The Online Library of Liberty

A project of Liberty Fund, Inc.

• Political Economy
• Part I.: Character and Logical Method of Political Economy.
• Part II.: Production.
• Chapter I.: Land and Natural Agents.
• Chapter II.: Labor.
• Chapter III.: Capital: Its Origin and Office.
• Chapter IV.: The Productive Capability of a Community.
• Part III.: Exchange.
• Chapter I.: The Theory of Value.
• Chapter II.: The Theory of International Exchanges.
• Chapter III.: Money and Its Value.
• Chapter IV.: Money and Its Value—continued—debased Coin: Seigniorage.
• Chapter V.: Inconvertible Paper Money.
• Chapter VI.: Bank Money.
• Chapter VII.: The Reaction of Exchange Upon Production.
• Part IV.: Distribution.
• Chapter I.: The Parties to the Distribution of Wealth.
• Chapter II.: Rent.
• Chapter III.: Interest.
• Chapter IV.: Profits.
• Chapter V.: Wages.
• Chapter VI.: Wages.—continued.
• Chapter VII.: Two Other Shares In Distribution.
• Chapter VIII.: The Reaction of Distribution Upon Production.
• Part V.: Consumption.
• Chapter I.: Subsistence: Population.
• Chapter II.: The Appearance of New Economic Wants.
• Chapter III.: Consumption: the Dynamics of Wealth.
• Part VI.: Some Applications of Economic Principles.
• I.: Usury Laws.
• II.: Industrial Co-operation.
• III.: Political Money.
• IV.: Pauperism.
• V.: The Doctrine of the Wage-fund.
• VI.: The Multiple Or Tabular Standard of Deferred Payments.
• VII.: Trade Unions and Strikes.
• VIII.: The Knights of Labor.
• IX.: Attacks On the Doctrine of Rent.
• X.: The Nationalization of the Land.
• XI.: The Banking Functions.
• XII.: The Present Banking System of the United States.
• XIII.: Foreign Exchanges.
• XIV.: Bi-metallism.
• XV.: The Revenue of the State.
• XVI.: The Principles of Taxation.
• XVII.: Protection Vs. Freedom of Production.
• XVIII.: Socialism.

PART III.

EXCHANGE.

CHAPTER I.

THE THEORY OF VALUE.

111. Exchange as a Department of Political Economy.—We have seen that there is a tendency among recent writers to abolish the familiar departments of political economy, severally known as production, exchange, distribution and consumption, as interfering unduly with the simplicity and perhaps with the dignity of the science they have chosen to cultivate. Even of those who have retained certain of these titles, there is a general consent at least to abandon exchange, as a department of political economy.∗

I am disposed to think that this general abandonment of exchange, as a distinct title in political economy, is due to a confusion of exchange with trade or commerce, viewed as productive agencies. It is seen that the most of what is done in trade or commerce pertains to the production of wealth. The labor employed in packing or baling goods, in transporting them to market, in opening and exposing them for sale, is engaged in the production of wealth, equally with that employed in raising the raw materials from the ground, or fashioning them into merchantable shapes. Values are created as truly in the one case as in the other. Even the labor of the clerks and salesmen is productive labor as much as that of the artisan or the agriculturist. The horses and wagons, the locomotives and cars, the shops and warehouses, of trade and commerce are strictly productive agencies.

What is it, then, that need be considered under the title, exchange? What is left, after production has been fully treated? Why should this department of political economy be retained?

Under the title, exchange, in a systematic treatise on political economy, I would consider the Ratios of Exchange, the terms on which goods, commodities, articles possessing value, items in the sum of wealth, exchange for one another. We are here called to answer the question: Why does so much of this commodity exchange for so much of that? Why not for more? Why not for less?

Such a question, it appears to me, can best be treated apart from the exposition of the physical conditions under which wealth is produced (as, for instance, the efficiency of the division of labor, or the diminishing productiveness of land); apart from the discussion of the forces by which the product of industry is distributed in wages, interest, profits, rent; apart, also, from the question, what effects upon the future production of wealth will be wrought by giving one direction, or another, to the consumption of the existing body of wealth.

112. Exchange Arises out of the Division of Labor.—The occasion for exchange arises out of the division of labor. Were all persons engaged in the same productive avocations, there would be no inducement to exchange. To barter fish for fish, or bread for bread, would be simply a waste of time and energy. It is because men first divide in production that they afterward unite in exchange. It would be easy to conceive a community in which each producer should be engaged in precisely the same work as every other, each raising from the ground or making by the labor of his hands all that he were to eat, drink or wear. In such a situation, all that has been said of the causes of the varying efficiency of individual laborers would hold good; all that has been said concerning “diminishing returns in agriculture,” all that has been said of the origin and office of capital, would still hold good. But there would be no actual exchange, because there would be no division of labor.

Let, however, the production of the individuals of a community be varied by ever so little, the occasion for exchange will arise. If one agriculturist raise wheat, another rye, another potatoes; and if others raise, some cattle, some sheep, some swine, the products will soon begin to be exchanged. Then the question will arise, how much wheat shall be given for a bushel of rye or potatoes; how many sheep or swine for an ox?

Let the principle of the division of labor be carried further, until a score or a hundred of mechanical arts and trades and half a dozen learned professions come to be recognized, and the occasions for exchange will rapidly extend to a large part of the entire production of the community. The farmer may still consume a half∗ of his own corn and beef and potatoes, but the smith will scarcely consume the product of his own labor for three days in the year; the boot-maker will be content with one out of fifty pairs of boots he makes in the same time; the physician will probably take none of his own medicines.

113. An Exchanging Class.—And it will result, either that these persons, having occasion to exchange their products for those of others, will have to give up an appreciable portion of their time to making those exchanges in person, or else, the work of making exchanges will become the subject matter of a new profession or avocation.

If the smith can in one day make as many horseshoes as the farmer could in ten; and if the farmer can in one day do as much in raising wheat as the smith could in two or three, it is evident that the peddler or shopkeeper who enables the farmer to keep steadily at work raising wheat and yet have shoes for his horses, and the smith to keep making shoes and nothing else, and yet have bread to live upon, is a productive agent as truly as smith or farmer.

Just as the division of labor between the individuals of a community gives rise to exchange, so the extension of the same principle to the communities of any country, or still further, to all the countries of the world, creates new occasions for exchange and rapidly multiplies the objects to be exchanged. In all these successive cases the agencies by which exchanges are effected: the labor of the men engaged in trade or transportation; the horses and wagons, the steam-cars and ships; the services of the clerks who write orders for goods and keep account of sales and payments, of the bankers who advance the requisite capital or remit the proceeds of commercial ventures, even of the shipping reporters and financial editors who supply the information upon which merchants and bankers alike must act, all these agencies are as truly productive of wealth as the labor of mechanics or miners or agriculturists, and are to be treated under the title, production.

We have, under the title exchange, only to investigate the principles which determine that so many dozens of wood screws made in Providence or so many pounds of horseshoe nails made in Troy, shall purchase so much of the wheat of Illinois, the tobacco of Kentucky, the sugar or molasses of Cuba, the tea of China.

114. Value.—Whence comes this power-in-exchange? What are its conditions, and what its limitations?

We have defined value as the power which an article confers upon its possessor, irrespective of legal authority or personal sentiments, of commanding, in exchange for itself, the labor, or the products of the labor, of others.

But let us go further, and inquire how it is that one article confers on its possessor such a power, while another does not; why it is that, of two articles of value, one confers the power of commanding the labor of others for weeks or years, while another is parted with for the service of a day or an hour.

115. Value and Price.—But, first, let us introduce a term, the use of which is not absolutely necessary at this point, but which will, nevertheless, save much circumlocution, and perhaps avoid a liability to misunderstanding—that term is Price. Value is, briefly speaking, purchasing power, or power in exchange. Price is purchasing power expressed in terms of some one article; power-in-exchange-for-that-article, be the same wheat, or beef, or wool, or gold, or silver. In common speech the word price brings up the idea of money-value, the purchasing power of an article expressed in terms of money. Yet it is equally correct to say that the price of a horse is seventy-five bushels of wheat, as to say that it is one hundred dollars. Inasmuch as we have not yet introduced the money function into our discussion, the word price, throughout the present chapter, will be understood in its more general sense, as the purchasing power of a commodity expressed in terms of some other article.

116. Distinction between Value and Utility.—In setting out upon our search for the law of value, a distinction of great importance requires to be made. Value must be severely distinguished from utility. Many economists of merit have stumbled at this point. Even of those who have observed the distinction between the two conceptions, some have resorted to unfortunate terms for their characterization, and have written of value in use and value in exchange. Now, value in use is utility, and nothing else, and in political economy should be called by that name and no other. Value is power-in-exchange, and, therefore, the term value-in-exchange is seen to be a bad one, at once clumsy and misleading.

Nor must it be thought that value and utility have any such necessary and constant relation to each other that one may safely be used for the other. On the contrary, an article may have the highest conceivable utility, yet no value.

The utility of atmospheric air is inexpressible. Atmospheric air has usually no value, because it is supplied naturally, in such abundance that any one can have as much of it as he has occasion to use without giving for it either his labor or the products of his labor. Even atmospheric air may, however, acquire value and be sold at a regular, definite price, so much per cubic foot, as when delivered through pipes to a diver beneath the surface of the ocean.

The utility of water is also beyond expression, yet ordinarily water has no value. In cities, however, water is delivered to householders at fixed rates, supposed to represent the cost of the service by which the fluid is stored, conducted and delivered. Water, though ordinarily to be had gratuitously, may thus acquire value. On the other hand, something may even be paid for merely getting rid of it. A party may enter into a contract for pumping it out of a mine, or a swamp, or a cellar, at so much a gallon. A much higher price is often paid for removing the fluid from the place where it is not wanted, than is commonly paid for bringing it to the place where it is wanted.

But while utility and value must not, in economic reasoning, be used interchangeably, as they so often are in ordinary speech, utility is everywhere one of the elements of value. It is always present, where value is present. It can not be assumed that a man will give his labor or the products of his labor for that for which he has no use.

117. Useful does not mean Beneficial. — It needs to be observed that the utility of which the economist speaks is not always the utility recognized by the moral philosopher or the physiologist. By that term the economist signifies only that an article answers a felt human want; that men have a use for it.

The appetite from which that sense of want arises may be vicious, the object itself may be prejudicial, even pernicious. Intoxicating liquors are, in their main uses, injurious to body and to mind; but so long as men want them, they have utility, in the economic sense. So long as men want them and can only get them by giving something for them, they have also value. Nay, the prussic acid which a desponding wretch buys of the druggist has its value as truly as the medicine which a father buys to save his child's life, and has its utility, in the economic sense, as well.

118. Is Value a Momentary Phenomenon?—We say, value is power-in-exchange. Some writers, using this definition, have proceeded to argue that value is a momentary phenomenon, beginning and closing with the act of exchange, and that an article has value only when it is exchanged; only while it is exchanging.

Is not this to confound our knowledge of a thing with the thing itself? A man owning an article can not know precisely what it is worth until he comes to exchange it. But it may all the time be beyond the possibility of doubt that the article has purchasing power; it would bring something in an exchange.

One owns a house in New York. He can not know at any given time, without resort to an actual exchange, what its value is, since value is power-in-exchange, and to an exchange, as to a quarrel, there must be two parties. The owner's personal estimate does not fix the value, which may prove much below that estimate. But while the owner may not know what is its power-in-exchange, there may be no room for doubt that it has such power. If it would not sell for %30,000, his estimate, it would bring %10,000 in any conceivable state of the market; but if it only brought %5,000, or %5, it would have value.

A farmer in Illinois has 1,000 bushels of wheat, and sells 500 bushels at %1.50. He knows that the remaining 500 bushels have value; but, just what that value is, he can not know. That the wheat would go off at some price, is beyond question; but it might take a considerable reduction, say to %1.45 or %1.40 to carry it off; or, on the other hand, a change in the market might put the price up to %1.55.

There are, indeed, circumstances where a man may not be able to know that an article in his possession has value unless he actually finds a purchaser for it. These are cases where the value of an article is, at the best, low; or where the uses of an article are few, and the demand for it spasmodic and intermittent. But to say that value is a momentary phenomenon, only emerging in the presence of a purchaser, and remaining only during the consummation of a bargain, seems much like saying that a body has weight only while some one is lifting it.

119. What is the Relation of Labor to Value?—We have said that value is the power which an article confers upon its possessor, irrespective of legal authority or personal sentiments, to command in exchange for itself the labor, or the products of the labor, of others.

Does that power arise solely and necessarily from the fact that labor has been bestowed upon the production of that article? No. It is true that men do not commonly give labor for that which has not cost labor; and that, on the whole, and in the long run, the respective values of a number of articles will, at least in the same community,∗ be nearly according to the amounts of labor that have been expended upon them, severally. But it is not because an article has cost labor that it possesses value. That is because it can not now be obtained without labor. In any given instance it is not necessary that a thing, to have value, should itself have cost labor in any degree; while it is not at all uncommon to find an article having a value equal to that of another article which cost twice as much labor as itself.

120. Prof. Senior's Statement.—Prof. Senior remarks: “Any other cause limiting supply, is just as efficient a cause of value in an article, as the necessity of labor to its production. And, in fact, if all the commodities used by man were supplied by nature without any intervention whatever of human labor, but were supplied in precisely the same quantities as they now are, there is no reason to suppose that they would either cease to be valuable, or would exchange in any other than their present proportions.”

Prof. Senior elsewhere inquires: “Suppose meteoric iron were the only form in which that metal were produced, would not the iron supplied from heaven be far more valuable than any existing metal?”

121. Here is an autograph of John Milton. The lines may have been written to a friend, or from a mere freak of fancy, or to occupy an idle moment. Labor, in the economic sense, there was none. Yet the autograph may be worth %20; that is, may command for its possessor the labor of a skilled workman for ten days, of ten working hours each. Here is a high degree of value (that is, command of the labor of others) where yet no labor has been. The explanation is found in the fact that Milton is dead, and his remaining autographs are few, while many people want them, and want them very much.

This is an instance of what may be called “monopoly-value,” or as some prefer to call it, scarcity-value. The value here is altogether irrespective of the amount of labor expended upon the production of the article, simply because the article can not be reproduced, or the stock of it replaced by labor.

122. Cost of Production, or of Reproduction.—Again, take the case of an article which, by reason of the discovery of new fields of the raw material, or of some mechanical invention, can now be produced with the expenditure of half as much labor as formerly. Will the value of the stock of such goods on hand be influenced by the original cost of producing them? Not at all. They will exchange for other products on the same terms as the goods brought into the market under the new conditions.

In the same way, if the amount of labor required for the production of this kind of goods should suddenly increase, from the diminution of the supply of materials, or other cause, the stock on hand would acquire a higher value, corresponding to the cost of bringing in new goods of the same quality.

Hence, in respect to all goods which can be produced, or the supply of which can be replaced, within the time during which those who want them are willing to wait for them, we say that value is determined not so much by the cost of production as by the cost of reproduction. They are exchanged for the products of others, not necessarily in proportion to the amount of labor they actually required, but, rather, according to the amount of labor which would now replace the stock.

123. Time an Element.—I said, “within the time during which those who want them are willing to wait for them.” The fact that goods can not be reproduced, or the stock of them renewed, without a certain delay, may, for a time, confer a monopoly-value on the existing stock. Thus, if the supply of food in a city had nearly failed, the fact that an abundance were certain to arrive in two weeks would have little or no effect on the value of the scanty store remaining. Men can not wait two weeks for food. They must have it at once. In their urgent necessity, they will exchange their labor, or the products of their labor, for continually smaller quantities of meat and bread, up to the very moment that the ships which bear the new supplies drop anchor in the harbor.

124. It is not Always the Cost of Reproduction.—But while, as between the cost of production and the cost of reproduction, it is the latter, and not the former, which determines the power an article shall have in exchange; it is not true that value is always determined by cost of reproduction. It may be, in regard to any given commodity, at any given time, that the cost of reproducing it would be greater, even far greater, than the price at which it sells. How can this be? I answer that this might occur through a diminution in the occasions for the use of that article.

Two generations ago, every decent family possessed a spinning-wheel, and spinning-wheels then bore a price fairly proportioned, we may suppose, to the cost of their production with the tools and materials then available. A little later, when it ceased to be customary to wear homespun, spinning-wheels may be said to have had no value at all. They were banished to attics, or turned into playthings for children, and quickly smashed to pieces. To-day, a fashion has come in, by which the spinning-wheel becomes the companion of the dado, æsthetic furniture, and Queen Anne windows; and a well-preserved and authentic specimen is worth more than the sum at which a good reproduction could be made and sold.

125. Demand and Supply.—If neither cost of production nor cost of reproduction determines the power which an article shall have in exchange, is there any principle of universal application on which value rests? I reply, yes: Value depends always and wholly on the relation between demand and supply.

These terms require to be defined. It will not answer to trust to the ideas which the words of themselves call up in the mind of the reader. Demand and supply alike have reference (1) to a certain article, and (2) to a certain price. In the economic sense, demand means the quantity of a given article which would be taken at a given price. Supply means the quantity of that article which could be had at that price.

Neither of these two elements of demand and supply must be omitted. From the neglect of one of them by many economists great confusion has arisen. Nearly all writers have seen that demand must have reference to a certain article, be it wheat, or potatoes, or iron, or wool, or something else in particular; that there is no such a thing as a demand indiscriminately for meat, potatoes, iron, wool, and all other articles in the market. In the same way it is seen that the word supply has no significance unless some one article is in view. It has not, however, been so clearly apprehended and strongly held in mind, that demand and supply both have reference to a certain price.

126. Desire is not Demand.—It has been said that demand means the quantity of any stated article which would be taken at a stated price. Demand can possibly come only from those who could give the price. So we see that desire is not demand. As Mr. Thornton says, there is no demand, economically speaking, in the hungry eyes of a penniless boy, looking at tarts through a pastry-cook's window. Without pennies, an unlimited longing and capacity for their consumption would not enable that boy to contribute aught to the demand for tarts.

127. Reduction of Supply.—Let us illustrate the application of the terms demand and supply in economics.

We will take the case of an island far out at sea, inhabited by a population mainly engaged in fishing and agriculture, having, on one side, a beach which is strewn with vast deposits of seaweed, which has been found to be a very good dressing, or manure, for the cultivated fields of the island. A hundred of the islanders are accustomed to get out the seaweed, in intervals of fishing or of cultivating their own little properties, selling it to the farmers inland.

We may suppose that this manure is found to increase the yield of the lands to which it is applied to such an extent that there are a thousand farmers who will each give ten bushels of wheat, this year, for five loads of seaweed. There is, then, a demand for five thousand loads at the price of two bushels of wheat per load. Now the supply—that is, the amount offered, or ready to be offered, at this price—may be greater or less than five thousand loads. It may be that the catch of fish along the shore is so abundant this season that all those who are accustomed to get out the seaweed find they can obtain more by fishing. There may, then, be no supply whatever, at this price. And it may happen that there will be no demand for seaweed at any higher price. The farmers may be agreed in believing that, what with the labor of applying the manure, and what with the necessity for paying for it months before the harvest, seaweed is not worth to any man more than two bushels of wheat. In this case, none of this article will be gathered, and the supply will be nil.

2d. It may happen that, in spite of the superior attractions of fishing, this season, a certain number of those who habitually gather the seaweed may continue to do so, some because of the force of habit; some because they know that the persons whom they have been accustomed to supply will look to them for it; some because their boats and nets are out of repair; some because of sickness in their families, indisposing them to go far from home. So that it may result that a thousand loads will be gathered. This may all be sold at two bushels of wheat per load.

Those who buy may be those who have usually bought of the persons who now have to sell, and this may be the sole or the determining reason why the seaweed is sold to them, and not to others; or they may be those whose farms lie nearest to the shore, and hence are first reached by the carts laden with the manure; or they may be those who “spoke first” for seaweed, early in the season. Any one of a number of reasons may control the selection of the persons who shall receive the thousand loads, out of the larger number who formerly purchased five thousand loads. And this, it will be observed, occurs without raising the price of seaweed, although the amount gathered has been greatly reduced.

3d. Again, it may happen that among the former purchasers of the seaweed will be found a considerable number of farmers, wanting in the aggregate 2500 loads, who esteem that article as worth more to them, per load, than two bushels of wheat; and, finding that it can not be had for the usual price, these may begin to offer, first, a quarter and, then, a half bushel more, in order to secure each the amount required by his own land.

Who, out of the former class of purchasers, shall be so disposed, may be determined by any one, or more, of several causes. It may be wont, it may be fancy, it may be obstinacy, or, it may be that their lands are of a nature peculiarly to need such dressing, and to respond with more than ordinary liberality to this expenditure in their behalf. This demand for seaweed may be found strong and persistent enough to fix the price at two and a half bushels of wheat, per load; and at this price enough of the fishermen may be induced to give up their fishing ventures to procure the required amount of 2500 loads.

128. Increased Supply.—We have given three cases where a reduction in the supply of seaweed brings up the question whether the demand shall prove sufficient to raise the price. Let us take successively a few cases of an increase of the supply at the previously prevailing price. An unusually heavy storm bringing the seaweed in large masses far up on the shore, or the invention of some new tool for getting it out, may enable each man engaged in this business to bring to market, with the same labor, a much greater amount; or a bad season for fishing may cause a larger number of persons to seek to get a livelihood in this way. Ten thousand loads are now produced, or are ready to be produced, at two bushels of wheat per load. This, then, is the supply; and it is to be observed that this is the supply equally whether the ten thousand loads are actually dug or not, if only those who are engaged in this business are ready to bring to market that amount at that price. In this situation one of several things may happen.

