SS^S''^\S\\ \^ J* ^c iuppl The original of tliis bool< 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/cu31924030177483 Cornell University Library HG221 .N62 Suppl. Bankers' monc olin 1924 030 177 483 BANKERS' MONEY A SUPPLEMENT TO A TREATISE ON MONEY £y the same Author. Principles OF POLITICAL ECONOMY. Volume I., I5s. Volume II., 123. 63. Volume III., 16s. HISTORICAL PROGRESS AND IDEAL SOCIALISM. Sboond Thousand. Price Is. 6(1. STRIKES AND SOCIAL PROBLEMS. Price 3s. 6d. MONEY AND MONETARY PROBLEMS. Sixth Edition. Price 7s. 61I. AQENTS IN AMERICA THE MACMILLAN COMPANY 66 PIETH AVENUE, NEW TOKK BANKERS' MONEY A SUPPLEMENT TO A TREATISE ON MONEY BY jfsfflELD NICHOLSON, M.A., D.Sc. PROFESSOR OF POLITICAL ECONOMY IN THE UNIVERSITY OF EDINBURGH SOMETIME EXAMINER IN THE UNIVERSITIES OF CAMBRIDGE, LONDON, AND VICTORIA LONDON ADAM AND CHARLES BLACK 1902 1\ / PREFACE The following chapters are based on a series of Lectures delivered before the Society of Accountants in Edinburgh, the Institute of Accountants and Actuaries in Glasgow, and the Institute of Bankers in Scotland. Some corrections have been made, and the matter has been broken up and arranged in sections for the convenience of the reader, but no substantial changes have been- introduced, and the work bears throughout the impress of its origin. The success of the book on Money and Monetary ProUems (now in its 6th edition) has led the writer to hope that these additional chapters may also prove useful to the same class of readers. The treatment, as in the earlier work, is intended to be introductory and suggestive and such as may help to stimulate those engaged in practical business to a wider study of the principles and history of finance. J. SHIELD NICHOLSON-. Univbbsity of Edinbttegh, August 1902. CONTENTS CHAPTER I WHAT IS "money"? 1. The money of the money market of the United Kingdom — § 2. Its practical importance — § 3. General scope of argument — § 4. Different kiuds of material money— § 5. Representative money — § 6. On the use of economic methods — § 7. Necessary to separate the functions of money — § 8. Money as a general medium of exchange — § 9. Money as a standard measure of values — § 10. Money as a standard for deferred payments — § 11. On the meaning of stability of value in the standard — § 12. Money as a store of values— § 13. Rdsume of the argument— § 14. The definition and meaning of " money " must vary with its monetary function — § 15. The standard as determined by positive law — § 16. The medium of exchange line as determined bylaw — § 17. Gold itself strictly not money but money material — § 18. In monetary problems necessary to state what meaning of money is intended Page 1 CHAPTER II THE FOKEIGN EXCIfANGBS 1. Introductory — § 2. International debts — Exports and imports — § 3. Real par of exchange — § 4. Trade of countries and of individual traders — § 5. Other elements in international indebtedness com- pared with exports and imports — § 6. Exports and imports typical of all international debts — § 7. Traders in each country receive payment in money of that country — § 8. Meaning and object of foreign exchanges — ^§ 9. The mint par of exchange — § 10. Limits of fluctuations — Gold points — § 11. R&um6 and illustrations— § 12. Favourable and unfavourable exchanges — § 13. Historical and present importance of— § 14. Short and long exchange— § 15. Influence of rate of interest — § 16. Of state of credit^ § 17. Variable effects of depreciation of currency — § 18. First case— § 19. Second case— § 20. Third case— § 21. The silver -§ 22. Summary of results .... 22 mi CONTENTS CHAPTER III THE RATE OF INTEREST i 1. Interest on money and on capital distinguished — § 2. Illustrations — § 3. Difficulties in definition of capital — § 4. Interest on capital divided into PROFiT-interest and LOAN-interest — § 5. LoAN-interest — § 6. Interaction between the two rates — § 7. Interest is a price and subject to the laws of prices — Competition and monopoly — § 8. Widening of markets with progress — § 9. The supply of loan- able capital — Production — § 10. Efiective desire of accumulation — § 11. Security— § 12. Demand for capital, and first for unproductive purposes— § 13. Demand for productive purposes — § 14. Forecast — § 15. Efiects of war — § 16. Interest on loanable money — § 17. Importance of legal tender — § 18. Supply of legal tender inelastic — ^§ 19. The bank rate and the market rate — § 20. Interaction of interest on capital, and interest on money as such — § 21. Pro- bable effects of great gold discoveries — § 22. Practical illustra- tion Page 42 CHAPTER IV COMMERCIAL CRISES § 1. Monetary and commercial crises distinguished — § 2. In monetary transactions ultimate solvency not sufficient — § 3. Deferred con- vertibility and suspended convertibility — § i. Possible over-issue of bank notes — § 5. Same principle applicable to other forms of credit — § 6. Banks of deposit and banks of issue — § 7. Deposit banks subject to little legal control— § 8. Causes of financial crises — Insufficient reserve— § 9. The credit superstructure — § 10. Causes of commercial crises — Over-speculation — Historical Cases — § 