the vaults of banks. 
 
 The Aldrich-Vreeland Act, which was to expire by limitation 
 June 30, 19 1 4, was extended by the Federal Reserve Act to June 30, 
 1915. The tax on circulating notes, secured otherwise than by 
 United States bonds, was fixed in this act at 3 per cent per annum 
 for the first three months, with an additional rate of ^ per cent 
 per annum for each month thereafter until a tax of 6 per cent per 
 annum was reached. 
 
 Up to January i, 19 14, only eighteen currency associations 
 had been organized and no currency certificates had been issued. 
 At the outbreak of the World War the banks resorted to the 
 use of both clearing-house certificates and Aldrich-Vreeland cur- 
 rency. About ^200,000,000 in certificates was issued and about 
 ^380,000,000 in emergency currency. Within ten months almbst 
 all the Aldrich-Vreeland notes were retired. 
 
 253. For fifty years after the passage of the National Banking 
 Act, in 1863, business in the United States suffered because of 
 defects in its banking and currency system. Chief among these 
 defects were the following : ( i ) decentralization of the gold re- 
 serve ; (2) lack of rediscount facilities and of central control over 
 discount rates and the foreign exchanges ; (3) inelasticity of the cur- 
 rency ; (4) cumbersome system of domestic exchange ; (5) liability 
 of the Federal Treasury for the redemption of credit money. 
 
 ' Mr. A. Piatt Andrew, former Assistant Secretary of the Treasury, has esti- 
 mated that the total issue of emergency currency during the panic of 1907 
 amounted to #500,000,000. 
 
PANIC OF 1907 369 
 
 254. National banks in central reserve cities (New York, 
 Chicago, and St. Louis) were required to carry in their own vaults 
 a lawful money reserve of not less than 25 per cent against deposit 
 liabilities ; those in some fifty other cities, designated as reserve 
 cities, also had to maintain 25 per cent reserves, of which one 
 half might be on demand deposit with approved national banks 
 located in the central reserve cities ; all other national banks, 
 known as country banks, had to maintain 15 per cent reserves, 
 of which three fifths might be deposited with approved national 
 banks in either central reserve or reserve cities. 
 
 New York City banks, because of their large call loan market, 
 were able to pay a low rate of interest on funds deposited with 
 them by country banks. Furthermore, it was convenient for coun- 
 try banks to have balances to their credit in New York, for through 
 these balances they could draw on New York when selling domes- 
 tic or foreign exchange to their customers. As a result of these 
 circumstances New York banks have always been large debtors 
 to banks in other parts of the country. In dull times money piled 
 up high in New York ; when business became more active, money 
 was withdrawn from New York, and New York banks were obliged 
 to call loans. This always hurt the speculator who had not fore- 
 seen it ; and by depressing security and commodity values it often 
 hurt the investor, the merchant, and the manufacturer. 
 
 Bankers found themselves helpless whenever they saw a mone- 
 tary panic or pinch approaching. Even though the pinch seemed 
 at first only a local affair, banks all over the country began draw- 
 ing in their reserves, thus pulling strength away from the spot 
 where it was needed and often bringing on a panic. This ex- 
 plains why the country suffered from the needless currency panic 
 of 1907. The same process aggravated the evils of the industrial 
 crises of 1873 and 1893. 
 
 The reader will understand the situation better if he takes into 
 account the following facts : ( i ) the commercial banks of the coun- 
 try in 191 3 owed their depositors about twenty billions, all payable 
 on demand ; the total currency supply of the country was only 
 about three and one-half billions, of which less than one half was 
 in the banks. Evidently, if all the depositors, or any considerable 
 
370 MONEY AND CURRENCY 
 
 number of them, had called for their money on the same day, the 
 banks would have had to close their doors. 
 
 255. What is the remedy? We must, as Mr. Paul M. Warburg 
 has pointed out in one of his excellent pamphlets on the subject, 
 treat our money reserves as a city does its water supply, — accu- 
 mulate it in one or more large reservoirs and be able to send it 
 at once to the spot where it is needed.^ The bankers of Europe 
 learned long ago that this was the effective way to maintain that 
 confidence which is essential to the solvency and operation of any 
 good banking system. In the United States, when financial trouble 
 threatened, each bank had to depend upon itself. 
 
 Assets of the banks were nonliquid. Most of their loans were 
 local, for there were no banks doing a nation-wide business and 
 none had branches. These loans could not be turned into cash 
 until maturity, and even then they often had to be renewed, espe- 
 cially in hard times when banks most needed larger cash reserves. 
 To a small extent banks, when pressed for funds, would discount 
 their customers' notes with other banks more fortunately situated. 
 This practice is known technically as rediscounting. It was 
 frowned upon and concealed, however, because it was regarded 
 as a sign of weakness on the part of the bank selling its paper 
 and because customers objected to having their notes peddled 
 about where anyone might see what they were borrowing. 
 
 The objections were absurd. Rediscounting is the only way 
 in which a bank can convert the great bulk of its assets from 
 " frozen " to liquid form. It is a sign not of weakness but of 
 good judgment. 
 
 European countries have long enjoyed the full advantages of 
 a rediscount system. There a central bank holds the greater 
 portion of a country's banking reserve. Banks in need of cash 
 take their commercial paper to the central bank and rediscount it. 
 The central bank fixes the rate at which such rediscounts are 
 made and thus determines the rate which banks must charge on 
 loans to their own customers. If a bank knows when a customer 
 applies for a loan that it must rediscount, and pay 6 per cent, 
 
 ' See Mr. Warburg's illuminating monograph TAe Discojint System in Europe 
 (government document). 
 
PANIC OF 1907 
 
 371 
 
 in order to furnish the funds required, it will certainly charge 
 that customer more than 6 per cent if it is to make a profit on 
 the loan. 
 
 The central bank thus effectively controls the market rate of 
 interest as soon as the banks must begin to call upon it for re- 
 discounts. By raising its rate it can check an undue expansion 
 of credit ; quickly force liquidation in commodities, particularly in 
 the stock and other speculative markets ; call a halt on the rise 
 in prices ; and, through these methods, raise the rate of the coun- 
 try's exchange and check exportation of gold. Of course, by 
 lowering its rate it can produce the opposite effect. 
 
 The reader will realize what a powerful weapon this is in con- 
 trolling international exchanges and gold movements and how 
 helpless a country must be which, itself without such a weapon, 
 attempts to compete with a country so armed. For fifty years 
 the United States was almost powerless either to regulate its own 
 rates of interest and expansion of credit or to control its exporta- 
 tion and importation of gold. 
 
 256. The requirement that national bank notes could be issued 
 only against an equal amount of government bonds deposited as 
 security rendered the credit money of the country utterly inelastic. 
 It neither expanded to accommodate increasing activity in busi- 
 ness nor contracted as activity declined. Consequently, when trade 
 increased and demanded additional currency, the banks could not 
 forestall such a course of events or mitigate its effects. 
 
 257. The domestic-exchange system has already been discussed 
 in Chapter V. It was a cumbersome and expensive system. If 
 a man in Red Bank, New Jersey, sent a check on his local bank 
 to a creditor in Coatesville, Pennsylvania, the check would be 
 deposited promptly enough in some bank in Coatesville ; but 
 weeks or even months might elapse before it actually came back 
 to Red Bank for payment. In the meantime, the depositor at 
 Coatesville either could not use the funds because they were un- 
 collected, or if he did get the use of them his bank or some other 
 was paying out funds which it had not collected. This mass of 
 uncollected checks floating around in the mails, and called the 
 float, was enormous. 
 
372 MONEY AND CURRENCY 
 
 AVhen the check finally got back to Red Bank the bank there 
 would deduct an exchange charge before remitting the amount 
 called for. This charge was either passed along directly to the 
 depositor, absorbed by his bank, or indirectly collected from him 
 through higher interest rates on his loans, requirement of a larger 
 deposit balance, poorer service, or some other way. 
 
 The system required constant shipping of currency from one 
 part of the country to another at no small expense and risk. Ex- 
 change on New York, with which a large part of inter-city pay- 
 ments were made, was quoted at a premium or discount in Chicago, 
 New Orleans, and other cities. The United States, which boasted 
 that it constituted the largest free-trade area in the world, found 
 that in reality a tariff was being levied on its trade because of a 
 defective system for making settlements between one city and 
 another. 
 
 258. The reader is already familiar with the peril inherent in 
 the obligations of the Federal Treasury as redemption agent for a 
 large mass of credit money. The peril was strikingly illustrated 
 in the three years following the panic of 1893, as described in 
 the preceding chapter. The maintenance of the gold standard 
 depended entirely upon the solvency of the national treasury. It 
 was liable for the redemption in gold of $347,000,000 of United 
 States notes, 550,000,000 silver dollars, and over $150,000,000 
 in subsidiary silver. Since national bank notes are redeemable by 
 the banks in silver or United States notes, any excess in the issue 
 of bank notes was likely to bring pressure upon the Federal Treas- 
 ury for gold. The Treasury was not in the banking business and 
 could obtain gold in an emergency only by the sale of bonds. So 
 when inflation or a period of expansion changed the international 
 balance of indebtedness against the United States and gave rise 
 to a demand for gold for exportation, there was always danger 
 that the so-called endless chain of greenbacks would again be set 
 in motion, as in 1894 and 1895, and withdraw gold from the 
 National Treasury in sums large enough to cause loss of confi- 
 dence either at home or abroad. 
 
 259. In 1908 Congress created a National Monetary Commis- 
 sion, charged with the duty of making a thorough study of the 
 
PANIC OF 1907 373 
 
 subject of banking. This commission reported in 191 1, and in 
 harmony with its recommendations a comprehensive bill was 
 introduced in Congress. 
 
 The commission found that the situation in the United States 
 called for the establishment of some kind of central institution 
 similar to the great banks of Europe. They believed, however, 
 that the new institution should not be a competitor of existing 
 banks, and in consequence their bill provided for the creation 
 of a so-called National Reserve Association, which was to have 
 power to do business with banks only. Its capital was to be 
 supplied by the national and state banks which joined the asso- 
 ciation. It was to be managed by a board of forty-two directors 
 elected by the member banks and representing the commer- 
 cial, industrial, and banking interests of the country. There were 
 to be local associations, and these were to be organized into dis- 
 trict associations, of which there were to be at least fifteen. A 
 local or district association, subject to the authority of the cen- 
 tral board, was to be managed by men selected by its own 
 member banks. 
 
 Practically, this National Reserve Association was to be a bank- 
 ers' bank with branches in different parts of the country. It was 
 to have power (i) to carry a large part of the reserves of mem- 
 ber banks ; (2) to rediscount indorsed promissory notes and bills 
 of exchange for member banks ; (3) to deal in gold bullion and 
 foreign exchange ; (4) to act as fiscal agent for the government 
 of the United States, receiving and disbursing government funds. 
 In order to encourage the use of bills of exchange and develop 
 in this country a discount market, national banks were given the 
 right to accept time drafts arising out of commercial transactions 
 up to the amount of one half of their capital and surplus. 
 
 The association was given the right to issue bank notes to the 
 amount of ;^900,000,ooo, against which it was to carry a reserve 
 of at least 50 per cent in gold or lawful money. If it issued 
 notes in excess of $900,000,000, the excess was to be taxed at 
 the rate of i^ per cent per annum, unless it was covered by an 
 equal amount of lawful money. National banks were to be per- 
 mitted to continue the issue of notes up to the amount then in 
 
374 MONEY AND CURRENCY 
 
 circulation, but additional issues were forbidden. The act con- 
 templated the ultimate retirement of the national bank note, its 
 place to be taken by the notes of the association. 
 
 This plan of the National Monetary Commission was commonly 
 known as the Aldrich Plan, Senator Aldrich of Rhode Island 
 having been chairman of the national commission. It had the 
 approval of prominent bankers and experts in finance, but was 
 obnoxious to Democrats, partly because it was a Republican meas- 
 ure and partly on the ground that it would centralize the so-called 
 money power of the country and finally fall under the control of 
 the great business and financial interests in New York City. Its 
 fundamental weakness lay in its failure to give the government 
 control of the conduct of the reserve association. In order to 
 satisfy the popular demand for a reform of the banking system, 
 another plan (one providing for less centralization of power and 
 reserves) was devised. The House bill, which was adopted in 
 September, 191 3, called forth vigorous criticism from banking 
 and business organizations. As a result it was greatly modified 
 in the Senate. The Federal Reserve Act became a law Decem- 
 ber 23, 19 1 3. In some important respects it is unlike either the 
 House bill or the Senate bill.^ 
 
 260. Under the Federal Reserve Act the country is divided 
 into twelve districts in each of which there is a federal reserve 
 bank. These reserve banks may have branches in their own dis- 
 tricts, and many do have them. The capital of each reserve bank 
 is subscribed by the member banks within its district. All national 
 banks are compelled to be members and state banks are permitted 
 to join provided they comply with certain requirements. 
 
 The reserve banks are under the "general supervision" of the 
 Federal Reserve Board at Washington, the members of which 
 
 1 The Democratic platform adopted at Baltimore in 1912 declared against the 
 Aldrich Plan. About the exact wording of the banking plank there is some dis- 
 pute. In the Democratic Official Handbook the plank reads as follows : " We 
 oppose the so-called Aldrich Bill for the establishment of a central bank." In 
 most newspapers the word " for " was printed " or." However the original draft 
 may have been written, the leaders in Congress evidently assumed that the plat- 
 form declaration had been against any and all kinds of central banks. Summaries 
 of the Federal Reserve Act and of the Aldrich Plan are printed in the Appendix. 
 
PANIC OF 1907 375 
 
 are appointed by the President. The Board has extensive powers, 
 either granted specifically or implied in the Federal Reserve Act. 
 It can go to almost any extent it chooses in the management of 
 the reserve banks. Detailed written reports are sent to Washing- 
 ton — daily, weekly, monthly, and annually — and all twelve banks 
 are connected with one another and with the Board by private 
 wires. The Board is thoroughly informed about the current opera- 
 tions of every reserve bank and does exercise control in many 
 cases with regard to very minute details. The Federal Reserve 
 Board also has a staff of examiners who from time to time visit 
 the reserve banks and make thorough examinations. Although 
 the Board has no capital of its own, the federal reserve system 
 in effect provides a central bank. 
 
 Each reserve bank has a board of nine directors, three of whom 
 are appointed by the Federal Reserve Board and six elected by 
 the member banks in the district. The Board designates one of 
 its appointed members as Federal Reserve Agent and Chairman 
 of the reserve bank's board of directors. He is the personal repre- 
 sentative of the Board in his reserve bank. Each reserve bank 
 has a governor, elected by its directors, whose functions corre- 
 spond closely to those of the president of any other bank. 
 
 The directors of each reserve bank elect a man to become a 
 member of the Federal Advisory Council, which then has twelve 
 members. The Council acts merely in an advisory capacity to the 
 Board and has no active partin the management of the banks. 
 
 261. The reserve banks are bankers' banks. They accept de- 
 posits from member banks, the government, and, for exchange 
 purposes only, from other -reserve banks and from nonmember 
 banks in their respective districts. They do not accept deposits 
 from individuals or business houses. Likewise they loan only to 
 their respective member banks, to one another, and to the govern- 
 ment (through the purchase of bonds and certificates of indebted- 
 ness). They may also deal in the warrants, etc., of the political 
 subdivisions of the United States, with certain restrictions. They 
 buy, from banks or any one in the open market, bills of exchange 
 and domestic acceptances of the type permitted under the act ; 
 but they do not loan directly to individuals or business concerns. 
 
376 MONEY AND CURRENCY 
 
 262. A reserve bank rediscounts for its member banks the 
 notes of their customers provided they arise out of commercial 
 or agricultural transactions and have not longer to run than is 
 specified in the act. It also loans directly to member banks upon 
 government securities as collateral. By permission or direction 
 of the Board it rediscounts for other reserve banks, or purchases 
 bills of exchange, acceptances, or securities from them. The rate 
 of discount charged to member banks or to other reserve banks 
 is subject to the approval or determination of the Board. By 
 exercising these powers the Board can shift funds from one part 
 of the country to another upon its own terms, as need may arise. 
 
 A reserve bank issues federal reserve notes in exchange for 
 gold or commercial and agricultural paper of the kinds eligible 
 for rediscount. Evidently these notes may expand as trade re- 
 quires so long as the reserve bank has sufficient reserves to back 
 them up. A reserve bank must not pay out the notes of another 
 reserve bank, but must send them either to the issuing bank or 
 to the Board for redemption. As soon, therefore, as a federal 
 reserve note gets into a reserve bank, it is retired. 
 
 The reserve banks issue another type of note, called the fed- 
 eral reserve bank note. These are issued against a deposit of 
 government securities, just as are the national bank notes. Like 
 the latter, they are not elastic. Reserve bank notes have been 
 issued to a large extent to take the place of silver certificates and 
 silver dollars, because the government has been selling silver in 
 response to the foreign demand. On February i, 192 1, there 
 were ^226,000,000 of reserve bank notes outstanding as com- 
 pared with $3,484,000,000 of federal reserve notes, the latter 
 furnishing the elastic element in our circulation. 
 
 Provision is made for the gradual retirement of the national 
 bank notes, and they were being retired steadily for a while. The 
 heavy demand for currency toward the end of the World War and 
 immediately following, however, increased their issue again so that 
 at the beginning of 1921 it stood about where it did in 1914, 
 namely, about $720,000,000. 
 
 In order to encourage the development of " dollar exchange " 
 (that is, drafts in terms of American money) and of a discount 
 
PANIC OF 1907 377 
 
 market in the United States, member banks are permitted to 
 accept drafts arising out of foreign trade -and certain types of 
 domestic trade. Under the Edge Act, passed December 24, 
 1919, banks are permitted to combine in the establishment of 
 foreign banking corporations which are to deal exclusively in 
 transactions connected with the financing of foreign trade. Mem- 
 ber banks may also establish branches in foreign countries. 
 
 The Board acts as a clearing house for the reserve banks, and 
 they in turn do the same for banks in their districts. Non- 
 member banks as well as member banks may avail themselves 
 of the clearing privilege by conforming to certain requirements. 
 Neither members nor nonmembers are required to clear. All 
 member banks are required, however, to remit at par to the re- 
 serve bank for any items presented to them for payment. In 
 many districts nonmember banks are practically compelled to do 
 the same through the medium of presenting items by express 
 companies or other agencies when any bank refuses to remit at 
 par for items sent through the mails. This practice has caused 
 some friction between the nonmember state banks and the re- 
 serve banks. Through this system enormous saving is made both 
 in time and in money. Each reserve bank is required to main- 
 tain a balance of not less than ^1,000,000 in the Gold Settlement 
 Fund at Washington to be available there for settling balances 
 due other reserve banks. On January 28, 192 1, the total amount 
 on deposit by the twelve banks was $462,000,000. During the 
 month ending January 15, 1921, total clearings through the fund 
 amounted to $12,000,000,000. The reserve banks make no 
 charge for this service, and the member banks are strictly limited 
 as to the charge they may make to depositors. 
 
 The reserve banks act as fiscal agents of the government. 
 During the World War they rendered notable service in this con- 
 nection. The old subtreasuries have been discontinued and their 
 functions assumed by the reserve banks. 
 