1st. The increase of supply may coincide with an increase of demand, due to the breaking up of new lands for tillage, or to the failure of some other species of soil-dressing previously used by many farmers, or to a wider popular knowledge of the advantage of using the seaweed. This increase of demand may be just such as to take off the entire ten thousand loads, at the customary price.

2d. That result is, however, unlikely. Even if an increase of demand should coincide with such a large and sudden increase of supply, it would be strange if the coincidence were so complete as to leave the price just where it was. If we take the more reasonable supposition that there is either no increase of demand, or an increase less than the increase of supply, shall we have, under the conditions existing, a new price resulting? In strict theory this is not necessary. It is conceivable that, while the producers of this article stood ready to deliver ten thousand loads at two bushels of wheat a load, their interests, feelings, and habits, with respect to labor and subsistence, might be so balanced, that, rather than take less than the customary price, they would allow the production to fall to five thousand loads.

3d. But this, again, is not probable. Although, as we shall see later (par. 145), there is great power in custom to fix prices, so much so that articles often keep the same price for years, in spite of considerable alterations in the conditions of production, it is not to be expected that so great a change as we have supposed to occur, would fail to establish a new price. The producers of seaweed being prepared to furnish ten thousand loads, and the purchasers being accustomed to take only five thousand, it is probable that the desire of individual producers to keep themselves fully employed at the business would induce Competition among the sellers of this article.

129. What is Competition?—This is the most important word in the theory of value. I have now used it for the first time, though it might have been introduced with equal appropriateness, a moment ago, in describing the change of price from two to two and a half bushels per load.

Competition signifies the operation of individual self-interest, among the buyers and the sellers of any article in any market. It implies that each man is acting for himself solely, by himself solely, in exchange, to get the most he can from others, and to give the least he must himself.

1. The idea of competition is opposed to combination. Wherever, and in whatever degree, buyers or sellers act in concert, whether by insisting upon a certain price, or by regulating the amount to be bought or sold, there competition is, in so far, defeated. In competition every man is supposed to be active and alert to slip in ahead of every other man and sell his own product first, and sell it at a higher price if possible. Men in this state act as freely and as independently as the minute particles of some fine dry powder absolutely destitute of cohesion. If any two particles in the economic mass stick together, so that one must move when, and as, and because, the other does, competition is in so far defeated.

(2) Competition is also opposed to custom. If in any degree one buys or sells at a certain price, if he buys or sells in a certain place, if he buys or sells of or to a certain person, because he has done so in the past, he obeys the rule of custom. In competition men are assumed in every transaction to seek and find their best market, that is, the place to buy or to sell, in which, at the time, and under the circumstances existing, they can get most for what they have to sell and will give least for what they wish to buy.

(3) Competition is opposed to sentiment. Whenever any economic agent does or forbears any thing under the influence of any sentiment other than the desire of giving the least and gaining the most he can in exchange, be that sentiment patriotism, or gratitude, or charity, or vanity, leading him to do any otherwise than as self interest would prompt, in that case, also, the rule of competition is departed from. Another rule is for the time substituted.

130. The Action of Competition.—Such is competition in the economic sense. Now let us return to our island. We have said that, with the producers of seaweed ready to get out and deliver ten thousand loads, while formerly but five thousand were used, it was not likely that a demand for the additional amount would arise to carry off the entire amount, at the customary price of two bushels of wheat a load; and that, consequently, competition would probably set in among the sellers of this article. Since there are not buyers enough to take off the whole supply, each producer will try to sell all his own stock, no matter who else does not; and since there is reason to apprehend that the price will sink below two bushels, he will try to sell as near that figure as possible, and, hence, he will sell as soon as he can find a purchaser.

Through this force the price will begin to decline. It may be by slow degrees; it may fall tumultuously. At two bushels of wheat, a load, demand and supply are unequal—ten thousand loads are offered∗ : only five thousand are ready to be taken. At one bushel and three pecks, the supply will perhaps sink to nine thousand loads, since some of the more adventurous among the producers, the more daring and skillful fishermen among them, or those having the best gardens and fields around their cottages, may decide that they can do better for themselves. Meanwhile, we may suppose the demand to rise to six thousand loads, so numerous are the farmers who think that, at that price, it will pay them to use the dressing freely on their lands. At a bushel and a half, demand and supply still more nearly approach each other. At the new price, the quantity offered—the supply—rapidly falls off. Meanwhile the demand has increased, since, at a bushel and a half for a load of manure, the net produce of the fields, that is, the amount of wheat remaining in the hands of the farmer after paying for the manure, may be appreciably enhanced. Supply and demand may now stand, respectively, at eight and at seven thousand loads.

Supply and demand remaining still sundered, it is necessary that there should be a further movement of price to bring them together. Whether that step shall be a short one, or a long one; whether supply and demand shall be equalized at a price much, or but little, below a bushel and a half, depends on two things, first, the utility to the farmers of the soil-dressing, when in excess of seven thousand loads, which we may call its Final Utility; and, secondly, the ability of the producers to do something profitable besides digging and hauling seaweed.

131. Final Utility.—This term has been used, in the fore-going illustration, with reference to the entire supply of seaweed in excess of seven thousand loads, be that excess one hundred, or nine hundred loads. Strictly speaking, however, the term should have reference only to the last appreciable quantity which the purchaser is ready to take and which a producer is ready to supply.

The following is Prof. Jevons' illustration of the difference between the total utility of any commodity, and the utility belonging to a particular portion of it.

“A pound of bread, per day, supplied to a person, saves him from starvation, and has the highest conceivable utility. A second pound, per day, has, also, no slight utility; it keeps him in a state of comparative plenty, though it be not altogether indispensable. A third pound would begin to be superfluous. It is clear, then, that utility is not proportional to commodity. The very same articles vary in utility, according as we already possess more or less of them.”

This descending scale of utility may be applied to successive quantities of seaweed, for the dressing of wheat lands. A farmer having a certain breadth of arable lands might profitably give two and a half bushels per load for the first ten loads, with which to dress certain of his fields. If no one stood ready to supply more of the seaweed, at a lower price, two and a half bushels would be determined as the price of the article. Were he to buy five other loads, he might have to apply them to other fields, the return from which would not justify the payment of more than two and a quarter bushels, a load. Now, it might be that a producer stood ready to deliver the additional quantity at that, but at no lower, price: if so, two and a quarter bushels would measure the final utility of the manure, and this will be its price.

Were the farmer to buy three more loads, he might have to apply them to still other fields, from which the enhanced return would justify the payment of two bushels a load, but no more. As, however, it takes two to make a bargain, his readiness to buy at this price would not make this the price of seaweed. It is only when a producer is found ready to deliver the commodity at the price, that a new price is determined. It might even happen that the farmer would be willing to take two more loads, if he could get them for a bushel and a half, a load, and that a producer would appear, willing to deliver the article at that price.

Now, according to the course of our illustration, the farmer has bought twenty loads; but the utility of the several parts of that aggregate amount has varied widely; the utility of the first part was very great; the utility of the last part comparatively small.

132. But One Price for a Commodity.—We have thus far assumed, for the purpose of illustrating the declining utility of successive portions of a commodity, that the farmer purchased the ten, the five, the three, and the two loads of seaweed at different times, and at prices corresponding to the gain in the wheat crop resulting to him from the application of the manure.

But suppose that the farmer had purchased the twenty loads at the same time, it is evident he would have paid one price for the whole. What would have been that price? Would it have been the highest price paid for any portion? Clearly not, since we have seen he could only afford to put the dressing upon certain of his fields, on condition of getting it at a much lower price. Would it have been at a price, the mean between the highest and the lowest? Just as little; for we have seen that producers stood ready to sell at one and a half bushels per load, which would not have been the case had the demand been sufficient to take off the supply at a higher rate.

If, in an open market, under full competition, any portion of a given commodity is to be sold at a certain price, then will all the portions of that commodity, sold at the same time, be sold at that price, whatever the degree of utility which may accompany each such portion. If I buy a quantity of food for my own consumption, I do not pay for that part which would suffice to keep me alive, a price such as I would pay, were it necessary, to be saved from starving; for another part of the food, a price corresponding to the discomfort and dissatisfaction I should feel in being insufficiently nourished; and, for a third part a price corresponding to the pleasure of ample and generous sustenance. I pay one price for the whole, the same for every equal part. That price measures the final utility of the food to me: that is, the utility of the portion at which I cease to buy, the portion beyond which I would as soon keep the price in my pocket as have more of the food.

Prof. Jevons states the case thus: “When a commodity is perfectly uniform or homogeneous in quality, all portions may be indifferently used in place of equal portions; hence, in the same market, and at the same moment, all portions must be exchanged at the same ratio. There can be no reason why a person should treat exactly similar things differently, and the slightest excess in what is demanded for one over the other, will cause him to take the latter instead of the former. In nicely balanced exchanges it is a very minute scruple which will turn the scale and govern the choice. A minute difference of quality in a commodity may thus give rise to preference, and cause the ratio of exchange to differ. But when no difference exists at all, or when no difference is shown to exist, there can be no ground for preference, whatever.”

133. What Constitutes an Economic Difference?—In the foregoing paragraph, Prof. Jevons speaks of commodities between which no difference exists. Of course there are no two articles in the universe precisely identical. What Prof. Jevons means is that there may exist no difference, as viewed by the would-be purchaser, with reference to some use to which the two commodities may be put, which use two commodities, apparently varying in many respects, may indifferently serve.

And it is to be noted that the existence or non-existence of an economic difference, will depend on the quality of the individual exchanger, on the purpose he has in view, on the scale of his transactions, and on other causes. Thus, a large dealer in poultry may buy five hundred pairs of chickens, in gross, only satisfying himself by a rapid examination that none fall below a certain standard as to size and condition. His customers, however, will inspect the individual fowls, with the greatest carefulness, and will perhaps be determined in their choice by considerations the most minute, and, possibly, whimsical. In the same way a wholesale lumber merchant may buy, in gross, a large amount of stock at a uniform price, and a half dozen of his customers may the next day go through his yards, each taking out, by preference, a certain portion as peculiarly adapted to some job of work he has on hand.

The fact that several commodities have a generic name in common does not constitute them the same articles for the purposes of exchange. Thus, corn is not sold in the Chicago market as corn, but as corn No. 1, or corn No. 2. Spring and Winter wheat never bring the same price; they are not one kind of commodity, but two, and a reason for a preference between them always exists.

The proposition we are considering further requires to be modified with regard to the obstacles to exchange, the ignorance or indifference of exchangers, etc. The consideration of these causes, as qualifying the principle that there can be but one price for any commodity, in the same market, at the same time, will be more conveniently postponed to the title (par. 149) The Friction of Retail Trade.

134. What is a Market?—Many definitions have been given to the word, market. As I apprehend it, the term, in political economy, should have reference, first, to a species of commodity; secondly, to a group of exchangers.

In this view, there is no market which is a market indistinguishably for all or for several commodities, as for tea, iron, cotton and wheat; but there is a market for each commodity, by turns, as a market for tea, in which tea is bought and sold; a market for iron, in which iron is bought and sold. Thus, there are as many markets as there are separate commodities.

Secondly, a market embraces all those who contribute to the supply of or the demand for a given commodity in any place. Hence, all those who are ready to buy of or sell to each other belong to the same market, no matter where they live.

I say, who are ready to buy of or sell to each other. It does not follow from this that all who in the same place are buying and selling the same article belong to the same market. Thus, suppose there are in New York five importers of tea, fifteen wholesale dealers in that article, a hundred retailers, and a half million consumers. All these do not belong to the same market. The importers of tea and the wholesale dealers constitute one tea market, the wholesale dealers and the retailers constitute another tea market; the retailers and the domestic purchasers constitute still another tea market. There are as many markets as there are groups of exchangers. In the case supposed, there are three tea markets; each has its own group of buyers and sellers; and in each of the three, at any time, tea is sold at a price different from that at which it is sold in any of the others. Thus, the price for precisely the same sort of tea, in the market made up of importers and wholesale dealers, may be %1.00; in the market made up of wholesale dealers and retailers, %1.10, and in the market made up of retailers and domestic purchasers, %1.25.

Hence we see that, without such a definition of the word market, it would not do to say that there can at any time in any market be but one price for a given commodity. There is never a day, in any great mart, when tea, iron, wool, wheat, or what not, is not selling at several different prices, it may be in the same street.

135. But while within a great mart there may, thus, be many markets, any one of these markets may extend far beyond the limits of that mart. To pursue the illustration already offered, the five New York importers of tea may sell not to the fifteen wholesale dealers of that city only, but to twenty other wholesale dealers in Brooklyn, Jersey City, Newark and other places within a radius of twenty or of fifty miles. A market is thus constituted of the five importers and these thirty-five wholesale dealers. Every one of the latter belongs as distinctly to that market as that one who lives nearest the City Hall, for he contributes as truly to the demand for tea in that market. Again, this body of wholesale dealers, thus re-enforced, may sell not to a hundred but to a thousand retailers scattered throughout all that region. This group of exchangers makes up the market, and not the fifteen wholesale dealers and the one hundred retailers of the city of New York only. These one thousand retailers, again, sell, not to half a million, but to a million and a half of consumers of tea.

All persons whose demand for, or whose supply of, a commodity goes to make up the aggregate demand for or supply of that commodity, in any given place, and hence to affect the price of that commodity in that place, belong to the same market.

136. But it may be said: this would make the whole world belong to the same market, and would, hence, take all significance out of the word. By no means. In the market which is made up of the five importers of tea, all perhaps having warehouses on one wharf in New York, and the thirty-five wholesale dealers of the surrounding region whom they supply, the price of tea will not, probably, be appreciably different from that which is paid in the market made up of the four Boston importers of tea and the twenty-five wholesale dealers who buy of them. If, for instance, the New York price were to be lower than the Boston price, the New York importers would begin to offer their stock in Boston, to get the advantage of the higher price there prevailing, and would hence contribute to the supply of tea there, and hence would come, so far forth, and for the time, to belong to that market.

But, in the market constituted of the wholesale dealers and the retailers of tea in and around New York, the price of tea may be one or two cents lower than in the corresponding market around Boston, without any of the New York wholesale dealers sending their stocks to New England, or any of the New England retailers coming to New York to take advantage of the lower price.

In the market constituted of the retailers and the domestic purchasers of tea, far wider differences may exist. The price of the same quality of tea might be, and might long remain, five or ten cents higher in the grocery stores of Newark than in those of Worcester or Nashua, without a single New England grocer going to Newark to retail his tea, or a single Newark householder going to Worcester or Nashua to lay in his year's supply.

I repeat my proposition: all those persons who contribute to the general demand for any commodity, as felt in any place, or to the supply of that commodity there available for purchase, and who, hence, serve, as buyers or as sellers, to affect the price of that commodity in that place belong to the same market.

137. Normal Price.—If there were a good market for any given commodity, i. e., if competition were perfect; (1) if there were no large stock of that commodity, but it could be produced freely and equably throughout the year, as wanted; (2) if the demand for it were uniform and strong, about the same quantity being required for use in every equal period of time; (3) if no large “plant,” or machinery, or great amount of capital in other forms, were required for its production; (4) if the producers of that commodity had an easy resort, or economic escape, to occupations in which other commodities were produced, and if, in turn, producers in other occupations could readily and successfully take up the production of the commodity in question, then the price of that commodity would, at any time, be close to the cost of production. By cost of production we are to understand, not the average cost of the whole supply, but the cost of that part which is produced at the greatest disadvantage.

That price would express the Final Utility of the commodity in question, that is, the utility of the portion which, at the price, it was just worth the consumer's while to purchase. That price would also express the sum of the efforts and abstinences of those producers who brought forth this commodity under the least favorable conditions, of all who contributed to the supply. Inasmuch as this price is to be paid alike by all purchasers of this commodity, it follows that those who have produced it under more favorable conditions∗ will obtain a remuneration which will represent more than the sum of their individual efforts and abstinences.

A price which corresponds closely to the cost of production may be called Normal Price.

138. Market Price.—Inasmuch as the conditions recited in the foregoing paragraph are never fully realized, there is for every commodity, in every market, a Market Price which differs more or less widely from the normal price.

This market price always measures the Final Utility of the commodity, that is, the utility of it to the last purchaser to whom it is just worth while to buy of it, at that price. Otherwise, that person would either not buy, which, by leaving a portion of the supply untaken, would determine a new and lower price, at which he or some one else would buy; or, he or some one else would buy more of it, which, by adding to the demand, would determine a new and higher price.

But while market price must always measure the utility of the commodity to the last purchaser, that is, the person to whom it is just worth while to buy at that price, market price does not always measure the efforts and abstinences of the last producer, that is, the person producing under the greatest disadvantage: to whom, therefore, it is only just worth while to produce at that price. It is in this latter respect that market price differs from normal price.

139. Relation of Market Price to Normal Price.—The causes which make market price differ from normal price are various. The illustration of them might be extended indefinitely. They may be grouped as follows:

I. The existence of a stock. For the purpose of exhibiting in its simplest form the operation of supply and demand, I took an article of which, it was assumed, no considerable stock existed at any time. The seaweed was supposed to lie in vast deposits on the shore, and to be got out (produced) as required. This is a condition which tends to keep market price close to normal price. In the case of most commodities, however, a considerable stock always exists: a fact which profoundly influences market price.

The existence of a stock is determined by various causes. In order that there may be grain to form the food of the long winter and early spring, seed must have been sown and the growing crop cultivated months previous. In order that there shall be a supply of wool in the market, sheep must have been bred years before. Many commodities make no such requirement. In order that there may be grain, the processes of production must have been begun months back; but, given grain, it is only necessary, in order to have bread, that the miller should have a day's notice, and the baker time to heat his oven. Hence, with an immense stock of grain, amounting to thousands of millions of bushels, there may be but a small stock of flour, of which only a minute fraction will, at any time, be in the form of bread.

140. Distinction between Stock and the Supply.—The stock of any article in existence, at any time, must not be confounded with the supply of that article, considered as a commodity in the market.

By the word supply, we express the quantity of a commodity offered at any given price. At one price the supply may be but a small fraction of the stock. At successively higher prices, larger and larger portions of the stock would be offered, that is, would come to constitute the supply—until a certain price would take off the entire stock.

Indeed, the supply may even become greater than the stock, under a highly speculative organization of trade. Thus, in the grain or cotton market, or in the market for railway shares or government bonds, brokers daily offer to sell and contract to deliver vast amounts of the several commodities in which they deal, of which, perhaps, they possess little or none at all.

Sometimes it happens that those who are offering such commodities are entrapped∗ by a combination of purchasers into contracts to deliver, on a certain day, more than the entire quantity within reach, or even in existence. In such a case, the supply is still the amount offered at the price. This it is, and not the stock, which, taken in connection with the demand for the commodity, determines the price.

141. The necessity in some cases, the usage in others, of meeting the demand from a stock, and not out of daily production, causes market price to diverge from normal price, through excess or deficiency of production.

In order that there may be wheat, three millions of persons, more or fewer, in the United States, plant the grain many months previous to the anticipated consumption of the wheat by the miller and the baker. These persons break up the land and sow the seed without mutual understanding as to the extent of their operations. Each is governed by a notion, more or less vague, as to the probable demand for wheat. It is not at all a matter of certainty that the mistakes in calculation of one farmer will offset those of another. On the contrary, there is a strong tendency in the errors of producers to accumulate all on one or on the other side of the line of equable production.

If the price of wheat, owing to a deficient supply, has been high, almost all producers will be found, the next year, largely planting wheat. This is likely to produce a surplus which will perhaps bring down the price below the average, whereupon farmers, with almost as much unanimity as in the former case, will, the next year, diminish their operations in this direction. Those who are sagacious enough to look about them and say: Others are planting wheat freely, therefore, I will plant something besides wheat, are exceptional. In productive industry it is the rule that men go in droves; act under common impulses, with the result of causing excess and deficiency to alternate with great rapidity and often great violence. And this holds good, not alone of persons in the lower departments of production. It is almost equally true of merchants and manufacturers and bankers. The select few who have the coolness and the sense to buy when others are most eager to sell, and to sell when others are most eager to buy, reap rich harvests of gain.

142. Substitution of one Commodity for Another in Use.—The influence upon price of an excess or deficiency in the stock of a commodity may be greatly diminished through the tendency to substitute one article for another in use. Thus, the cereals are, to a great extent, substituted for each other in use; one kind of meat for another,∗ and even bread for meat, or meat for bread, in the case of a marked deficiency of one or the other. If the crop of wheat be short, maize, barley, rye, buckwheat and oats are increasingly made use of as food; with a short crop of all the grains, resort is had to the cheaper kinds of animal food. The result of such substitution is to raise the price of the substituted article, and to prevent the price of the article for which it is substituted from rising as high as it otherwise would. The two commodities are thus, for the time, and in a degree, joined together in price. A mutual dependency is established between them.

143. Liability to Deterioration.—The influence upon market price of an excess in the stock of any commodity is greatly controlled by its liability, or non-liability, to deterioration. In the case of some commodities, the variations in price due to this liability are such as to make it appear that price has cut itself wholly clear from cost of production, or cost of reproduction. A commodity exceptionally subject to this condition may lose ten, thirty, fifty, or seventy per cent. of its price in a few days, or even in a few hours. Thus, in fish markets, the price of a fish might have been a shilling when the market opened at 5 o'clock in the morning, eight-pence at 10 o'clock, sixpence by noon, while at three or four o'clock in the afternoon one could have it on his own terms. In the same way, strawberries are often sold on Saturday night at one-half or one-third the price of the morning.