11. Similarity in development — § 12. The tulip mania— § 13. Other speculative manias— § 14. Other causes— Excess of fixed capital — § 15. Over-production — § 16. Raw materials and the seasons — § 17. The sun-spot theory— § 18. Theory of credit cycles— § 19. Importance of reference to history 63 BANKERS' MONEY A SUPPLEMENT TO A TREATISE ON MONEY CHAPTEE I WHAT IS " MONEY " ? § 1. The money of the money market of the United Kingdom. — In a very able address on the Constitution and Course of the Money Market, delivered in 1888 by Dr Charles Gairdner, late manager of the Union Bank of Scotland, the intro- ductory sentences are as follows : " The money market of the United Kingdom is an institution of great importance and of some complexity. It has gradually grown to enormous proportions, and embraces a fund almost equal in amount to the sum of the National Debt. This fund is held by the banks, is practically at call, and is repayable in gold; and yet ninety-five per cent, of it is engaged in promoting the industries and material interests of the country and the world, while only five per cent, is actually held in coin." If you consider carefully the meaning of this statement. 2 BANKERS' MONEY it must strike you that, in spite of your familiarity with the state of things described, it is a very ex- traordinary statement. The fund of money of the money market is, on this calculation, over £600,000,000 in amount ; 95 per cent, of it is apparently not in the market at all, that is to say, not in the banks by which it is said to be held ; and only 5 per cent, is actually in coin. It may be added also that the total amount of coin in the United Kingdom is only about one- sixth of the total money of the money market as given by Dr Gairdner, and it is not in any sense under the control of the banks, but is being circulated from hand to hand. § 2. Its p7'actical importance. — Since, then, the greater part of the " money " of the money market is not metallic money, the question is, " What is it ? " It is no doubt something very real, for, as we all know, the abundance or scarcity of " money " affects the rates charged by banks for advances and discounts, and in that way affects the whole trade of the country. When the scarcity of money becomes extreme, we have indeed a commercial crisis, and for the time being all the trade of the country is thoroughly disorganised. And we know also by experience that at times of crisis the amount of metallic money or money material held by the banks is of the most vital importance. In the words of Walter Bagehot, the author of Lombard Street, and a banker and an economist of the first rank, " All our credit system depends on the Bank of England for its security. On the wisdom of the directors of that one joint-stock company it depends whether England shall be solvent or insolvent." And if the precise WHAT IS "MONEY"? 3 method of stating the truth seems rather overstrained, there is no question of the central fact. Once the real gold reserves available for banking purposes get below a certain level — which again is variable accord- ing to circumstances — the whole monetary system of the country becomes clogged, and for the time almost unworkable. § 3. GeTieral scope of argument. — The subject I propose to discuss in this and the following chapters is in reality " The Constitution and Functions of the Money Market." In the first chapter I shall examine the meaning and nature of the term '' money " ; in the second I shall examine under the title of the " Foreign Exchanges " the interaction of the " money " of differ- ent countries ; in the third I shall treat of the rates charged for loans of " money " under the title of the " Eate of Interest " ; and in the fourth, I shall give some account of the disorganisation of the money market under the title of " Commercial Crises." On each of these topics it would be much more easy to write a treatise than a chapter, and in each of them also the familiarity of the terms employed conceals great difficulties. Accordingly, at the risk of appearing too simple, I shall give most attention to the funda- mental principles ; but at the same time, in order not to appear too theoretical, I shall endeavour to illus- trate the principles by reference to concrete facts of striking importance in themselves. 8 4. Different kinds of material money. — In dealing with the question What is " money " ? we may begin by a rapid survey of the various " things " that have been in the past or are in the present actually called 4 BANKERS' MONEY " money." You will find in the book on Money, by the late Professor Jevons, an interesting account of a great variety of primitive kinds of money — e.g., cattle, slaves, tobacco, dried fish, straw mats, skins, and many others. You will also find in the very remarkable and learned work of Professor Eidgeway on the Origin of Currency and Weight Standards excellent illustrations of the beginnings of the evolution of "money." In the course of progress the metals gradually displaced other substances ; in the struggle for monetary exist- ence amongst the metals, silver and gold were the survivors ; next, in the