 263. The federal reserve banks are required to carry a reserve 
 of 40 per cent in gold against federal reserve notes outstanding 
 and 35 per cent against deposits. A graduated tax is provided 
 for any deficiency in reserves. 
 
378 MONEY AND CURRENCY 
 
 The reserve requirements of national banks are cut practically 
 in half ; and all legal -reserves must be deposited with the reserve 
 bank of the district, so that cash in a national bank's own vault 
 is now nothing more than till money. The legal requirements 
 are as follows : 
 
 A. Against time deposits : 
 
 All national banks ..... 3 per cent 
 
 B. Against demand deposits : 
 
 Central Reserve City Banks . 1 3 per cent 
 
 Reserve City Banks . ...10 per cent 
 
 Country Banks 7 per cent 
 
 All member banks come under the same reserve requirements 
 as those for national banks. Of course, state law may require 
 more or less in the case of member state banks and trust com- 
 panies ; but in some states the law has been changed to conform 
 to the Federal Reserve Act in so far as reserves of member state 
 institutions are concerned. 
 
 It will be seen at a glance that cutting reserve requirements, 
 as the act did, made possible an enormous expansion of credit 
 based upon the same reserves. Under the National Banking Act, 
 for example, ^100,000 of deposits in a New York City bank re- 
 quired $25,000 in reserves; under the Federal Reserve Act the 
 same deposits would require a reserve deposit with the reserve 
 bank of $13,000, and against this reserve deposit the actual cash 
 required to be held by the reserve bank is only $45 50. In the case 
 of New York City, then, a dollar of reserve is nearly five and one- 
 half times as potent as it was under the National Banking Act. 
 
 264. The act did not change the status of the United States 
 Treasury as redemption agent. Instead of lessening the liability 
 of the Treasury, it increased it, for it made the Treasurer respon- 
 sible for the new federal reserve notes. Nor did it lessen the 
 heterogeneity of our currency supply. On the contrary, it added 
 two new kinds of bank notes to the existing stock. It did lessen 
 the probability that the Treasury would again be embarrassed by 
 the redemption problem, for the federal reserve system properly 
 managed will prove a powerful safeguard to American credit. 
 
WAR INFLATION AND CRISIS 379 
 
 Proper management is a difficult task, not to be accomplished 
 by men whose only or chief experience lies in the field of politics. 
 The federal reserve system must be divorced, and kept divorced, 
 from politics. 
 
 265. The war which began in August, 1914, between the Cen- 
 tral Powers and the Entente in Europe affected prices in many 
 countries in a manner illustrating most clearly some of the funda- 
 mental principles of money which have been expounded in the 
 earlier chapters of this book. All of the belligerent countries in 
 Europe abandoned the gold standard when the war broke out and 
 issued huge quantities of bank notes and other forms of paper 
 money. As this so-called credit money was not redeemable in 
 gold, depreciation of the currency, in varying degrees in different 
 countries, immediately took place. There was of course at the 
 same time a corresponding rise of prices in different countries. 
 
 Inasmuch as the United States, even after it entered the 
 war in 19 17, was able to maintain the gold standard throughout 
 the war and thereafter, the gold value of the depreciated European 
 currencies was accurately indicated by their foreign exchange value 
 quoted in American dollars. The English sovereign declined 
 from par (;^4.8665) to ^3.20. In 1920 it began to recover its 
 value and by February 14, 192 1, it was worth ^3.90. On the 
 same date the French franc (par 19.3 cents) was worth only 7.3 
 cents, while the German mark (par 23.8 cents) was worth only 
 1 1 cents. We cannot take the space here to discuss in detail 
 the monetary problems left as a legacy of the war to the various 
 countries of Europe. It must suffice to point out to the reader 
 that many European countries under the stress of the World War 
 furnished the student of money some most remarkable illustra- 
 tions of the nature of fiat money and of the perils, distress, and 
 injustice inevitably connected with its use. 
 
 As is usually the case, government officials in Europe have 
 been reluctant to admit that their currencies were depreciated, and 
 instead have claimed, as they did in England in 18 10, that gold 
 was at an abnormal premium because of the exigencies of war, 
 or have sought to " amuse their ignorant subjects with fantastic 
 explanations of the perversity of the exchanges and chimerical 
 
380 MONEY AND CURRENCY 
 
 schemes for ' correcting ' them by stopping imports or borrowing 
 still more from abroad." 1 But the reader must not let himself 
 be confused by statements from official quarters, no matter how 
 high, which are in conflict with sound principles. The simple 
 fact is that paper money not redeemable in gold, and issued in 
 quantities in excess of the amount of gold and convertible paper 
 normally demanded by the business of a country, causes the prices 
 of commodities to rise and becomes automatically fiat money. 
 
 Since England's leadership in finance and London's proud posi- 
 tion as the world's financial centre cannot long be maintained 
 unless a paper pound and a sterling bill of exchange are redeem- 
 able in gold at their face value, there is every reason to believe 
 that the English government and England's financiers will do 
 their utmost to reestablish their monetary system fairly on the 
 gold standard. This can be accomplished, of course, only by the 
 retirement of a certain amount of depreciated paper money issued 
 during and immediately after the war. 
 
 1 From the Introduction to the "Paper Pound of 1797-1821," by Edwin 
 Cannan, Professor of Political Economy in the University of London. In this ■ 
 volume, which is a reprint and discussion of the famous Bullion Report of 1810, 
 Professor Cannan, commenting on the deadly nature of government issues of 
 paper money, says in the Introduction : " In the comparatively short war of 
 1914-1918 currencies 'not convertible at will into a coin which is exportable' 
 (Report, p. 17) were issued by governments and government banks in amounts 
 compared with which the 100 per cent increase in thirteen years, which made the 
 Bullion Committee complain so vigorously in 1810, looks absolutely trifling. The 
 British government brought out an entirely new issue of £1 and 10 s. notes and 
 increased it to 293 millions at the date of the armistice : the Bank of France in- 
 creased its issue from 6000 million francs to 30,500 millions : the Italian increase 
 was from 2500 millions to over 8000. The precise increase in Germany and 
 Austria-Hungary is obscure, but understood to have been much greater. The 
 record since the armistice is still less of a kind to give the present-day Europeans 
 ground for boasting themselves better than their fathers. In twenty-three weeks 
 the British government had increased the note issue by 59 millions more, and 
 the total still stood on October i, 1919, at 335 miUions. The French issue on 
 October 2 was 36,250 millions, the Italian in July, 1919, was about 10,000 millions, 
 and the Russian ruble is being manufactured in numbers which suggest astrono- 
 mers' calculations rather than anything terrestrial. The result is what Horner 
 and the Bullion Committee feared. The pound in October, 1919, will buy just 
 about the same amount of gold as it would when the Bullion Committee sat in 
 1810, that is, about 107 grains instead of the normal 123^, but it is respectable 
 compared with its colleagues in Kurope." 
 
WAR INFLATION AND CRISIS 381 
 
 France faces a more difficult problem than England, for the 
 franc suffered greater depreciation than the paper pound. But 
 the French people, like the Italians, have in the past proved their 
 ability to cope with difficult financial problems, and we may hope 
 therefore that both France and Italy will in a few years have re- 
 stored their currency to the gold basis. The great depreciation 
 of the German mark leads one to doubt if it ever will be restored 
 to its original value. It would seem more likely either that the 
 mark will be debased or that an entirely new coinage will be 
 adopted by the German government if any real effort is made in 
 the future to place the German currency on the gold basis. 
 
 Chart VI, on page 382, will give the reader a general idea of 
 the course of prices during and after the World War in the United 
 States, England, France, and Italy. It will be noted that changes 
 in prices in England, although at a higher level, corresponded 
 quite closely with price changes in the United States. In Italy 
 and France, on account of the large issues of paper currency, 
 prices rose to much greater heights than in the United States 
 and England. The chart is reproduced from the Monthly 
 Review of the Federal Reserve Bank of New York of Decem- 
 ber 31, 1920. 
 
 266. While the United States, as we have said, was able to 
 maintain the gold standard during the war and thereafter, 
 nevertheless its people suffered from the evils of an inflated 
 currency, although in lesser degree than the people of other 
 belligerent nations. During the years 1915-1916 the monetary 
 gold stock of the United States, on account of heavy imports 
 from Europe sent in payment for exports of war supplies, in- 
 creased by about ;^ i ,000,000,000, the total amounting at the 
 end of 1916 to nearly $3,000,000,000. This new gold found 
 its way into the banks of the United States and became the basis 
 for an expansion of credit and caused a remarkable rise of prices 
 during 1916-1917. The index number computed on the basis of 
 the price of 19 13 as 100 stood at 186 in July of 191 7. Although 
 the country's monetary stock of gold did not increase after 191 7 the 
 level of prices continued to rise until May of 1920, when the index 
 number stood at 272, which meant of course that in that month 
 
382 
 
 MONEY AND CURRENCY 
 
 $2.72 would buy in the wholesale markets no more of goods in 
 general than was purchasable with $1 in 191 3. 
 
 This great rise of prices was by many people attributed to the 
 scarcity of goods due to the, diminution of the country's produc- 
 tive power, while others explained it by the statement that the 
 
 1914 
 
 1915 
 
 1916 19.17 
 
 Chart VI 
 
 1918 
 
 1919 
 
 1920 
 
 war had greatly increased the demand for goods and so caused 
 the rise of prices. The average man does not understand the 
 relation of money and credit to prices, and so lends a ready ear 
 to the most plausible explanation that is offered. Hence when it 
 was officially explained that the increased quantity of currency 
 and bank credit was not the cause of high prices but rather the 
 result, many people were inclined to accept this dictum almost as 
 
WAR INFLATION AND CRISIS 383 
 
 if it were self-evident. The demand for goods, it was explained, 
 in connection with their scarcity had made prices rise, and this 
 rise of prices had made necessary the issue of more paper cur- 
 rency in order that the business of the country might not suffer. 
 The weakness of this explanation lies in the fallacious assumption 
 that there can be an increase in the demand for goods before 
 there has been any increase in the supply of money and credit. 
 No man can buy goods unless he has money in his pocket or a 
 bank account or credit with the seller, and he cannot get credit 
 with the seller unless the latter believes that in due time money 
 or its equivalent will be forthcoming. 
 
 This great rise of prices in the United States, strictly speak- 
 ing, was the product of inflation quite as much as if it had been 
 caused by an excessive issue of paper currency. Economically 
 the $1,000,000,000 of gold which the war added to the mone- 
 tary stock of the United States did not belong to it, for the gold 
 had not come in response' to the normal laws of trade and com- 
 merce. Since, however, it was injected into our monetary system 
 and made the basis for a great expansion of credit, its effect on 
 the price level was no different from that which would have been 
 exerted by an issue of a billion dollars of legal tender greenbacks. 
 We must conclude therefore that the rise of prices in the United 
 States from 1914 to 1920 was the result of gold inflation. This 
 may seem to some readers paradoxical and anomalous. Yet it 
 is strictly true that the monetary unit of the United States was 
 an inflated gold dollar during the war, and the probability is that it 
 will remain such so long as the United States retains possession 
 of the gold it obtained in the course of the war. 
 
 Chart VII, on page 385, gives the reader a graphic view of the 
 changes in the stock of gold in the United States from 191 3 to 
 1920, the concurrent changes in the level of prices, and the great 
 increase in the volume of the country's bank clearings, which are 
 fair indices of the expansion of bank credit. During this period 
 the index number of wholesale prices (the average of prices in 
 191 3 being assumed as 100) rose from 100 in 191 3 to 272 in 
 May, 1920, thereafter declining rapidly, so that the average of 
 prices in 1920 was only 236 ; the total of the country's bank 
 
584 
 
 MONEY AND CURRENCY 
 
 clearings increased at equal pace, rising from loo in 191 3 to 265 
 in 1920. The country's monetary stock (gold and credit money) 
 increased in similar fashion, namely, from $3,700,000,000 in 191 3 
 to $8,400,000,000 at the end of 1920 — a rise from 100 to 227. 
 The following table gives the figures on which Chart VII is based. 
 
 Year 
 
 Gold Stock in 
 
 United States 
 
 (Millions) 
 
 Bank Clearings in 
 
 United States 
 
 (Millions) 
 
 Index Numbers of Wholesale Prices 
 
 (Bureau of Statistics, United States 
 
 Department of Labor) 
 
 
 Yearly Average 
 
 Highest Monthly 
 Average 
 
 1913 
 1914 
 1915 
 
 fi9'7 
 1817 
 2261 
 
 $i6g,8ii 
 155.-41 
 187,813 
 
 100 
 100 
 lOI 
 
 100 
 100 
 lOI 
 
 1916 
 1917 
 1918 
 
 2741 
 3040 
 3080 
 
 261,850 
 306,942 
 332.349 
 
 <^4 
 176 
 
 196 
 
 * 
 
 134, October 
 
 1S6, July 
 
 207, September 
 
 1919 
 1920 
 
 2833 
 2761 
 
 417.415 
 451,030 
 
 212 
 236 
 
 23S, December 
 272, May 
 
 267. The sharp upward tilt of prices in the latter part of 1919 
 and the first half of 1920 and the sharp decline in the latter part 
 of 1920 require a few words of explanation, for during this period 
 the monetary stock of gold in the United States decreased by some 
 $300,000,000. Why under such circumstances does the index num- 
 ber of prices within a year rise from 200 to 272 and then in seven 
 months suffer an equal decline .'' If the reader examines Chart VI, 
 on page 382, he will discover that during the same period there were 
 similar sharp fluctuations of prices in England, France, and Italy. 
 It is fair to assume therefore that common causes were at work in 
 all these countries. In the United States we know of at least three 
 circumstances that made for higher prices in this period, and it is 
 quite probable that similar conditions prevailed in other countries. 
 
 I. After the armistice was signed, although there was for a 
 time some recession of prices, there was soon developed in 19 19 
 a great feeling of buoyancy and confident expectation, which led 
 to extravagant speculation in commodities. 
 
WAR INFLATION AND CRISIS 
 
 385 
 
 
 
 
 
 
 
 
 
 
 
 
 ~ 
 
 
 
 
 " 
 
 
 
 
 
 
 
 
 
 
 " 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 /^ 
 
 
 ,■ 
 
 260 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 / 
 
 V 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 iy 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ''/ 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 / 
 
 / 
 
 
 i 
 
 
 240 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 / 
 
 / 
 
 
 \ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ' 
 
 
 
 \ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 / 
 
 / 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 / 
 
 I 
 
 
 
 
 
 220 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 i 
 
 
 1 
 
 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 j 
 
 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 f 
 
 
 / 
 
 
 
 
 1 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 / 
 
 
 
 
 
 \ 
 
 200 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 / 
 
 
 i, 
 
 -' 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 / 
 
 ,. 
 
 \' 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 y 
 
 <-- 
 
 
 
 
 
 
 
 
 
 
 
 — 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 / 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 /. 
 
 / 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 j 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 
 - 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 / 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 / 
 
 
 1 1 
 
 ' 
 
 
 
 
 
 
 
 
 160 
 
 
 
 
 
 
 
 ! 
 
 
 
 
 
 1 
 
 / 
 
 
 
 ! 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 i 
 
 
 
 
 
 !■' 
 
 
 ^ 
 
 y 
 
 
 
 ~ 
 
 
 ^^~^ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 ^ 
 
 [^ 
 
 
 
 
 
 
 ■v 
 
 
 
 
 
 
 
 
 
 
 
 
 — 
 
 
 
 
 
 h 
 
 
 
 
 
 
 
 
 
 
 
 
 '~ 
 
 140 
 
 
 
 
 
 
 
 
 
 
 J 
 
 
 
 
 
 
 
 
 
 ] 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 / 
 
 1 
 
 I 
 
 
 
 
 
 
 
 
 
 
 i_ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 /' > 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 / 
 
 r! 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 120 
 
 
 
 
 
 
 
 
 
 /, 
 
 ' 
 
 f 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 / 
 
 / 
 
 /■ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 / 
 
 
 '/ 
 
 
 
 
 
 
 
 
 W 
 
 hoi 
 
 is: 
 
 le 
 
 Pri 
 
 ce^ 
 
 
 — 
 
 - 
 
 
 
 
 
 
 
 
 
 
 / 
 
 
 / 
 
 ' 
 
 
 
 
 
 
 
 
 B£ 
 
 ^ nU, 
 
 ■ 1 1 J 
 
 
 - 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 / 
 
 ,6 
 
 
 
 
 
 
 
 
 
 
 Gc 
 
 Id 
 
 L 
 
 PPl 
 
 yn 
 
 
 
 
 
 
 
 
 100 
 
 
 
 
 
 
 '^ 
 
 ^ 
 
 
 — 
 
 -/ 
 
 / 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 -- 
 
 
 . 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 _ 
 
 _ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 J914 1915 1915 1917 1918 1919 1920 
 Chart VII 
 
386 MONEY AND CURRENCY 
 
 2. The flotation of the Victory Loan in the spring of 19 19 
 was very largely financed by an expansion of credit,^ the banks 
 throughout the country lending most liberally against promissory 
 notes secured by government bonds. 
 
 3. The people of the United States, rejoicing that the war was 
 over, tired of pinching and saving to help win the war, and long- 
 ing for the luxuries and indulgences they had denied themselves 
 during the war, began to sell their Liberty bonds and with the 
 proceeds indulged in an extravagant orgy of buying. Many shops 
 throughout the country freely advertised their willingness to accept 
 Liberty bonds in payment for the goods on their shelves. The 
 demand for goods was so eager and insistent during this period 
 that prices rose by leaps and bounds and fortunes were made by 
 men who had little or no experience in business. 
 
 The buying fever culminated in May, 1920, and in the ensu- 
 ing months prices rapidly declined, bringing disaster to many 
 business firms which had failed to see or guard against the peril 
 concealed in the wild so-called " seller's market " which followed 
 the armistice.^ 
 
 The use of Liberty bonds as currency worked mischief in two 
 ways, for it not only increased the demand and raised the prices 
 
 1 The bulk of the subscriptions to the Liberty and Victory loans were made 
 through banks, the subscribers paying varying percentages of cash and giving 
 their notes for the balance. Using as collateral the bonds and certificates of 
 indebtedness issued in anticipation of the bonds, banks discounted their own 
 notes at a federal reserve bank. The floating of a war loan, therefore, was always 
 accompanied by a great increase in the volume of member banks' collateral notes 
 secured by government war obligations, which were discounted by the federal 
 reserve banks. The flotation of the Victory Loan, for example, raised these 
 discounts from $1,350,000,000 in January, 1919, to $1,860,000,000 in May. 
 
 2 Wholesale prices in the United States rose and fell during 1920 as follows, 
 the figures being the monthly average of prices as calculated by the United States 
 Bureau of Labor Statistics, the average of prices in 1913 being taken as 100 : 
 
 January . . . . . ... 248 July . . . 262 
 
 February . 249 August . . 250 
 
 March . . .... 2^^ September . . 242 
 
 248 
 
 July . . 
 
 249 
 
 August 
 
 253 
 
 September 
 
 265 
 
 October . 
 