The necessity of storage, in the case of a postponed sale, has often the same influence on the price of a commodity as liability to deterioration. The dealer, not having facilities for storing his stock, may be disposed to let it go at a very low price.

144. II.—Organization of Industry and Existence of Plant.—A second cause which makes market price differ from normal price is found in the organization of industry and the existence of machinery and “plant.”∗ It was to get rid of this cause that, in our extended illustration of the influence of supply and demand upon price, we took a simple “extractive” industry, the gathering of seaweed along the shore, which could not be supposed to involve the use of numerous or expensive instruments, or the exercise of much skill, and that we assumed the persons so engaged to be in a position readily to turn themselves to tillage or the fisheries, in case of a falling off in the demand for seaweed.

145. III.—Customary Price.—Another cause which makes market differ from normal price, is the force of custom. We owe the existence of a customary price, in some things, to the power of public opinion, which determines that there shall be a stated, well-known price for certain services and certain commodities; and, in other things, to habit or the mental inertia of purchasers. Thus, in the former case, public opinion would not tolerate varying and uncertain prices of admission to places of public amusement, varying and uncertain tolls over bridges or fares on public conveyances, varying and uncertain fees for the performance of necessary services, such as those connected with physical comfort, the preservation of life, or the burial of the dead. It is seen and felt that to leave the buyer to haggle and bargain at the door of a theater over the price of admission; on the brink of a river as to the sum to be paid for a cast across the stream; in the sick room, about the fee for a prescription or the medicine that is to save life or relieve pain, would be indecent, intolerable.

Hence, public opinion prevails to establish a price on all such occasions, which is alike irrespective of the actual service rendered in the individual instance, and of the cost of rendering that service. The rule of final utility is here suspended or altogether abolished. The traveler might be willing to give a large sum, rather than pass the night in a storm, without shelter, on the bank of a river, but he gets a cast across for the customary price. The father would give all his fortune, were it needed, for the prescription to save his child's life, or the medicine which the prescription calls for; but, instead, under the rule of customary price, he pays the physician two dollars, or a guinea, as the case may be, and, at the apothecary's, pays for the medicine by the ounce, in silver, though he would pay for it, drop for drop, in his own blood, could it not be had otherwise.

Where public opinion can not be trusted to establish a customary price, in cases like the above, the law generally enters and fixes the rates at which commodities and services shall be sold. Of course, the prices paid must be sufficient to make it worth while to keep up the service, whether of the apothecary, the physician, the ferryman, or the actor or opera singer; but the price to be paid is made independent of the wealth or poverty, the knowledge or ignorance, the little or the great need, of the individuals purchasing.

146. Influence of Habit on Price.—Far beyond the range of customary price, in the limited class of cases above referred to, is the effect of habit and mental inertia, in restraining, or wholly repressing, the movements of price. In the former class of cases, the seller consciously submits to a restraint upon his freedom of action imposed from without, viz., by public opinion or law. In the far wider field now in contemplation, buyers and sellers are left free, so far as outside influence is concerned, but are constrained, in a higher or lower degree, by the laws of their mental constitution. No human being ever escapes from the force of habit. It is always easier to do what we have done before than to do what we have never done; to do what we have done twice than what we have done but once; to do what we have done often than what we have done seldom.

The degrees in which men are thus bound by habit differ widely. A capability of taking the initiative in action, mental courage and activity, freedom from fear and superstition, a readiness to meet new conditions and perhaps even a pleasure in encountering risks and odds, are among the fruits of culture; they constitute an inheritance in families; they even become a characteristic of nations and races.

The effects of habit upon prices are important. Habit always in some degree, often in a great degree, resists the economic tendency to a new price. The effect is seen at its maximum in wages, the price of labor. A day's wages often remain the same through years. So strong is this tendency that wages sometimes remain unaffected by the presence of a number of unemployed laborers. Instead of wages falling until all the laborers are brought into service at the reduced rates, employers continue to pay the old rates to a smaller number of workmen.

Over the price of goods habit exerts an influence not less real, though not equally powerful. It often suffices to keep price stable against an economic reason for movement, and even when movement takes place, it begins later and ceases earlier, by reason of this constant resistance.

147. The Moral and Intellectual Elements of Demand and Supply.—Our definitions of demand and supply, as respectively the quantity of any given article which purchasers stand ready to take at a certain price, and the quantity which producers or holders stand ready to deliver at the same price, clearly recognize a moral and an intellectual element alike in demand and in supply. “Stand ready” to take or to deliver. Any thing which affects that readiness, is, then, an element of demand or of supply. Supply is not a stock (Par. 140), a definite quantity, which must be sold, whether or no. It may be that out of a large stock, holders stand ready to deliver but a small quantity at the price offered.

The reason for withholding the stock may be found in the physical conditions attending the reproduction of the article, e. g., a scarcity of the material out of which it is made, or the reason may be found in an intellectual apprehension, just or mistaken, of the state of the market, or the probabilities of the immediate future; or, waving this consideration, the reason for a larger or a smaller quantity being offered or taken at a certain price may be moral, that is, may be found in the greater or less tenacity of purpose, or the greater or less courage to undertake risks and sustain arduous and doubtful enterprises.

In all variations between normal and market price, moral and intellectual elements are important factors. It often happens that the producers or holders of an article, anticipating a rise of price, on some account which may prove to be wholly fictitious, will keep back the entire stock, only to sell it, a little later, at a price far below that which they could have obtained for it while the false apprehension lasted.

More or less, false apprehensions enter to affect the demand for and the supply of every article in every condition of the market; but the influence of this cause may be in one period ten times or a hundred times as great as in other periods. The contrast between a placid noonday and a “hurricane eclipse of the sun,” is hardly more marked than the contrast between a peaceful, sluggish market and one excited by mysterious rumors, emanating no one knows where, or wrought to frenzy by false reports manufactured by the parties to some great jobbing interest.

148. Retail Contrasted with Wholesale Trade.—The foregoing holds good even of the wholesale markets, where the parties who buy and sell commodities are picked and skilled men, long familiar with the conditions of the articles in which they deal, with large opportunities, whether by price-currents, newspaper, post or telegraph, or by special and secret inquiry, for ascertaining all the facts bearing on the question, at what price they should buy or sell.

In retail trade, the moral and intellectual elements of demand and supply play a much more important part. On one side is the merchant, who by frequent resort to the wholesale dealer is kept advised of the conditions of the market. On the other side is the “customer,” a creature of custom, as the term implies; often ignorant in the widest sense of the word, unintelligent and untrained; always and necessarily ignorant in the special sense of being unacquainted with the conditions which should determine price, not knowing what a commodity ought to cost, and, in the case of many classes of commodities, unable to judge of the quality of the goods offered, perhaps at the mercy of the dealer in the matter of the measure or weight.

The merchant, again, is the possessor of capital, and can wait to dispose of his goods at the best time. The customer, on the other hand, is generally in urgent need of commodities for immediate use, and frequently poor, so that he must buy in small quantities; perhaps even, in debt, so that he feels under a strong constraint to trade only with his creditor, who thus holds him at a double disadvantage, for how can he quarrel, as to quality, measure, or price, with the man whom he is not able to pay for goods already had and consumed?

149. The Friction of Retail Trade.—From the ignorance and inertness of the “customer” arises what may be called the Friction of Retail Trade. “Retail price,” says Mr. Mill, “the price paid by the actual consumer, seems to feel slowly and imperfectly the effect of competition, and where competition does exist, it often, instead of lowering prices, merely divides the gain among a greater number of dealers. It is only in the great centers of business that retail transactions have been chiefly or even much determined by competition. Elsewhere it rather acts, when it acts at all, as an occasional disturbing influence. The habitual regulator is custom, modified from time to time, by notions existing in the minds of purchasers and sellers, of some kind of equity or justice.”

And referring to this manifest inability of the customer in retail trade to look out for himself, in a struggle with the expert dealer, Prof. Cairnes says: “Between persons so qualified the game of exchange, if the rules be rigorously enforced, is not a fair one; and it has consequently been recognized universally in England, and very extensively among the better class of retail dealers in Continental countries, as a principle of commercial morality, that the dealer should not demand from his customer a higher price for his commodity than the lowest he is prepared to take. Retail buying and selling is thus made to rest upon a moral rather than an economical basis, and, there can be no doubt, for the advantage of all concerned.”

150. Economic Forces Never Cease to Operate.—I am disposed to think that these eminent economists overrate the disability under which the customer suffers in retail trade; and, secondly, that the inference they draw from the undoubted fact of the general prevalence of a customary price, viz., that this shows that competition is not the regulator of such trade, is not fully justified. To take an analogous case, let one look around him, in any highly organized community, and he will see very little display of force in compelling proper things to be done, or in repressing acts injurious to society. He will see on every side men doing just and decent and even courteous and kindly things, respecting the rights of others and making use inoffensively of their own powers and privileges, just as if all this were natural and pleasant to them, as, indeed it has, to a great degree, become. These actions appear to be spontaneous and instinctive; and one thus looking around on the orderly and civil procedure of daily life, whether in social intercourse or in business, might think that force was not, in any proper sense, the regulator of that community; he might conclude that good will towards others, self-respect and public spirit were universal. Yet if that power which in every civilized state is always at hand, however veiled or disguised, to protect person and property, to repress lawlessness and to punish crime, were once withdrawn, society would speedily be transformed, and the occurrence of every form of rapine and violence would instruct the observer that, behind the fairest show of order, right dealing and courtesy, stands the armed force of the community.

So, while within certain limits, competition seems to disappear wholly from retail trade, and custom and respect for the rights of the purchaser enter to banish “higgling” from the market and to impose the one-price system, and thus retail buying and selling, as Prof. Cairnes says, comes to rest upon a moral basis, yet the economic forces always lie beneath, as the bed-rock below which the effects of moral forces can not go. Let the cost of an article rise above the customary price, and merchants will make an advance upon that price, in spite of custom. Let merchants demand an utterly exorbitant price, and competition will spring up, even among the least intelligent and least enterprising buyers.

CHAPTER II.

THE THEORY OF INTERNATIONAL EXCHANGES.

151. We stated, in paragraph 119, that, on the whole and in the long run, the respective values of a number of articles will be nearly according to the amounts of labor that have been expended upon them, severally. That this will be true throughout any small community is seen in the consideration that, if certain articles failed to have as much, or nearly as much, value for the unit of labor as other articles produced in that community, some of the laborers who had been engaged in the production of the articles thus disparaged in exchange, would set themselves to making some other article or articles more highly appreciated. Either this would, at some stage, raise the value of the disparaged articles, through reducing the supply of them; or, if the community cared so little for those articles as not to be willing to pay a higher price for them, production in those lines would ultimately cease.

Subject to important exceptions—such as will be indicated in paragraphs 339-342—the respective values of articles will be regulated in the way that has been indicated, within any small community. Is any modification of this conclusion required, as exchange is conceived to be carried on between distant communities, constituting, perhaps, distinct nations?

152. We shall reach the essence of the matter if we assume the trading world to be confined to half a dozen islands, which interchange their products freely, but between which no movement of labor or capital ever takes place. One of these might have a tropical climate and rich soil, producing in abundance tea and coffee, tobacco, sugar and molasses, silks, spices and dye-stuffs. The population of this island we will assume to be in excess, the point of diminishing returns (par. 51) having long since been passed. Island No. 2 is like island No. 1, except that the point of diminishing returns has not yet been reached. Island No. 3 lies in some northern sea, producing hemp, wool, flax, and the cereal grains. Island No. 4 is the land of oil and wine. Island No. 5 is filled with extensive mines of coal and the useful metals. Island No. 6 has a poor soil, a bleak climate, and a scanty population, whose production comprises only ice, lumber, fish and furs.

What, now, will be “the exchanging proportions” or terms of exchange, between these islands, at any given date? Will it still be true that the values of their respective products will be nearly according to the amounts of labor (omitting capital, for the time, from consideration) which have been involved in their production, severally? I answer, that, at any date which we may take for the purpose of our illustration, this would not necessarily be so. Assuming the strength, skill, intelligence and energy of all the laborers in all the islands to be equal, a given amount of labor in one island might command the product of two days' labor in another island, while commanding the products of only half a day's labor in still another. This supposition is not an unreasonable one. Differences as great exist to-day among the countries of the world, even after making the allowances necessary to bring the several laboring populations to an equality in the respects of strength, skill, intelligence and energy.

153. What, then, would govern the exchanging proportions subsisting between the several islands? I answer that the only explanation which anywhere, at any time, can be offered for existing ratios of exchange, is found in the relation between supply and demand. Within each of the several islands taken for the purpose of our illustration, values would approximately be regulated by labor, according to the principle first stated. But, as between themselves, each of these islands would constitute a unit, whose terms of exchange with all the other islands would be determined by the Equation of International Demand, to use the phrase of Mr. J. S. Mill. What is meant by this formidable phrase? This: that values, in exchanges between these islands, will be governed by the demand of each island for the productions of all the other islands, as against the demand of all the other islands for those commodities which itself produces. In the case supposed, the play of economic forces may result in giving to a day's labor in one island a very great purchasing power in comparison with a day's labor in any other island, and a vastly greater purchasing power in comparison with a day's labor in some one other island.

Thus, we might suppose the taste for olive oil and wine to be, at the date we have taken for the purpose of this illustration, not widely spread among the other islands. In some, the uses of olive oil might not be known at all. In that case, there would be but little demand for the productions of island No. 4, as a whole. As between the producers of olive oil and the producers of wine, the force of competition would operate steadily to bring about the result that a day's labor in a vineyard would yield as much purchasing power as a day's labor in an olive grove. But, while the producers of olive oil and the producers of wine would thus be brought upon an equality as regards each other, both classes of producers would be at a disadvantage in comparison with producers in the other islands, generally. We might say, with the producers of any other island; or we might suppose that, the mechanic arts being still in a backward state, island No. 5 would experience a still smaller demand, relative to its laboring population; and the inhabitants of that island might be obliged to continue getting out iron ore, smelting it in their furnaces, working it up in their forges, only to sell the products of a very long day's labor for the products of nine hours' labor in island No. 6; ten hours' labor in island No. 4; six hours' labor in island No. 3; five hours' labor in island No. 1; three hours' labor in island No. 2.

We have said, five hours' labor in island No. 1, and three hours' labor in island No. 2. How is this? The productions of these two islands are the same; their soil and climate we have assumed to be the same. Truly; yet the fact that in one of these islands the stage of diminishing returns has been reached and passed necessitates, as we have seen, a lower percapita production: a difference which might not be exaggerated in the ratio of three to five.

If, now, we assume a sudden development of the mechanic arts and a rapid and extensive use of iron in tools and machinery, island No. 5, from being at the foot of the scale, as regards the purchasing power of a day's labor, might rise almost instantaneously to the top. A day's labor there might come to command the products of a day's labor in an island previously the most favored; might soon come to command the products of two or three days' labor almost anywhere else. What island No. 5 has to sell has now become of supreme importance. The sugar planters of Nos. 1 and 2, the wheat growers of No. 3, the lumber operators and ice cutters of No. 6, find that they can greatly increase their production with implements and machines made of iron. The iron-workers, therefore, realize rich gains, and fare sumptuously upon the products of all the other groups of laborers.

Now, upon the assumption that labor and capital do not flow from one island to another, but only products are imported or exported, each island would be left indefinitely to its own economic lot, be that a hard one or a fortunate one, according to the demands from all the other islands for its characteristic products.

154. In the case of these separate communities, does the failure of values to correspond to amounts of labor, depend upon the question of nationality? I answer, no: the failure of correspondence between value and labor would occur just as fully between two islands which were subject to the same government, as between one of these islands and still another island under a different flag. The condition we have noted is due entirely to the fact assumed at the beginning, viz.: that labor and capital do not pass from one of these trading communities to another. It has nothing to do with nationality. Among different communities, be these large or small, distant or near, there will be an incessant tendency, due to changes of population, to changes in the arts, to changes in commercial demand, to the varying character of the seasons, and to a score of other causes, to disturb the relation between labor and value. Except as these causes may offset each other, the one force which should restore the equilibrium that has been disturbed, is to be found in the movement of labor or of capital, or of both, from the communities where the unit of labor or of capital receives the smaller return to the communities where it receives the larger return. If that movement does not, in fact, take place, the differences noted may continue and may even increase from age to age.

If, then, the failure of values to correspond to amounts of labor expended, has nothing to do with the fact of nationality, why should the economists, generally, have written of International Values, of International Trade, of the Equation of International Demand? I answer, because nations seemed to them to furnish the most convenient units for illustrating the operation of the forces concerned. It is true, it was true even when Ricardo developed this theory, in the early part of the century, that there are definite portions of the same nation between which the movement of labor and capital takes place as slowly and tardily as, often, between two separate nations. It is even true that there are groups of nations perhaps widely sundered geographically, between which this movement takes place far more readily than between contiguous sections of the same country.

Still, it is true now, and was true in a much higher degree when Ricardo wrote, that obstructions, physical, intellectual and moral, to the movements of labor and capital, tend to gather themselves along the boundary lines of nationality. This arises from differences of speech, of race, and perhaps, also, of religion, from prejudices against aliens, perhaps, also, laws putting them at a disadvantage; from reluctance at selfexpatriation, from physical obstacles of a marked character, which often, though not always, serve to divide nations from each other. Between any two given nations all the causes above noted may enter to raise to a maximum the resistance to migration. Between other two nations, only a part of these causes may operate, and may operate with greatly diminished force.

It was the foregoing considerations which induced the economists to take nations as the units for illustrating the economic effects of a cessation of the movement of labor and capital between separate communities. It has led, however, to misconception at two points: first, by creating the impression that because nations were taken as units in this discussion, nationality was the real reason for the phenomena observed; secondly, by diverting attention from the effects of a cessation of such movements within the limits of nationality. It would be safe to say that there are nations divided into a half-score of sections, between the two most friendly and fully contiguous of which the movements of labor and capital are scantier and slower than between certain two other nations, though separated by thousands of miles.

Wherever the movement of labor and capital ceases, there all the effects which are, by the economists, attributed to national differences, become fully realized. In just so far as those movements are reduced or retarded, the natural operation of competition, in restoring the normal relation of value to labor, is deferred or defeated. Even where movements of labor and capital actually take place, they may be so tardy and difficult that local causes may go on producing inequalities between the purchasing power of labor in neighboring communities, much faster than competition can efface them.

155. It follows from what has been said, that, in the exchanges of two considerable communities, be the same distinct countries or isolated portions of the same country, from one to the other of which movements of labor or capital do not take place or take place so tardily and painfully that they fail to keep up with the tendencies to divergence indicated in the preceding paragraph, it follows, I say, that in the exchanges between two such communities, articles may be imported into one of these communities, notwithstanding the fact that it could there be produced at a lower cost than in the community from which it was exported; and this state of things may, under the conditions recited, continue indefinitely.

This would scarcely happen between small contiguous communities. If in one of such communities, A., a certain kind of goods could be produced at lower cost than in communities B., C. and D., all the labor and capital, employed, within that group, in the production of that article, would pass over into A.; and the entire production of that article for that group would soon take place in that single community. As a result of this play of economic forces, no one of these communities would long import from any other any kind of goods which it could possibly itself produce at a lower cost.

Between communities or countries, however, experiencing no movements of labor or capital, exchanges of goods may, as we said, continue indefinitely to take place, notwithstanding the fact that the importing countries could, if they would, themselves produce many of the articles at a lower, perhaps a much lower cost than that at which they are actually produced in the countries from which they are brought. Thus, to return to our six trading islands, we might suppose that the demand for olive oil and wine had become so great that the inhabitants of island No. 4 could, by one day's labor in their vineyards or groves, command the products of two days' labor in island No. 1. If this were so, it might clearly be for their interest to continue producing olive oil and wine only, even though their soil and climate were such as to enable them to produce sugar or coffee or tea or spices at two-thirds the cost of which they were actually produced in island No. 1. By applying all their labor force and capital force to that for which they had the most marked qualification, they would, in the result, obtain more of any and all products which they might desire, than if they were to give up a certain portion of their labor power and capital power to the production of articles in respect to which their natural advantage would be less than in raising oil and wine, though it might be greater than that enjoyed by the actual producers of the articles in question.

156. That such would be the normal operation of the principle of self-interest will readily appear if we take the case of a skilled mechanic, say a blacksmith, in an agricultural community. The smith may have been brought up on a farm, and he may, conceivably, be so strong, so quick in his motions, so handy with tools, that he could, to-day, do one-fourth more of farm work than any one in the neighborhood. Since then, he can do farm work better than the farm hands, will he leave his forge? That will depend on the “Equation of Demand.” If there be several blacksmiths in the community, so that the demand for the work of each blacksmith is small, and if the other blacksmiths are as well able to work at the forge as himself, but are not, like himself, able to turn advantageously to farming, his economic interest may impel him to agriculture. If, on the other hand, he is the only blacksmith in the community, the demand for his work will certainly be great, perhaps so great as to enable one day's labor on his part to command two ordinary days' labor on the farm. In this case it would be the height of folly for him to leave his forge, since there he can acquire a value represented by 2, while on the farm the value of his product will be represented by only 1 ¼.