duel between gold and silver, for centuries silver held the supremacy ; and it is only in the last quarter of a century that gold has obtained the position of being practically the world standard for material money. § 5. Representative money. — Long, however, before the battle of the standards had become critical, some of the most important " money " functions had come to be performed by other " things," these other "things" being embraced by Jevons under the comprehensive term " representative " money. The substance of all these things, if it can be called substance, is in effect credit ; and although for certain purposes bank notes seem to have more of the nature of metallic money than do bills of exchange or cheques, as a matter of fact, in the money economy of the present day, bills of exchange, and especially cheques, are of far greater importance than bank notes. You might without much incon- venience abolish bank notes and carry on all internal trade and all foreign trade by coin, cheques, and bills WHAT IS "MONEY"? 5 of exchange, but without cheques and bills or some- thing of the same kind our present monetary system would be impossible. These various instruments — these credit documents — perform most important monetary functions ; of this fact there can be no doubt. The latest return of the London Bankers' Clearing-House gives nearly 10,000 millions sterling as the amount of the cheques, bills, etc. for the year 1901. I have said that bank notes are now of relatively small importance, but it was not always so. The history of Scottish bankiag in particular shows of what vital importance were the one-pound notes, and by no one has this importance been better brought out than by Sir Walter Scott in his famous letters on the Currency to the editor of the Edinburgh Weekly Journal, under the pseudonym of Malachi Malagrowther. The publication of these letters, it may be said, preserved for Scotland its one-pound note. The one-pound note, — this is the sum of Sir Walter's argument, — "converted Scotland from a poor, miserable, and barren country into one where, if nature has done less, art and industry have done more, than in any country in Europe, England herself not excepted." § 6. On the use of economic methods. — And here, if you will allow me, I will interject a general remark on the study of economies. It is necessary in the first place to get a real grip of economic methods, and especially of the method of abstract analysis. If you start at once with what you are pleased to call facts, you will make no progress whatever ; you might 6 BANKERS' MONEY as well hope to understand botany by taking at random a barrow-full of weeds and making your own classifications and dissections without reference to the science of the subject. You must in economic science in general, and in monetary science in particular, get firm hold of leading principles, or, if you prefer, of guiding hypotheses ; you must not be afraid of abstract reasoning. Thorold Eogers, who collected an invalu- able mass of materials in his great work on the history of Six Centuries of English Prices, fell into the most serious errors in his commentaries and deduc- tions, simply because he despised and failed to under- stand the abstract theory of money and prices.* The corresponding work for France, also for six centuries, by Vicomte d'Avenel, is in this respect far superior to that of Rogers, because the author has taken the trouble to make himself a master of theory. You must, then, begin with theory — abstract, hypothetical theory. But it is equally important to observe that you must end with facts and with history; your theory is only prehminary. And in dealing with historical facts, you must not expect to find them all nicely cut and dried and ready to be ticketed with some par- ticular form of some particular theory. Eeal facts are never isolated in this way ; they are intermingled with all kinds of other facts, and that is why you require your analytic methods to make the separation. And, moreover, facts of one kind being so intertwined with facts of other kinds, you must be prepared to * There is similar weakness in his most interesting work on the First Nine Years of the Bank of Englamd. WHAT IS "MONEY"? 7 search in very unlikely places. Most of you will not look naturally to Sir Walter Scott for the history of Scottish banking, but on the important phase to which I referred he may rank as an authority; and I may say incidentally that there is more economic history, that is to say history dealing with the real life of the people, in the novels of Sir "Walter Scott than in any general history with which I am acquainted. I apologise for the length of this digression, and turn again to my abstract theories. § 7. Necessary to separate the functions of money. — Seeing, then, that in actual usage the term money is so variable, it is hopeless to begin with the so-called facts ; we must take our monetary system to pieces to discover the working ; in other words, we must consider separately the various functions of money. We shall then find that the reason why it is so difficult, if not impossible, to frame a definition of "money" which shall include all the " things " actually called " money," — the reason is that some of the functions of money are best performed by some things and others by other things. This is true even of the so-called primary functions, and only when we have examined these primary functions shall we be able to determine if a simple definition of money is possible. S 8. Money as a general medium of exchange. — The Urd great function of money is to provide a general medium of exchange. It is usual to begin an account of this function by reference to the inconveniences of barter, as in the example of the prima donna on a voyage round the world, who, in exchange for her songs in the Society Islands, was to get a third of the receipts. 