 272 
 
 November 
 
 269 
 
 December 
 
 April . . iijj v..\-Luiji-i . . 22s 
 
 May . 272 November . . 207 
 
 June 269 December . ... 18 
 
 It is not strange that business failures in the latter part of 1920 were 100 per cent 
 greater in number and liabilities than in the corresponding period of 1919. On 
 
WAR INFLATION AND CRISIS 387 
 
 of goods but at the same time tended to lessen the production of 
 goods. Shopkeepers sold the bonds which they received from 
 their customers and thus absorbed a large amount of investment 
 capital which might otherwise have been used productively. The 
 net result of the buying craze was curtailment of production, scarcity 
 of many forms of merchandise, especially luxuries, exhaustion of 
 the people's artificial buying power, collapse of prices, numerous 
 business failures, cancellation of orders, increasing unemployment, 
 and general depression. 
 
 268. It would be idle to criticize the financial conduct of the 
 World War on the part of any of the belligerents, but it is cer- 
 tainly time for thoughtful men to consider most seriously whether 
 war must necessarily be accompanied by demoralizing changes 
 in the price level, inflicting great hardships on innocent people 
 long after the peace treaty has been signed. The rise of prices 
 in the United States, as a result of the recent war, was greater 
 and more demoralizing than the rise of prices which took place 
 during and after the Civil War of 1 860-1 865. Then the advance 
 in prices was from 100 in i860 to 217 in 1865, whereas the rise 
 of prices in the recent war was from 100 in 191 3 to 272 in 1920. 
 When wars cause such changes in the price level, to say nothing 
 of the heritage of an inflated bonded indebtedness burdening the 
 future years, one cannot help feeling that the aftermath of war 
 is much more grievous than need be. This is a subject most 
 worthy of scientific attention, and the conclusion may be that a 
 nation plunged into war ought to conscript its entire people, and 
 not merely those who are fit for the firing line. Then the need for 
 gigantic bond issues and for currency inflations might not arise. 
 
 the contrary, it is most remarkable that the country weathered such a price 
 cyclone without universal bankruptcy. 
 
 The average of wholesale prices for January, 1921, was 177. In view of the 
 great increase in the country's gold stock, there was good reason for believing 
 that the great drop of prices was nearly at an end. The country nevertheless 
 faced difficult problems. Many banks in the West and South were heavily bur- 
 dened with loans against agricultural produce made when prices were high ; re- 
 tailers, in involuntary league, clung desperately to the high prices as the only 
 means of avoiding bankruptcy ; and labor fought hard against any reduction of 
 its war wages. But economic laws are as resistless as the laws of nature. Read- 
 justment, however painful, was inevitable. 
 
MONEY AND CURRENCY 
 
 LITERATURE 
 
 Horace White, ]Mo7iey and Banking and " The Currency Bill in the 
 Senate," North American Reiiiew (January, I9t4); O. M. W. Sprague, 
 Battking Reform in the United States and History of Crises under the 
 National Banking System ; C. F. Dun'BAR, Theory and History of Banking; 
 Charles A. Conant, Principles of Money and Banking, Modern Banks 
 of Issue ; J. F. Johnson, The Canadian Banking System; publications of 
 the National Monetary Commission ■■ ; Edward D. Jones, Economic Crises ; 
 T. E. Burton, Financial Crises ; Paul M. Warburg, The Discount Market 
 in Europe and A United Reserve Bank of the United States ; A. Barton 
 H'EV&VK'^, History of Currency in the United States ; John T. Holsworth, 
 Money and Banking; Edwin T. Kemmerer, Modern Currency Reforms 
 and A. B. C. of Federal Reserve System; Harold G. Moulton, Prin- 
 ciples of Money and Banking; Chester A. Phillips, Readings in Money 
 and Banking and Bank Credit ; Thomas Conway, Jr., and Ernest M. 
 Patterson, The Operation of the New Bank Act ; H. Parker Willis, 
 Federal Reserve, a study of the banking system of the United States ; J. L. 
 Laughlin, Banking Progress. 
 
 1 Students should read especially the interviews with foreign bankers in Europe. 
 The publications are sold at cost price by the Superintendent of Documents, 
 Washington, D.C. 
 
APPENDIX 
 
 r. GOLD STANDARD ACT OF MARCH 14, 1900^ 
 
 (Sections 2 to 9 inclusive) 
 
 Chapter 41. — An act to define and fix the standard of value, to maintain the parity 
 of all forms of money isstted or coined by the United States, to refund the public 
 debt, and for other ptcrposes. 
 
 Be it enacted by the Senate and House of Representatives of the United. 
 States of America in Congress assembled, That the dollar consisting of 
 twenty-five and eight tenths grains of gold nine tenths fine, as estab- 
 lished by section thirty-five hundred and eleven of the Revised 
 Statutes of the United States, shall be the standard unit of value, 
 and all forms of money issued or coined by the United States shall 
 be maintained at a parity of value with this standard, and it shall be 
 the duty of the Secretary of the Treasury to maintain such parity. 
 
 MAINTENANCE OF RESERVE FUND 
 
 Sec. 2. That United States notes, and Treasury notes issued under 
 the act of July fourteenth, eighteen hundred and ninety, when pre- 
 sented to the Treasury for redemption, shall be redeemed in gold coin 
 of the standard fixed in the first section of this act ; and in order to 
 secure the prompt and certain redemption of such notes as herein 
 provided it shall be the duty of the Secretary of the Treasury to set 
 apart in the Treasury a reserve fund of one hundred and fifty million 
 dollars in gold coin and bullion, which fund shall be used for such 
 redemption purposes only; and whenever and as often as any of said 
 notes shall be redeemed from said fund it shall be the duty of the 
 Secretary of the Treasury to use said notes so redeemed to restore 
 and maintain such reserve fund in the manner following, to wit : First, 
 by exchanging the notes so redeemed for any gold coin in the gen- 
 eral fund of the Treasury ; second, by accepting deposits of gold coin 
 at the Treasury or at any subtreasury in exchange for the United 
 States notes so redeemed ; third, by procuring gold coin by the use 
 of said notes, in accordance with the provisions of section .thirty-seven 
 
 ^ From Laws of the United States Helating to the Coinage (Washington, 1904). 
 
 389 
 
390 MONEY AND CURRENCY 
 
 hundred of the Revised Statutes of the United States. If the 
 Secretary of the Treasury is unable to restore and maintain the gold 
 coin in the reserve fund by the foregoing methods, and the amount 
 of such gold coin and bullion in said fund shall at any time fall below 
 one hundred million dollars, then it shall be his duty to restore the 
 same to the maximum sum of one hundred and fifty million dollars 
 by borrowing money on the credit of the United States, and for the 
 debt thus incurred to issue and sell coupon or registered bonds of 
 the United States, in such form as he may prescribe, in denomina- 
 tions of fifty dollars or any multiple thereof, bearing interest at the 
 rate of not exceeding three per centum per annum, payable quarterly, 
 such bonds to be payable at the pleasure of the United States after 
 one year from the date of their issue, and to be payable, principal 
 and interest, in gold coin of the present standard value, and to be 
 exempt from the payment of all taxes or duties of the United States, 
 as well as from taxation in any form by or under state, municipal, or 
 local authority ; and the gold coin received from the sale of said 
 bonds shall first be covered into the general fund of the Treasury 
 and then exchanged, in the manner hereinbefore provided, for an 
 equal amount of the notes redeemed and held for exchange ; and the 
 Secretary of the Treasury may, in his discretion, use said notes in 
 exchange for gold, or to purchase or redeem any bonds of the United 
 States, or for any other lawful purpose the public interests may re- 
 quire, except that they shall not be used to meet deficiencies in the 
 current revenues. That United States notes when redeemed in accord- 
 ance with the provisions of this section shall be reissued, but shall 
 be held in the reserve fund until exchanged for gold, as herein pro- 
 vided ; and the gold coin and bullion in the reserve fund, together 
 with the redeemed notes held for use as provided in this section, 
 shall at no time exceed the maximum sum of one hundred and fifty 
 million dollars. 
 
 Sec. 3. That nothing contained in this act shall be construed to 
 afifect the legal-tender quality as now provided by law of the silver 
 dollar, or of any other money coined or issued by the United States. 
 
 DIVISIONS OF ISSUE AND REDEMPTION ESTABLISHED 
 
 Sec. 4. That there be established in the Treasury Department, as 
 a part of the office of the Treasurer of the United States, divisions 
 to be designated and known as the division of issue and the division 
 
APPENDIX 391 
 
 of redemption, to which shall be assigned, respectively, under such 
 regulations as the Secretary of the Treasury may approve, all records 
 and accounts relating to the issue and redemption of United States 
 notes, gold certificates, silver certificates, and currency certificates. 
 There shall be transferred from the accounts of the general fund of 
 the Treasury of the United States, and taken up on the books of said 
 divisions, respectively, accounts relating to the reserve fund for the 
 redemption of United States notes and Treasury notes, the gold coin 
 held against outstanding gold certificates, the United States notes held 
 against outstanding currency certificates, and the silver dollars held 
 against outstanding silver certificates, and each of the funds represented 
 by these accounts shall be used for the redemption of the notes and 
 certificates for which they are respectively pledged, and shall be used 
 for no other purpose, the same being held as trust funds. 
 
 Sec. 5. That it shall be the duty of the Secretary of the Treasury, 
 as fast as standard silver dollars are coined under the provisions of 
 the acts of July fourteenth, eighteen hundred and ninety, and June 
 thirteenth, eighteen hundred and ninety-eight, from bullion purchased 
 under the act of July fourteenth, eighteen hundred and ninety, to 
 retire and cancel an equal amount of Treasury notes whenever re- 
 ceived into the Treasury, either by exchange in accordance with the 
 provisions of this act or in the ordinary course of business, and upon 
 the cancellation of Treasury notes silver certificates shall be issued 
 against the silver dollars so coined. 
 
 ISSUE OF GOLD CERTIFICATES 
 
 Sec. 6. That the Secretaiy of the Treasury is hereby authorized 
 and directed to receive deposits of gold coin^ with the Treasurer or 
 any assistant treasurer of the United States in sums of not less than 
 twenty dollars, and to issue gold certificates therefor in denominations 
 of not less than twenty dollars, and the coin so deposited shall be 
 retained in the Treasury and held for the payment of such certifi- 
 cates on demand, and used for no other purpose. Such certificates 
 shall be receivable for customs, taxes, and all public dues, and when 
 so received may be reissued, and when held by any national bank- 
 ing association may be counted as a part of its lawful reserve : Pro- 
 vided , That whenever and so long as the gold coin held in the reserve 
 
 ^ By Act of Congress the Secretary is now authorized to issue gold certificates 
 against deposits of gold bullion. 
 
392 MONEY AND CURRENCY 
 
 fund in the Treasury for the redemption of United States notes and 
 Treasury notes shall fall and remain below one hundred million dol- 
 lars the authority to issue certificates as herein provided shall be 
 suspended : And provided further, That whenever and so long as 
 . the aggregate amount of United States notes and silver certificates in 
 the general fund of the Treasury shall exceed sixty million dollars the 
 Secretary of the Treasury may, in his discretion, suspend the issue 
 of the certificates herein provided for: And provided further. That of 
 the amount of such outstanding certificates one fourth at least shall 
 be in denominations of fifty dollars or less : And provided further. 
 That the Secretary of the Treasury may, in his discretion, issue such 
 certificates in denominations of ten thousand dollars, payable to order. 
 And section fifty-one hundred and ninety-three of the Revised Statutes 
 of the United States is hereby repealed. 
 
 DENOMINATION OF SILVER CERTIFICATES 
 
 Sec. 7. That hereafter silver certificates shall be issued only of 
 denominations of ten dollars and under, except that not exceeding 
 in the aggregate ten per centum of the total volume of said certifi- 
 cates, in the discretion of the Secretary of the Treasury, may be 
 issued in denominations of twenty dollars, fifty dollars, and one hun- 
 dred dollars ; and silver certificates of higher denominations than ten 
 dollars, except as herein provided, shall, whenever received at the 
 Treasury or redeemed, be retired and canceled, and certificates of 
 denominations of ten dollars or less shall be substituted therefor, and 
 after such substitution, in whole or in part, a like volume of United 
 States notes of less denomination than ten dollars shall from time to 
 time be retired and canceled, and notes of denominations of ten 
 dollars and upward shall be reissued in substitution therefor, with 
 like qualities and restrictions as those retired and canceled. 
 
 Sec. 8. That the Secretary of the Treasury is hereby authorized 
 to use, at his discretion, any silver bullion in the Treasury of the 
 United States purchased under the act of July fourteenth, eighteen 
 hundred and ninety, for coinage into such denominations of sub- 
 sidiary silver coin as may be necessary to meet the public require- 
 ments for such coin: Provided, That the amount of subsidiary silver 
 coin outstanding shall not at any time exceed in the aggregate one 
 hundred millions of dollars.^ Whenever any silver bullion purchased 
 
 1 By Act of Congress in 1903 the Secretary was given authority to coin sub- 
 sidiary silver without limitation as to the amount outstanding. 
 
APPENDIX 
 
 393 
 
 under the act of July fourteenth, eighteen hundred and ninety, shall be 
 used in the coinage of subsidiary silver coin, an amount of Treasury 
 notes issued under said act equal to the cost of the bullion contained 
 in such coin shall be canceled and not reissued. 
 
 Sec. 9. That the Secretary of the Treasury is hereby authorized 
 and directed to cause all worn and uncurrent subsidiary silver coin 
 of the United States now in the Treasury, and hereafter received, to 
 be recoined, and to reimburse the Treasurer of the United States for 
 the difference between the nominal or face value of such coin and the 
 amount the same will produce in new coin from any moneys in the 
 Treasury not otherwise appropriated. 
 
 II. PRINCIPAL FEATURES OF THE ALDRICH PLAN 
 AND THE FEDERAL RESERVE ACT 
 
 ALDRICH PLAN 
 
 FEDERAL RESERVE ACT 
 
 1. Charter, Capital, and 
 Location 
 
 Fifty-year charter for a National 
 Reserve Association (N. R. A.) ; 
 head office in Washington ; author- 
 ized capital equal to 20 per cent of 
 the capital of banks eligiblefor mem- 
 bership (estimated at $300,000,000) 
 — one half payable in cash, the re- 
 mainder subject to call. 
 
 The country to be divided into 
 fifteen districts, with a branch of 
 N. R. A. in each. 
 
 as 
 
 I. Charter, Capital, and 
 Location 
 
 At the head of the system is the 
 Federal Reserve Board, consisting 
 of seven members, with an office in 
 Washington ; no capital. 
 
 A Federal Advisory Council 
 consisting of as many members a" 
 there are reserve districts, twelve 
 no capital. 
 
 Incorporates for twenty years 
 not less than eight nor more than 
 twelve federal reserve banks, each 
 in a city in a federal reserve 
 district, the districts together to 
 embrace the continental United 
 States, excluding Alaska. 
 
 Branches of N. 
 have any capital. 
 
 R. A. not to To the capital of a federal 
 
 reserve bank, not to be less than 
 $4,000,000, member banks must 
 
594 
 
 MONEY AND CURRENCY 
 
 All subscribing banks to be 
 formed into local associations, each 
 to have corporate powers and to 
 be composed of not less than ten 
 banks. These local associations to 
 be grouped into fifteen districts. 
 (There is no provision for local as- 
 sociations in the Federal Reserve 
 Act except in that it extends life of 
 Aldrich-Vreeland Act.) 
 
 subscribe a sum equal to 6 per 
 cent of their paid-in capital and 
 surplus — one half payable in in- 
 stallments within six months, the- 
 remainder subject to call. 
 
 If banks do not make sufficient 
 subscriptions, stock may be offered 
 for public subscription, no single 
 legal person to hold more than 
 $25,000 in any one reserve bank. 
 If bank and public subscriptions 
 are insufficient, the United States 
 is to underwrite the balance. 
 
 Stock of N. R. A. not to' be 
 transferable and not to be hypothe- 
 cated. 
 
 Only stock held by member 
 banks is entitled to voting power. 
 
 Outstanding capital stock to be 
 increased as the capital (not sur- 
 plus) of member banks is in- 
 creased or as new members are 
 added, and decreased vice versa. 
 Surrendered shares to be priced at 
 book value. 
 
 Requirement that a national 
 bank shall deposit United States 
 bonds before commencing business 
 is repealed. 
 
 Congress may amend or repeal 
 the act at any time. 
 
 II. Membership 
 
 National banks not required to 
 subscribe. All national banks, state 
 banks, trust companies, etc., may 
 become members if they comply 
 with the requirements of the act. 
 
 II. Membership 
 
 Every national bank must sub- 
 scribe to the reserve bank of its 
 district within thirty days after 
 notice from the organization com- 
 mittee or cease to act as' a reserve 
 agent. If any national bank in the 
 United States (excluding Alaska) 
 fails to comply with the act within 
 one year after its passage, it will 
 forfeit its charter. 
 
APPENDIX 
 
 395 
 
 III. Earnings, Dividends, axd 
 Taxes 
 
 From net earnings, cumulative 
 dividends of 4 per cent to be paid. 
 Further earnings to be divided — 
 one half to go to surplus fund 
 until it amounts to 20 per cent 
 of paid-in capital, one fourth to 
 United States, and one fourth to 
 stockholders ; but stockholders not 
 to receive over 5 per cent divi- 
 dends altogether. After they re- 
 ceive 5 per cent, further earnings 
 to go, one half to surplus and one 
 half to United States until the 
 surplus reaches the 20 per cent 
 limit, after which all additional 
 earnings to go to United States. 
 
 III. Earnings, Dividends, and 
 Taxes 
 
 Cumulative dividends of 6 per 
 cent payable on the stock ; the 
 remainder of net earnings to go to 
 the United States, except that all 
 net earnings up to December 31, 
 1918, shall be paid into a surplus 
 fund until it amounts to 100 per 
 cent of the subscribed capital, and 
 that thereafter 10 per cent of such 
 earnings shall be paid into surplus. 
 
 All payments to the United 
 States in its own right are to be 
 used to supplement the gold re- 
 serves against United States notes 
 or to reduce the outstanding bonded 
 indebtedness. 
 
 N. R. A. and its branches and Capital stock, surplus, and in- 
 
 the local associations exempt from come of federal reserve banks 
 
 state and local taxation except taxes exempt from taxes except upon 
 
 upon real estate. real estate. 
 
 N. R. A. to pay United States 
 a franchise tax of i-^ per cent 
 annually upon an amount equal to 
 par value of United States bonds 
 transferred to it by banks. 
 
 IV. Stockholders' Liability 
 
 Expenses and losses of local as- 
 sociations in excess of commissions 
 to be met by assessment of mem- 
 ber banks of the association in pro- 
 portion to ratio which their capital 
 and surplus bears to aggregate 
 capital and surplus of members 
 of the association. 
 
 IV. Stockholders' Liability 
 
 Shareholders of federal reserve 
 banks responsible for engagements 
 of their bank to the extent of 
 their subscription in addition to 
 the amount subscribed. 
 
396 
 
 MONEY AND CURRENCY 
 
 Liability of stockholders same 
 as under National Banking Act. 
 
 Stockholders of national banks 
 held individually responsible for the 
 engagements of their bank, each to 
 the amount of his stock in addition 
 to the amount invested. 
 