The reason of the case will appear still plainer if we contemplate a country physician, who, having been brought up on a farm, and being accustomed to cultivate a small tract, for his health and pleasure, in the intervals of practice, might easily be as good an agriculturist as many of his neighbors. The question is, shall he buy farm products or raise them himself? I answer: so far as health and pleasure, in the intervals of practice, allow, he will do well to cultivate the land; but as a matter of business he can not afford to sacrifice the smallest part of his professional work for the sake of raising vegetables instead of buying them. As a physician, he can easily command three or four days' labor, for one of his own. Even were he the best farm hand in the county, he would be throwing away a great economic advantage, were he to attempt to raise from the soil all that which he desired to consume.

157. Now, what we have seen the blacksmith and the county physician doing, nations and smaller communities are continually doing, under the operation of the principle of self-interest. Many a country imports, generation after generation, commodities a., b. and c., which it could produce more cheaply than those who made them. The reason is, that there are other branches of industry, x., y. and z., in which it has a still higher relative advantage. So far as movements of labor and capital take place, there will be a constant tendency for laborers and capitalists to come to the more favored country, and here set up industries, a., b. and c. But this will, at the best, go on slowly; and it may be altogether defeated by the discovery that commodities, m., n. and o., can be produced in the country in question, not, indeed, so advantageously as x., y. and z., but far more advantageously than a., b. and c. Consequently, all the additional labor and capital coming into this country, in this generation and perhaps in the next, may be directed toward building up industries m., n. and o.; and commodities a., b. and c. may continue to be imported.

158. Such being the conditions under which trade takes place between countries, from one to the other of which movements of labor and capital do not occur, or occur so tardily as not to overtake the tendencies to local disturbance which have been dwelt upon, we have to note two things in closing this chapter.

First, in any country, the value of an imported article does not tend to be determined by what would be the cost of production of that article in that country. It does not even tend to be determined by its cost in the country in which it was actually produced. The normal value of such an article, in such a place, depends on the cost of production of the article which is exported to pay for it, transportation being taken into account.

Second, while it is for the interest of a country enjoying great economic advantages, to apply its labor power and capital power to certain lines of production, only, looking to purchase from others many classes of commodities which it could produce as well as or even better than they, such a course is also for the economic interest of the countries with which it trades, since they are thereby enabled to obtain the products of the former country, at a lower, probably much lower, cost than that at which they could hope themselves to produce these, or to obtain them from any other quarter.

CHAPTER III.

MONEY AND ITS VALUE.

159. Exchange Arises out of the Division of Labor.—Men become the producers of that which they expect to consume but in part, if at all. Their choice as to what they shall produce, ceases to be determined by considerations affecting their personal wants, and comes to be determined mainly, if not wholly, by considerations affecting their abilities and aptitudes. They no longer produce that which they desire to eat, drink or wear. They produce that one among many things known to the market which they can produce to the best advantage, let who will, in time, eat, drink or wear it. Their own wants they look to see, in turn, satisfied by the labor of others.

To the market all producers bring their several products, or such part thereof as they do not care individually to consume. From the market each late producer, now become a consumer, carries away that which he is to eat, drink, or wear, or otherwise enjoy. In the market is done that which we call exchange.

The economic function of exchange is to bring producers and consumers together, and thus allow the division of labor to be carried as far as it will increase production. The division of labor has no economic virtue except so far as it increases production. When that point has been reached, a further subdivision of occupations and employments would be useless, or of merely curious interest. Exchange, in turn, has no virtue except as it allows the division of labor to be carried out. Its sole function, economically, is to enable each species of wealth, each article known to the market, to be produced in the place and by the person where and by whom it can be produced to the greatest advantage.

160. The Economic Function of Money.—In its function of bringing producers and consumers together, exchange discovers the need of the great agent of which we are about to speak—Money. Just as the occasion for exchange arises out of the fact of the division of labor, and as the economic efficiency of exchange is limited to that occasion, so the need of money arises solely out of the fact of exchange, and the economic efficiency of money is limited strictly to the occasion for exchange. The interests of a community require as much exchanging as will secure that division of labor which will achieve the highest productiveness of land, labor and capital; and they require no more exchanging than this. They require as much money as will enable that amount of exchanging to be effected with the least effort and with the greatest assurance of a transfer of real equivalents; and they require no more money than this. No economic efficiency other than or beyond that indicated, can justly be attributed to money.

But how does money facilitate those exchanges which it is for the interest of society to have effected? Just what is the function of money?

161. Double Coincidence in Barter.—Money facilitates exchanges by dispensing with that double coincidence, of wants and of possessions, which barter, i., e. exchange without the use of money, involves. We have seen that, so far as the division of labor is carried out, men cease to produce all or even the greater part of what they wish to consume. Producing that which they can produce to the best advantage, they look to others for those particular articles which are required for the supply of their individual wants. The producer and the would-be consumer of each article, therefore, must get together, somehow, or else the wants of the community will remain unsatisfied.

But that each producer for himself should find some person who has what he wants and at the same time wants what he has, would involve very roundabout exchanges, occupying a great deal of time, and occasioning much delay and frequent disappointments. The bootmaker who wanted a hat for his own use might find many persons who would be glad to get pairs of boots, but had no hats to give in exchange, and several persons who had hats, indeed, to sell, but were already supplied with boots, before he found one person who both had hats and lacked boots. And, moreover, when that person were found, a further difficulty would probably arise from the failure of an exact equivalency between the two articles to be exchanged. A pair of boots might be worth more than a hat; perhaps three pairs of boots might be worth four hats. Yet the bookmaker wants but one hat; the hatter wants but one pair of boots. Things would soon get into a fearful muddle, this way.

But if, by general consent, formal or implied, the producers of the community should hit upon one article which they would all agree to take in exchange for whatever they wished to sell, a vast saving of time and labor, of annoyance and disappointment, would be effected, especially if the article so taken should be one, say, wheat, susceptible of minute division, without loss of utility.

162. Money, the Medium of Exchange.—What shall we call the function which the wheat would in this case perform? Clearly it is something altogether beyond and in addition to its ordinary natural function, as wheat, which is simply to be made into flour, to be, in turn, made into bread. In the use proposed, the wheat would serve another purpose. What shall we call that purpose?

The function performed by the wheat, in the instance given, is that of a Medium of Exchange. The significance of the word medium, in this connection, is found in the fact that the wheat becomes an intermediate thing in the commerce between the producers and the consumers of any and of every article. The wheat is no longer an end, as when used for food, but a means to an end, which end may be boots, or hats, or groceries, or what not. The person who takes wheat for what he has produced may already have more wheat than he could eat in a year. He does not take it with a view to eating it, but because with it he can obtain, in kinds and quantities and at times to suit his wants and convenience, whatever he may wish to eat, drink, or wear, or to warm or house himself withal.

Now, the function which has been described is the Money function. Money is the medium of exchange. Whatever performs this function, does this work, is money, no matter what it is made of, and no matter how it came to be a medium at first, or why it continues to be such. So long as, in any community, there is an article which all producers take freely and as a matter of course, in exchange for whatever they have to sell, instead of looking about, at the time, for the particular things they themselves wish to consume, that article is money, be it white, yellow, or black, hard or soft, animal, vegetable, or mineral. There is no other test of money than this. That which does the money-work is the money-thing. It may do this well; it may do this ill. It may be good money; it may be bad money—but it is money all the same.

163. Universal Acceptability of Money.—We said, all producers, since it is not enough that an article is extensively used in exchange, to constitute it money. Bank checks are used in numerous and important transactions of exchange, yet are not money. It is essential to money that its acceptability should be so nearly universal that practically every person in the community who has any product or service to dispose of will freely, gladly, and of preference, take this thing, money, instead of the particular products or services which he may individually require from others, being well assured that with money he will unfailingly obtain whatever he shall desire, in form and amount and at times to suit his wants.

When any article, no matter what its substance or form, acquires this degree of acceptability, no matter how obtained or how retained, so that each person, in his place in the industrial order, without the expectation of consuming this article, and without reference to the character or credit of the person offering it, takes it freely from any man whenever he has anything to sell, because he knows that any other man will freely take it from him whenever he may wish in his turn to buy, that article becomes money, and remains money while that condition continues. To serve as the medium of exchange is the money-function, and whatever does this is money.

164. Money and Civilization.—It is evident that the introduction of money, even in a primitive state, vastly facilitates exchanges, and renders it easy to carry out the division of labor. It is further evident that the use of money is a condition precedent to an advanced state of industrial society. The division of labor could not without it be carried so far as is involved in complicated manufactures and extended commerce.

“It has been wisely said,” remarks M. Chevalier, “that no machine economizes labor like money, and its adoption has been likened to the discovery of letters.”

The allusion is probably to the noble sentence of Gibbon: “The value of money has been settled by general consent to express our wants and our property, as letters were invented to express our ideas; and both these institutions, by giving a more active energy to the powers and passions of human nature, have contributed to multiply the objects they were designed to express.”

165. Historical Forms of Money.—We have said that any article which acquires a certain degree of acceptability throughout the community, would thereby become money, whatever its material or form. Yet material and even form may have much to do with securing to any given article, at any given time, the requisite degree of acceptability. The industrial habits and the tastes of a people and their social conditions may make that money which among another people would be an impossible money. Rock salt long served the Abyssinians as money; rice, the dwellers on the Coromandel shore; cacoa, the aboriginal Mexicans; olive oil, the inhabitants of the Ionian islands; wampum, the early New Englanders; tobacco, the early Virginians and Marylanders; tea, compressed into small cakes, the Russians; dates, the savages of the African oases; beaver and seal skins, the peoples of many northern lands. Cattle and sheep were employed as money, alike by the early Greeks, by the Romans who conquered the Greeks, and by the Teutons who conquered the Romans.

166. The Metals as Money.—But, of all substances, the metals have enjoyed the widest use as money, from a remote period. Iron, lead, tin and copper, one or another, have been thus employed in nearly every country whose history is known.

From its numerous and important uses in the domestic arts, in the chase, and in warfare, the first-named metal was the subject of such wide and constant demand as to make its further use as the general medium of exchange, i. e., as money, very simple and natural. The art of mining being in early times very crude, small quantities of iron represented a large amount of labor, and thus contained a high purchasing power. Moreover, in comparison with wheat, cattle, and many other primitive forms of money, iron cost little or nothing to keep and was but little subject to waste, while a given mass could easily be divided into pieces of any required dimensions, which could again be reunited, by fusion, or by welding when heated. The money of Lacedæmon was of iron; the Swedes used money of this metal during and after the exhausting wars of Charles XII.; and iron is still reported to be so used by the inhabitants of Senegambia.

Lead was extensively employed as money by the early Romans and the early English, and is still used in the same way by the Burmese. Tin was used by the Mexicans as money; was long so employed in Sweden, in long, flat blocks; and is even now a medium of exchange among the Chinese and Malays and in Prince of Wales Island.

But more than iron, tin or lead, has copper, in the later centuries, been used as money. Having, from its cost of production, a high value for its bulk, it came to supersede iron in this use, when the latter metal became too cheap to form a convenient money. During the silver famine of the middle ages, copper returned to be the chief money of circulation in Europe. And though, after the revival of silver production through the discovery of Mexico and Peru, it fell out of use as a principal money of wealthy and prosperous countries, it has remained a considerable element in the monetary circulation of the world, even to this day.

Platinum was for a brief period, between 1828 and 1845, used as money in Russia, where that metal is produced; but the great difficulty of rendering platinum, now from ingots into coin, and again from coin into ingots, prevented the success of this experiment, notwithstanding that platinum is justly regarded as one of the noblest of the metals.

167. The Precious Metals.—All the other metals, however, pale before the light of two transcendent substances, the Precious Metals, so-called, silver and gold. Having numerous important uses in the industrial arts; possessing the highest adaptation for the purposes of ornament and decoration, these metals have always and everywhere exerted, beyond all other objects of human desire, a strange, a mysterious fascination upon the minds of men.

168. Coinage.—Under the title, coinage, we may take account of all methods of determining, for easy popular recognition, the quantity and quality of individual portions of that which is used as money. It is in their adaptations to the art of the coiner that the metals, and especially the precious metals, exhibit their most marked qualifications for use as money. With some kinds of money, indeed, no such mode of determination is required, the divisions being natural, as in the case of the red feathers and shells used as money, or of cattle and sheep, which only need to be counted.

With other, and indeed, most, forms of money, it is necessary to give a customary shape to the pieces to be so used. The Abyssinians, who used rock salt as money, cut it into bricks of uniform dimensions, so that each person taking a brick in exchange might know how much salt he was receiving. Here, the problem was merely mechanical; no chemical tests were required. The salt being of reasonably uniform quality, the receiver was only interested to know its quantity.

With money of gold and silver, and even of copper or iron, however, both the quantity and the quality of each piece offered may be brought into question, unless some means be adopted by which the piece shall be made to exhibit unmistakably the amount of pure metal it contains. The problem is thus both a mechanical and a chemical one, and is solved by what we call, in the limited sense, Coinage. The metal is melted, and in that state is brought to the required degree of purity, or “fineness.” It is then cast into ingots, and by successive mechanical processes, with machinery of great delicacy and power, drawn out to the required thickness, cut into planchets, “milled” around the edges, and stamped on both sides∗ with devices expressive both of the sovereignty of the nation under whose authority the coins are struck, and of the quality and quantity of the metal contained.

Coinage has generally been regarded as an act of sovereignty, and the counterfeiting of the coin has been widely punished as treason. In England, the King's sovereignty only extended to the coinage of gold and silver, the private coinage of copper not having been prohibited until the present century. So important is the money-function, so strong is the tendency to abuse the privilege of coining, so helpless are the mass of the community, especially the poor and economically weak, under a corrupted coinage, that, even in popular governments, where prerogative is not known, the private minting of money is punished by grave penalties. That coins shall fully perform their office as money, they must be taken readily, without suspicion, or at most, after a brief inspection such as even the ignorant and inexpert can give.

169. What Determines the Value of Money?—It is only the present inquiry which brings the topic of money into the department of exchange. Otherwise, money belongs to the department of production, as clearly as does any other agency of trade or transportation, cattle, carts, railways or banks. The mining of the precious metals is governed by the laws which regulate the production of other kinds of wealth. The minting of gold and silver is equally a branch of production. Assayers, refiners and coiners are as much producers of wealth as the laborers employed in a pig-iron furnace.

But under the title, Exchange, we may properly inquire why any one article, produced as we find it to be produced, under existing conditions, exchanges for so much of any other article, and not for more or for less. Pre-eminently in respect to iron or copper, silver or gold, when cut into planchets and stamped as coin, do we need to raise this question and discuss it in all simplicity and severity of reasoning, because the subject has been allowed to become involved in a thousand difficulties, from the lack of clear definitions and from the failure rigorously to exclude every thing alien or adventitious. The discussion of the laws of money has engendered so much passion and prejudice as to make it hard to secure a respectful attention, or even a rational attitude of mind towards any statement of monetary doctrine which differs in the minutest particular from that of the hearer. Men who are candid and even liberal in politics and religion become furiously or stupidly fanatical as soon as their views on money are controverted. When Sir Walter Scott made a surly critic say to the author of certain Letters on the Currency, “In your ill-advised tract you have shown yourself as irritable as Balaam and as obstinate as his ass,” he evidently intended to characterize the whole race of writers on this theme.

The value of money, like the value of any thing else, is purely a question of demand and supply. The cost of producing money is only important as affecting the supply. Limit the supply,∗ and it does not matter whether there be any cost of production or not. The advantage of taking that for use as money which has an appreciable, definite, and, as far as may be, constant cost of production, is found in the fact that the supply of such money will be limited by natural causes, instead of being left to law, convention or accident.

170. What is the Demand for Money?—The demand for money is the occasion for the use of money in effecting exchanges. In other words, it is the amount of money-work to be done.

This is not determined by the gross volume of the wealth of the community, since all that wealth is not to be, in fact, exchanged. For a similar reason, it is not determined by the amount of the annual production of the community.

It is not determined even by the volume of products to be exchanged, inasmuch as some classes of these may require to be exchanged several times, and some but once. Moreover, in spite of the difficulties of barter, many products are, through a fortunate coincidence of wants and of possessions, especially in agricultural communities, exchanged against each other. More important still, the modern organization of commerce, especially through the agency of banks, provides for the creation, and subsequent cancellation, of indebtedness∗ on account of products given and taken in exchange, to an extent which vastly diminishes the actual use of money in effecting transfers.

171. The Money-Demand a Reality.—Not the less, is the demand for money a reality. Banks and clearing-houses, checks and book credits reduce the occasion for the use of money, but they do not supersede its use altogether, nor are there any signs that they will do so in any future, near or remote. In every community, though in some more than others, goods are offered for money. Men seek money, having in their hands wherewithal to pay for it. Some of them must have money, whatever it cost. With others any appreciable increase in the difficulty of getting money, or any appreciable doubt as to the “goodness” of that which is circulating in the community, does away with the disposition to obtain it, drives them to barter, and thus destroys a portion of the demand for money.

Some part of the exchangers of every community may be regarded as always on the verge of barter. They could exchange their products for the products of others which they wish to consume, without unreasonable trouble. Others, again, would exchange their products for money in the face of very great difficulties and embarrassments; yet for each of these is a point at which difficulties and embarrassments will give rise to an effort, which will thereafter increase rapidly in force, to resort to barter or to credit, as the means of escaping the use of money. Should the matter proceed far enough, production will even be limited or modified to meet the exigency.

172. Effect of Discredit on the Money-Demand.—Thus, if the money of a country be openly discredited, as in France prior to and during the Hundred Years' War, and, again, during the Revolution; in England, under Henry VIII. and the Protector Somerset; in the United States, during the circulation of the so-called Continental currency; and in Italy, through many dreary periods of her history, men will not only resort increasingly to barter or to credit, but such discredit of the coin or other circulating medium may become a force which will operate powerfully to modify and even to limit production. Men will produce fewer things and those different from what they would have done under conditions more favorable to the division of labor and the consequent exchange of products.

This, however, can never be carried so far as totally to dispense with the use of money. In any society above the barbarous state, something must be used, to some extent, as money, so long as production goes on at all.

We see, thus, that the demand for money has no definite relation to the total wealth, or the annual product of a community, or even to the volume of products to be exchanged. The demand for money varies with the amount of money-work to be done, which, in turn, varies with the industrial organization of communities, with seasons, and with circumstances innumerable. Not the less, however, as we said, is the demand for money a real thing. Goods are offered for money; and, with a given supply, the more goods are so offered, the higher will be the value of money—that is, prices will fall. The fewer goods are offered, the lower will be the value of money—that is, prices will rise.

173. Value and Price.—It will have been noticed that, in the foregoing paragraph, I have used the word price as signifying the money-value of goods. As we stated in a previous chapter, value is the generic term which expresses power-in-exchange. Price is power-in-exchange-for-some-one-article. Where money is used, price commonly expresses power-in exchange-for-money. Where nothing to the contrary is intimated, the price of an article is understood to be the value of that article in terms of money—the amount of money it will command in exchange.

174. What is the Supply of Money?—If such is the demand for money, what is the supply? It is the money-force available to do the money-work required to be done, in the given community, at the given time. The money-force, or the supply of money, is not measured by what is usually called the amount of money, that is, the number of gold dollars or bits of paper used as money, but is composed of two factors—the amount of money and the rapidity of circulation. “The nimble sixpence does the work of the slow shilling.” There may be as much money-force in 1000 dollars, each of which passes from hand to hand four times a week, as in 4000 dollars which change owners but once from Monday morning to Saturday night. The rapidity of circulation varies widely among different communities, according to the density of settlement, the prevailing occupations of the people, the facilities for the transportation of freight and passengers. And the rapidity of circulation not only varies according to such general conditions, but it varies from day to day, with the state of trade and the temper of the public mind.

175. The Money Supply a Reality.—But while the money-supply varies thus incessantly, it is none the less a real thing; so real that, at any given time a decrease of the supply of money will enhance its value—that is, will lower prices; and an increase of that supply will reduce its value—that is, will raise prices.

We have spoken of reducing the value of money as equivalent to raising prices; and of enhancing the value of money as equivalent to lowering prices. This is manifest enough to anyone who thinks of the matter; but the student of political economy needs to become so familiar with this equivalency that he will not have to think consciously about it; but the one mode of expression will always and instantly suggest its equivalent. To enhance the value of money is, of course, to give a larger purchasing power to each integral part of the circulating money—that is, to each piece or coin, and to any given number of pieces or coins. But if money purchases more of other things, other things, conversely, purchase less of money—that is, bear lower prices.

On the other hand, to say that the value of money is lowered, is to say that money purchases less of other things; but if money purchases less of other things, other things, conversely, purchase more of money—that is, bear higher prices.

176. International Distribution of Money.—We have seen that it is impossible to say what, at any time, in any community, is the demand for money, or the supply of money. We have now to see that, with money having a natural cost of production, no one has any need to know, either how much money there is, or how much is needed, inasmuch as the demand for money will, under such a system, easily and surely, because automatically, bring in the due supply required to enable all the exchanges of the community to be transacted with the minimum of effort and delay, and with the highest assurance of the exchange of real equivalents.

The territorial distribution of money is effected through the agency of Price.

Let us suppose that, of two trading countries having the same kind of money, the amount in each, i. e., the number of pieces or coins, is such that, the rate of circulation being what it is, and the demand for money what it is, the scale of prices in the two countries precisely corresponds, cost of transportation of goods being, for the purposes of the illustration, left out of account. Now let us suppose that, all other elements of the case remaining unchanged, the amount of money in one of these countries, A, is suddenly and largely increased, say, by the discovery of treasure or by the opening of new mines. The supply of money having thus been increased, the value of money, as we have seen, must decline, that is, prices must rise. A given amount of money will purchase less of other things than before, which is equivalent to saying that other things will purchase more of money.