8 BANKERS' MONEY When counted, her share consisted of three pigs, twenty- three turkeys, forty-four chickens, four thousand cocoa- nuts, and large quantities of bananas, lemons, and oranges. The only method of saving this -svealth was to set the live stock to devour the fruit, and although this may be called a primitive form of banking, it is highly inconvenient. After some such preliminary statement of the incon-. veniences of barter, and the insinuation that barter is only proper for savages, it is usual again to drag up barter from these lowest deeps and to set it on the highest pinnacle of civilisation. We are told that all exchange is in reality barter, that commodities pay for commodities, and that money is only an intermediary. That trade is incapable of development when confined to direct barter, and also that all trade is in the last resort barter, are both truths of the highest importance. And both propositions being true, the appearance of con- tradiction must be an appearance only. All the difficulty would be avoided if it were stated that all exchange is ultimately barter, but that " money " is in general a necessary intermediary. To describe money as " only " an intermediary is to suggest, at anyrate, that it might be dispensed with. And if by " money " we mean exclusively metallic money, that is perfectly true ; but if we mean that the monetary function, as performed by some representative of this metallic money, can be eliminated and dispensed with, that is perfectly false. You can only realise the fundamental importance of this primary monetary function by tracing the stages of industrial progress. The gradual substitution of ex- change by money for exchange by barter has been one of WHAT IS "MONEY"? 9 the greatest agencies in civilisation. Without money in its simplest form, that is in the shape of cattle or skins or some material thing generally desired and acceptable, trade would have been strangled in its infancy. And without money in its most highly developed form, that is in the form which it assumes in banking, modern industry would be impossible. In any just analysis banks are as necessary to production as are ships, railways, or factories. But before leaving this primary function of money, that is, as a medium of exchange, we may go one step further. It is not necessary in modern commerce that some credit document, such as would be taken by a banker, should directly represent so much coin at every transaction. Besides cheques and bills, there are book credits, and even book credits are not necessary. It is sufficient that the commodities to be exchanged shall be expressed in terms of money, and in this case a relatively small balance (if any) of money need be transferred. In the case of international trade, indeed, we often have cases in which commodities are directly exchanged for commodities without the intervention of any form of credit. In this and similar cases, however, the monetary function passes into that of a measure of values. Both sets of commodities are measured in terms of money, and this is very different from simple barter. S 9. Money as a standard measure of values. — It is time to observe then, secondly, that money is required not only to furnish a common medium of exchange, but to provide a standard measure of values, or common measure in which all values can be expressed. lo BANKERS' MONEY The necessity for a common measure of values appears very early in history. Thus, in the early medieval period, when rents were actually paid in the shape of so much labour or so much produce, it became customary to measure the values in terms of money. And in our own times valuations are made for all kinds of purposes as well as for actual ex- changes. Thus, historically and actually, we may separate the function of money as a measure of values from the function as a medium of exchange. But the two are so closely connected, that though there may be measurement without exchange, there cannot be exchange without measurement, that is, in the ordinary course of modern trade. In spite of this close connection, however, it is important to observe that the actual medium may not itself be the standard measure ; it is enough if it is related to the standard as multiples or sub-multiples, or in any exactly determinate way. At present, in the United Kingdom, the sovereign is the standard unit of value ; all values are