 V. Officers and Directors 
 
 I. Organization Committee 
 
 Organization committee to be 
 composed of Secretary of Treasury, 
 Secretary of Agriculture, Secretary 
 of Commerce and Labor, and 
 Comptroller of the Currency. 
 
 V. Officers and Directors 
 
 /. Organization Comm.ittee 
 
 The act provides for a reserve 
 bank organization committee com- 
 posed of Secretary of Treasur)', 
 Secretary of Agriculture, and Comp- 
 troller of the Currency. 
 
 2. Directors of N. R. A. 
 
 Board of N. R. A. to be com- 
 posed of forty-five directors and 
 constituted in the following manner: 
 
 {a) Six ex-officio members — 
 governor, two deputy governors, 
 Secretary of Treasury, Secretary 
 of Commerce and Labor, and 
 Comptroller of Currency. 
 
 (b) Fifteen directors to be elected, 
 one by directors of each branch of 
 N. R. A. 
 
 {c) Twelve directors elected by 
 voting representatives of the various 
 districts, voting power weighted ac- 
 cording to stock representation. 
 
 (</) The twenty-seven thus elected 
 to elect twelve more, representative 
 of the various interests of the coun- 
 try and not officers of banks. (No 
 more than three of classes (c) and 
 (d) to come from any one district.) 
 
 Normal term of office to be three 
 years. No member of any national 
 
 2. Federal Reserve Board 
 
 The Federal Reserve Board is 
 composed of the Secretary of the 
 Treasury, the Comptroller of the 
 Currency, ex-officio, and five per- 
 sons appointed by the President ; 
 salaries, $12,000. Only one mem- 
 ber from one district. Of two, ex- 
 perienced in banking and finance, 
 one shall be governor and one vice 
 governor of reserve board. No 
 member of Congress can sit on 
 the board. 
 
APPENDIX 
 
 397 
 
 or state legislative body to be a di- 
 rector of N. R. A., of a branch, or 
 of a local association. 
 
 Governor to be selected by the 
 President of the United States from 
 a list submitted by board of direc- 
 tors and to be subject to removal 
 for cause by a two-thirds vote of 
 directors. Two deputy governors 
 to be elected by the board of direc- 
 tors for terms of seven years. 
 
 J. Committees of N. R. A. 
 
 The directors of the N. R. A. to 
 elect annually from their number 
 an executive committee composed 
 of nine members, the governor 
 to be ex-ofiRcio chairman and the 
 two deputies and the Comptroller 
 of the Currency ex-officio members, 
 and not more than one elected mem- 
 ber to be chosen from any one dis- 
 trict. All powers of the board not 
 reserved or otherwise delegated to 
 be exercised by an executive com- 
 mittee. 
 
 J. Federal Advisory Council 
 
 A federal advisory council of 
 one member from each reserve 
 district, elected annually by direc- 
 tors of the reserve banks. Com- 
 pensated by reserve banks. 
 
 Board of supervision, to be 
 elected by board of directors from 
 among their number, the Secretary 
 of the Treasury to be ex-officio 
 chairman. 
 
 4. Directo7-s of Branches 
 
 Each branch to have a board of 
 directors : 
 
 (a) Directors of each local as- 
 sociation to elect one member. 
 
 4. Federal Reserve Banks 
 
 Each federal reserve bank con- 
 trolled by nine directors : 
 
 Three elected through a system 
 of electors by stock-holding banks. 
 
398 
 
 MONEY AND CURRENCY 
 
 (/>) A number of directors equal 
 to two thirds of the number of local 
 associations elected by representa- 
 tives of banks in each local asso- 
 ciation, the voting power of the 
 representatives to be weighted ac- 
 cording to stock representation. 
 
 (c) The directors thus elected 
 to choose additional directors equal 
 in number to one third of the num- 
 ber of local associations, fairly rep- 
 resentative of the various interests 
 of the country and not officers of 
 banks. 
 
 ((/) Manager of the branch to 
 be ex-officio member and chairman 
 of board. Manager and deputy 
 manager to be appointed by gov- 
 ernor of N. R. A. with approval of 
 executive committee. 
 
 Three (elected by rnembp^bank^ 
 representing business intoKsts dQ 
 the district. ' ; ■■ |s (ifi 
 
 Three appointed by theFedeca/ 
 Reserve Board, which is to desig- 
 nate one as chairman of'thg'board 
 of directors and federal reserve 
 agent, and a second as deputy 
 chairman and deputy federal re- 
 serve agent. These three must 
 have been residents of the district 
 for two years. 
 
 Four directors of branch offices 
 selected by the reserve bank and 
 three by the reserve board. 
 
 Normal term of office to be 
 three years. 
 
 Local associations to elect di- 
 rectors annually — three fifths by 
 straight ballot and two fifths by 
 stock representation of member 
 banks. 
 
 VI. Powers 
 
 /. National Reserve Association 
 
 N. R. A. to receive deposits only 
 
 from the United States and from 
 
 subscribing banks. Upon deposits 
 
 no interest to be paid. 
 
 All domestic transactions of the 
 N. R. A. to be confined to the gov- 
 ernment and subscribing banks, 
 
 VI. Powers 
 /. Federal Reserve Board 
 
 The reserve board has the fol- 
 lowing powers : 
 
 To examine reserve banks and 
 member banks. 
 
 To permit or require reserve 
 banks to rediscount paper of other 
 reserve banks at rates to be fixed 
 by the board. 
 
APPENDIX 
 
 599 
 
 of the purchase 
 nment or state 
 n governments 
 bullion. 
 
 to act as fiscal agent 
 of United States, receiving, dis- 
 bursing, and caring for government 
 funds. 
 
 N. R. A. may rediscount, for and 
 with indorsement of any depositor 
 bank, notes and bills of exchange 
 arising out of commercial transac- 
 tions. Such notes and bills not 
 to have over twenty-eight days to 
 run and to have been drawn at 
 least thirty days prior to date of 
 rediscount. The amount not to 
 exceed capital of appUcant bank ; 
 the amount bearing the name of 
 any one person, corporation, etc., 
 not to exceed lo per cent of capi- 
 tal and surplus of said bank. 
 
 N. R. A. may rediscount such 
 paper, having more than twenty- 
 eight days to run but not more than 
 four months, if guaranteed by the 
 applicant bank's local association. 
 
 Subject to limitations, N. R. A. 
 may discount direct obligations of 
 a depositing bank if indorsed by 
 its local association. In such cases 
 the local association to take from 
 applicant bank securities equal to 
 four thirds of the amount of its 
 indorsement and hold them to the 
 account of N. R. A. 
 
 To suspend for stated periods 
 reserve requirements and to levy 
 a tax on deficiency in reserves. 
 
 To regulate the issue of notes. 
 
 To add to or reclassify existing 
 reserve and central reserve cities. 
 
 To suspend or remove officials 
 of reserve banks, giving written 
 notice of the cause. 
 
 To require writing off of doubt- 
 ful assets of reserve banks. 
 
 To suspend, liquidate, or reor- 
 ganize reserve banks violating the 
 act. 
 
 To require bonds of federal 
 reserve agents. 
 
 To exercise functions of a clear- 
 ing house for reserve banks or 
 to require any reserve bank to do 
 same for member banks. 
 
 To levy upon reserve banks 
 semiannual assessments sufficient 
 to meet expenses of the board. 
 
 To exercise general supervision 
 over the reserve banks. 
 
 To define the character of bills 
 eligible for discount by reserve 
 banks and to limit and regulate re- 
 discounts and acceptances. 
 
 To establish the rate of interest 
 to be charged reserve banks on 
 federal reserve notes issued. 
 
 To fix charges to be collected 
 by member banks for checks cleared 
 through reserve banks. 
 
 To choose three directors for 
 each reserve bank, designate fed- 
 eral reserve agents, and choose 
 three directors for each branch of 
 a reserve bank. 
 
400 
 
 MONEY AND CURRENCY 
 
 N. R. A. to fix and publish uni- 
 form rate of discount for the entire 
 United States. 
 
 N. R. A. may buy from a sub- 
 scribing bank acceptances of banks 
 or good financial houses arising 
 out of commercial transactions and 
 having not over ninety days to run. 
 
 N. R. A. may invest in United 
 States bonds or in short-term ob- 
 ligations (not over one year to run) 
 of the United States or of any 
 state or of foreign governments. 
 
 N. R. A. may buy from its sub- 
 scribers and sell foreign checks 
 and bills of exchange arising out 
 of commercial transactions, with 
 not over ninety days to run, and 
 bearing the signatures of at least 
 two responsible parties of which 
 the last is that of a subscribing 
 bank. 
 
 To require reserve banks to 
 open branches in their districts and 
 permit them to establish agencies 
 abroad. 
 
 To permit state banks and trust 
 companies to become members. 
 
 To add to the list of cities in 
 which banks may not lend on farm 
 lands. 
 
 To permit a national bank to 
 act as trustee, executor, etc. 
 
 To review and determine the 
 rates of discount established by 
 reserve banks on commercial 
 paper. 
 
 To call on reserve banks for ad- 
 ditional security against circulation. 
 
 To regulate the transfer of re- 
 serve bank stock. 
 
 N. R. A. may also establish 
 branches in foreign countries for 
 the purpose of dealing in two-name 
 bills of exchange arising out of com- 
 mercial transactions and having not 
 over ninety days to run. 
 
 To be the duty of the N. R. A. 
 or any of its branches, upon re- 
 quest, to transfer any part of the 
 deposit balance of a subscribing 
 bank to the credit of any other 
 bank having an account with the 
 
APPENDIX 
 
 401 
 
 N. R. A. If balance is transferred 
 from the books of one branch to 
 those of another, the service to be 
 charged for at a rate to be fixed 
 by executive committee of branch 
 at which transaction originates. 
 
 2. Local Associations 
 
 The local associations are not 
 comparable to any organization 
 under the Federal Reserve Act. 
 
 Local associations may guaran- 
 tee paper which their members 
 wish to rediscount at the branch 
 of the N. R. A. in their district, 
 charging a commission to be fixed 
 by its board of directors. The guar- 
 anty of the association in case of 
 loss to be met by its member banks 
 in proportion to capital stock and 
 surplus of each. Total amount of 
 guaranties not to exceed at any 
 time aggregate capital and surplus 
 of banks forming the guaranteeing 
 association. 
 
 2. Federal Advisory Council 
 Federal advisory council meets 
 in Washington at least four times 
 a year. It has power to confer with 
 the reserve board, to make recom- 
 mendations, and to call for infor- 
 mation. 
 
 Any local association may act as 
 a clearing house for its members 
 and may be required so to act bv 
 N. R. A. 
 
 J. Federal Reserve Banks 
 
 A reserve bank may receive 
 deposits from the United States, 
 from member banks, and from 
 other reserve banks for exchange 
 purposes. A reserve bank may act 
 as the fiscal agent of the United 
 States. A reserve bank must re- 
 ceive at par from member and from 
 
402 MONEY AND CURRENCY 
 
 other reserve banks checks and 
 drafts drawn upon any member 
 bank in any district, but member 
 banks may charge expenses for col- 
 lections and exchange, and reserve 
 banks may make charges for their 
 services. Nothing is said as to the 
 payment of interest on deposits. 
 
 Discounts may be made by a 
 reserve bank for member banks 
 as follows : 
 
 Paper with indorsement of mem- 
 ber bank drawn for agricultural, in- 
 dustrial, or commercial purposes 
 and maturing within ninety days 
 of discount. 
 
 Paper drawn for agricultural 
 purposes or based on live stock and 
 having not more than six months 
 to run, the aggregate of this class 
 of paper to be limited by the re- 
 serve board to a certain percentage 
 of the capital gi the reserve bank. 
 
 Acceptances having a maturity 
 at time of discount of not over three 
 months and arising (a) out of ex- 
 portation or importation of goods ; 
 (f) transactions for the purpose of 
 furnishing dollar exchange; (<:) trans- 
 actions involving the domestic ship- 
 ment of goods, provided such drafts 
 are accompanied at time of ac- 
 ceptance by shipping documents 
 conveying or securing title or by 
 warehouse receipts covering readily 
 marketable staples. 
 
 A reserve bank may make ad- 
 vances directly to member banks 
 upon their promissory notes for a 
 
APPENDIX 403 
 
 period not exceeding fifteen days, 
 provided such notes are secured 
 by paper eligible for rediscount or 
 by bonds or notes of the United 
 States. 
 
 Discount rates may be estab- 
 lished by the reserve banks, sub- 
 ject to the review and determination 
 of the reserve board. To the rates 
 of discount will be added the rate of 
 any tax imposed upon the reserve 
 bank by reason of any deficiency 
 in the reserves. 
 
 In the open market, under rules 
 of reserve board, reserve banks 
 may buy and sell exchange of the 
 maturities eligible for rediscount, 
 deal in gold, and invest in United 
 States bonds and in warrants, etc., 
 of states, cities, etc. (including irri- 
 gation and drainage districts), ma- 
 turing within six months. 
 
 Every reserve bank must estab- 
 lish branches in its own district and 
 may do so in the districts of other 
 reserve banks which have sus- 
 pended ; and may establish agen- 
 cies in foreign countries, which 
 may buy and sell two-name bills 
 of exchange having not more than 
 ninety days to run. 
 
 Reserve banks may issue cir- 
 culating notes against United States 
 bonds under certain conditions (see 
 IX, 2). 
 
404 
 
 MONEY AND CURRENCY 
 
 J. Member Banks 
 
 In addition to rights already con- 
 ferred by law, member banks to 
 be authorized to accept commercial 
 paper drawn upon them having not 
 more than four months to run — 
 the amount not to exceed one half 
 of the capital and surplus of accept- 
 ing bank. 
 
 The organization of banks in 
 foreign countries and in dependen- 
 cies of the United States authorized. 
 Stock of such banks may be held 
 by national banks, but the aggre- 
 gate of such stock held by any one 
 bank not to exceed 20 per cent 
 of its capital. Such a bank may 
 have an office in the United States, 
 but not to receive deposits in the 
 United States nor compete with na- 
 tional banks for domestic business. 
 
 National banks may establish 
 separate savings departments and 
 lend not more than 40 per cent 
 of their savings deposits upon real 
 estate up to 50 per cent of the 
 value of the property. (There is no 
 provision for savings departments 
 in the Federal Reserve Act.) 
 
 4. A f ember Banks 
 
 Member banks may accept drafts 
 or bills having not more than six 
 months' sight to run and arising out 
 of exportation or importation of 
 goods ; or growing out of transac- 
 tions involving domestic shipment 
 of goods, provided such drafts at 
 time of acceptance are accompanied 
 by shipping documents conveying 
 or securing tide or by warehouse 
 receipts covering readily marketable 
 staples. No bank may accept for 
 any one legal person drafts aggre- 
 gating more than i o per cent of its 
 paid-up capital and surplus, unless 
 secured by documents attached ; 
 no bank shall accept drafts to an 
 amount exceeding one half its paid- 
 up capital and surplus, provided the 
 amount may be extended to equal 
 its paid-up capital and surplus by 
 permission of the Federal Reserve 
 Board ; but in no case may accept- 
 ances of domestic drafts exceed 
 50 per cent of its paid-up capital and 
 surplus. Member banks may also 
 accept drafts or bills of exchange, 
 having not over three months' sight 
 to run, drawn by foreign bankers 
 for the purpose of furnishing dol- 
 lar exchange, the amount not to 
 exceed 50 per cent of the accept- 
 ing bank's paid-up capital and 
 surplus. 
 
 Member banks have exclusive 
 right to rediscount facilities offered 
 by reserve banks. 
 
•APPENDIX 
 
 405 
 
 On improved and unencumbered 
 farm lands situated in same reserve 
 district national banks outside of 
 central reserve cities may make 
 loans at 50 per cent of actual 
 value, not to run for more than five 
 years ; the aggregate may equal 
 25 per cent of capital and surplus 
 or one third of time deposits. 
 Such banks may receive time de- 
 posits and pay interest thereon. 
 
 With permission of reserve 
 board, member banks with capital of 
 $1,000,000 or more may establish 
 branches in foreign countries. 
 
 National banks may charge cus- 
 tomers the actual expense of col- 
 lections, the rate to be fixed by 
 reserve board. 
 
 By permission of reserve board 
 they may act as trustee, executor, 
 administrator, and registrar. 
 
 No member bank can act as 
 agent of a nonmember bank in 
 applying for discounts from a fed- 
 eral reserve bank except by per- 
 mission of reserve board. 
 
 Secretary of Treasury may use 
 member banks as depositories. 
 
 VII. Reserves 
 /. National Resove Association 
 
 The N. R. A. to maintain 50 
 per cent reserve in gold or lawful 
 money against all demand liabilities, 
 
 VII. Reserves 
 
 J. Federal Reserve Banks 
 
 A federal reserve bank is to 
 maintain a reserve in gold or law- 
 ful money of 35 per cent against 
 
4o6 
 
 MONEY AND CURRENCY 
 
 including deposits and circulating 
 notes. If reserves fall below 50 
 per cent, N. R. A. to pay special 
 tax at a rate increasingly of i^ per 
 cent per annum for each 2^ per 
 cent of such deficiency. 
 
 In computing the demand lia- 
 bilities of N. R. A. a sum equal to 
 one half of the amount of United 
 States bonds held by it which have 
 been purchased by it from national 
 banks to be deducted. 
 
 deposits, and in gold of 40 per 
 cent against its federal reserve 
 notes outstanding. 
 
 The 40 per cent gold-reserve 
 requirement may be suspended by 
 the reserve board; a tax of i per 
 cent per annum upon any de- 
 ficiency until the reserve falls to 
 32^ per cent. When the reserve 
 falls below that point, a tax at 
 the rate increasingly of not less 
 than i|- per cent per annum to 
 be levied upon each 2^ per cent 
 or fraction thereof of additional 
 deficiency. 
 
 Each reserve bank is required 
 to keep on deposit in the Federal 
 Treasury gold sufficient for re- 
 demption of its reserve notes, in 
 no event less than 5 per cent ; 
 this deposit is counted as part of 
 the 40 per cent reserve required. 
 
 2. Member Banks 
 
 Deposits with N. R. A. and notes 
 of N. R. A. may be counted as 
 part of reserve of member banks. 
 
 To be no change in percentage 
 of reserve required against demand 
 deposits. 
 
 Time deposits maturing within 
 thirty days subject to same reserve 
 requirements as demand deposits. 
 
 Time deposits having more than 
 thirty days to run to have no reserve 
 
 2. Member Banks 
 
 Member banks to carry a 5 
 per cent reserve against time de- 
 posits (those not payable before 
 thirty days). 
 
 Reserves against demand liabili- 
 ties — 7 per cent for country 
 banks, 10 per cent for banks in 
 reserve cities, 13 per cent for 
 banks in central reserve cities. 
 All required reserves must be on 
 deposit with the federal reserve 
 bank of the district. 
 
APPENDIX 
 
 407 
 
 requirements until within thirty 
 days of maturity, after which to 
 be subject to same reserve require- 
 ments as demand deposits. 
 
 Savings deposits to be subject to 
 notice of thirty days or more and to 
 be covered by a reserve equal to 40 
 per cent of that required of demand 
 deposits in same locality. 
 