Now, if goods will purchase more money in that country, the owners of goods in the other trading country, B, will at once feel themselves impelled by self-interest to send their stock thither, to secure the benefit of the higher prices. Having exchanged goods for money in A, they will bring the money back to their own country, B. Why not invest the money in the country where they sold the goods? Because, by the conditions assumed, though A is, as they have found, an excellent market to sell in, since prices are high, it is, from that very fact, a bad market to buy in.

177. And while all owners of goods in B are hurrying to get their goods to A, in order to take advantage of the higher prices prevailing there, every holder of money in A is equally impelled to get his money as soon as possible to B, in order to take advantage of the lower prices there. Where all parties are so fully agreed, the thing is likely to be done quickly. Money flows from A to B until the equilibrium which was disturbed has been restored, that is, until the general scale of prices is the same in both countries. After this, the two countries will continue to trade as before; but each will keep its own money. A will pay for the cotton, rice and sugar of B with its own wheat, lumber, coal and ice.

178. The Money Movement Automatic.—It will be observed that the movement of money which has been described was not due to any one discovering that A had more money than it needed, or than its proportional share. No statistician or banker announced this result after computing the demand for money and the supply of money in that country. The exchanges which restored the equilibrium of prices were due wholly to the action of individuals, moved by a view of their own interest. Not one of them cared, perhaps not one of them knew, whether money was in excess in A, or not, but each, finding that by sending goods from B to A, or money from A to B, he could secure a profit, contributed to the result.

We have seen, in speaking of retail exchanges (par. 149), that a great amount of resistance is experienced in the operation of what are called “the laws of trade,” and we shall have occasion to note, when we come to speak of wages, that the laborer's inertia, ignorance and poverty defer greatly, and even sometimes defeat altogether, the movements from place to place, or from occupation to occupation, which is required to secure his interests.

While the actual freedom and fullness of movement can, in no department of economic activity, reach the theoretical maximum, the result is more nearly obtained in the department under consideration than in any other. The persons who ship goods or money, in consequence of excess or deficiency in the money supply, being merchants of large experience and ample means, kept fully advised of the state of the markets by weekly letters and price-currents, and in later years, by information received daily, and now, even by hourly reports, through land telegraphs and ocean cables, the actual here closely approximates the theoretical readiness and completeness of movement. At the same time, it is easy to exaggerate even that readiness and completeness.

179. Picking or Selecting the Coin.—We have seen that any local excess of money, as between one country and another, immediately sets in motion forces which tend to restore the equilibrium. The local excess of money also promotes the use of the precious metals in the industrial and decorative arts. This application of the metals, always considerable, may be readily increased through a reduction in their value. As less and less of other things, wheat, iron or cotton, or of labor which produces all these things, will purchase a given amount of gold and silver, more gold and silver go to the melting pot.

In the case of exportation, or the melting of coined money, due to local excess, what determines the selection of the coins to be exported or melted? Is it purely a matter of chance, or is it controlled by the comparative proximity of coins to the place of exportation or the seat of the manufacture of jewelry, or of dental goods, or of photographers' supplies; or does some distinct economic force enter to decide that certain coins shall go and others stay? Let us inquire.

180. Irregularities in the Coin.—In the process of coining, it is inevitable, notwithstanding the truly admirable science and skill applied to this art, that differences should exist between coins. The mints of some countries do their work much more exactly than others;∗ but the best mints can not turn out pieces absolutely uniform in fineness and weight. A certain range of variation must be allowed, and this is generally formulated by law, and is known as the “tolerance” of the mint.

Even were all coins issued of exact uniformity, the wide difference in usage would soon make an appreciable difference in their weight. Some go early into hordes or deposits; others are worn down by almost continuous circulation; others still are dealt with illegitimately by clipping, punching, and “sweatting,” till a considerable portion of their substance disappears.†

If, now, with a body of coin of unequal value, a demand for the money-metal arises, for export or for use in the arts, the process of picking or selecting coin will at once begin. All merchants and bankers dealing largely in coin will lay by those of full or nearly full weight, and throw the lighter specimens back into circulation.

This process of picking or selecting coin, begins early in the history of such a demand as has been indicated, and proceeds steadily as long as that demand lasts. The operation costs practically nothing, and the profit, where great numbers of coins are daily handled, is large and certain. Clerks and cashiers become so expert that they can tell light coins by the touch, while, if doubt exists, a pair of adjusted scales will in an instant decide the question.

181. Gresham's Law.—The observation of this process of picking or selecting coin has led to the statement of the economic theorem, known as Gresham's Law,∗ viz., that “bad money always drives out good money.”

Thus baldly stated, as in most treatises it is, the theorem is false. That effect will not be produced unless the body of money thus composed of heavy and of light coins, is itself in excess of the needs of the community, as determined by the law of the territorial distribution of money, which has been stated. In a country in which money is, according to this standard, deficient, a light coin may have, by reason of that deficiency, a nigher purchasing power than a heavy coin in a country in which money is in excess.†

182. The Value Denominator, usually called the Measure of value.—Thus far we have spoken of but one function of money, that of the Medium of Exchange, and we have written as if there were but one. This has been for the purpose of fixing the reader's attention strongly on the work of money, as the medium of exchange.

In addition to this function of money, however, nearly all economists are agreed in recognizing another independent and co-ordinate function of money, viz., as a “Measure of Value.” “A second difficulty,” says Professor Jevons, “arises in barter. At what rate is any exchange to be made? If a certain quantity of beef be given for a certain quantity of corn, and, in a like manner corn be exchanged for cheese, and cheese for eggs, and eggs for flax, and so on, still the question will arise—how much beef for how much flax, or how much of any one commodity for a given quantity of another? In a state of barter, the price current list would be a most complicated document, for each commodity would have to be quoted in terms of every other commodity, or else complicated rule-of-three sums would be necessary. Between 100 articles there must exist no less than 4950 possible ratios of exchange. All such trouble is avoided if any one commodity be chosen, and its ratio of exchange with each commodity be quoted. Knowing how much corn is to be bought for a pound of silver, and, also, how much flax for the same quantity of silver, we learn without further trouble how much corn exchanges for so much flax. The chosen commodity becomes a common denominator or common measure of value, in terms of which we estimate the value of all other goods, so that their values become capable of the most easy comparison.”

183.—An Incidental and Subordinate Function.—Admitting the importance of having a value-denominator, in which the prices of all articles shall be expressed, we can not admit that this constitutes a separate and independent function of money, since it is evident that gold or silver, or any other article, can only serve as a value-denominator by and through being used as the medium of exchange.∗ It is only because silver, for instance, is, in fact successively exchanged against all the articles in the market that the respective values of these articles, in terms of silver, become known, and that it, hence, becomes possible to make up the price-current with 100 specifications, e. g., and not with 4950. Instead of this being an independent and co-ordinate function of money, therefore, it is merely an advantage resulting from the use of money as the medium of exchange. It is, at most, an incidental and subordinate function. The better statement, still, would be that money serves as

I. The Medium of Exchange:

• (a)Dispensing with the double coincidence required in barter.
• (b)Furnishing a value-denominator.

184.—II. The Standard of Deferred Payments, usually Called the Standard of Value.—We have seen that it is of the essence of a sale for money, that the producer, or whoever at the time stands in the place of the producer, parts with his product, receiving therefor something which he does not expect personally to consume. His reason for receiving this article in exchange for his product is that with it he expects to obtain, in time and place and amount most suitable to his convenience, that which he shall desire to consume. In other words, he, by the act of exchange, defers his own consumption of the equivalent of his product, taking a piece or pieces of money, as a sort of certificate or pledge that he shall receive such an equivalent whenever he gets ready to enjoy it. It was in this view of money that Adam Smith said: “A guinea may be considered as a bill for a certain quantity of necessaries or conveniences upon all the tradesmen of the neighborhood.”∗

It will appear that, looking toward the satisfaction of the producer's wants, a sale for money is only half a transaction. He sells his product for money, and must, in turn, sell, so to speak, his money for the product of others, such as he may desire personally to consume. To do this, however, though a two-fold transaction, requires far less of time and labor, and involves far less liability to ultimate disappointment, than the attempt to secure the “double coincidence of wants and of possessions,” spoken of in par. 161.

185. Money a Pledge of Future Enjoyment.—But while, in the very act of a sale for money, the producer defers his acquisition of the products of others, the question, when that acquisition shall be realized, remains for himself alone to answer. He has the money, and whenever he chooses to step into a shop and lay it down upon the counter, he may take his equivalent then and there, whether in meat or flour or groceries or clothes or tools for his trade.

186. Sales on Credit.—We are now to contemplate transactions of a different character, which give rise to a new function of money, viz., exchanges where the equivalent is not, at the time, received by the seller of goods; but where future payment is promised. These transactions are known as Sales on Credit, because the willingness of the producer to part with his goods, without at the time receiving an equivalent, depends upon the credit of the purchaser, or the degree of confidence attaching to his word or his bond. In such a case, the purchaser's character for honesty, his responsibility, as measured by the amount of his possessions, and the efficiency of the law in enforcing payments, all must be taken into account.

187. The vast extension of credit-sales under the modern organization of trade, makes a new and very important requirement upon that article which is to be used as money, viz., that, in addition to being conveniently portable, not liable to deterioration or accidental injury, easily subdivided, etc., it shall be reasonably stable in value. Where a man takes money in his hand as the equivalent of the product sold, which we call a sale for cash, he has no anxiety on this account. He may exchange his money for goods the same day. If not, it is because he does not choose to do so. The matter rests with him. But if a man is to forbear payment for a considerable time, it becomes of great importance that he should know what that which he is to receive at a distant date will be worth to him when he gets it. On the day of the sale, the money which is stipulated is worth the goods; otherwise, the sale would not have taken place. On the day of payment, the money may be conceivably worth twice the goods, or only half the goods. The risk of some undeserved loss, the chances of some unearned gain, are inherent in the nature of sales on credit. Whether that risk of loss or chance of gain shall be great or small, will depend on the degree of stability which attaches to the value of the article used in that community, during that period, as money.

It is evident that articles which might be equally well fitted for use as money in sales for cash, that is, which might be otherwise equally well fitted to serve as the medium of exchange, may be very differently qualified to serve as what we call the Standard of Deferred Payments.

188. The Grains and the Metals.—Thus, if we compare the grains and the metals, we note that the former are quickly consumed, the greater part in the first year, all within the second year; while the latter last, even in active use, many years. The average “life” of iron may perhaps be stated at fifteen to twenty years; the life of copper is much longer, and that of gold and silver covers several human generations.

From these facts it results that, if the production of any grain, e. g., corn or wheat, falls off considerably, in any year, through excess or deficiency of moisture or heat, the value of that grain will rise rapidly, it may be to an inordinate height. The production of gold or silver, and, in a lower degree, of copper or iron, might be sensibly diminished for years without greatly affecting the quantity and, by consequence, the value of the existing stock.

Now, if wheat were to be used as money, it would not infrequently happen that, in the irregular alternation of good and bad harvests, a producer selling his goods on one or two years' credit, would, when the payment came to be made, receive one-half as much more, or even twice as much in value, as he would have received had the payment been made at the time of the sale; or he might receive only two-thirds or even only one-half what his goods were then worth. Nor could the injuries which the producer might suffer by receiving less than the value of the goods he parted with, be trusted to be compensated by the unearned gains he might make at other times. So irregular and unaccountable is the occurrence of bad seasons, that one man might have nearly all bad luck and another nearly all good luck. The former might be ruined, bankrupted, and driven out of his shop or farm, before the tide turned in his favor. As many as seven successive bad seasons have been known in England. On the other hand, the metals are not subject to frequent value variations of great extent, though liable to incessant oscillations of moderate range. Gold and silver, especially, on account of their high degree of durability, are almost exempt from the influence of the production of a single year.

189. Fluctuations in the Value of the Precious Metals.—But while the precious metals are thus almost a perfect “standard of deferred payments,” from one year to another, they are yet subject to great periodic variations from generation to generation and from century to century. The production of the precious metals is of the most spasmodic character. At times, a flood of gold, or of silver, or of both, has poured from newly-opened mines, as after the discovery of the mines of Potosi in 1545, and of the mines of California almost coincidently with those of Australia, in 1849-51; at times, on the other hand, mining industry has almost wholly ceased, either from the exhaustion of known deposits, or as the result of war or civil disturbance. Such a cessation of mining industry followed the invasion of the Roman Empire by the Teutonic tribes. The series of revolutions and insurrections in the Spanish American States, beginning in 1809, destroyed the mining machinery, scattered the mining populations, and closed the mines of regions which had previously been among the most prolific sources of the world's supply of metallic money. In agriculture, however, while incessant fluctuations in the supply of the grains, even those most largely and widely planted, result from the mutability of the climate, the changes from generation to generation, and from century to century, are not so far reaching.

The vast breadth of arable land of reasonably uniform quality; the simplicity of the processes of agriculture, and the wide diffusion of the art of tillage; the comparative immunity of the soil amid ravages which greatly impair, perhaps permanently cripple, manufacturing, and in an even greater degree, mining industry; the limited applicability of the principle of the division of labor to agriculture and the relative inefficiency of machinery in its operations: these causes combine to render bread-corn, in truth, what Francis Horner pronounced it to be, “the real and paramount standard of all values.”

190. Corn Rents.—The superior stability of value of the cereals, through long periods of time, has led to the suggestion that, in the case of contracts extending over considerable terms of years, grain should be adopted as the standard for determining the obligations of the debtor, the rights of the creditor. To a limited extent this has been done; but the tendency to express the consideration of all sales in terms of that which is the current money of daily use in the community is so strong that few persons, even of those who are acting as trustees, take the trouble thus to guard the interests they represent. The manifest convenience of having that for the standard of deferred payments which is also the medium of current exchanges, the indolence and want of initiative in the mass of mankind, perhaps, also, a superstitious regard for the precious metals, combine to withstand the reasons which urge the expression of rents, interest and annuities in terms of some leading grain, in the case of long leases, permanent loans and fixed charges upon land.

191. Multiple or Tabular Standard.—It has even been proposed to go further, in the effort to avoid those undeserved losses which result to debtors or to creditors, from changes which take place in the value of even the precious metals through long periods of time. The scheme for a multiple standard or tabular standard, to form which a great number of articles should be joined together, in order that their individual value-variations may offset each other, was, early in the century, suggested by writers in England and Germany, and has more recently been advocated by Prof. Jevons of the former, and by Prof. Roscher of the latter country. This proposed scheme will be briefly discussed in Part VI.

CHAPTER IV.

MONEY AND ITS VALUE—CONTINUED—DEBASED COIN: SEIGNIORAGE.

192. Debased Coin.—We now approach a question which should be decided entirely upon the principles regulating the value of money already laid down, yet which is the subject of so much misconception, which has been so covered-over with false reasoning and which is so sure to arouse prejudice and passion, that it is needful for the teacher to accompany the student over the ground, and, if possible, save him from the pitfalls and quagmires into which trained logicians and practiced writers have fallen. Prof. Jevons has remarked that a kind of intellectual vertigo attacks all who treat this fatal theme of money; and we have now reached the point where most people lose their heads. The beginner ought not to be left to find his way here alone, even if he has already been provided with the chart and compass to guide his steps.

193. Seigniorage.—The most safe and convenient entrance to this land of gins, and snares, and griefs, is through seigniorage. That term has long been applied to the amount of metal abstracted by government, or the lord, the seignior, before coinage. Seigniorage may be of two kinds, or rather two degrees.

1. When the cost, either actual or approximate, of coinage is taken out, and thus the state or the lord is reimbursed for the expense.

2. When more metal than is necessary to repay the expense of coinage is abstracted; and thus the state or the lord makes a profit by the coinage.

194. Cost of Coinage.—Let us consider the first. Shall the value of the coin be computed according to the market value of the contained metal, viewed as so much bullion, or shall the cost of the mintage be added to the value of the metal? For instance, if the expense of making the coin called a dollar be one cent, shall the coin contain a hundred cents' worth of gold or silver, or shall it contain only ninety-nine cents' worth, and the cost of the coinage be added to make up the dollar?

On this point the opinions of economists and the practice of governments differ. Although the question involved is not wholly economic in its nature, but is in part matter of political and fiscal expediency, we will here briefly state the arguments on the one side and the other.

On the one hand, it is said that gold and silver, being wanted in the form of coins, are, for that reason, worth more in coin than in bullion. Serving an additional use as coined money, they are the subjects of a demand over and above what exists for uncoined bullion, a larger demand justifying a higher price.

It is urged that there is no more reason why gold in coin should not be valued higher than gold in bars, than there is why gold in bars should not be valued higher than gold imbedded in quartz. Note the treatment of the other metals, it is said: Iron is sold in the form of plates, rivets, rods, and chains, at more than the price of iron in the pig. In the same way, if gold in coin costs more, and is more useful than in ingots, those who want it in the form of coin, and not the whole community, should pay for the coinage.

Moreover, it is urged, if such a charge be not made, a vast amount of metal will alternately be coined and melted down, recoined, and again melted. A seigniorage charge will put a premium upon the exportation or melting of coin so that bullion will be taken instead.

195. Gratuitous Coinage.—It was in this view that Dudley North called gratuitous coinage∗ “a perpetual motion found out, whereby to melt and coin, without ceasing, and so feed goldsmiths and coiners at the public charge.”

In the face of these considerations, however, some of the greatest commercial nations, England foremost among them, have maintained gratuitous coinage. Nor is this course wholly without economic justification.

It is said that, while the expense of equipping, officering, and operating a mint is large, the difference in expense caused by minting more or fewer coins, is very small. For this, it is argued, the country establishing gratuitous coinage is compensated by the instantaneousness with which the export of gold follows the slightest accumulation in excess of the wants of trade.

196. Seigniorage in Excess of Cost of Coinage.—So much for seigniorage which only covers the cost of coinage.∗ We have now to speak of mint charges which exceed that cost, and become a source of revenue to the state. In the old days of high prerogative, kings frequently made their sole right of coinage a means of profit. In England, during the reign of Edward IV., the seigniorage on gold was above 13 per cent.; during the reign of Henry VII., it once rose to 16 per cent. These, however, were exceptional instances in England. In France, in Italy, and in most of the countries of continental Europe, before the great revival of modern commerce, debasement of the coin was a favorite resort of weak or profligate monarchs. Both in quantity and quality, in weight and in fineness, the circulating money was pinched and robbed, until the actual amount of pure metal bore sometimes a ludicrously small ratio to the original fine contents of the coin. The English “pound” was once a pound-weight of silver. The pound of standard silver is now coined into 66, instead of 20 shillings. The “pound scots,” of which we read, had but

of its original weight. The florin and the Spanish maravedi were once pieces of gold. The former is now a piece of silver; the latter a piece of copper.

197. What is the Effect of Seigniorage on the Purchasing Power of Coin?—On this subject I follow Mr. Ricardo without deviation, believing that he was the economist who most fully and justly apprehended the relations of money to price; and that departure from the principles laid down by that great thinker leads to confusion, misconception and needless controversy.

Let us suppose that a certain country requires for the purposes of domestic trade 1,000,000 pieces, each containing 100 grains of fine gold. This would involve the use of 100,000,000 grains of gold as money; and a certain average level of prices would result from the relation between this amount (its rate of circulation being assumed constant, for the purposes of the following illustration), and the demand for money arising from the exchanges actually requiring to be effected by the use of money.

Now, suppose the principle of seigniorage to be introduced, the sovereign, out of every hundred grains brought to the mint, taking one to repay the actual cost of coinage, putting into circulation 1,000,000 pieces of 99 grains each, and placing 1,000,000 grains in his storehouse as treasure, or causing it to be manufactured into plate or ornament. There are now only 99,000,000 grains of gold in circulation, but the same number of pieces, each of the same “mint-value,” i. e., 100 grains.

Will each piece now purchase as much of other commodities as before, or less?

I answer, as much. There is the same demand for pieces for the purposes of exchange; there is the same supply; the same prices must result.

But suppose the sovereign proceeds further, and takes, not one grain, but ten, from every hundred, issuing 1,000,000 pieces of only 90 grains each. Will the purchasing power of each piece be affected? Not in the least. There is the same demand for pieces, the same supply. People still want pieces of money; can only get them by giving commodities for them; have as many commodities and no fewer to give; and there are just as many pieces and no more to be obtained in this way.

198. Excessive Issues.—But let us take a step in a different direction. Let us suppose that the sovereign, instead of placing in his treasury the 10,000,000 grains which he took under his right of seigniorage, coins this gold also into pieces of 90 grains each, and pays them out for personal or public expenses. What will be the result? Depreciation will at once begin. The 90,000,000 grains, when coined into the same number of pieces of the same official (mint) denomination as the 100,000,000 had been, retained the same purchasing power; but when the 100,000,000 are coined into a larger number of pieces, the purchasing power of each piece at once falls.

199. Ricardo's Statement.—“While the state alone coins,” says Mr. Ricardo, “there can be no limit to this charge of seigniorage; for, by limiting the quantity of coin, it can be raised to any conceivable value.”

“On the same principle,” he remarks, “viz., by a limitation of quantity, a debased coin would circulate at the value it should bear if it were of legal weight and fineness, and not at the value of the quantity of metal it actually contained.”