measured in numbers, or in parts of sovereigns or pounds sterling. But the actual payments may be made by bronze, silver, notes, cheques, or entries in books. And the unit of value which itself constitutes or determines the standard measure need not itself be a coin at all. Thus, in most European countries the standard unit of value was originally the pound of silver, but there was never a coin of that magnitude or ponderosity. In fact, for centuries in England, though the standard measure was the pound of sterling, the only coins of any importance were silver pennies — the table, twenty WHAT IS "MONEY"? ii pennyweights one ounce, and twelve ounces one pound, shows the original relation of the penny coin to the pound measure : the pennyweight was literally a penny weight. If all transactions and exchanges were effected immediately, anything that is universally accepted would serve as a standard measure of values. Thus, for example, inconvertible bank notes, at any 'particular moment, will effect exchanges just as well as convertible notes or coins. If others accept the notes at the same valuation in any market, that is sufficient. But as soon as we consider the production of things, we pass from a moment of time to a more or less prolonged period of time. § 10. Money as a standard for deferred payments. — It is this element of time which gives rise to a third primary function of money, namely, to provide a standard for deferred payments. Both theoretically and practically this function of money presents the greatest difficulties. The real meaning of any monetary contract is liable to be disturbed by fluctua- tions in the value of the monetary standard. Here, again, the best and most easy example is in- convertible paper. Suppose the notes were constantly changing in value, and that in the course of a week or a year you had to pay for every new purchase twice as much in notes, whilst for your old contracts, includiag your income, you only receive the old amount of notes, obviously you would be deprived of half the purchasing power of your money. That is the essential evil of inconvertible paper; it fluctuates in value, and vitiates the real meaning of contracts. In 12 BANKERS' MONEY extreme cases it ceases to fulfil this function of money- altogether, and monetary bargains are made on some other basis in spite of legal prohibitions and penalties. Now what is true of inconvertible paper in a magnified form is true of every standard for deferred payments in a greater or lesser degree. You make a contract on a gold basis — you will no doubt receive so much gold, or what represents so much gold, when the contract matures ; but what the value of that gold will be depends entirely on the course of prices in the meantime. And, as a rule, if you take any selection of representative commodities, there is some movement in prices ; that is to say, so much gold purchases more or less of various things and services. § 11. On the meaning of stability of value in the standard. — So long as the conditions of production and of demand are liable to change, it is impossible to get any standard with absolute stability of value, and the utmost we can aim at is relative stability of value. To attain this end we may eliminate certain common causes of fluctuation. Thus, for example, as regards supply, it is quite clear that if you have a very large durable stock, the variation in the annual pro- duction will be of minor importance. The annual supply of gold, for example, is always small relatively in the total world's supply, unlike the annual supply of wheat. Thus, so far, gold is a better standard than wheat. Again, for some things there is a fluctuating demand, and for others relatively a steady demand ; and here again gold has the advantage compared with other substances that at different times have been used as money. WHAT IS "MONEY"? 13 At first sight it seems as if the want of stability of value in the standard itself is a very terrible thing ; but in this world there is perhaps nothing practical which attains the perfection of theory, and fortunately within limits this want of perfection is under ordinary conditions of no practical importance. Your yard measure expands and contracts with every change in temperature, but for ordinary purposes this is of no importance. In the accurate measurement of time, however, such contraction and expansion must be allowed for, and you have great skill displayed in making compensations in chronometers ; and similarly in certain astronomical observations and calculations an error in the instrument of the smallest degree may vitiate the result, and incidentally send a big ship to the bottom of ocean. Fortvinately, as regards value, no such precise measurements are required for practical purposes — everything is, as a rule, done within reasonable margins. It is only occasionally, with very great change in the conditions of demand or supply, that serious changes occur in the value of the money material that constitutes the standard. On such occasions there may be a very real disturbance of the meaning of monetary contracts and a very real dis- turbance of the distribution