 When member banks place re- 
 serves with their reserve bank, 
 the reserve bank may accept, 
 to the amount of half the pay- 
 ment, paper eligible for rediscount. 
 Against reserves with a reserve 
 bank, member banks may check, 
 under rules and penalties fixed by 
 the reserve board. When reserves 
 are below requirements, a member 
 bank may not make new loans or 
 pay dividends. 
 
 The net balance of amounts due 
 to and from other banks is taken 
 as the basis for ascertaining de- 
 posits against which reserves are 
 required. 
 
 Clause permitting national banks 
 to count as a part of their reserves 
 the 5 per cent redemption fund is 
 repealed. 
 
 VIII. Reports and 
 Examinations 
 
 N. R. A. to report weekly to 
 Comptroller of Currency ; report 
 to be published. In addition, full 
 reports to be made to Comptroller 
 coincident with the five reports called 
 for each year from national banks. 
 
 Duplicates of bank examiners' 
 reports to be filed with N. R. A. 
 for confidential use. 
 
 All national banks to submit to 
 N. R. A. a statement of condition 
 monthly or on demand. 
 
 VIII. Reports and 
 Examinations 
 
 Federal Reserve Board to pub- 
 lish a weekly statement of condition 
 of all reserve banks, to examine 
 each reserve bank annually or of- 
 tener upon an application of ten 
 member banks, and to make an- 
 nual report to Speaker of House 
 of Representatives. 
 
 Every reserve bank must re- 
 port to the reserve board when 
 demanded. Reserve banks may 
 examine member banks with ap- 
 proval of reserve board. 
 
4o8 
 
 MONEY AND CURRENCY 
 
 Examiners appointed by Comp- 
 troller of the Currency to examine 
 member banks at least twice 
 yearly. 
 
 No bank subject to visitorial 
 powers other than those authorized 
 by law or vested in the courts or 
 exercised by Congress or com- 
 mittees thereof duly authorized. 
 
 IX. Currency 
 
 /. National Reserve Association 
 Notes 
 
 National Reserve Association 
 Notes to be issued, redeemable 
 in lawful money at head office or 
 branch offices of N. R. A. Notes 
 to constitute a first lien upon all 
 assets of N. R. A. and to be re- 
 ceivable in payment of all dues to 
 the United States and from the 
 United States (except such as are 
 specifically payable in gold) and of 
 all debts due to a national bank. 
 
 All notes of the N. R. A. to be 
 covered to extent of at least one 
 third by gold or lawful money, and 
 the remaining portion by bankable 
 commercial paper or obligations of 
 the United States. No notes to be 
 issued while the reserves of lawful 
 money stand below one-third limit. 
 
 Notes of N. R. A. in circulation at 
 anytime in excess of $900,000,000 
 (including national bank notes out- 
 standing), not covered by equal 
 
 IX. Currency 
 
 7. Federal Reserve Notes 
 
 Federal reserve notes, obliga- 
 tions of the United States, to be 
 issued to federal reserve banks 
 at discretion of reserve board, in 
 denominations of $5, $10, $20, $50, 
 and $100, redeemable in gold or 
 lawful money at any reserve bank 
 and in gold at United States 
 Treasury. Notes to be secured by 
 equal amount of paper eligible for 
 rediscount and by first lien on 
 assets of issuing bank, and to be 
 receivable for all taxes, customs, 
 and other public dues. Reserve 
 banks may be permitted to sub- 
 stitute collateral. 
 
 Notes must be forwarded to 
 issuing bank for credit or redemp- 
 tion when received by other re- 
 serve banks. Notes presented for 
 redemption at United States Treas- 
 ury to be paid and returned to 
 issuing bank. If presented other- 
 wise than for redemption, they may 
 be exchanged for gold and returned 
 
APPENDIX 
 
 409 
 
 amount of lawful money held by 
 N. R. A., to pay special tax of 
 i^ per cent per annum, and notes 
 in excess of $1,200,000,000 not so 
 covered to pay tax of 5 per cent. 
 
 to issuing bank or may be re- 
 turned for credit of United States. 
 
 No reserve bank can pay out 
 notes of another bank under pen- 
 alty of 10 per cent face value of 
 the notes. 
 
 Reserve board may reject an 
 application for notes from any re- 
 serve bank. 
 
 Reserve bank may retire notes 
 by depositing with the reserve 
 agent federal reserve notes, gold, 
 gold certificates, or lawful money. 
 
 2. Bond-Secured Circulation 
 
 To be no additional issue of 
 circulating notes by any national 
 bank. National banks may retain 
 outstanding circulation, but in case 
 any part of it shall be retired, such 
 retirement to be permanent. 
 
 2. Bond-Secured Circulation 
 
 National bank notes may be re- 
 tired as indicated below under head 
 of United States Bonds. 
 
 Reserve bank may take out, 
 against such bonds as it is required 
 to purchase by the act, an equal 
 amount of circulating notes similar 
 to national bank notes except in 
 that they are obligations of the 
 reserve bank and not limited in 
 amount by the capital of the 
 issuing bank. 
 
 J. Gold Standard Act 
 
 Gold Standard Act of 1900 re- 
 affirmed. In order to obtain gold 
 the Secretary of the Treasury is 
 authorized to use United States 
 bonds or one-year 3 per cent gold 
 notes. 
 
4IO 
 
 MONEY AND CURRENCY 
 
 J. United States Bonds 
 
 Upon application of N. R. A., 
 Secretary of Treasury to exchange 
 2 per cent bonds bearing circula- 
 tiori privilege, purchased from banks 
 by N. R. A., for 3 per cent bonds 
 without circulation privilege, pay- 
 able after fifty years. 
 
 N. R. A. to hold the 3 per cent 
 bonds during its corporate exist- 
 ence, provided that after five years 
 Secretary of Treasury may per- 
 mit it to sell $50,000,000 of the 
 bonds annually, and provided fur- 
 ther that the United States reserve 
 the right to buy them at any time 
 at par. 
 
 ^. United States Bonds 
 
 Banks no longer required to de- 
 posit bonds with the Treasurer of 
 the United States upon organization. 
 
 At any time after two years and 
 before twenty years national banks 
 which become member banks may 
 file with the United States Treas- 
 urer an application to sell United 
 States bonds securing circulation. 
 Every three months the reserve 
 board will pass upon these applica- 
 tions and may require federal re- 
 serve banks to purchase such bonds 
 at par and interest, the purchasing 
 reserve bank to deposit the price 
 with the United States Treasurer 
 and the Treasurer to pay the sell- 
 ing bank any surplus over an amount 
 necessary to redeem national-bank 
 notes outstanding against the bonds 
 in question. When redeemed, these 
 notes would be permanently retired. 
 
 The total amount of bonds ac- 
 quired in any one year by reserve 
 banks not to exceed $25,000,000. 
 
 Two per cent bonds against 
 which no circulation is outstanding 
 may be exchanged by reserve 
 banks for one-year 3 per cent gold 
 notes, renewable for thirty years, to 
 the extent of half the face value of 
 the bonds, and thirty-year 3 per 
 cent gold bonds for the remainder. 
 Upon application of a reserve bank, 
 approved by reserve board, the 
 gold notes may be exchanged for 
 
APPENDIX 
 
 411 
 
 X. State Banks 
 
 Plan proposed to permit state 
 banks and trust companies to be 
 converted into national banks. 
 
 Without becoming a national 
 bank any state bank or trust com- 
 pany may become a member of a 
 local association subject to follow- 
 ing provisions : 
 
 (a) That, if a bank, it have 
 paid-in capital not less than that 
 required for national banks in same 
 location ; and that, if a trust com- 
 pany, it have unimpaired surplus 
 of not less than 20 per cent of its 
 capital and, if located in a city of 
 25,000 inhabitants or less, it have 
 paid-in capital of not less than 
 $100,000 and in a larger city a 
 proportionately greater capital up 
 to $500,000 in a city of 500,000 
 inhabitants or more ; 
 
 (b) That it be subject to same 
 reserve requirements against de- 
 mand deposits as -those for national 
 banks of its location, except that it 
 may deposit part of its reserves 
 with state banks and trust com- 
 panies as well as with national 
 banks in reserve and central reserve 
 cities ; 
 
 ((-) That it maintain against other 
 classes of deposits the percent- 
 age of reserves required by the 
 plan; 
 
 gold bonds. Neither gold notes 
 nor gold bonds have circulation 
 privilege. 
 
 X. State Banks 
 
 State banks with sufficient capi- 
 tal may be converted into national 
 banks (if conversion does not con- 
 travene state law), with the approval 
 of Comptroller of the Currency. 
 
 Without becoming national banks 
 state banks with requisite capital 
 may, upon approval of reserve 
 board, become member banks, but 
 must comply with the capital, re- 
 serve, and other requirements of 
 such banks. Reserve board may 
 require a state bank or trust com- 
 pany, which has become a member 
 bank but has not complied with 
 requirements, to surrender its stock 
 upon repayment of its subscription. 
 
412 MONEY AND CURRENCY 
 
 (d) That it make same reports, 
 submit to same examinations, etc., 
 as other member banks. 
 
 XI. NONMEMBER BANKS 
 
 Except under provisions of state 
 law controlling state banks which 
 have become member banks, a 
 member bank cannot have on de- 
 posit with a nonmember bank a 
 sum in excess of lo per cent of its 
 capital and surplus. Except with 
 permission of the reserve board 
 a member bank cannot act as a 
 medium for a nonmember in re- 
 ceiving rediscounts. 
 
 National banks in Alaska or out- 
 side the continental United States 
 may remain nonmembers, or such 
 banks (except those in Philippine 
 Islands) may, with consent of 
 reserve board, become member 
 banks in any one of the districts. 
 

 o 
 
 1-1 
 u 
 
 > 
 
 z 
 o 
 
 w 
 
 H 
 
 O 
 
 H 
 < 
 
 H 
 
 
 ?1 
 
 
 W 
 
 ?i:s 
 
 >; 
 
 <~,^ 
 
 H 
 
 Si-fl 
 
 r>1 
 
 £= 1 
 
 < 
 
 fei.o 
 
 
 
 M 
 
 
 
 I-J- 
 
 
 H'^..-| 
 
 
 
 as 
 
 0- 1 
 
 
 a ^oo 
 
 y: 
 
 ^rS 
 
 
 
 -I-' 
 
 i-a 
 
 "T ° 
 
 
 
 &<S S -g 3 S 
 
 CO 
 
 „ 
 
 Q 
 
 N II 
 
 
 
 OS 
 
 
 Q OS 
 
 °--o' 
 
 
 
 00 N r; Wiv£> »« 
 
 
 i^ 
 
 
 bo 
 
 
 
 
 
 
 c^ 
 
 vO 
 
 
 
 rt t=^ 
 
 \D00 O-OO CO 
 
 
 so 
 
 roes. 
 
 
 
 "■ " "^ "* CT. N 
 
 
 
 
 
 
 
 
 
 
 
 c " 
 
 vo' - in rC o" 
 
 ■^ 
 
 V3 
 
 oo 
 
 
 rt) 
 "—1 
 
 ^'^ '^ ?, 
 
 
 g 
 
 ■* 
 
 _ 
 
 <>00 ■* " M t^ -0- - 
 
 •o c^ 
 
 ^ 
 
 oco 
 
 
 
 f^ w O sD MvD O N 
 
 t-. o 
 
 
 O tC 
 
 
 k. 
 
 "^ N^QO_0O "_00 M -^ 
 
 O in 
 
 M 
 
 °s; 
 
 O 
 
 
 
 
 
 •Is 
 
 
 i-Tso" 
 
 o" 
 
 osw:. 
 
 h 
 
 E ^ 
 
 t-. iri CO N l/^l'O 'T V 
 
 C^ P)_ 
 
 
 t! 
 
 3 
 
 <LI H 
 
 m' n vDoo" - "" oT di 
 
 
 
 r-s 
 
 > 
 
 00 >n - ro-O ro -d- 
 
 
 OS 
 
 
 
 o 
 
 
 N I--, 
 
 •jd" 
 
 
 
 
 
 
 («: 
 
 
 
 
 ^sD 
 
 ^ 
 
 O m 
 
 Z 
 
 "'" 
 
 ^" 
 
 OS 
 
 sO 
 
 
 9. 
 
 « prxopTMNoo-* 
 
 
 
 so' m 
 
 > 
 
 XI c? 
 
 00 c>- -^wioSo - 
 
 S, ^ 
 
 
 o «i 
 
 £ 5^ 
 
 00 -O ^O O; t^ 'J^ 
 
 ■^M 
 
 oo 
 
 
 y. 
 
 
 C?u-iMr^--^r^l> 
 
 
 ds 
 
 •o" 
 
 O 
 
 
 t^ -00 -O -1- N f^ 
 
 O t^ 
 
 
 o 
 
 1) 
 
 C"f M (s f/100 
 
 (^ >0 
 
 ^ 
 
 
 S 
 
 Q 
 
 ^ r? 
 
 
 S£* 
 
 
 
 
 
 
 
 
 
 NnDu-iO-»-Mp»CO 
 
 oo N 
 
 g; 
 
 
 
 
 ■<}■ ui O 1- (*tO O -h 
 
 
 S "^ 
 
 
 -° S 
 
 
 O JT 
 
 ■«; 
 
 2^ 
 
 d> f^ >n C^ tC inoo lO 
 M vO C^OO « M. - « 
 
 f-OO 
 
 
 6 c^ 
 
 "^ i^ O IN C^\D [^ -t 
 
 •^00 
 
 "* 
 
 
 C> M rC in N " C? d* 
 
 in d 
 
 
 
 
 t^ U-. o^ lO^O c*i - 
 
 
 s£) 
 
 tC 
 
 
 « 
 
 OD ro MM CO m 
 
 
 
 o 
 
 
 Q 
 
 w> 1^ 
 
 
 1 
 
 
 
 
 O O in 
 
 
 m 
 
 
 
 
 
 
 sD 
 
 
 iPHD- 
 
 li 
 
 inco &■ 
 
 
 
 
 
 Pi w zu u 
 
 ,Q Cy 
 
 
 
 Cs 
 
 
 
 ttH ufc 1: 
 
 £ CTv 
 
 0_ N N 
 
 
 
 
 
 ■J ^ ( o 
 
 
 CO M -^ 
 
 
 
 
 
 IJ 
 
 W N '^ 
 
 
 ?? 
 
 
 
 m 
 
 V Fede 
 
 BSERVE 
 
 Issues 
 
 ESERVE 
 
 Q 
 
 Wt 
 
 
 
 
 
 
 
 
 «i 
 
 
 
 « 
 
 g-5 8 
 
 C^ N 00 
 
 
 ? 
 
 
 
 a^p^jHp^ 
 
 ^ o 
 
 
 
 c;; 
 
 
 
 Held 
 
 SERVE 
 ERAL 
 AGAIN 
 
 ERAL 
 
 |3s 
 
 00 o C^ 
 
 
 «& 
 
 
 
 
 
 00 - - 
 
 >0 '^ 
 
 o 
 
 
 0\ " N n T 
 
 m [^ 
 
 
 
 
 
 OO in M w r-. 
 
 
 
 
 
 f^ ■* C? NsD 
 
 
 sd 
 
 
 
 < 
 
 0^ 
 
 CO OO CO O^ -1- 
 
 In Jo 
 
 r^ 
 
 
 
 HH U t W 
 
 S 
 
 \0 *D ij" O' C^ 
 
 r^ -^ 
 
 
 
 
 Q 
 
 00 -O - M 
 
 fo 
 
 
 ^, 
 
 
 
 ^" I o < 
 
 
 
 
 
 
 
 h ,n Z 
 
 
 M r^ M -J- r-. 
 
 
 
 
 
 
 
 ^^ m 
 
 
 
 
 7 H S 
 5 U " 
 
 
 t^ -* Q. voo 
 
 
 0^ 
 
 
 
 JU o 
 
 nO r^ " M (^ 
 
 ■^ 
 
 
 
 
 a 'ji 
 
 E Sv 
 
 ■S, <y -g' -8-S 
 
 °." 
 
 ^ 
 
 
 
 j<: 
 
 r 
 
 d" m CO "^^^ 
 
 "^ ro 
 
 - 
 
 
 
 13 
 
 ■m. 
 
 " 
 
 
 
 
 
 
 in S M ^ >o 
 
 o o 
 
 sO 
 
 C H 
 
 1- 
 
 ^ OS 
 
 CO i2 "'■ - 'O 
 
 f:: c^ ooo 
 
 ^A 
 
 
 a 
 
 4> 
 
 
 Sg 
 
 6 S' 
 
 N_ "^ m vo to 
 
 CO CO \D ^D CO 
 
 ^ 
 
 CO fT 
 
 "^ 
 
 
 fcCfi 
 
 
 fo O -J- -q-o 
 
 >0 N 
 
 
 
 
 ^ u H 
 
 Q 
 
 00 « N too 
 
 4. " 
 
 
 
 M 
 
 ■*-• 
 ClJ 
 
 CO 
 
 
 _ 
 
 Cj» ■* in iD m 
 
 Is 
 
 
 cnp 
 
 " 
 
 C -O - OS 
 
 in -J 0_ 0_ r;. 
 
 TO 
 
 •a 
 
 
 -J u 
 
 -Ss 
 
 oo" t^ ^ "-^ N 
 
 c» d" 
 
 c? 
 
 
 
 is 
 
 CO m O 00 o> 
 
 vO « 
 
 
 
 
 
 CO oo_ so 0_ in 
 
 mo 
 
 •o 
 
 a 
 
 
 ■^ cs \D sjf <o 
 *o s5 so -^.o 
 
 (y. r? 
 
 -T 
 
 t3 
 
 
 :^ z: 
 
 (J 
 
 
 00 
 
 
 
 
 Q 
 
 r-. M c^ ro^^ 
 
 M l^ 
 
 ?P 
 
 3 
 
 
 
 
 ■eft " 
 
 
 •■A 
 
 S<3 
 
 '13 a 
 o " 
 
 
 
 .3 >- n 00 w ■" s 
 
 w 
 
 
 
 
 
 ■s=t:t)Ss>.m'- - 
 
 o 
 
 
 >^ - 
 
 - H 
 
 
 ■ s 
 
 CU 
 
 o 
 H 
 
 •ss. 
 