“In the history of the British coinage,” he continues, “we find, accordingly, that the currency was never depreciated in the same proportion that it was debased, the reason for which was that it was never increased in quantity, in proportion to its diminished intrinsic value.”

Mr. Ricardo did not flinch from the assumption of a seigniorage of 50 per cent. “There can,” he asserted, “exist no depreciation of money, but from excess. However debased a coinage may become, it will preserve its mint value; that is to say, it will pass in circulation for the intrinsic value of the bullion which it ought to contain, provided it be not in too great abundance.”

This doctrine, which has proved “a hard saying” to many economists, a stumbling-block and a rock of offense to many readers, is, it will be observed, merely the rigorous, courageous application of the principle that the value of money is determined solely by the relation between demand and supply. I believe it to be the true doctrine of monetary circulation.

It is not to be thought that Mr. Ricardo advocated a seigniorage in excess of the cost of coinage. “ The limits beyond which a seigniorage can not be advantageously extended,” he says, “are the actual expenses incurred in manufacturing the coin.” The objections to a debased coinage are two: First, inasmuch as the mint value of such coins is above the value of the bullion they contain, the excess of such coins in circulation may proceed to a high degree, producing mischievous effects upon trade and industry, before exportation begins, since, for use in foreign lands, the coins have value only according to the amount of pure metal in them. Secondly, the practice of reducing the amount of bullion in the coins is deemed to be a dangerous one, because there is no point at which we can be sure it will stop. Every fiscal exigency of the government will suggest fresh attacks upon the integrity of the coin.

These objections, the first of which alone is based upon economic principles, are precisely those which we shall see (pars. 441-445) offered to the issue of inconvertible paper money.

200. The Omitted Proviso to Ricardo's Statement.—There is one proviso which should be attached to any statement of Mr. Ricardo's theorem regarding the value of debased coin. That Mr. Ricardo failed himself thus to qualify his proposition “that, however debased a coinage may become, it will preserve its mint value,” has caused much misapprehension of his views. The required proviso has already been intimated (par. 172), when we were speaking of causes which may diminish the demand for money.

If debasement of the coin be carried so far and carried on so long that a popular reluctance to receive the money pieces be generated, sufficient to cause men to modify or limit their production in order to avoid exchanges, or to cause them to encounter the inconveniences of barter rather than handle the distrusted coin, then depreciation may result. That is, the supply of money will become excessive through the blow inflicted upon the demand for money. But this can happen on no other condition; and a popular reluctance to receive coins is not a necessary consequence of debasement. Why do men take money at all? We said, in first describing the money function, that it is not because they have, at the time, any personal use for the gold or silver or iron or leather, or paper, or wood, of which it may be composed; but it is taken as a means of obtaining, in due time and place, that which they do desire to consume. Men take money because they believe others will, in turn, take it from them. If a man be only assured of this, he has no reason to care, in fact he does not care, what the money is made of, what the coin contains.

201. Depreciation not a Necessary Result of Debasement.—Let us suppose the coin of a country, without being increased in amount, to be debased three per cent., and the fact to become known. The habit of accepting the coin is strong; the acquired momentum of the circulating mass is great; men must (1) either take the coins in exchange for their products, or (2) they must cease to produce; or (3) they must change their industry and produce that which does not need to be exchanged, i. e., that which they will themselves consume; or (4) they must resort to barter. Now, any one of the latter courses involves an initial loss, greater, doubtless, much greater, than any possible loss in receiving coin debased three per cent. For this reason men continue to receive the coin, or, more properly, they continue to receive it without reasoning at all about the matter, having been accustomed to take it freely. If any man, more thoughtful than his fellows, hesitates to accept the money pieces, his doubts vanish on beholding all around him receiving it without demur. That is all he needs. If others will take the coins from him, his own occasions will, in turn, be answered. He does not want to eat the coins, or to make them into jewelry, but to use them in buying the necessaries of life. If they will do that, they are good enough for him. And so a full and free acceptance of a debased coinage might be established, in spite of a momentary feeling of reluctance, or even without such a feeling arising at all. Just this condition of things has existed, in many a country, many a time.

Suppose that, after the community has become accustomed to a seigniorage of three per cent., some exigency of government, or the greed of the prince, should lead to a further equal debasement of the coin, making a total of six per cent. In that event, either the habit of accepting the coin of the realm would maintain the circulation of the debased money, or, if that circulation were to be challenged by popular objection, then the question would be presented to every man, as before, whether he would take this debased coin, or cease producing, in whole or in part, or change his industry so as to produce articles which would not require to be exchanged, or, lastly, resort to barter. It might easily happen that to do any one of the things last spoken of would cost any producer more than the possible loss by accepting coin debased three per cent. further; and, so, a full and free circulation of the debased coin might be maintained.

202. And it is to be borne in mind that this coin circulates at its mint-value, not at a discount of six per cent., or of any other rate. There is no reason why the coin should be subjected to a discount. Assuming, as we have done, that the habits of the people in regard to production and trade have not been, as yet, changed by the debasement of the coinage, there are just as many goods to be exchanged as before. Just as many money-pieces are, therefore, needed, while no more money-pieces are to be had, since we have all along made the condition that the metal abstracted by the government should not be put into new coins.

203. Depreciation Results from Excessive Issues.—But now let us suppose that, when the debasement has proceeded to the extent of ten per cent., government takes the gold and silver it has abstracted, and issues it in the form of new coin debased like the other. Immediately depreciation will set in. The value of money, like the value of any thing else, is determined by the relation between demand and supply. The goods to be exchanged for money pieces remaining the same in amount, and the number of pieces having been increased, the purchasing power of each piece falls.

So far the effect is the same as in the case of an excess of full-metal coin; but, as depreciation proceeds, the essential difference between the two kinds of money appears. With an excess of full-metal coin, exportation begins at once. The country becomes a good market to sell in, a bad market to buy in, both for the same reason, viz., prices are higher there; and the course of exchange will speedily bring in the remedy. With debased coin, however, no outlet is afforded until the depreciation reaches the point when the 90 grains of fine metal in the coin will bring more abroad, melted down, than the coin (though of the mint-value of 100 grains) will bring at home. Within this limit, depreciation may proceed without remedy.

204. Inflation.—A permanent excess of the circulating money of a country, over that country's distributive share of the money of the commercial world, is called inflation. Its influence on industry and trade, and on the distribution of wealth, will be discussed hereafter.

CHAPTER V.

INCONVERTIBLE PAPER MONEY.

205. In monetary science, the true entrance to paper money is through seigniorage. If we have rightly apprehended the relations of seigniorage to the circulation of coin, and to prices, we need have no difficulty in dealing with any question arising under the present title.

“The whole charge for paper money may be considered as seigniorage.” This remark of Mr. Ricardo is true and very significant. We have seen that the State may withhold from the coin one per cent. of the pure metal, to cover the cost of coinage; that it may withold ten per cent., as a means of securing revenue for the treasury; that the State may go further and, by successive invasions of the coin, take out two-thirds of the money metal, as in the case of the English pound sterling, or all but three per cent., as in the case of the pound Scots; that it may even go further still and substitute copper for gold, as in the case of the Spanish maravedi.

Now let the last step be taken in the same direction, and, instead of pieces of metal, let the public treasury issue pieces of paper bearing the names of the superseded coins, and we shall have a body of money governed by precisely the same principles, alike as to circulation and as to the resulting prices of commodities, as a debased coinage. Paper money is money upon which the seigniorage charge is one hundred per cent.

206. Historical Instances of Inconvertible Paper Money.—The invention of paper money, like many another great discovery, is traced to the orient. When Marco Polo visited China in the twelfth century, he found in circulation a money consisting of pieces cut from the inner bark of the mulberry tree. These were issued “with as much solemnity and authority as if they were of pure gold and silver.” A century later, one of the rulers of Persia introduced paper money in direct imitation of the Chinese, the imitation extending even to devices and names; but the experiment here was less fortunate than the Chinese experiment, since, after two or three days of enforced circulation, the markets were closed, the people rose, the officials were massacred, and the money disappeared. A century later, we hear of paper money in Japan.

It took the duller-witted races of Europe some centuries more to comprehend the mysteries of paper money; and meanwhile princes had to content themselves, when hard-up, with operating upon the coin, swearing their coiners not to divulge the secrets of the mint, and juggling their people just as far as the omnipresent scales and acids of the banker would permit. But when paper money became once fairly introduced into Europe, it was, like some of those other inventions and discoveries referred to, rapidly improved in its details and extended in its applications.

An eminent writer on finance, M. Wolowski, claims for his native country of Poland the proud distinction, as he regards it, of having been the only nation in Europe which has given no example of the issue of paper money; but it is to be remembered that Poland lost her independence a long while ago. Had she survived to the present time, it is not unfair to believe she would have her paper money history equally with the gigantic neighbors who crushed out her national life.

Of the present States of Europe, all which border on the Mediterranean, excepting France and Italy, have inconvertible paper money, issued by government. Russia, though both a northern and a southern State, casts in its lot with the Mediterranean nations in this respect. The northern tier of countries, Great Britain, France, Belgium, Holland, Germany, and Scandinavia, have paper money, indeed, but of that class which we shall describe, under a subsequent title, as Bank Money.

207. Characteristics of Inconvertible Paper Money.—The kind of money of which we are writing may either be issued originally by the State, as in the case of the present paper money of most of the southern States of Europe already mentioned; as in the case of the “assignats” and “mandats” of the French revolutionary epoch; as in the the case of the “Continental currency” of the American revolution, and of the “Greenbacks” and “Confederate notes” of the war of secession; or, secondly, it may result from the degeneration of bank money, originally issued with the character of convertibility, but, by some exigency of government or stress of commercial misfortune, losing that character, and protected in its inconvertibility by law, as in the case of the English Bank money of the “Restriction” (1797—1821), as in the case of the notes of the Bank of France during the revolution of 1848, and, again, during and after the war of 1870-71, and as in numerous other cases of minor importance.

Generally speaking, forced circulation is an attribute of this sort of money, though that character may be disguised, especially in the case of degenerated bank money, by one artifice or another. For instance, the money may not be made legal tender, but all remedy at law may be taken away from creditors who refuse to receive it.

Paper may be declared to be redeemable in coin; that promise may even be borne upon the face of the paper; but if provision be not made so that, in fact, every holder of a note can obtain coined money therefor at will, the paper is inconvertible. If any conditions to redemption are interposed, it is none the less inconvertible than if redemption were not even promised.

The pledge of public lands or stocks for ultimate payment, makes no difference, in this respect. No paper money is convertible, the full, immediate and unconditional redemption of which is not, at all times, within the choice of the holder.

208. Is this Properly Called Money?—American economists have generally agreed to deny the title, money, to such issues. Indeed it is as much as one's reputation for economic orthodoxy is worth, to concede that inconvertible paper may become money.

If we seek a reason for this attitude of the economists, we find that it is because they deprecate the use of such a “circulating medium,” deeming it mischievous, pernicious, destructive of industrial and social well-being. But, as I have ventured elsewhere to remark, it would be as reasonable to deny that whisky is drink, because we deprecate its use as drink, as to deny that inconvertible notes are money because we deprecate their use as money.

The economists have dealt with the subject as if the question were necessarily this, money or not money? money being assumed to be, not only a good thing in general, but always beneficial, in all relations and under all circumstances. And, inasmuch as they think they have shown (in which I fully agree with them), that the use of inconvertible paper produces very injurious effects, they deny that it is entitled to be called money.

According to the views presented in this treatise, the sole test of money is the performance of the money function. As has been said, that which does the money-work is the money-thing. If it does this work well, it is good money; if it does this work ill, it is bad money.

209. May Paper Money Serve as the Common Medium of Exchange?—About this there can, I conceive, be no doubt whatever. Take the United States “Greenbacks” of 1862 to 1879. Did producers accept them readily in full payment for goods? Yes, with the utmost readiness. Did men resort to barter to avoid the use of this medium of exchange? No. Did men refuse to produce, or contract their production, or modify it, lest they should have to receive those circulating notes in payment? Again, no.

There never had been a period in our history when the division of labor was carried further; when the differentiation of industry and the diversification of production went on more rapidly. This is the sure test of the performance of the money function. The differentiation of industry and the diversification of production involve increasingly the use of money. Whenever production is being enlarged and diversified, there, without any question, something is acting successfully as the medium of exchange.

Observe that it is not now a question of prices, of how many dollars in greenbacks were required in 1864 or 1874 to buy what ten dollars in gold would have purchased in 1860, or would purchase at the present time. That, as we have seen, is a matter of the volume and rapidity of circulation. The question now, is simply as to the freedom and fullness of circulation.

It is not asserted that such paper is always and everywhere money. It becomes money when it begins to do the money-work; it remains money as long as it continues to do that work; it falls out of the category of money when it ceases to do that work. After the American Congress had issued the “Continental” money in such quantity that even the treasury ceased to keep a record of the issues, and the value had sunk to 200:1 of silver, there is no question that, for a short period before the notes finally disappeared and silver came back, the notes ceased to be money. Men would not take them; modified their production, or curtailed it to avoid the necessity of taking the discredited paper; resorted increasingly to barter, in spite of all its inconveniences. The same fate befell the French “mandats” after the revolutionary authorities had issued “assignats” to an amount popularly stated at forty-five thousand millions of francs. The Confederate notes ceased to be money upon the collapse of the government that issued them.

210. May Paper Money serve as the Value Denominator?—It is at this point that the economists appear to me most deeply in error, insisting, as they do, that here is something which metal money does, but paper money can not do.

It was said, in the last chapter, that money, in performing the function now in question, is commonly spoken of as the “Measure of Value.” Now, what money does in this connection is no more than to serve as the common denominator of values, as described by Prof. Jevons, in par. 182. It was shown in the pages immediately following, that this function is not a separate and independent function of money, but a purely incidental and subordinate function; that not only is any thing which is competent to serve as the general medium of exchange, adequate also to serve as the common denomintor of values; but that any thing which does, in fact, serve as the medium of exchange, must, in the very act and part of doing so, create the price-current, which is what is sought under this title.∗

If corn, beef, wool, potatoes, coal, and all other articles in the market are daily exchanged for that one article—money—no matter of what it consists, or why it became money, we have, as the direct result of those transactions, the means of comparing the values of corn, beef, wool, and all other articles: that is, we have our price-current. If all those articles are exchanged against pieces of paper, we obtain their exchanging proportions just as really, just as accurately, readily and intelligibly, as when they are exchanged against pieces of gold, silver or copper. If one article brings three pieces of paper, another ten, another eight, we learn the comparative value of those articles as quickly and easily as if the first brought three pieces of silver, the second ten, and the third eight.

211. May Paper Money Serve as the Standard of Deferred Payments?—We have seen that paper money may become the general medium of exchange, being taken as freely and eagerly as money of silver or gold. We have also seen that whatever serves as the general medium of exchange does, by that very fact, serve, also, as the common denominator of values, furnishing the price-current from which are determined the exchanging proportions of all commodities in the market.

That paper money may serve as the standard of deferred payments goes without saying. As was stated under a previous title, forced circulation is generally an attribute of this sort of money, and where that is the case, such money becomes, by definition, the standard of deferred payments. By it the obligation of the debtor, the claim of the creditor, is measured, as of course. Even where paper money is not made legal tender, it is almost, if not quite, as likely to become the standard of deferred payments as a money of silver or gold. The tendency to express the consideration of all sales in terms of that which is the current money of daily use, is so strong that few persons, even of those who are acting as trustees, will take the trouble to make leases, rents, annuities or interest upon loans payable in any thing but the ordinary circulating medium of the time.

The notes of the Bank of England were not legal tender, in the ordinary sense, during the period of the “Restriction”; yet, though they ceased to be convertible in 1797, the first instance, so far as I am aware, of a refusal to accept such notes in payment of debts, was that of Lord King, in 1811; and this refusal took place, as Lord King claimed, not from any selfish motive, but purely in order that, by strongly attracting public attention to the unfortunate monetary condition of the kingdom, he might promote the resumption of specie payments.

During the circulation of the legal tender greenbacks in the United States, every person who wished to make contracts for future payments in terms of gold or silver, was at liberty to do so; yet it is notorious that few took advantage of their legal right in this respect. That which had become, no matter how, the current money of daily use became, for that reason alone, the almost universal standard of deferred payments.

It is another question whether paper money performs this function with justice to debtor and creditor, or with advantage to the general community. That question we shall meet further on.

212. What Determines the Value of Paper Money?—What determines the value of any kind of money? What determines the value of any thing? Demand and supply. The demand for money is, as we saw (par. 170), the amount of money-work to be done, the amount of exchanging requiring to be effected through the use of money. The supply of money is the money-force available to do the money-work. It is compounded of the volume of the circulating money and the rate of circulation. Supposing the occasion for the use of money—the demand—to remain the same, and the rate of the circulation of paper to be the same as that of metal, the value of a body of paper money would be the same as that of a body of money consisting of as many pieces of metal as there were pieces of paper, the pieces being of the same “denominations,” whether stamped with the mint-press or the printing-press.

We said: “Supposing the rate of circulation of paper to be the same as that of metal.” I am aware of no reason for supposing that any difference in the rate of circulation of metal money, on the one hand, and of paper money on the other, would exist, if all other conditions were alike, of sufficient importance to be taken into account. The paper would, of course, be handled somewhat more easily, would be remitted by mail or parcel-delivery somewhat more readily and safely, and thus a thousand dollars, so-called, in paper would do somewhat more money-work than a thousand dollars in metal. The difference in that respect would, however, not be important.

We may accordingly drop this proviso. We also said: “Supposing the occasion for the use of money—the demand—to remain the same.” Will the demand for money be affected by the substitution of paper for metal? The popular opinion undoubtedly is that the mere fact of the emission of inconvertible paper produces discredit, so that such money, irrespective of any excess, at once becomes distrusted and avoided.

213. Depreciation not a necessary consequence of Inconvertibility.—The opinion above stated is unfounded. We saw (par. 201) that depreciation is not a necessary result of debasement of the coin. Not only will the same line of reasoning establish the proposition that depreciation is not a necessary result of the issue of inconvertible paper; but historical instances not a few exist of such paper money maintaining itself for a time in circulation without discredit and without depreciation. It is undoubtedly true, as Prof. Bonamy Price asserts, that “experience has proved that it need not of necessity suffer any depreciation of value.”∗

214. Inconvertible Paper always issued as Cheap Money.—The moving cause in the issue of inconvertible paper money has been its cheapness, as compared with the metal money which it has replaced. Whatever excellencies may have been reflectively discovered in such money after it had come into circulation, I am not aware that the institution of such money has been due, in an individual instance, to any other virtual reason than that which has been expressed.

We saw that the sovereign first pinched the coin, say, one per cent., under the name of seigniorage, to meet the cost of coinage, and then, finding the opportunity too tempting, took out it might be five, it might be fifteen per cent., or even more, for his own benefit. The issue of paper money, is in effect, the exaction of a seigniorage of one hundred per cent. At times, that exaction has been made in cold blood, at the dictate of avarice; at times, and indeed, more often, the exaction has appeared to be justified, if not sanctified∗ by some great exigency of national life.

215. Without any such stress of fiscal necessities as those caused by war, paper money has been frequently issued by governments as a fiscal resource, to enable public works to be created, to meet an unexpected deficiency of revenue, or even, as in the case of some of the early American colonies, to set bounties on manufactures or the fisheries. There is always a great temptation, to statesmen and to people alike, in times of emergency, in the knowledge that it is possible to replace a money of high cost by a money of low cost, of cost, indeed, so small that it may be called no cost.

216. Is it really Cheap Money?—That depends on whether it be good money or not. The money function is so important, so vital, in the industrial system, that there can be no true economy in any money but the very best. If the first cost of money can be saved, in whole or in part, without loss of efficiency or safety, that course is unmistakably dictated by the same law of the human mind which impels the individual to go to his object by the shortest path, or to buy in the cheapest market. To use a money which has to be dug out of the depths of the earth, drilled and blasted out of rock, perhaps at the depth of two thousand feet where water almost boils from internal fires, when a money in every way as good could be made from paper-pulp and printed with a steam press, would be the extreme of wastefulness. On the other hand, to use any but the best money, that which will perform the money function in the most perfect manner, would be economy of the same sort and degree as putting rotten timbers into a bridge because they were cheaper than sound timbers.

217. Is it, then, Good Money?—I know of nothing in the history of inconvertible paper money to indicate that such money, when issued of a denominative value not to exceed the mint-value of the coin which would have circulated in the community under the law for the territorial distribution of money which has been stated (pars. 176–80), may not serve as the general medium of exchange, so far as the internal∗ trade of a country is concerned, in every way as satisfactorily as the coin itself. Indeed, if any preference exists, it will be in favor of the paper money, as more convenient to handle, more readily transported, more successfully concealed.

Moreover, it has, I think, been sufficiently shown that whatever acts as the general medium of exchange, in the very act of doing this performs the function of a common denominator of values, furnishing a price-current in which the values of all commodities are expressed in terms of that one article.

But as regards the function of a standard for deferred payments, a wide difference may exist between two articles which might, with equal convenience, be used as the medium of exchange. It might happen that an article having a decided preference in the latter function would be found far inferior in the former function; might even be miserably deficient in the requisites of a standard of deferred payments. Let us, then, inquire further respecting inconvertible paper money, on this score.