of wealth. Even in this case, however, the evil ought not to be exaggerated. The loss of one is the gain of another in any monetary disturbance, and the evil only becomes serious where the uncertainty actually dominates the volume of trade and production. § 12. Money as a store of values. — To the three primary functions of money already considered we may 14 BANKERS' MONEY add a derivative function. Money may be used as a store of values. In its elementary form this function is extremely simple — it consists simply of hoarding so much actual metal. But in the course of development this function of money has also become much more difficult of comprehension. To pay money into a bank by means of a cheque is very different from putting — according to the French idiom — ^ little sous into a big stocking. In the case of the cheque, the only material difference consists, as a rule, in the change of a few figures in the books of one or two banks. And yet we speak as if the money were " stored " in the bank. § 13. R4sum6 of the argument. — Thus, again, we are led back to the original question propounded as the problem of this lecture, namely, What is " money " ? What is this " money " that I put in the bank when I pay in a cheque, and What does the bank do with the "money"? We may indeed ask not only What is the " money," but Where is the " money " ? The answer to the question " What is money ? " which serves to cover most of the popular usages, is the answer given in the late Professor Walker's book on Morhey — " Money is that money does " — or, in other words, anything which performs the functions of money may be classed as money. But then all the difficulties of the definition reappear when we ask the further question : In order that a thing may be classed as money, must it perform all the functions or only one or two of these functions ? Take, for example, concrete cases : In this country, for practical purposes, the gold coinage only fulfils all the functions. Gold only is compulsory legal tender under WHAT IS "MONEY"? 15 all conditions for the fulfilment of monetary contracts ; Bank of England notes, for example, are not legal tender by the bank itself, and other bank notes are still more restricted as regards this function ; even the other coins made of silver and bronze, though popularly classed as money, have only a limited acceptance — they are, indeed, "token" money, and legally on the same footing as bank notes except for small payments. The sovereign, again, is, in this country, the only standard measure of values ; it is so, however, simply because the law has so determined. When a country is obliged to resort to inconvertible paper, it very often prohibits the use of gold as a standard, and by penalties tries to make its notes the standard. If we refer back to history we find examples of what is called the double standard, or better the alternative standard of gold or silver — that is to say, at the option of the debtor a monetary contract might be met by so much gold or so much silver, the rate being in general determined by law. On various grounds economists have proposed other standards, as, for example, an amalgam of gold and silver, or notes representing so much gold and silver. Again, in this country gold is the standard for deferred payments. Take the National Debt : it is repayable in gold, though it may not be repaid for centuries. Similarly as regards many perpetual debentures, the interest is payable in pounds sterling — that is to say, gold. But when we take very long periods, changes in the value of the standard may be of practical importance. In this case we have all i6 BANKERS' MONEY the difficulties connected with appreciation and de- preciation, some of which will be considered in connection with the " Foreign Exchanges." To remedy these difficulties some economists have proposed a tabular standard. In effect, this is a composite standard composed of a number of representative commodities. It is assumed that the debtor will covenant to pay not so much gold, but so much purchasing power, and thus the amount of gold money to be paid would vary with the course of prices. Finally, when we consider the function of money as a store of value, the most important store is, in this country, the reserve of gold in the Bank of England. Most of the rest of the money that is deposited or stored in our banks is only "represen- tative " money ; it is only supposed to be repayable in gold. As a matter of fact, if all the so-called money which is supposed to be repayable at call were demanded at the same time, only a very small percentage could be paid. But although all this " bank " money could not be changed into gold at any particular time, and although it only represents gold in the highly conventional sense that it is re- payable in gold, if demanded, it is not to be con- sidered as in any sense unreal or intangible. The funds of the banks which are not represented by gold are represented by other forms of property, as, for example, by the produce and manufactures against which bills are drawn and are taken to the banks for discount, and also by the Government and other securities which are really mortgages over the property of the nation or of companies or of individuals. WHAT IS "MONEY"? 