 §1 
 
 Is 
 
 
 
 ^ 
 
 
 (1.0 
 
 li 
 
 — WWW S 
 ^ o*^ - ^ 
 
 |0 == ° 
 t -^^ ■§ 
 
 '5 E 
 
 - aj 
 
 'o^Q c « 
 Ssc-^SJ 
 ■ ■* os^^ 
 
 sO_ •" o 
 
 S'sll 
 
 «J - S rt 
 
 3 5 S^ 
 
 o.rt 
 
 !ftQ=3 
 
 sO S S rt 
 
 ° J. ,A^ 
 
 D—^ „Q0 
 
 «^ i 
 
 00 ' 
 
 
 ° £ £ 
 
 W OJ 
 
 ■J -a 
 
 
 3 g -s 
 
 "s'Sw S 
 SgaS S- 
 h wS ■a 
 
 : <u rt f *- "^ 
 
 ^ - u =^ 
 
 1 ?: w o "U 
 
 ) ^ S ^ c >- 
 
 '— ,"5 *" '- iJ 
 
 jr? c <u 0) '- 
 
 : £ S > -t; — 
 
 
 ID a 
 
 bo ■ 
 
 
 U C > ^ ^ W>rt 
 
 g.2 s ^'S a s s s 
 
 .i2SS°».S^Es-S 
 .S o " c 3 " S E "^ 
 ^ = aj S-> 5 > S w « 
 
 3J^it-2sS°w 
 
 -= w >.?'S^ " 2'^ o 
 
 s w O.S H aSr^afi 
 
 2 CO , 
 
 OJ 
 
 413 
 
 2 So Si;3^ 5>a'- 
 
 a-»Hoow&;5ji 
 
 J S Bj w i^'C S'^'T^TS 
 
 "^ S; 3 i; >,'o K '^ " "y 
 , S-s-^-d.. -c,.« 
 
 E C^ m ni 
 
IV. VALUE OF GOLD COIN AND BULLION IMPORTED 
 
 INTO AND EXPORTED FROM THE UNITED 
 
 STATES, 1872-1920 
 
 Year ending 
 June 30 
 
 Extorts 
 
 Imports 
 
 Excess of 
 Exports 
 
 Excess of 
 Imports 
 
 1872 
 
 49,548,760 
 
 8,717,458 
 
 40,831,302 
 
 
 •873 
 
 44,856,715 
 
 8,682,447 
 
 36,174,268 
 
 
 1S74 
 
 34,042,420 
 
 19,503,137 
 
 14,539,283 
 
 
 1S75 
 
 66,980,977 
 
 13,696,793 
 
 53,284,184 
 
 
 1876 
 
 31,177,050 
 
 7,992,769 
 
 23,184,341 
 
 
 1877 
 
 26,590,374 
 
 26,246,234 
 
 344,140 
 
 
 1878 
 
 9>204,455 
 
 13,330,215 
 
 
 4,125,760 
 
 1879 
 
 4,587,614 
 
 5,624,948 
 
 
 1,037,334 
 
 1880 
 
 3,639,025 
 
 80,758,396 
 
 
 77,119,371 
 
 1881 
 
 2,565, '32 
 
 100,031,259 
 
 
 97,466,127 
 
 18S2 
 
 32,587,880 
 
 34,377,054 
 
 
 1,789,174 
 
 J883 
 
 11,600,888 
 
 17,734,149 
 
 
 6,133,261 
 
 1884 
 
 41,081,957 
 
 22,831,317 
 
 18,250,640 
 
 
 1S85 
 
 S.477,892 
 
 26,691,696 
 
 
 18,213,804 
 
 j886 
 
 42,952,191 
 
 20,743,349 
 
 22,208,842 
 
 
 1887 
 
 9,701,187 
 
 42,910,601 
 
 
 33,209,414 
 
 1888 
 
 18,376,234 
 
 43,934,317 
 
 
 25,558,083 
 
 1889 
 
 59,952,285 
 
 10,284,858 
 
 49,667,427 
 
 
 1890 
 
 17,274,491 
 
 12,943,342 
 
 4,331,149 
 
 
 1891 
 
 86,362,654 
 
 18,232,567 
 
 68,130,078 
 
 
 1892 
 
 50,195,327 
 
 49,699,454 
 
 495,873 
 
 
 1893 
 
 108,680,844 
 
 21,174,381 
 
 87,506,463 
 
 
 1894 
 
 76,978,061 
 
 72,449," 19 
 
 4,528,492 
 
 
 1895 
 
 66,468,481 
 
 36,384,760 
 
 30,083,721 
 
 
 1896 
 
 112,409,947 
 
 33,525,065 
 
 78,884,882 
 
 
 1897 
 
 40,361,580 
 
 85,014,780 
 
 
 44,653,200 
 
 1898 
 
 15,406,391 
 
 120,391,674 
 
 
 104,985,283 
 
 1899 
 
 37,522,086 
 
 88,954,603 
 
 
 51,432,517 
 
 1900 
 
 48,266,759 
 
 44,573,184 
 
 3,693,575 
 
 
 1901 
 
 53,185,177 
 
 66,051,187 
 
 
 12,866,010 
 
 1902 
 
 48,568,950 
 
 52,021,254 
 
 
 3,452,304 
 
 1903 
 
 47,090,595 
 
 44,982,027 
 
 2,108,568 
 
 
 1904 
 
 81,459,986 
 
 99,055,368 
 
 
 17,595,382 
 
 1905 
 
 92,594,024 
 
 53,648,961 
 
 38,945,063 
 
 
 1906 
 
 38,573,591 
 
 96,221,730 
 
 
 57,648,139 
 
 1907 
 
 5 1,399,1 75 
 
 114,510,249 
 
 
 63,111,073 
 
 1908 
 
 72,432,924 
 
 148,337,321 
 
 
 75,904,397 
 
 1909 
 
 91,531,818 
 
 44,003,989 
 
 47,527,829 
 
 
 1910 
 
 118,563,215 
 
 43,339,905 
 
 75,223,31° 
 
 
 1911 
 
 22,509,653 
 
 73,607,013 
 
 
 51,097,360 
 
 1912 
 
 57,328,348 
 
 48,936,500 
 
 8,391,848 
 
 
 1913 
 
 77,762,622 
 
 69,194,025 
 
 8,568,597 
 
 
 1914 
 
 112,038,529 
 
 66,538,659 
 
 45,499,870 
 
 
 1915 
 
 146,224,148 
 
 171,568,755 
 
 
 25,344,607 
 
 1916 
 
 90,249,548 
 
 494,009,301 
 
 
 403,759,753 
 
 1917 
 
 291,921,225 
 
 977,176,026 
 
 
 685,254,801 
 
 191S 
 
 190,852,224 
 
 124,413,483 
 
 66,438,741 
 
 
 1919 
 
 "6,575,535 
 
 62,363,733 
 
 54,211,802 
 
 
 1920 
 
 466,592,606 
 
 150,540,200 
 
 316,052,406 
 
 
 414 
 
V. STANDARD INDEX NUMBERS (1905-1920)' 
 (Continued from page 112) 
 
 
 U. S. Department 
 
 OF Labor 
 (Base 1890-1899) 
 
 Sauerbeck 
 (Base 1867-1877) 
 
 " Economist " 
 (Base 1845-1S50) 
 
 1905 
 
 1 1 5.9 
 
 72 
 
 97 
 
 1906 
 
 122.5 
 
 77 
 
 106 
 
 1907 
 
 129.5 
 
 80 
 
 114 
 
 1 90S 
 
 122.8 
 
 73 
 
 105 
 
 1909 
 
 126.5 
 
 74 
 
 100 
 
 I9I0 
 
 1 3 1. 6 
 
 78 
 
 log 
 
 I9II 
 
 129.2 
 
 80 
 
 114 
 
 I9I2 
 
 ^33(> 
 
 85 
 
 i'7 
 
 ^ Continued to 1920 on p. 417, the average of prices in 1913 being there taken as 100. 
 
 415 
 
VI. ESTIMATED MONETARY STOCK OF THE UNITED 
 
 STATES ON JUNE 30, 1885-1919 > 
 
 (In millions of dollars) 
 
 
 Gold 
 
 Gold 
 
 Silver 
 
 Silver 
 
 Sub- 
 
 Bank 
 
 U.S. 
 
 Treasury 
 
 
 
 Coin anu 
 
 Certifi- 
 
 Dollars 2 
 
 Certifi- 
 
 sidiary 
 
 Notes 
 
 Notes 
 
 Notes of 
 
 Total* 
 
 
 Bullion 
 
 cates 
 
 
 cates 
 
 Silver 
 
 
 
 i8go 
 
 
 1885 
 
 589 
 
 140 
 
 204 
 
 140 
 
 75 
 
 317 
 
 347 
 
 
 1532 
 
 1886 
 
 591 
 
 131 
 
 234 
 
 116 
 
 75 
 
 3°9 
 
 347 
 
 
 1556 
 
 1887 
 
 65s 
 
 121 
 
 267 
 
 146 
 
 76 
 
 279 
 
 347 
 
 
 1624 
 
 1888 
 
 706 
 
 142 
 
 299 
 
 229 
 
 76 
 
 252 
 
 347 
 
 
 1680 
 
 IS89 
 
 680 
 
 154 
 
 334 
 
 263 
 
 77 
 
 211 
 
 347 
 
 
 1649 
 
 1890 
 
 696 
 
 .58 
 
 369 
 
 302 
 
 77 
 
 186 
 
 347 
 
 
 1675 
 
 I89I 
 
 647 
 
 152 
 
 382 
 
 315 
 
 78 
 
 168 
 
 347 
 
 50 
 
 1672 
 
 1892 
 
 664 
 
 157 
 
 388 
 
 332 
 
 78 
 
 173 
 
 347 
 
 102 
 
 1752 
 
 1893 
 
 592 
 
 93 
 
 390 
 
 331 
 
 77 
 
 179 
 
 347 
 
 147 
 
 1732 
 
 1894 
 
 629 
 
 66 
 
 394 
 
 337 
 
 76 
 
 207 
 
 347 
 
 153 
 
 1806 
 
 1895 
 
 636 
 
 48 
 
 401 
 
 329 
 
 77 
 
 212 
 
 347 
 
 146 
 
 1819 
 
 1896 
 
 600 
 
 43 
 
 419 
 
 343 
 
 76 
 
 226 
 
 347 
 
 130 
 
 1798 
 
 1897 
 
 697 
 
 39 
 
 441 
 
 375 
 
 76 
 
 231 
 
 347 
 
 "5 
 
 1907 
 
 1898 
 
 864 
 
 37 
 
 458 
 
 399 
 
 76 
 
 228 
 
 347 
 
 lOI 
 
 2074 
 
 1899 
 
 975 
 
 34 
 
 471 
 
 406 
 
 75 
 
 241 
 
 347 
 
 94 
 
 2203 
 
 1900 
 
 1036 
 
 228 
 
 491 
 
 416 
 
 83 
 
 310 
 
 347 
 
 76 
 
 2343 
 
 igoi 
 
 1125 
 
 289 
 
 520 
 
 435 
 
 90 
 
 354 
 
 347 
 
 48 
 
 2484 
 
 1902 
 
 "93 
 
 347 
 
 540 
 
 454 
 
 97 
 
 357 
 
 347 
 
 30 
 
 2564 
 
 1903 
 
 1249 
 
 409 
 
 554 
 
 465 
 
 102 
 
 414 
 
 347 
 
 "9 
 
 2685 
 
 1904 
 
 1328 
 
 495 
 
 560 
 
 470 
 
 107 
 
 449 
 
 347 
 
 13 
 
 2804 
 
 1905 
 
 1358 
 
 5'8 
 
 559 
 
 465 
 
 i'5 
 
 496 
 
 347 
 
 9 
 
 2884 
 
 1906 
 
 1476 
 
 560 
 
 561 
 
 477 
 
 118 
 
 561 
 
 347 
 
 7 
 
 3070 
 
 1907 
 
 1466 
 
 678 
 
 562 
 
 476 
 
 130 
 
 604 
 
 347 
 
 6 
 
 3115 
 
 1908 
 
 1618 
 
 823 
 
 563 
 
 474 
 
 147 
 
 698 
 
 347 
 
 5 
 
 3378 
 
 1909 
 
 1642 
 
 853 
 
 564 
 
 484 
 
 159 
 
 6go 
 
 347 
 
 4 
 
 3406 
 
 1910 
 
 1636 
 
 863 
 
 565 
 
 489 
 
 155 
 
 713 
 
 347 
 
 4 
 
 3420 
 
 1911 
 
 1753 
 
 995 
 
 565 
 
 463 
 
 160 
 
 728 
 
 347 
 
 3 
 
 3556 
 
 1912 
 
 1818 
 
 1040 
 
 565 
 
 482 
 
 171 
 
 745 
 
 347 
 
 3 
 
 3649 
 
 1913 
 
 1867 
 
 1087 
 
 568 
 
 484 
 
 175 
 
 759 
 
 347 
 
 3 
 
 3719 
 
 1914 
 
 1872 
 
 1081 
 
 568 
 
 491 
 
 182 
 
 751 
 
 347 
 
 2.4 
 
 3722 
 
 1915 
 
 1973 
 
 1 174 
 
 568 
 
 493 
 
 185 
 
 936 3 
 
 347 
 
 2.2 
 
 401 1 
 
 1916 
 
 2450 
 
 1579 
 
 568 
 
 499 
 
 188 
 
 929 » 
 
 347 
 
 2.1 
 
 4484 
 
 1917 
 
 3019 
 
 1627 
 
 568 
 
 493 
 
 198 
 
 1276!^ 
 
 347 
 
 1.9 
 
 5410 
 
 1918 
 
 3065 
 
 1066 
 
 499 
 
 399 
 
 231 
 
 24628 
 
 347 
 
 1.8 
 
 6606 
 
 1919 
 
 3112 
 
 805 
 
 308 
 
 192 
 
 242 
 
 3445' 
 
 347 
 
 1-7 
 
 7456 
 
 1 These figures are compiled from the reports of the Secretary of the Treasury and from the 
 Statistical Abstract. 
 
 - 1890-1919 does not include silver held against Treasury notes. 
 
 3 Includes federal reserve notes. After 1916 also includes federal reserve bank notes. 
 
 * The totals do not include the gold or silver certificates, as an equal amount of gold or silver is 
 included in the totals under gold coin and bullion and silver dollars. 
 
 4.16 
 

 5 
 B 
 
 u 
 
 o 
 
 1—1 
 
 'c3 
 
 Ph 
 
 m 
 
 j3 
 
 « -S 
 
 Calcutta, 
 India; 
 Depakt- 
 ment of 
 Statistics 
 (75 commodi- 
 ties) 
 
 1 "fjIsHOH 
 
 Canada ; 
 Depart- 
 ment of 
 
 Labor 
 (272 quota- 
 tions) 
 
 w >n r^vo f^ T>00 CO -J-oo « "^co >o .^ ^ .* "fl 
 O0«p.ir^S- MO -l-m .^.O •O m in .* T^ m m 
 
 HM-MwNM MN NMNflNNNMNMN 
 
 Australia ; 
 Common- 
 wealth 
 Bureau 
 Census and 
 Statistics 
 (g2 commodi- 
 ties) 
 
 TOO- 
 141 
 
 155" 
 
 T7O 
 
 180 
 
 T99 
 
 197 
 
 203 
 206 
 209 
 
 217 
 
 225 
 233 
 234 
 236 
 230 
 215 
 208 
 
 Japan ; 
 Bank of 
 Japan for 
 Tokyo 
 (56 commodi- 
 ties) 
 
 O^Ot.^t^a.r^.n 000 «MMgMt.*O"n0vO« 
 
 Sweden ; 
 
 SVENSK 
 
 Handels- 
 tidning 
 (47 quota- 
 tions) 
 
 - .fl-oO ^(*1M 0- i-.*m lOvO ^O \0 nO 1. m 
 
 Italy ; 
 Prof. 
 Bachi 
 (40 commodi- 
 ties) 
 
 QmoNO.O>^ vO".) ^\0 o.O.O.m(»)N Noo 
 -t.4N.Tm ^.tf- ^ 'n^O .00.00.000.0 
 
 France ; 
 
 Bulletin 
 
 de la 
 
 Statistique 
 
 G^N^RALE 
 
 (45 commodi- 
 ties) 
 
 0Mi^f^NO.t^ into r^N moo tnO - O ts 
 tnoo tn m On <xi n moo m c C* ts GO 
 ---t-Mtntn .*.* .*mmmmTt..«.mmm.* 
 
 United 
 Kingdom ; 
 Statist 
 (45 commodi- 
 ties) 
 
 §2s?ll3- s-s- ?l,aS°i.f1'H-s 
 
 United 
 
 States ; 
 
 Bureau of 
 
 Labor 
 Statistics 
 (3 28 quota- 
 tions) 
 
 00-^-*-t-»i/i 000 ooc^c^mNOMONmr-. 
 
 United 
 States ; 
 Federal 
 Reserve 
 
 Board 
 (go quota- 
 tions) 
 
 O-O N Noo m -f 00 -i-ooo 
 
 2 M^j ;T;T;r'S'St?J?l7{:|g? 
 
 
 
 1913 
 
 1914 
 
 igtO . . . 
 igi7 .... 
 igrS .... 
 igig .... 
 
 u,ig 
 
 November 
 
 December . ... 
 
 ig2o 
 January . . . 
 February .... 
 March . . . 
 April . . 
 
 May 
 
 June 
 
 July 
 
 August . . 
 September . 
 October . 
 November . , , 
 
 &e 
 
 ^ 
 
 
 .2 
 
 ^ 
 
 
 m 
 
 
 
 
 s 
 
 
 r-J 
 
 ft; 
 
 j: 
 
 Oa 
 
 
 
 
 g 
 
 K 
 
 
 ■w 
 
 
 
 t^ 
 
 ? 
 
 3 
 
 aj 
 
 
 
 
 
 
 
 
 
 
 e 
 
 
 ;i 
 
 
 
 
 ■c 
 
 c 
 
 -a 1- 
 
 xj 
 
 £ 
 
 n s: 
 
 
 
 
 
 
 1 
 
 
 
 
 H 
 
 ^ c 
 
 
 3 
 
 
 bcC 
 
 
 r. 
 
 1 
 
 
 
 
 Q 
 
 
 3x: I 
 
 CJ3 ij : 
 
 2 c s 
 
 4) O- 
 
 *5j J2 P >■ 
 
 "C-c « 
 
 O 4J 0) o 
 
 1 2^11 
 
 m t«^ 5 o 
 
 "5. 
 
 g u u 
 
 cnH 2—1 
 - " 6 a" 
 
 SB 
 
 4>7 
 
VIII. GOLD AND SILVER IN EUROPEAN CENTRAL 
 
 BANKS,^ IN CANADA,^ AND IN THE TREASURY AND 
 
 NATIONAL BANKS OF THE UNITED STATES^ 
 
 Country 
 
 Gold 
 
 Silver 
 
 Total 
 
 England . . 
 France 
 
 Germany . . . 
 Russia . . 
 Austria-Hungary 
 
 
 $197,324,452 
 628,959,640 
 
 218,757.553 
 728,896,800 
 
 255.585.300 
 82,605,200 
 
 205,252,000 
 58.733.500 
 31,984,134 
 23,246,050 
 31,040,000 
 10,340,200 
 
 »1 58.532.338 
 86,330,000 
 38,479.900 
 61,085,750 
 147.163,550 
 17,702,500 
 4,866,490 
 15,992,065 
 
 $197,324,452 
 787,491,978 
 305,087,553 
 767,376,700 
 316,671,050 
 229,768,750 
 
 Italy . . 
 Netherlands . 
 Belgium 
 Sweden . . 
 Switzerland . 
 Norway 
 
 
 
 222,954,500 
 63.599.990 
 47.976.199 
 23,246,050 
 31,040,000 
 10,340,200 
 
 Total European 
 Canada 
 United States 
 
 $2,472,724,828 
 
 138,203,000 
 
 i.35'.426,5o6 
 
 $530,152,593 
 
 7,700,000 
 
 538.447.544 
 
 $3,002,877,422 
 
 145,900,000 
 
 1,889,874,050 
 
 Grand total 
 
 
 
 $3,962,351,334 
 
 $1,076,300,137 
 
 $5,038,651,472 
 
 ' June 6, 1(512. Taken from Bendix, The Aldrich Plan. 
 