218. Inconvertible Paper Money as the Standard of Deferred Payments.—In the fact that this money has no natural cost of production, lies the possibility, not merely of gross injustice as between individuals and classes of the community (which is not an economic consideration), but also of grave industrial evils, and even disasters of the most appalling character. Mr. Ricardo has rightly said that, by limiting the supply, any degree of value can be given to the money of a country, be it of gold and silver or of paper; but in the case of the last no limitation of the supply is set by natural forces. Paper money has no cost of production. The expense of printing a dollar bill is so small, that, for purposes of economic reasoning, it may be disregarded altogether, while the expense of printing a ten-dollar bill or a hundred-dollar bill or a thousand dollar bill is no greater. The limitation of supply in the case of such money, therefore, must be left to law, convention, or accident.

We have seen that it would require many years of highly stimulated production to affect appreciably the world's stock of the precious metals, and, by consequence, the value of those metals. The cereal grains, indeed, being consumed in one or two years after their production, may be increased in quantity more rapidly, say, twenty or thirty per cent. in a year, as the result of exceptionally abundant harvests; yet even here human volition only controls the elements of production to a limited extent; and increase on such a scale could not be carried forward more than two or three years at the furthest. In the case of paper money, however, the stock may be increased, at the will of the issuer, to any extent, within the briefest period. The quantity may be trebled, decupled, centupled, by the operations of the printing-press.

219. Domestic Effects of Inflation.—The value of money depending, as has been shown, upon the relation of supply to demand, an increase of issues implies a loss of value in each given quantity of money. This involves a corresponding loss to all creditors, and a corresponding gain to all debtors. That result, being brought about by legislation or by the act of the prince, is properly termed confiscation. So far as it concerns only the existing body of debts, the question of confiscation is of interest only from the point of view of political equity. But such a measure also becomes a highly destructive force within the field of present and future industry, dealing a grievous blow at the instincts of frugality in the individual, and at the organization of the industrial body for the purposes of production and exchange.

Such a blow once dealt might in time be recovered from; but if new fiscal exigencies of the government, or the political pressure of the debtor class draw out other issues of inconvertible paper, not only will the value of the money continue to sink, through excess of supply, but another cause will begin to work in the same direction. The money demand will receive a shock such as has been described in par. 200, which may operate slowly and continuously, or may produce a sudden collapse of the circulation, the treasury crowding out the paper upon a reluctant and indignant people, who will none of it; who, through experience of grave losses in the past, shun it as they would the plague, contracting their industry, or changing its form at whatever sacrifice, or resorting to barter in spite of all its inconveniences, to avoid the use of the detested money. This was the fate, at the last, of the American “Continental Currency,” and of the “Assignats” and “Mandats” of the French revolution.

Such are the possibilities attending the issue of paper money by the government. It may be asked what are the probabilities of the case? As we have here reached the limit of strictly economic inquiry, I prefer to postpone our answer to this question to Part VI., where, under the title “Political Money,” the subject will be briefly treated in its political and historical aspects.

220. Inconvertible Paper Money and Foreign Exchanges.—But before we leave the topic of inconvertible paper money, we have to view another phase, viz., its relation to International Exchanges. Thus far, we have spoken of the issue of paper money by government, only in its effects upon domestic trade and production. We are now to consider its influence upon the commercial relations of the issuing country with foreign countries.

By the mere fact of the adoption of this kind of money, a country loses all the advantages of an automatic regulation of the money supply through the normal movements of trade. Paper money finds no outlet in international commerce. It can not be exported and retain its value. Hence its regulation becomes purely mechanical. Having no natural cost of production, it will not, if in excess in any country, flow away in obedience to the law which governs the distribution of a money having acceptance abroad equally as at home. If issued in excess, it can only be removed by being pumped out by the same force which originally issued it.

Even where the excess of such paper money, over what would have been that country's distributive share of the world's money, be not enough to produce grave disturbances of domestic industry, the effect on foreign trade will yet be momentous. The immediate result of any excess must be to establish a premium upon that metallic money in which alone foreign balances can be paid.

To one who is not familiar with the largest operations of commerce this may seem a small matter; yet, if we may trust those who are best qualified to decide such questions, the money of a commercial state can not depart, by the narrowest interval, from the money in which international balances are discharged, without creating obstructions, exciting apprehensions and even occasioning losses, to which modern trade, with its highly developed and acutely sensitive organization, will not submit, or will do so only upon the payment of heavy fines by the offending community.

During the German war, and for some years after, viz., from 1871–1877, the notes of the bank of France were inconvertible; yet such was the sagacity and prudence of the directors of that institution that at no time was there any considerable discount on that money, the premium on gold being often but a small fraction of one per cent. Yet, slight as was the disturbance of the domestic circulation, Mr. Bagehot, in his standard work, Lombard Street, written during the period of suspension, attributes to it the most momentous consequences.

“The note of the bank of France,” he says, “has not, indeed, been depreciated enough to disorder ordinary transactions. But any depreciation, however small, even the liability to depreciation, without its reality, is enough to disorder exchange transactions. They are calculated to such an extremity of fineness, that the change of a decimal may be fatal, may turn a profit into loss. Accordingly London has become the sole great settling-house of exchange transactions in Europe, instead of being, as formerly, one of two.”

CHAPTER VI.

BANK MONEY.

221. The Characteristics of Bank Money.—To secure the superior convenience of paper money, and, in a degree, also, its cheapness, as contrasted with money of metal, while retaining the comparative stability of value which characterizes the latter, and to keep the local circulation in such close communication with the general circulation of commerce as to insure the automatic regulation of the money supply, bank money has been invented.

The essential characteristic of such money is that the paper is instantly convertible, on the demand of the holder, into coined money. Whenever, by the unrebuked and unpunished lapse of the banks issuing paper money, as so frequently in the early history of the United States, or by the action of government upon its own initiative and for its own purposes, the money so issued fails to be convertible to the full extent indicated, it becomes inconvertible paper money. Nothing entitles paper to be called bank money except full, instant, unconditional redemption in coin. There is no stopping-place between this condition and inconvertibility.

Generally speaking, this sort of money is issued by institutions which, whether under State patronage or not, are so far disconnected from the government that their officers and agents can be sued in courts, and their assets and effects be attached for the recovery of the amount promised by the bank notes to be paid on demand. In this matter of connection with the State, however, there is found among banks, in one country or another, every degree from least to largest. In some instances the true character of bank money has been preserved in the case of institutions having what would appear a dangerously close connection with government.

222. The Origin of Bank Money.—Bank money in its modern form was first issued in Sweden, in 1658. The Bank of Scotland issued £1 notes as early as 1704, while the Bank of England did not issue notes below £20 prior to 1759. The issue of bank money, proper, did not begin in America until after the revolution, although nearly every colony had been, at one period or another, deluged with inconvertible paper money. The great bank money countries of to-day are the United States and the States of Northwestern Europe.

223. The Coin Basis of Bank Money.—We have said that, in addition to the superior convenience of bank money over coin, the motive for issue is found in its comparative cheapness. Banking experience has shown that a much larger denominative amount of notes can be kept in circulation than is held of specie for redemption.

On all this excess, the issuer of the notes derives a profit which is measured by the rate of interest on his loans, after deduction is made of the expense of maintaining the service. The metal thus displaced from circulation is exported, or melted down for use in the arts.

The advantage to the community of this saving in the cost of the money used in effecting exchanges, is thus conceived by Adam Smith.

“The gold and silver money which circulates in any country may very properly be compared to a highway, which, while it circulates and carries to market all the grain and corn of the country, produces itself not a single pile of either. The judicious operations of banking, by providing, if I may be allowed so violent a metaphor, a sort of wagon-way through the air, enables the country to convert, as it were, a great part of its highways into good pastures and corn-fields, and thereby to increase very considerably the annual produce of its land and labor.”

The amount of saving effected by bank money varies, in the first instance, according to the proportion of coin, or “specie,” as it is commonly called, reserved to meet demands for the redemption of the notes: to serve, that is, as the basis of the circulation.

That proportion is different in different countries, and often in different banks in the same country. The most common legal minimum reserve is one-third. In Leipsic, before the unification of Germany, the specie reserve was two-thirds, while in Bavaria it was but one-fourth.

Before the war of secession, the banks of the United States held an absurdly small amount of specie, the proportion in some States falling to ten, five, or even three per cent. But the so-called bank money of many of the States of the American Union, during certain periods in the early history of the nation; was really nothing but inconvertible money, hardly the pretense of redemption being maintained.∗

224. The Banking Principle.—The view of the operations of bank money which is held by the great majority of writers of repute, in nearly all countries, is that, when really convertible into coin on demand; with all reasonable facilities existing for redemption, and with redemption actually taking place from time to time; with a public opinion which does not allow to be questioned the right of any man anywhere, for any reason or for no reason, to require coin, for any and all notes he may hold; and with exemplary penalties,† provided by law and enforced by the courts, for the first failure or the slightest delay on the part of banks to make good their promises, such money acts in all respects precisely as would a body of money composed wholly of coin. It is held to be fully subject to the law (par. 176) which governs the territorial distribution of money consisting of the precious metals only; and to have every economic virtue which belongs to such money, with the added advantage of greater cheapness and greater convenience in use.

“We are willing,” says Mr. Tooke, the leader of the school of economists known as the advocates of the “Banking Principle,” whose theory I have stated, “we are willing to consider a metallic currency as the type of that to which a mixed circulation of coin and paper ought to conform. But, further, we contend that it has so conformed, and must so conform, while the paper is strictly convertible.”

The same opinion is expressed, with great emphasis, by Mr. Fullarton and Mr. James Wilson, and by M. Courcelle-Seneuil.

225. The Currency Principle.—The view of bank money which has been stated in the foregoing paragraph, is that which is held by a majority of writers of reputation. The opposite opinion was maintained by a school of economists in England, comprising the advocates of the so-called “Currency Principle,” the leader of the school being Lord Overstone.

In the view of this school, something more than sound banking is needed to give a country good bank-money. If numerous, competing banks are left free to issue notes in such quantity and of such denominations as their own interests may dictate, with such specie reserves as their own prudence alone may suggest, there will always be the probability and often an extreme danger of over-issue, a body of bank-money so composed not being wholly amenable to the law of distribution which governs metal money, but possessing the capability of temporary and local inflation.

This opinion was ably maintained by Lord Overstone, Mr. Norman and Colonel Torrens, against the views of the Bank of England, and after a long struggle, the economists of this school triumphed in the enactment of the Bank Act of 1844∗ which still governs the note-circulation of England, though the principle on which it was framed is now challenged by many of the best financiers and economists.

In the United States, owing doubtless to gross abuses of the right of bank-note issue, such as have been adverted to in a note on a preceding page, the views of the English currency school obtained an acceptance among professional economists and writers on finance even wider and more complete than in England, although in but few states did this lead to legislation in any degree comparable, in scope or stringency of operation, to the English act of 1844. The leading writers on this question in the United States, were Messrs. William M. Gouge, Condy Raguet and Amasa Walker.

226. The Currency Principle vs. the Banking Principle.—The question whether a body of money composed partly of coin and partly of bank notes fully convertible into coin, acts in all respects as would a body of money composed wholly of coin, or, on the other hand, has the capability of being issued in local excess and so maintained for a long enough time to affect local prices, and thus initiate abnormal movements of trade and production, I regard as the one open question in the theory of money. Brought up in the school which held the latter view, my own reading and reflection have confirmed me in the belief that there resides in bank money, even under the most stringent provisions for convertibility, the capability of local and temporary inflation. The arguments on the two sides of the question are so evenly balanced, and the statistical evidence is so ambiguous, that differences of opinion are likely long to exist between men of intelligence and candor. I freely confess that the preponderance of authoritative opinion is against the view I hold.

CHAPTER VII.

THE REACTION OF EXCHANGE UPON PRODUCTION.

227. Evil Possibilities involved in the Division of Labor.—We have seen that the division of labor is an essential condition of large and varied production. But the division of labor, when carried far, involves possibilities of loss and disaster. These become more and more serious as production becomes more and more extended and complicated, until, in the most highly organized industrial state, we have to explain the failure of a community to realize its full productive capability, mainly by reference to industrial misadventures and even, at times, a partial paralysis of the productive powers of the community, originating in this very source.

The cause of the trouble adverted to is found in misunderstandings between producers and consumers, whom it is the nature of the division of labor to set apart, and, in an advanced industrial state, widely apart, often by half the circumference of the globe.

It is evident that, were there no division of labor into separate occupations, the relation between production and consumption would be a simple one. Production would, within the capabilities of the several agents concerned, viz., land, labor, and capital, only be limited by the effective desire of the several individuals of the community to consume wealth. Each man would work by himself, for himself, producing those things, and those only, which he wished personally to eat, drink or wear, or house or warm himself withal. There would here be no question of a market, for every man would be his own customer.

From this point, we may mark off three stages of industrial development.

228. The First Stage.—The first is where distinction of trades is introduced, and men no longer consume all, or perhaps any part, of the articles they have produced; yet where consumers live near the producer, and are personally known to him. In this condition, production, except in agriculture, generally waits for an order from the consumer. If goods are produced in advance of an order, the kinds are few, the forms are simple, the styles standard. There is, moreover, the reasonable expectation that some certain person, or some one out of a certain group of persons, will surely and soon need the goods, and will become the consumer. Here, we see, is not much liability to a misunderstanding between producer and consumer.

229. The Second Stage.—The second stage is where the element of personal acquaintance between producer and consumer disappears. Production no longer waits for orders, but anticipates demand. Goods are produced for a general market, and upon a calculation of the quantity probably to be required. The individual producer has no longer his own circle of customers; but competes with other producers for the largest possible share of the patronage of a wide circle of consumers. Yet it is still true that production is carried on by artisans working singly or in small groups. Tools and implements are simple and inexpensive; there is little of “plant” or fixed capital. Fashions are few and styles remain standard through long periods of time. Here, manifestly, the opportunity for misunderstandings between producer and consumer exists in a higher degree than under the former conditions described. Yet even here production may still go on with tolerable uniformity: all hands working steadily through all the seasons of the year, with a reasonable assurance that all goods which are well made, will find a market at fairly remunerative prices.

230. The Third Stage.—The third stage is reached, when increasing facilities of communication make the world one trading community. Then production becomes highly diversified, and the specialization and localization of trades proceed so far that one country, or perhaps one group of towns, produces the greater part of all the goods of a certain sort which are consumed throughout the world. Then luxury and refinement of living are carried to the maximum, so that not only are classes of goods multiplied almost indefinitely, but fashions and modes enter till standard styles almost disappear, each season bringing minute modifications of demand which are not to be satisfied except by an exact compliance, even the colors and shades of one year becoming intolerable the next.

It will appear that conditions like the foregoing increase enormously the liability of misunderstanding between producers and consumers. The possibilities of error in supplying the markets, no longer of a village, but of the world, become tremendous.

231. The Appearance of the Entrepreneur.—But it must further be added, that powerful and complicated machinery is now introduced, and costly structures and “plant” are required. Great numbers of operatives, of both sexes and all ages and of every degree of strength and skill, have to be gathered under one roof, each knowing only his or her own part; all requiring to be instructed and equipped, organized, energized, and directed by the intelligence and will of one man. In other words, we have reached the entrepreneur stage (pars. 106–9) of industrial development.

The introduction of the principle of mastership into industry makes a great gain of productive power; but this gain is not secured without an appreciable loss. The entrepreneur (to anticipate, for a moment, a topic in Distribution), finds his motive for organizing and conducting the great enterprises of modern industry in the profits (pars. 302, 429) which he hopes individually to realize. His entire personal interest is found here. It is, perhaps, to secure a net profit of twenty thousand dollars, that he leases land and buildings, and borrows capital, and hires the labor requisite to achieve an annual product of half a million of dollars. If, then, the conditions of trade and industry are such as to destroy for the time his profit; much more if they are such as to threaten a loss which will impair the integrity of the capital, his interest in production is greatly diminished, if not destroyed. He will either cease producing entirely, or, which is more likely, will contract the scope of his operations. Were he to produce %500,000 worth, as heretofore, a small fraction of his stock unsold might sweep away his own gains for the year, or leave a deficit; whereas, were he to produce but %400,000 or %350,000 worth, he would probably dispose of his stock at prices high enough to make himself good and perhaps leave a small margin of profit, while holding his laboring force and his customers together.

232. Fluctuations in Production.—Such being the conditions under which production takes place, under the modern organization of industry, we note that there is in the nature of the case a continuous loss through the failure of the producing body to meet, promptly and precisely, the demands of the body of consumers. Wherever, from any cause, there is a failure correctly to anticipate those demands and supply them perfectly, in time, in degree, in form, loss of value results. That there should be such failure in part, is inevitable.

But the loss which we had chiefly in view in beginning this chapter, and with reference to which we have written this long introduction, is not the steady, continuous loss of value due to the inability of those who direct production to comprehend, fully and seasonably, the varying demands of distant markets. It is the occasional loss resulting from the frequent and often furious fluctuations which are involved in the modern organization of trade and industry.

From that organization the alternation of highly stimulated and of deeply depressed production appears to be inseparable. The course of trade and industry through the cycle which the conditions of modern life seem to have established, is so well described by Prof. Alfred Marshall that I can not forbear to give it in full:

“The beginning of a period of rising credit is often a series of good harvests. Less having to be spent in food, there is a better demand for other commodities. Producers find that the demand for their goods is increasing, they expect to cell at a profit, and are willing to pay good prices for the prompt delivery of what they want. Employers compete with one another for labor; wages rise; and the employed in spending their wages increase the demand for all kinds of commodities. New public and private companies are started, to take advantage of the promising openings which show themselves among the general activity. Thus the desire to buy and the willingness to pay increased prices grow together; credit is jubilant and readily accepts paper promises to pay. Prices, wages and profits go on rising; there is a general rise in the incomes of those engaged in trade; they spend freely, increase the demand for goods, and raise prices still higher. Many speculators, seeing the rise, and thinking it will continue, buy goods with the expectation of selling them at a profit. At such a time a man who has only a few hundred pounds can often borrow from bankers and others the means of buying many thousand pounds' worth of goods; and every one who thus enters into the market as a buyer, adds to the upward tendency of prices, whether he buys with his own or with borrowed money.

“This movement goes on for sometime, till at last an enormous amount of trading is being carried on by credit and with borrowed money. Old firms are borrowing, in order to extend their business; new firms are borrowing in order to start their business; and speculators are borrowing in order to buy and hold goods. Trade is in a dangerous condition. Those whose business it is to lend money are among the first to read the signs of the times; and they begin to think about contracting their loans. But they can not do this without much disturbing trade. If they had been more chary of lending at an earlier stage, they would simply have prevented some new business from being undertaken; but when it is once undertaken, it can not be abandoned without a loss of much of the capital that has been invested in it. Trading companies of all kinds have borrowed vast sums with which they have begun to build railways and docks and ironworks and factories; prices being high they do not get much building done for their outlay; and though they are not yet ready to reap profits on their investment, they have to come again into the market to borrow more capital. The lenders of capital already wish to contract their loans; and the demand for more loans raises the rate of interest very high. Distrust increases; those who have lent become eager to secure themselves and refuse to renew their loans on easy or even on any terms. Some speculators have to sell goods in order to pay their debts; and by so doing they check the rise of prices. This check makes all other speculators anxious, and many rush in to sell. For a speculator who has borrowed money at interest to buy goods may be ruined if he holds them a long time even while their price remains stationary; he is almost sure to be ruined if he holds them while their price falls. When a large speculator fails, his failure generally causes that of others who have lent their credit to him; and their failure again that of others. Many of those who fail may be really ‘sound,’ that is, their assets may exceed their debts. But though a man is sound, some untoward event, such as the failure of others who are known to be indebted to him, may make his creditors suspect him. They may be able to demand immediate payment from him, while he can not collect quickly what is owing to him; and the market being disturbed he is distrusted; he can not borrow, and he fails. As credit by growing makes itself grow, so when distrust has taken the place of confidence, failure and panic breed panic and failure. The commercial storm leaves its path strewn with ruin. When it is over, there is a calm, but a dull, heavy calm. Those who have saved themselves are in no mood to venture again; companies whose success is doubtful are wound up; new companies can not be formed. Coal, iron and the other materials for making fixed capital fall in price as rapidly as they rose. Iron works and ship, are for sale, but there are no buyers at any moderate price.

“Thus the state of trade, to use the famous words of Lord Overstone, ‘revolves apparently in an established cycle. First we find it in a state of quiescence—next improvement, growing confidence, prosperity, excitement, overtrading, convulsion, pressure, stagnation, distress, ending again in quiescence.’”

233. Periodicity of Panics.—So frequently have trade and industry made this weary round, that the writers on finance have undertaken to establish the law of the periodicity of panics and hard times. The term of ten years is that most often fixed upon for the completion of the cycle. There is at least a very curious series of coincidences to give some substance to this hypothesis.

But whether there are, indeed, forces operating which bring about commercial convulsions and industrial distress at regular intervals, or not, it seems clear that, under the conditions depicted in the first part of this chapter, it is inevitable that the producing and exchanging body should alternate frequently and even violently between a state of depression and partially suspended activity, and a state of highly animated, excited, almost convulsive exertion, in which the agencies alike of production and of exchange are strained to their utmost to meet demands which are stimulated to the highest extravagance by a universal passion of speculation.

234. Loss of Productive Force.—It is evident that this is not an order of things under which the largest production of wealth takes place. The two extremes do not offset each other, with the same result as if production had been proceeding calmly and equably through the entire period. On the contrary, each extreme involves great and permanent loss of productive force. There is much misdirection of energy, much waste of material, much vital injury to labor power and capital power, in the haste and strain and fever of highly stimulated effort.