17 It was said by Sir James Steuart, a great writer who preceded Adam Smith, that any form of property could be melted down into bank money. But the aggregate amount of this " bank " money must always depend partly on the amount of the real reserve available, and partly on the nature of the demands likely to be made on this reserve. The progress of bankiug in one important respect is shown by the diminution in the proportion of gold reserve to liabilities which it is necessary to keep, and this again depends partly on the demands for gold for cir- culating purposes — including transmission abroad — and partly on the credit of the banking system as a whole. § 14. The definition and meaning of " money " must vary with its monetary function. — It would obviously be absurd to say that only the gold of the money market is money, and still more absurd to go to the other extreme and say that the other forms of property pledged directly or indirectly to the banks are money. If, then, for the last time we put the question : What is " money " ? — As the result of our inquiry into the monetary functions, the only satisfactory answer appears to be that we must recognise that there are various kinds of money, and that the definition must vary according to the monetary function that we are considering. In reality, instead of trying merely to frame a verbal definition, we ought always to make clear the different monetary functions. And a good practical rule is, as in other similar cases in economics, to use quahfying adjectives indicating the kind of money or the kind of monetary function to be considered. i8 BANKERS' MONEY § 15. The standard as determined hy positive law. — The standard of value in any country is exactly determined by the law of that country, and this definition governs the interpretation of all monetary contracts. How far the use of such a standard is compulsory is also a matter of law, and how far the law can be carried out depends partly on public opinion. As a matter of fact, at the present time most commercial contracts in this country are expressed in terms of " money,'' that is to say, in terms of the pound sterling ; but if people so desire, there is nothing to prevent them making bargains to make payment according to a tabular standard or any other standard. But, as a matter of history, in the course of time the governments of all countries beyond a certain stage have adopted as their standard some definite amount of gold or silver (and in some cases an alternative at a certain rate). At the beginning of last century England formally adopted the gold standard, and in the last thirty years the gold standard has been adopted to such an extent that it may now claim to be the commercial standard of the world. The gold moneys of the different countries are in this way related accord- ing to the amount of fine gold they contain. In certain countries, however, silver is still the standard, and in others there are various legal standards which are only indirectly or partially on a gold basis, as, for example, the rupee in India. These other standards, however, for the purposes of international trade, may be reduced to terms of gold at any particular time.* § 16. The medium of exchange line as determined * Compare the chapter on " The Foreign Exchanges." WHAT IS "MONEY"? 19 ly law. — The "medium of exchange in any country which people Wjust accept in satisfaction of a debt when offered by the debtor is also a matter of law, and how far its compulsion can be extended to future contracts is a matter of Government and public opinion. How far, as a matter of fact, people may and do accept other means of settlement in place of legal tenders is a matter of habit and convenience, and how far such acceptance is final or irrevocable is a matter of law. These various " things," which locally and temporarily so far fulfil the function of money as a medium of exchange, may be said to represent, or to be based upon, standard money — that is, in most countries, gold, directly or indirectly. Thus, gold in gold- standard countries may also be said to be the fvmda- mental medium of exchange, though in some cases the foundation may be in bulk and value relatively small compared with the ^superstructure. The actual use of gold may be economised to a marvellous extent by the use of " representative " money ; but it cannot be dispensed with altogether, any more than the founda- tion of a building. § 17. Gold itself strictly not money hut money material. — Gold, then, under present conditions certainly fulfils all the monetary functions to a degree that is not true of anything else. But, to raise one last difficulty for purposes of illustration, gold itself is not money but only money material, and therefore so far only representative of " money." At the time of the great Australian gold discoveries in the early 'Fifties, gold in South Australia is said to have fallen to 45s. an ounce, and in Victoria to 60s., as compared 20 BANKERS' MONEY with the mint price of £3, 17s. 10|