 2 Total stock on January i, 1912. See Report o/the Comptroller of the Currency for igi2. 
 "' June 30, igi2. See Report o/the Director of the Mhitfor iQis. The above information is not 
 available for European central banks or in Canada since 1913. 
 
 418 
 
INDEX 
 
 Aldrich Bill, 373-374, 393 ; opposed by 
 
 Democrats, 374 n. 
 Aldrich-Vreeland Act, 367-36S 
 Andrew, A. Piatt, 368 h. 
 Arbitrage houses, 94, 98 
 Assignat, 31 1-3 12 
 Austria, 235, 310, 325 ; fiat money in, 
 
 292-294, 318 
 
 Balance of trade, 83-97 
 
 Bank Act of 1844, 335 
 
 Bank credit should be easily liquidated, 
 
 59 
 
 Bank credit money, Bank Act of 1844, 
 335; bank note, 331; bond-deposit 
 system of, 334 j Canadian system, 
 333-334. 338-339; convertibility of, 
 332-335 ; distinguished from bank 
 deposit, 331-332; ease of redemption 
 necessary, 331, 336-338; elasticity 
 of, 333; England's system, 335; limit 
 on issue of, 332 ; national bank note, 
 338 «. ; prices and, 337 ; restriction 
 period, 335 ; right issue of, 337 ; 
 safety-fund system, 333 ; " schools " 
 of banking, 335-336; seasonal move- 
 ments of currency, 334 
 
 Bank deposit compared with bank note, 
 
 331-332 
 
 Bank draft, 47 
 
 Bank of England, notes of, 54 «. ; panic 
 of 1907, 367 n. ; price paid for Amer- 
 ican gold coin, 91 «.; reserve of, 58; 
 restriction period, 60 
 
 Bank of France, inflated issues in 1914- 
 1919, 380 n. ; note issue of, 54 n., 325 ; 
 silver in, 328-329 
 
 Bank of Germany, note issue of, 325 
 
 Bank note, defined, 42 ; freedom of 
 issue, 53-54 ; greenback period, 275; 
 national, 354; prices and the, 123- 
 124; War of 1812, 343. See also 
 Bank credit money. Currency system 
 (United States), Federal Reserve Act 
 
 Bank rate. See Rate of discount 
 
 Bank reserves, 16, 50-51, 58«., 59, 369- 
 370 ; Bank of England, 58 ; lawful 
 
 money as, 58-59. See also Federal 
 Reserve Act 
 
 Bank statistics show volume of credit, 64 
 
 Bank of United States, 343 
 
 Banks, clearing houses and, 47-48 ; 
 credit instruments of, 46-50 ; cur- 
 rency receipts of, 46; depend on 
 savings of people, 139; local char- 
 acter of, in United States, 369-370 ; 
 operations of, 46-50 ; reserves of, 16, 
 50-51, 58«., 59, 369 
 
 Barter credit defined, 41 n. 
 
 Belgium, 225 
 
 Bill of exchange, 49 
 
 Bimetallism, 217-240; advantages of, 
 221-224; before 1800,237-240; dis- 
 tinguished from monometallism, 217- 
 218; early experience of United 
 States with, 227-229; foreign trade 
 under, 222-224; French experience 
 with, 224-226, 232-233 ; Gresham's 
 law, 233, 237 ; Alexander Hamilton 
 and, 341 ; India's experience with, 
 302-305; mint ratio, 218-219; Dr. 
 Pierson, 232?/.; price changes under, 
 221-224 ; relative values of gold and 
 silver, 229-233; theory of, 218-224; 
 United States' experience with, 227- 
 229, 341-346 
 
 Bland-Allison Act, 236, 348-354 
 
 Bonds used as currency, 386 
 
 Book account, 49 
 
 Brassage, 179-180 
 
 Bullion, relation of, to coin, 180-184 
 
 Bullion Report, 292 
 
 Call loans, 147-148 
 
 Canada, bank notes in, 338-339 ; credit 
 system of, 54«.; elasticity of cur- 
 rency in, 324 
 
 Capital, confused with money, 138 ; 
 demand for, 137,142-144; depends on 
 savings, 138; economists' definition 
 of,36, I36».; fund, origin of, 141-142 ; 
 goods, 140; marginal productivity 
 of, 137-138 ; rate of interest and, 135- 
 138; supply of loanable, 137-138 
 
 419 
 
420 
 
 MONEY AND CURRENCY 
 
 Captain Kidd's treasure, effect of, on 
 prices, if discovered, 124-127 ; effect 
 of, on rate of interest, 147 
 
 Carlile, \V. W., 300 «. 
 
 Cash distinguished from money, 8-9 
 
 Central banlcs, 370-371 
 
 Check, 46. See also Currency, deposit 
 
 China, 197-199, 224, 255, 260 
 
 Circulation, rapidity of, 65-68 
 
 Clearing house, banks under, 367; fed- 
 eral reserve system, 377 ; panic of 
 1907, 367-368 ; uses of, 47-48 
 
 Clearing-house certificates, 48 n. ; used 
 as emergency currency, 368 
 
 Coinage, debasement of, 188-190 
 
 Coiit^s Financial School^ 248 
 
 Commodity, economists' use of term, 8 
 
 Commodity money, brassage, 179; 
 commercial value, 182; credit money 
 not to be confused with, 199; demand 
 curve, i86;;.; dollar, definition of, 
 199, 200 K.; early forms of, 178; free 
 coinage of, 179-180, 1S4-186, 256; 
 gold and silver as, 178-201; Gresh- 
 am's law, 194-196; lacks stability of 
 value, 202-203 ' mint price, 183-184, 
 191; rate of interest and, 146-158, 
 197 ; regulation of supply, 196-201 ; 
 relation between coin and bullion, 
 180-184; David Ricardo and, 190, 
 191 «.; seigniorage, 179, 187-194 
 
 Commodity rate. See Rate of interest 
 
 Confidence, basis of credit, 37-41, 63- 
 64, 269 
 
 Consumers' goods, definition of, 140 
 
 Correspondent, definition of, 78 «. 
 
 Costa Rica, 260 
 
 Cost of production, 117-120 
 
 Credit, amount of money as basis for, 
 58-59 ; auxiliary of money, 3-4 ; 
 banks' dealings in, 43-45 ; based on 
 confidence, 37-38 ; business condi- 
 tions and, 38; classes of, 5, 41-46; 
 defined, 4, 9, 35 ; dependence on 
 money, 41 ; of general acceptability, 
 42-43, 123; good system of, 52; 
 importance of, as a medium of ex- 
 change, 69 ; in good times, 63-64 ; 
 not a commodity, 36; of limited 
 acceptability, 44-46 ; prices and, 5-6, 
 57-58, 117-118, 121-124; relation of, 
 to capital, 142-145; relation of, to 
 money, 5, 58-61 ; short sale ef money, 
 62 ; superiority of, 51-52 ; systems of, 
 in foreign countries, 52, 54 k. ; volume 
 of, 64-65. See also Barter credit 
 
 Credit instruments, 14; long-time, 51; 
 security for, 37-38 ; substitute tor 
 money, 51 
 
 Credit money, causes of depreciation 
 of, 319-322; classifications of, 339"-; 
 confidence necessary for, 320 ; con- 
 vertible, 318-319; definition of, 42, 
 315; deposit currency and, 323; depre- 
 ciated, becomes fiat money, 268-272 ; 
 depreciated, in England, 292 ; effect 
 of, on prices, 316-318; gold exports 
 and, 317, 324; Gresham's law, 318; 
 kinds of, 324-332 ; limitations of, 
 43; makes currency elastic, 322-324; 
 not commodity money, 199; pur- 
 poses of, 321-322; silver dollar, 320; 
 token money, 315-316; Treasury 
 notes, 319; United States' system 
 of, 324; use of, 316; value of, 316; 
 when legal tender, 319. &i?aAffBank 
 credit money and Government credit 
 money 
 
 Credit of general acceptability, 42-43, 
 123 
 
 Credit of limited acceptability, 44-50 
 
 Credit ruble in Russia, 295-297 
 
 Crimean War, 295 
 
 Currency, bonds as, 386; definition of, 
 8-g ; deposit currency, 44, 47, 64-65, 
 121 ;/., 323; kinds of, 363-365; seas- 
 onal movements of, 83, 322-323 ; ship- 
 ments of, 80-84, 88-89 ; supply of, in 
 United States, 248 
 
 Currency school, 335-336 
 
 Currency system before Federal Re- 
 serve Act, Aldrich-Vreeland Act, 
 367-368 ; contrasted with discount 
 market in Europe, 370 ; defects of, 
 36S-372 ; elasticity lacking in, 356, 
 359' 371 ; emergency currency of 
 1907 and 1914, 368 ; gold movements, 
 356-359, 371, 372; local character of 
 banks, 369-370 ; National Monetary 
 Commission, 372-373; nonliquid bank 
 assets, 370; panic of 1907, 366-368; 
 suspension of cash payments (1907), 
 367 ; United States Treasury and 
 the, 372 
 
 Deferred payments, different standards 
 of, 172-177 ; stability of the stand- 
 ard in, 171 
 
 Demand and supply, ]8«., 55-76. See 
 also Money 
 
 Denmark, 235 
 
 Deposit. See Bank deposit 
 
INDEX 
 
 421 
 
 Deposit currency. See Currency 
 
 Discount, rate ol. See Rate of discount 
 
 Discount market, 370, 376 
 
 Division of labor, 71 
 
 Dollar, definition of, izn., 199-200, 
 217, 330 «. 
 
 Domestic exchange, balance of trade, 
 83-84 ; correspondent defined, 78 ?«.; 
 currency shipments, 80, 85 ; methods 
 of making payments, 77-79 ; New 
 York exchange, 78-84 ; seasonal 
 movements of currency, 83 ; old sys- 
 tem expensive and cumbersome, 371; 
 use of credit, 77-80 
 
 Dun's Review J ill, 214 
 
 Economist index number, i u , 214 
 
 Ecuador, 260 
 
 Edge Act, 377 
 
 Elasticity of currency, 322-326, 368, 
 37 '> 376- See also Credit money 
 
 Emergency currency, Aldrich-Vreeland 
 Act, 368; in 1893, 43 
 
 Endless chain, 359 
 
 England, bank credit money in, 335 ; 
 banking experience of, 335-336; 
 credit system in, 54 «.; fiat money in, 
 291-292; gold standard in, 155-156, 
 380; government credit money, 330; 
 monetary evolution of, 237-240 
 
 England, Bank of. See Bank of England 
 
 Entrepreneur, definition of, 36; price 
 level and the, 166-170; rate of inter- 
 est and the, 140 
 
 Europe, depreciated currencies after 
 1914 in, 379-381 ; discount market in, 
 
 370-371 
 Exchange. See Domestic exchange and 
 
 Foreign exchange 
 Exports of United States, loi 
 
 Falkner, R. P., 109-110, 242, 279 
 
 Farrer, Lord, 127 
 
 Federal Advisory Council, 375 
 
 Federal Reserve Act, Aldrich Bill com- 
 pared with, 374 ; bankers' banks, 375 ; 
 banks the fiscal agents of government, 
 
 377 ; criticism of bankers concerning, 
 374; discount market, 376-377 ; effects 
 of, 378 ; elasticity of, 376 ; federal re- 
 serve agents, 375; foreign exchanges, 
 377; gold reserve, 377-378; govern- 
 ment board, 375; note issue, 376; 
 powers of federal reserve banks, 374- 
 
 378 ; supervision under, 374-376 ; 
 Treasury under, 378 
 
 Federal reserve banks, 374 ff. 
 
 Federal Reserve Board, 374-375 
 
 Fetter, F. A., 142 «. 
 
 Fiat money, 263-314; artificial regula- 
 tion, 263; assignat, 311-312; Aus- 
 tria's experience with, 292-294, 310; 
 BuUion Report, 292 ; confidence as 
 a basis, 269-270 ; defects of, 307- 
 310; depreciated credit money be- 
 comes, 268-27'2, 380; distinguished 
 from commodity money, 271 ; dur- 
 ing World War, 379-381 ; effects of 
 Civil War on, 272-273 ; France and, 
 311-312; greenbacks as, 272-273; in- 
 convertible bank notes in England, 
 291-292; in India, 297-304; lacks 
 permanence, 313; material may be 
 valuable, 266-267 ; performs services 
 of money, 263 ; David Ricardo and, 
 292; Russia and, 295-297, 309-310; 
 shells might be, 264-266 ; silver, 
 297-304 ; so-called " ideal money," 
 306-309; supply of, 73, 75 ; theoreti- 
 cal advantages of, 306-307 ; Treasury 
 notes, 273-274 
 
 Fisher, Irving, 142 n. 
 
 Florin, 292-294 
 
 Foreign exchange, arbitrage houses, 94, 
 98 ; balance of trade, 85, 92, 97-98, 
 102 ; cable exchange, 87-88 ; control 
 by central bank, 371 ; currency ship- 
 ments, 88-90 ; difference in price 
 levels, 99-100; gold points, 91 ; gold 
 shipments, 97-98 ; London exchange, 
 85-102; mint par, 85; par of ex- 
 change, 88-91 ; seasonal demand for 
 currency, 99 ; short and long bills, 
 87 ; sterling exchange, 87 ; stock- 
 market securities, 93 ; visible and 
 invisible trade, 91-102 ; during World 
 War, 379 
 
 Foreign trade, loi, 256, 260 
 
 Franc, 85 n. 
 
 France, Bank of. See Bank of France 
 
 France, bimetallism, 224-227, 255; elas- 
 ticity, 324 ; gold standard in, 349, 
 379, 381 ; government credit money, 
 329; paper money in, 311-313, 325, 
 329, 380 n. 
 
 Free coinage. See Commodity money 
 
 Frozen credits, 370 
 
 Germany, Bank of. See Bank of Ger- 
 many 
 
 Germany, gold standard in, 349, 379, 
 381 ; government credit money, 329; 
 
42 2 
 
 MONEY AND CURRENCY 
 
 limit on issue of bank notes, 332 ; 
 silver, use of, 252, 255, 329; war in- 
 flation in, 379, 380 71. 
 
 Gold, amount used, 42, 207 ; coinage of, 
 185-186, 193; exportation of, 323, 
 359, 371 ; exports and credit money, 
 324; free coinage, 184-185; importa- 
 tion of, 322, 381, 383; importation 
 during panic, 57-58 ; inflation of na- 
 tional stock of, 381-384; price of, in 
 greenback period, 285-290; standard 
 in United States, 346, 379 ; of Treas- 
 ury in emergencies, 372 ; use of, in 
 the arts, 180-184; withdrawals after 
 Sherman Act, 359 
 
 Gold and silver, production of. See 
 Production of gold and silver 
 
 Gold bullion, 185 
 
 Gold coin in United States, 413 
 
 Gold points, 91, 98 
 
 Gold reserves, I57«.,327; decentralized, 
 368-369 ; federal reserve banks and, 
 
 377-378 
 
 Gold Settlement Fund, 377 
 
 Gold shipments, 97-98 
 
 Gold standard, abandoned by European 
 countries during World War, 379 ; in 
 England, 155-156; inEurope, 234-236, 
 260 ; in Japan, Mexico, and Peru, 203 
 
 Gold Standard Act, 360-365, 389 
 
 Good, economic and free, 9 
 
 Government credit money, confidence 
 necessary, 328-329; definition of, 
 325 ; depreciation of, 268-270 ; elas- 
 ticity of, 326; forced issue bad, 325; 
 foreign systems, 329-330 ; irredeem- 
 able, 328-330; lawful money in the 
 United States, 330; legal-tender qual- 
 ifications, 330 ; limit of issue, 328- 
 331; loan to government, 325; psy- 
 chological risk in, 327 ; reserves for, 
 326; United States, 327 
 
 Greeley, Horace, 85 
 
 Greenbacks, analysis of price changes, 
 280-283; bank notes, 275; Confed- 
 erate money, 275-276; demand for, 
 276-280 ; distinguished from money 
 and currency, 274 ; effect of cancella- 
 tion, 25; endless chain, 359; Falkner 
 index number, 279 ; fiat money, 
 272-273; legal tender, 42, 51, 200; 
 little gold used, 274 ; other legal- 
 tender paper, 277 n. ; price of gold, 
 285-291 ; prices influenced by, 123, 
 242, 273-276; Public Credit Act, 288- 
 289; quantity of, 330 K,; redemption 
 
 under Gold Standard Act, 362 ; re- 
 sumption period, 2S3-284 ; George E. 
 Roberts on, 287?;.; value due to serv- 
 ice as money, 290 
 Gresham's law, credit money and, 318; 
 explanation of, 194-196, 337 ; illus- 
 trated by bimetallism, 233, 237 
 
 Hamilton, Alexander, 227-228, 341-342 
 Helm, Elijah, 250 «. 
 Holland, 234 
 
 Ideal money. See Fiat money 
 
 Imports of the United States, loi 
 
 Index number, defects of, 106-107 ; 
 Dun's Revie'S), III; Economist, III; 
 R. P. Falkner, 139-1 10; gold and the, 
 214, 242; greenback and the, 279; 
 how found, 107; ideal, 108; W. Stan- 
 ley Jevons, no; rupee and, 304; A. 
 Sauerbeck, in; showing prices to 
 1857, 133 »• ; Dr- Soetbeer, in; 
 weighting, 107 
 
 India, bimetallism, 302-305 ; W. W. 
 Carlile, 300 n. ; debt of, 223-224 ; 
 depreciation of rupee, 298-299 ; fiat 
 money, 268 ; free coinage of silver 
 suspended, 300 ; gold not the stand- 
 ard in 1893, 223-224 ; prices and 
 money supply, 11 6-1 17; Sauerbeck 
 index number, 302 ; silver fiat money, 
 297-305 ; silver question in, 246, 
 257-258 ; value of rupee, 301-305 ; 
 wheat and silver, 257-260 
 
 Indianapolis, Monetary CoTmnlssiou^s 
 Report, 285 
 
 Inflation under gold standard during 
 and after war, 381-387 
 
 Interest, rate of. See Rate of interest 
 
 Jacob, William, 2 10-2 11 
 
 Japan, 203, 260 
 
 Jevons, W. Stanley, no, 132 ;/., 133 «. 
 
 Kidd's treasure, 124-126, 147 
 Kinley, David, 64«., 130 
 
 Latin Union, 225, 234 
 
 Laughlin, J. Laurence, in, 121 », 
 
 Law, John, 304 
 
 Law of cost, 18 «., 74-75 
 
 Lawful money, bank reserves, 51, 58- 
 59; definition of, 7, 51 ; gold certifi- 
 cates, 364; government credit money, 
 330; national bank notes redeemable 
 in. 353-354 
 
INDEX 
 
 423 
 
 Legal tender, definition of, 9; Gold 
 Standard Act, 364-365; inflation, 
 319; notes in bank reserves, 51. See 
 also Government credit money and 
 Fiat money 
 
 Legal-tender act, 272-274 
 
 Liberty bonds, 386 
 
 " Limping standard," 347-354 
 
 Loanable funds. See Capital 
 
 Locke, John, 20, 238, 243 
 
 London drafts, 86-87 
 
 London money market and the rate 
 of interest, 155-156 
 
 Macaulay, Thomas B., 196, 23S 
 
 MacLeod, H. D., 34-35 
 
 Marginal utility, 18 n., 137 
 
 Medium of exchange, i-io 
 
 Mercantilist theory, 21-22 
 
 Mexico, gold, 203; seigniorage, 194; 
 
 silver question in, 255, 261-262 
 Mill, John Stuart, 20, 34-35, 61 «., 162, 
 
 243 
 
 Mint par, 85 
 
 Mint price, 12, 183-184, igi 
 
 Mint ratio, 218. See also Bimetall- 
 ism 
 
 Monetary circulation, 9 
 
 Money, bank reserve, 50 ; barter and, 
 2—3; based on goods, 41-42 ; causes 
 of increased demand for, n 6; changes 
 in purchasing power, 69 ; circum- 
 stances affecting demand and supply 
 of, 55-76; commodity, see Commod- 
 ity money; common denominator, 13; 
 confused with capital, 138-139, 142; 
 credit, see Credit money ; defined, 
 6-9; demand for, 19-26, 55-73; dif- 
 ferent meanings of the word, 6-7 ; 
 distinguished from cash, credit, and 
 currency, 3-6 ; division of labor, 7 1 ; 
 evolution of, 1-2 ; exchangeability 
 its primary utility, 1 1 ; fiat, see Fiat 
 'money; nature of, 11-33; origin of, 
 2-3 ; rapidity of circulation, 65-68 ; 
 relation to credit, 57-65 ; standard of 
 deferred payment, 14; standard of 
 prices, 13-17, 29-32; store of value, 
 14-17 ; supply of, 73-76 (see also Sup- 
 ply of money) ; two important uses of, 
 50; universal exchangeability, 14; 
 value of, 11-33, 55 
 
 Money unit, 26 «. 
 
 Money utility, supply of, 26-29 
 
 Monometallism. See Bimetallism 
 
 Mtiltiple standard, 172, 175 
 
 National Bank Act, 368 
 
 National bank notes, 274-275, 331-332, 
 
 376 
 National banks, defects of, 368-372 ; 
 
 Federal Reserve Act, 374 
 National debt, 244-245, 255 
 National Monetary Commission, 372 
 National Reserve Association. See 
 
 Aldrich Bill 
 New York exchange, 78, 80 
 Nicholson, J. S., 304 n. 
 Norway, 235 
 
 Panic, effect of, on credit, 57-58 ; gold 
 imports during, 57-58 ; of 1893, 
 57 «■. 245. 257, 356-358; of 1907, 
 366-36S ; rapidity of circulation dur- 
 ing a, 68 ; rate of interest during a, 
 152 
 
 Paper money. See Fiat money 
 
 Par of exchange, 85, 88-gi 
 
 Pay checks, 43 
 
 Peru, 203, 260 
 
 Peso, 261 
 
 Pierson, N. G., 129 «., 232 n. 
 
 Population, n 6-1 17 
 
 Portugal, 225 
 
 Pound sterling, 218 
 
 Preston, 210 11. 
 
 Price, appreciating standard, effect of, 
 166; changes in the Middle Ages, 
 1 70-1 71; definition of, 5, g, 12; de- 
 preciating standard, 1 68-1 71 ; impor- 
 tance of, 161-176; level of, not 
 important in itself, 162-163; John 
 Stuart Mill on, 162; psychological 
 effect of changes in, 165; relation 
 to credit, 5-6; relation to money, 
 12, I2«. ; seasonal fluctuations in, 
 322-323; Adam Smith, 170; stand- 
 ard of deferred payments and, 171- 
 176; use in comparison of values, 
 14; value of money and, 162 
 
 Price changes, credit and, 64 ; effect 
 on capital, labor, and wages, 124-127 ; 
 foreign trade and, 99-100, 260; not 
 uniform, 124-130; during World 
 War, 381 
 
 Prices, arithmetical average of, 105 ; 
 bank notes and, 123-124; bank re- 
 serves and falling, 157-158; causes 
 of variations in, 202 ; changes in 
 commodity, 113, 128-135; classes 
 affected by changes in, 1 67-171; com- 
 modity rate of interest and, 1 58-160 ; 
 
424 
 
 MONEY AND CURRENCY 
 
 cost of production and, 117, 119; 
 course of, after 1897, 128-129 ; course 
 of, after 1914, 381-387; credit money 
 and, 323; demand for money, 116- 
 121; downward course of, 127-128; 
 etitrepreneur and falling, 1 64 ; ex- 
 port and import of gold and, 74 ; 
 geometric mean, 106; of gold in 
 greenback period, 285-291 ; gold 
 miners' interest in, 205-208 ; gold 
 price of silver, 258-261 ; greenbacks 
 and, 123, 133, 273-284; influence of 
 credit, 57, 61, 121-124, 322-323; in- 
 flux of gold and silver in sixteenth 
 and seventeenth centuries, 131-132; 
 Captain Kidd's treasure, 124-125, 
 148; David Kinley on, 130; mal- 
 adjustment of, 130-135 ; median, 
 106; miners' gold deposits, H3-114 ; 
 money supply and, 70, 113-116, 123- 
 127, 383 ; national debt and, 245, 253 ; 
 panic of 1907, 366-367 ; real costs 
 of production and, 120; relation of 
 money and credit to, 103-134; silver 
 question and, 241 ; Adam Smith and, 
 131 K.; speculative, 127; stability of 
 the standard, 171; temporary increase 
 of money supply, 149 
 Production of gold and silver, causes of 
 price variations, 202-203; cost of, 203- 
 205; William Jacob on, 209; mar- 
 ginal mines, 206; in Middle Ages, 
 209-210; mining methods, 208-209; 
 output of, 128-129 «., 132-133, 183, 
 209, 215; price movements, 212-216; 
 prices vary with output, 212-216; 
 George E.Roberts on, 21 5«.; Thorold 
 Rogers on, 212 h.; Adam Smith on, 
 212; world's output, 207-208 
 Promissory note, definition of, 44 
 Public Credit Act, 282, 288-289 
 
 Railroads in United States, 167 n. 
 
 Rapidity of circulation, 65-68 
 
 Rate of discount, 138, 142 
 
 Rate of interest, affects speculation, 1 49, 
 152; always figured in money, 136; 
 call loans, 147 ; capital and the, 
 135-136; commodity, 158-160; defi- 
 nition of, 135; demand for capital 
 and the, 144 ; determined by demand 
 for and supply of loanable capital, 
 155 ; Falkner index number and the, 
 158; forces governing, 155; London 
 money market, 155-156; low, 137- 
 138; panic and the, 152,366; "price," 
 
 or value, of money, 145 ; price re- 
 adjustments and the, 146-160; real 
 cause of low, 1 54 ; relation to money 
 and credit, 1 35-161 ; relation to prices, 
 146-158; war and the, 140 
 Real costs, 120-121 
 Real profits, wages, etc., 39-40 
 Rediscounting, 370-371, 376 
 Regional banks. See Federal Reserve 
 
 Act 
 Restriction period, 60, 291-292, 335 
 Resumption Act, 283-284 
 Ricardo, David, 190, igi »., 292 
 Roberts, George E., 215, 287 n. 
 Rogers, Thorold, 212 n. 
 Ruble, 295-297. See also Russia 
 Rupee, 117, 246 «. See also India 
 Russia, fiat money in, 295-297, 309-310; 
 gold in, 310; paper in, 325; silver in, 
 255, 260 
 
 Safety-fund provision for bank notes, 333 
 Sauerbeck, A., iii, 132?;. , 133 «., 250- 
 
 253' 301-302 
 
 Savings provide loanable capital, 139- 
 140 
 
 Scott, W. A., 231, 265 n: 
 
 Seager, H. R., 142 «. 
 
 Seigniorage, 179, 187-194; in France, 
 227 K., 229 
 
 Sherman Act of 1890, 354-361 
 
 Short sale of money, 62-63 
 
 Siam, 260 
 
 Sight exchange, 87 
 
 Silver, arguments for, 243 ; attack on 
 gold standard, 244 ; Bland-Allison 
 Act, 236, 348-354 ; cause of rise in 
 prices abroad, 256; changes in value 
 of, 250-254 ; decline in value of both 
 metals, 250-252 ; demonetization of, 
 in United States, 242; dollar, 242 «.; 
 Falkner index number, 242 ; falla- 
 cious argument for gold, 254-257 ; 
 foreign trade, 256; gold price of, 
 257-260 ; "gold-bug conspiracy," 244; 
 in India, 246-247, 257 ; John Locke, 
 243-244; Mexico, 255, 261; John 
 Stuart Mill, 243-244 ; national debt, 
 244-245; prices after 1873, 242- 
 243 ; rate of interest after 1873, 243 ; 
 rise of prices, destroyed, 241 ; Sauer- 
 beck index number, 250-253; Sher- 
 man Act of 1890, 354-361 ; trade 
 dollars, 242 k. ; value changes of gold 
 and, 250-254; world's supply of, 247 
 
 Silver certificates, 351-354 
 
INDEX 
 
 425 
 
 Silver dollar, United States' experience 
 with, 344 ff. 
 
 Smart, William, 21 
 
 Smith, Adam, 71, 131 //., 170, 212 
 
 Soetbeer, Adolph, iii, 210 
 
 Sovereign, 85 n. 
 
 Spain, 212, 235 
 
 Standard, appreciating, 166-168; com- 
 modity, 174; depreciating, 168-171 ; 
 labor, 174; limping, 347-354; mul- 
 tiple, 172, 175; stabiUty important, 
 171, 178; tabular, 172; utility, 173 
 
 Sterling exchange, S6-96 
 
 Stock market, 84-93, 1^7' ^^^ 
 
 Sumner, W. G., 133 h. 
 
 Supply, law of, 74 
 
 Supply of money, automatic regulation 
 of, 73-74; cost of production, 73; 
 demand, 127-128; distinction be- 
 tween money units and utility, 75- 
 76 ; fiat money, 73-75 ; increase in 
 production of wealth, 71 ; David 
 Kinley on, 130; prices and an in- 
 crease in the, 123 
 
 Sweden, 235 
 
 Switzerland, 225 
 
 Token money, 315-316. See also Credit 
 money 
 
 Trade, invisible, 93-97 
 
 Trade dollar, 242, 347 
 
 Treasury, United States, circulation 
 statement, 413; gold standard, 360- 
 363; limitations of, 372; management 
 of, 360 ; reorganization of, 362-363 ; 
 status of, unchanged by Federal Re- 
 serve Act, 378 
 
 Treasury notes, 273-274, 319, 343, 354, 
 362-364 
 
 Trusts, 254 
 
 United States, Bank of. See Bank of 
 United States 
 
 United States, foreign trade of, 85-102, 
 256 
 
 United States, money in : bimetallic 
 period, 341-346; Bland-Allison Act, 
 348-354 ; bond syndicate, 358 ; de- 
 crease of gold reserve, 358-360; 
 effects of Federal Reserve Act on, 
 376, 378 ; effects of World War on, 
 383-384 ; endless chain of green- 
 backs, 359; fiat money, 346; five 
 epochs of, 341 ; gold exports after 
 1890, 357 ; gold standard, 346, 360- 
 365 ; kinds of currency, 363-365 ; 
 law of 1873, 346-347 ; lawful money, 
 353-354; "Hmping standard," 347- 
 354 
 
 Utility, 8 
 
 Value, definition of, 8 ; general rise or 
 fall of, impossible, 13; law of, 17-19; 
 money as a common denominator, 
 
 13 
 Veblen, T. B., 142//. 
 Victory loan, 386 
 Visible and invisible trade, gi-96 
 
 Wages, 107-108, 126, 164, 168; affected 
 by price changes, 128; in bad times, 
 
 153 
 Walker, Francis A., 67 
 Wampum, 178 
 War, 140, 276; effect of War of 181 2, 
 
 343 ; effect of World War, 379-387 
 Warburg, Paul M., 370 
 Wells, David A., 72 ti. 
 Wheat, value of, compared to money, 
 
 17-18 
 Wild-cat currency, 60 
 
ANNOUNCEMENTS 
 
MONEY AND BANKING 
 
 Revised and continued to the year igi4 
 By Horace White 
 xiv -I" 541 pages 
 
 The first edition of this book, published in 1S95, '" response to a 
 popular demand for information on the Money Question as a political 
 issue, met so adequately the need for a book on monetary banking and 
 theory which should be both a record and an interpretation of the finan- 
 cial history of the United States, that five successive editions have been 
 necessary in the period since that time. Each new edition has corre- 
 sponded to some marked advance in monetary science as manifested in 
 national legislation. 
 
 The fifth edition has been brought thoroughly up to date and con- 
 tains the full text of the Federal Reserve Act, with a chapter analyzing 
 and explaining the act. The text, therefore, now covers fully the three 
 significant steps in recent monetary legislation — the Aldrich-Vreeland 
 Act of 1908, the central bank plan of the National Monetary Commis- 
 sion, and the Federal Reserve Act. The treatment of money and bank- 
 ing abroad is equally up to date. 
 
 MONEY AND CURRENCY 
 
 Revised Edition 
 By Joseph French Johnson, New York University 
 423 pages, with charts and diagrams 
 
 A CLEAR and orderly presentation of the laws that determine the level 
 of prices and the rate of interest, and of the important part which 
 money and currency play in our great industries. In a closely reasoned 
 study the author develops the theory of money and credit advanced by 
 David Ricardo and John Stuart Mill, and shows by numerous illustra- 
 tions how it applies to the complex phenomena of to-day. The revised 
 edition, besides bringing up to date the review of monetary and bank- 
 ing legislation in the United States, gives a full analysis of the Federal 
 Reserve Act of December 23, 191 3, and considers the probable effect 
 of its operation. 
 
 GINN AND COMPANY Publishers 
 
SELECTIONS AND DOCUMENTS 
 IN ECONOMICS 
 
 Under the editorial supervision of William Z. Ripley, Harvard University 
 
 An application of the case system of the law school 
 to the teaching of economics 
 
 SELECTED READINGS IN ECONOMICS 
 
 Edited by Charles J. Bullock, Harvard University. 705 pages 
 
 SELECTED READINGS IN PUBLIC FINANCE (Second Edition) 
 Edited by Charles J. Bullock, Harvard University. 920 pages 
 
 SELECTIONS FROM THE ECONOMIC HISTORY OF THE 
 UNITED STATES, 1765-1860 
 Edited by Guy Stevens Callender, Yale University, xviii + 819 pages 
 
 SELECTED READINGS IN RURAL ECONOMICS 
 
 Edited by Thomas Nixon Carver, Harvard University. 974 pages 
 
 SOCIOLOGY AND SOCIAL PROGRESS 
 
 Edited by Thomas Ni.xon Carver, Harvard University. Sio pages 
 
 TRADE UNIONISM AND LABOR PROBLEMS (Second Series) 
 Edited by John R. Commons, University of Wisconsin, xiv -t- 62S pages 
 
 RAILWAY PROBLEMS (Revised Edition) 
 
 Edited by William Z. Ripley, Harvard University, xxxiv -f- S25 pages 
 
 TRUSTS, POOLS, AND CORPORATIONS (Revised Edition) 
 Edited by William Z. Ripley, Harvard University, xxxiii -(- S72 pages 
 
 SELECTED READINGS IN INTERNATIONAL TRADE AND 
 TARIFF PROBLEMS \Ja press\ 
 Edited by Frank William Taussig, Harvard University 
 
 READINGS IN SOCIAL PROBLEMS 
 
 Edited by Alfred Benedict Wolfe, University of Texas. 804 pages 
 
 184 
 
 GINN AND COMPANY Publishers 
 
NEW BOOKS IN THE SOCIAL SCIENCES 
 
 THE NATIONAL GOVERNMENT OF THE UNITED 
 STATES 
 
 By Everett Kimball, Professor of Government in Smith College. Svo, 
 cloth, 629 pages. 
 
 A TEXTBOOK which gives a new and fresh treatment of our 
 national government, never losing sight of the fact that the 
 Constitution is the supreme law of the land, and its interpreta- 
 tion by the Supreme Court is, until altered,' authoritative. 
 
 The aim of this book is to set forth for college classes the de- 
 velopment and present operation of the national government of 
 the United States. It differs from other textbooks in that it quotes 
 the actual words of the opinions of the Supreme Court, so that the 
 student is led to read and examine the decisions for himself. 
 
 IMMIGRATION AND AMERICANIZATION 
 
 Compiled and edited by Philip Davis, Lecturer on Immigration and 
 Americanization at Boston University, assisted by Bertha Schwartz. 
 Svo, cloth,' xii -t- 770 pages. 
 
 The only organized reference book covering the entire field 
 of immigration and Americanization. It contains the best liter- 
 ature on these subjects which has been produced from colonial 
 times to the present day. 
 
 CIVILIZATION AND THE WORLD WAR 
 
 By Anson Daniel Morse, late Winkley Professor of History in Amherst 
 College. l2mo, cloth, x -t- 664 + xxiv pages, illustrated. 
 
 What is civilization ? How do peoples become civilized ? How 
 was civilization attacked during the World War ? By what means 
 can we make for a better civilization ? To these questions 
 " Civilization and the World War " tries to find right answers. 
 
 182 a 
 
 GINN AND COMPANY Publishers 
 
PRINCIPLES OF POLITICAL 
 ECONOMY 
 
 By Thomas Nixon Carver, Professor of Political Economy in 
 Harvard University 
 
 x2mo, cloth, ix + 5SS pages 
 
 A NONTECHNICAL discussion of the problems of nation-building 
 designed by its scope and style to interest the general reader, and 
 fitted by its arrangement for classroom use. At no period in the his- 
 tory of democracy have men been compelled to think so seriously on 
 the question of the strength of democratic nations as at present, nor 
 has it ever been so apparent that national strength is largely economic. 
 This book examines the economic foundations of our national strength 
 and points out some of the more direct methods of improvement. 
 
 The discussion is aimed at the plain average citizen and at the student 
 who will be the average citizen of the coming years, since the people 
 themselves must understand the economic principles upon which 
 national greatness depends. The book is particularly recommended 
 for high-school seniors and for students beginning the study in college. 
 
 SOCIOLOGY AND SOCIAL PROGRESS 
 
 A HANDBOOK FOR STUDENTS OF SOCIOLOGY 
 
 By Thomas Nixon Carver, Professor of Political Economy in 
 Harvard University 
 
 Svo, cloth, Sio pages 
 
 Extracts from the more significant writings on social problems 
 of the last two centuries, classified and arranged in logical sequence 
 to give a systematic view of the subject. Although designed prima- 
 rily for juniors and seniors in our colleges and universities the general 
 reader will find it most readable. It may be used as a textbook, as 
 the basis of a course in sociology, or as a companion volume to one 
 of the various textbooks already in use. 
 
 GINN AND COMPANY Publishers