On the other hand, the long, dull spell of inactivity that succeeds is not given wholly to recuperation of exhausted energies, renewal of stocks of materials, repair of machinery and plant. It is not a waste of time, merely, involving a proportional loss of productive power: that inactivity becomes itself a cause of mischief. It induces in the working classes a lethargy, a despondency, a recklessness, which are forces productive of evil. It generates habits of lounging and of drinking, perhaps of tramping, which may not be shaken off even with renewed employment.

235. “Hard Times.”— Nothing needs to be added, of clearness or of force, to Prof. Marshall's statement of the course which trade and industry run from the time they first cross the line of reviving prosperity to the moment they plunge into the abyss of broken credit, falling markets, commercial panic, failing banks, and general distress. But there is one industrial phenomenon of great significance in respect to our question, why the actual production of a community comes so far short of its productive capability? which economists have not been accustomed to explain: this is, the long continuance of the periods of industrial depression and of restricted production.

It will readily appear that, after running such a rig as has been described, the agencies of trade and industry will require time to refit. The track must be cleared of the wreck. The places left vacant by the casualties of the great crash must be filled by new men. But the actual time covered by the period of depression is sometimes much longer than can be accounted for by the mere loss and destruction of a panic. “Hard Times” are protracted long after the capital power and the labor power of the community are in condition to resume their interrupted functions.

For several years after the panic of 1873, in the United States, industry did not reach its former proportions. During that period vast amounts of labor power and capital power remained unproductive. Tens of thousands, if not hundreds of thousands, of laborers were unemployed; an even greater number were employed only on half or three-quarters time. Hundreds of furnaces were out of blast; thousands of waterwheels ceased to turn; thousands of engines stood still. Yet, during this time, these workmen had occasion to consume food and clothing for themselves and their families; needed to work to earn the means, and were honestly willing, yea, heartily desirous to work. All this time the owners of capital were ready to secure a return for their investments, if they could find opportunity; the conductors of business were eager to win a profit by employing their abilities and experience in productive industry. Why, then, was it, when all were willing to work and needed to work, that they did not work? What was the force that kept these laboring men, these water-wheels and engines, these capable conductors of business, idle so long?

236. Diversifled Production.—We have seen that, as society makes progress toward a minuter organization of industry, productive capability is enhanced, but that, coincidently, at each stage, the opportunities for misunderstanding between the body of producers and the body of consumers are greatly multiplied, while labor power and capital power fall more under the control of men of exceptional abilities, with whom comes to rest all initiative in production.

Now, if we examine the list of articles sold in the market, in a modern community, we shall find some of them supplying wants which are constant and vital. We shall find others which minister to the most delicate tastes or gratify only the merest casual fancies. In a country like England, France, or the United States, tens of thousands of laborers are employed in producing articles of the most trivial character: fireworks, toys, bonbons, fripperies of dress, while hundreds of thousands more are employed in producing articles deprivation of which would not induce cold or hunger, or impair health, or be incompatible with public decency or personal self-respect.

237. Propagation of Economic Shocks.—Let us suppose, as the result of a period of prosperity, the variety of products to have been carried to a very high point, when a disaster, primarily affecting either industry or trade, it matters not, befalls a community. It may be a great fire, or a great flood, or an epidemic of yellow fever, or the destruction of some leading crop. No matter where it comes from, or where it first strikes, the immediate effect is to diminish the productive power of the community, as a whole. At once the consumption of those articles which are least essential to comfort and decency is checked. If we suppose the thousands of articles known to the market to form twenty-six groups, A to Z, their utility to the consumer regularly declining from the top of the list to the bottom, we may assume that the first effect of the calamity will be to reduce the consumption of articles forming groups X, Y and Z. No matter, as we said, where the blow first falls, the laborers affected produce for the time less, and must limit their own consumption accordingly, which they do by restricting their use of articles below W.

The labor and capital employed in groups X, Y and Z, can not easily or soon be transferred to other groups. The laborers, especially, find that the present is no time to seek employment in other avocations. They must stay where they are, and do the best they can there. Hence they find themselves employed on part time, and at reduced wages. The sums they formerly earned were expended in purchasing articles all the way from A to Z. In their sudden poverty they are obliged to cut off their own consumption of all articles except those which are necessary to comfort and decency, say from A to M, inclusive.

But this action of producers X, Y and Z involves a diminished demand for products, N to W. Each group of producers, at this end of the line, are obliged to curtail still further their consumption of articles X, Y and Z, while producers from S to W begin to restrict their use of articles below T. This action, however, becomes at once the cause of new effects. The unfortunate representatives of X, Y and Z are now obliged wholly to deny themselves all products from H downwards; producers T to W, in turn have to give up indulgence in products below N; producers N to S, in consequence, no longer purchase products below R.

The shock next reaches groups I to M, who have to diminish their consumption, to correspond to the reduced demand for their own products; X, Y and Z are now glad to get enough of A, B, C and D to barely subsist upon; while S, T, D, U, V and W carry their retrenchment upwards, till they stop at M. And so the movement goes forward until the favored producers A to D—favored, in that the articles they produce are of vital importance—experience some diminution of demand, and, producing less in consequence, have less to give in exchange for the products of others. So a stone, thrown into a lake, sets in motion a wave which extends outwards in all directions till it reaches the bank, even in the most retired nook along the shore.

238. Aggravation of Economic Shocks. — It is evident that, were the community perfectly intelligent and self-possessed, the ultimate result of this play of forces would be the distribution of the whole initial shock over the entire producing body. No addition would be made to the shock as the movement proceeded, and the effect upon each successive group of producers reached would be less and less. Those producing articles the most essential to life, health and social decency would suffer to hardly an appreciable extent, as the wave set in motion by the rock thrown into the lake becomes the merest ripple against the shore.

This is all that is necessarily involved in the propagation, through economic media of perfect elasticity, of an original blow like that assumed. In fact, industrial injuries are at times distributed in this way throughout the producing body, without panic, without apprehension, even without observation.

Let, however, the shock be sharp and severe, and communicated in some startling form, and let it occur when the public mind is in an apprehensive mood, or when the commercial body is unstrung by political or social disturbances, and we may see the impulse propagated with increasing force, from subject to subject, till the movement acquires fearful violence.

239. The Industrial Panic.—The commercial panic we are all familiar with, by experience or report. We know how some slight cause, acting on the fears and imaginations of men, will overthrow the financial structure of a nation in a few weeks, perhaps days, prostrating the proudest houses, and spreading ruin far around. There is nothing that can stand against panic. One man's fear makes another man afraid. One man's fall brings down another, who, but for that, might have stood firm; and thus the mischief proceeds, from bad to worse. So much for the trading body.

The progressive aggravation and acceleration of the forces of mischief throughout the producing body takes place not less surely, though it is here less ostensive.

A manufacturer feels the demand for his goods fall off somewhat. In ordinary times he would receive the fact as an intimation to reduce his production, but only to a corresponding extent. Indeed, in good times he would receive that intimation in a somewhat skeptical spirit. He would not be disposed to believe that any serious check was to be experienced. He would look to see trade start up again, and, in this mood, would reduce his production somewhat less than correspondingly. To that extent, he would speculate: that is, would anticipate events and discount the future. For the moment, then, he would transmit the shock, not aggravated but mitigated.

But let the shock be at first severe, and let it come upon the public mind in a suspicious mood, and the matter will take another turn. The merchant feels the demand for his goods fall off abruptly. He fears there is more to come. He is determined not to be caught with a large stock on his hands, and, in his orders to the manufacturer, he exaggerates the natural and proper effect of the change in the market. The manufacturer, on his part, knows nothing directly of the actual falling off in demand. He only learns it as it comes to him heightened by the apprehensions of the merchant. In his turn, he exaggerates the evil and reduces his production more than proportionally. His anxiety now is, not to make a profit, but to avoid loss. He knows he will be safe if he runs his mill on half or three-quarters time.

And it is here that the cause indicated in par. 231 begins to operate with great and destructive force. The entrepreneur's personal concern in production being derived wholly from his contemplated profit, which may be but a small percentage of the value of the goods produced, his individual interests may, for the time, become divorced from those of his laborers or of the general community. In his anxiety to save himself, he may act with as much needless cruelty as men do when panic-stricken in a fire or a wreck.

240. But the action of manufacturer Z, whether wisely or unwisely taken, becomes, as we have seen, an element in the conditions of production for all the lower letters of the alphabet. As he pays less wages, his workmen have less to spend for the products of other branches of industry. The merchants in these lines, feeling the falling off in demand, exaggerate it in their orders to manufacturers, especially manufacturers X and Y. These, in turn, apprehensive of worse to come, curtail their operations more than correspondingly, and so the movement proceeds, with increasing violence.

And, let us repeat, however unnecessary Z's action in reducing his production below a certain point, yet, if he actually does so, that action makes a corresponding reduction in X and Y's operations a necessity of their situation: just as truly so as if Z had a good reason for what he did. And if, in turn, X and Y become alarmed, and overdo the thing, that of itself constitutes an obligation upon manufacturers higher in the alphabet to cut down work and wages.

241. How Far may this be Carried?—Two questions arise upon this view of the power of apprehension and suspicion to aggravate the force of any industrial or financial shock. The first: how far may it be carried? the second, how long may it last?

May the movement to check production proceed until all industry is locked fast in “a vicious circle”: no one producing, because others will not consume, while no one is able to consume the products of others because he himself produces nothing with which to buy them?

I answer, no. The staple industries, especially those yielding the necessaries of life, will never be suspended. The demand for their products is so constant and certain that panic has little power over them. Groups A to D will, therefore, continue to produce nearly as much as before; not, indeed, quite so much, because there will be individuals, thrown out by the revolution at the foot of the alphabet, who are unable to find a new place where they can produce enough to purchase even the barest subsistence. Groups E to H, or K, moreover, having to do with articles essential to comfort and social decency, will withstand the shock communicated to them sufficiently to maintain a production not very far below that of good times.

Now, so long as A to D produce liberally, and E to H or K, still produce considerably, all persons employed within those groups will have the means of purchasing the products of groups further down the list; and so industry will be kept alive, though but just alive, in those groups which produce articles not essential to life, or health, or decency.

242. How Long may such a Condition Last?—I answer: in theory, it may last indefinitely. Practically, it is liable to be terminated, after a longer or shorter period of suspense, by reviving courage and enterprise on the part of men of affairs, or through the stimulus to production administered from some quarter. It may be so slowly as to be almost imperceptible; it may be so rapidly as to outrun calculation, that the expansion takes place. This will depend much on the natural temper of the community; much on the immediate cause provoking renewed enterprise; much on accident.

The one essential condition is that speculation be initiated, that is, that men begin to look ahead, to anticipate demand, and to discount the future.

One man begins to produce, no longer on orders, no longer cautiously and fearfully, as if it were too much to believe that his goods will be taken off his hands, but in a sanguine spirit, assuming the initiative in production, and boldly encountering its risks. Producing more largely, his workmen have more to offer for the products of other industries, which is of itself a reason for a larger production in these branches, whose managers and proprietors respond in the same spirit. Finding the demand increasing, they act as if they believed it were about to increase still further. They produce somewhat in anticipation, and thus give their hands more to offer in exchange for the products of still other industries. From day to day the movement proceeds, gathering force as it goes, and production swells continually under the contagious influence of hope and courage, just as before it shrank and shriveled under the breath of fear and panic.

I have said that peculiarities of national character have much to do with the speedy or tardy revival of production. Nowhere ought recovery to be more rapid than in the United States. Among no people is there more of elasticity, greater alertness of action, more readiness to assume responsibilities and to run risks. Nowhere, too, does nature afford an ampler margin for subsistence, or more abundant material for the repair of mistakes and misadventures.

243. Two Examples.—The history of the panic of 1857 offers a capital illustration of the facility with which the American people recover from the sharpest contraction of productive industry, where nothing withstands the revival of trade, and where no second shock remains to be experienced. The country was in a generally sound condition, both as to capital and credit, when the blow fell. As the result, industry had scarcely shrunk to its minimum, under the influence of panic, when the enterprise and courage of merchants and manufacturers began to cause expansion. Within a few months production was again at the limits of our capital power and labor power.

When the panic of 1837 came, the country was in a wretched condition, through the misapplication of capital and the wide extension of credit.

The buoyancy of the national temper led, even at this time, to a speedy revival; but the succeeding shock of 1839 threw the country back again, and the fear and distrust thereby engendered kept the energies of the nation in a state of partial repression through a long period. Such may be the influence of a single instance of hard fortune upon reviving industry.

Quite as prejudicial to expanding production is the continual apprehension of hostile or meddlesome legislation. When the whole body of business men are sore from disasters; when much of the industrial and commercial structure still lies in ruins, it takes but little to check the disposition again to adventure capital. That little is abundantly supplied by the popular apprehension of legislation unfavorably affecting money and credit. It need not be a great thing under a man's arms which will so increase his margin of buoyancy as to enable him to float for hours. It is a very small thing around a man's neck which will so diminish his margin of buoyancy—narrow at the best—as to drag him to the bottom.

[∗]To this Mr. Mill forms a conspicuous exception. He makes exchange, as distinguished from production and from distribution, the subject of one of the books of his Political Economy.

[∗]In England, says Prof. Roscher, it is 38.8 per cent. of the supply that comes to the market; in Belgium, 40; in Saxony, at least 50 per cent. In Germany, the farmers consume on an average, two-thirds themselves.

The ratio between the portion of the crop marketed and the portion consumed at home, is, of course, not the same for any two countries, or for the same country, at any two dates. It is continually changing with changes in the habits of living among the people, with changes in the facilities of transportation, etc.

[∗]The significance of this qualification will be seen when we come to speak of International Exchanges, in the following chapter.

[∗]We have before stated that the supply of any article is not necessarily confined to the stock in markets or warehouses, but embraces all that producers stand ready to bring forward at the price named, within the period over which the demand extends. In the present illustration, we are assuming the producers to be getting out the seaweed from day to day.

[∗]When we reach the department of Distribution, Part IV, we shall give the generic name of Rent to this excess of price over cost of production.

[∗]This is called a “corner.”

[∗]“We must, in fact, treat beef and mutton as one commodity of two different strengths, just as gold at eighteen carats and twenty carats is hardly considered as two, but as one commodity, of which twenty parts of one are equivalent to eighteen of the other.“—Jevons—”The Equivalence of Commodities.”

[∗]“Prices are liable to great fluctuations in trades in which there is a great use of fixed capital.”—Marshall—“Economics of Industry.”

[∗]At first, coins were impressed on one side, as is now the “gall,” the only native coin of Cochin China. This allowed the metal to be shaved from the smooth side of the coin. Afterwards characters were stamped on both sides, but the area of the coin was not fully defined, allowing the edges to be clipped, as is largely the case with the Tomans of Persia. Later improvements surrounded the coin with a well-defined rim, while the edges were milled to still further protect the integrity of the piece.

[∗]I have already quoted (par. 120) the remark of Prof. Senior that “any other cause limiting supply is just as efficient a cause of value in an article, as the necessity of labor to its production.”

[∗]This function of banks will be spoken of, more at length, under that title in Part VI.

[∗]Three gold coins, the Russian Imperials, the French Napoleons, and the American Eagles, are bought by the Bank of England without remelting. The United States Mint turns out the finest gold coin of the world; the Russian Mint the next best. The mint of France was, fifty years ago, charged with grave errors, all on one side, viz., in favor of the minters; but that mint is now of high authority. The mint of Great Britain has until recently been badly managed and has done poor work, in comparison with the others named, not out of any dishonest intention, or lack of mechanical skill, but from adherence to old fashions and antiquated machinery. Mr. Ernest Seyd and Prof. Jevons concurred some years ago in a very unfavorable criticism of the establishment on Tower Hill. More recently there has been improvement.

[†]Prof. Jevons estimated the proportion of “light” sovereigns in England, that is, of sovereigns reduced below the legal standard for circulation, to be 30 per cent., the proportion in some agricultural districts rising to 44 per cent.

[∗]From Sir Thomas Gresham, founder of the Royal Exchange of London. Died 1579.

[†]Mr. Ricardo clearly expressed this necessary qualification of Gresham's Theorem, but, in doing so, has been followed by few writers. It is, he says, “a mistaken theory to suppose that guineas of 5 dwt. 8 grains, can not circulate with guineas of 5 dwt., or less. As they might be in such limited quantities that both the one and the other might actually pass in currency for a value equal to 5 dwt. 10 grains, there would be no temptation to withdraw either from circulation; there would be a real profit in retaining them.”

[∗]Hence we see the error of Prof. Bowen's statement: “We can do without money as a medium of exchange, and can even barter commodities for other commodities without the use of any medium. But we can not do without money as a common standard or measure of value.” Were we to do without money in the former capacity, we should perforce have to do without it in the latter, inasmuch as it is only by being actually used as a medium of exchange, that the power of money to purchase each commodity by turns became known.

[∗]Prof. Senior calls money “Abstract Wealth.”

[∗]The distinction between gratuitous coinage and free coinage, is not sufficiently observed. Where no seigniorage charge is made, but the coin contains the full amount of bullion which corresponds to its mint value, i. e., when the dollar contains one hundred cents' worth of metal, that is gratuitous coinage. Free coinage exists, where any owner of bullion has the right to have it coined on the same terms as the government, or as any other citizen, whether with or without a seigniorage charge. Thus free coinage exists in England in regard to gold. Any subject can bring gold, in any amount, to the mint and have it made into gold coin; but free coinage does not exist with respect to silver, that metal being coined only in such amounts as the Government, through the Bank, deems necessary for supplying the people of the Kingdom with “change.”

In the United States free coinage exists also in regard to gold; but the coinage of silver is restricted. By the law of 1878, the Secretary of the Treasury must coin two millions of silver dollars a month, and may coin four millions, but no more. The coinage of half and quarter dollars, and of smaller pieces of silver, is governed by the same principle as in England. During the continuance of the bi-metallic system (Part VI) in the states of the “Latin Union” (France, Italy, Belgium, and Switzerland), free coinage existed in regard to both metals. The coinage of silver is now restricted in those countries.

[∗]M. Chevalier has proposed to apply the term Brassage to the charge for the actual cost of coinage.

[∗]The idea that values are “measured” by money, has a great deal of tenacity. A somewhat more extended discussion of this question will be found in my work on Money, Chap. XIV.

[∗]On a point so vital it may be well to add authority to reason, especially as current American literature misrepresents the real purport of economic opinion on this subject.

Mr. Thomas Tooke, the most eminent economic statistician of the world, explicitly and repeatedly states that depreciation is not a necessary consequence of inconvertibility.

Mr. James Wilson, founder of the London Economist, and a states man and financier of wide experience, declares that if the amount of inconvertible paper be properly regulated, “there is no reason whatever why such notes should suffer depreciation.”

M. Courcelle-Seneuil, a French writer on Finance, whose views are entitled to much consideration, expresses the opinion that if the emissions of paper money be moderate, they may have the same value as metallic money.

I have made use of three names of the first rank in the economics of finance. Let me now quote, at greater length, the most illustrious writer known to monetary science.

“The whole charge for paper money,” says Mr. Ricardo, “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. It is not necessary that paper money should be payable in specie to secure its value; it is only necessary that its quantity should be regulated according to the value of the metal which is declared to be the standard.”

[∗]Hence the phrase the “the blood-stained Greenback.” Lest I should be misunderstood, let me say that it is my firm belief that the issue of inconvertible paper money is never a sound measure of finance, no matter what the stress of the national exigency may be. I believe it to be as surely a mistaken policy as the resort of an athlete to the brandy bottle. It means mischief always. If there is ever a time when a nation needs its full collected vigor, with a steady pulse, a calm outlook, a firm hand, a brain undisturbed by the fumes of this alcohol of commerce—paper money—it is when called to do battle for its life with superior force. It is to my mind the highest proof of the supreme intellectual greatness of Napoleon, that, during twenty years of continuous war, he never was driven to this desperate and delusive resort. I hold any man to be something less than a statesman, in the full sense of that word, who, under any stress of fiscal exigency, supports or submits to a measure for the issue of paper money not convertible, at the instant, on demand, without conditions, into coined money. The political arguments by which such measures are always supported, on the outbreak of war, seem to me the veriest trash, due half to ignorance, and half to cowardice.

[∗]The relations of inconvertible paper money to foreign trade and international exchanges will be spoken of in paragraph 220.

[∗]Mr. Condy Raguet thus describes the action of American banks during this period, when in a state of suspension:

“Banks, when they default in their payments, not only never ask the indulgence of their creditors, for any specified extension of time, but they do not even think themselves under obligation to pay interest to the creditors for the funds they forcibly detain from them; nay, they frequently, in the midst of their insolvency, declare dividends of the very profits which actually belong to their creditors.”

Of an earlier period Mr. Gallatin has written: “It was the catastrophe of the year 1814 which first disclosed not only the insecurity of the American banking system, as then existing, but also that, when a paper currency, driving away and superseding the use of gold and silver, has insinuated itself through every channel of circulation, and become the only medium of exchange, every individual finds himself, in fact, compelled to receive such currency, even when depreciated more than twenty per cent., in the same manner as if it had been a legal tender.”

[†]“By convertibility of the paper,” says Mr. Tooke, “according to the ordinary signification of the term when applied to bank notes in this country (England), is meant that a holder of a promissory note—payable on demand—may require payment in coin of a certain weight and fineness, and in the event of refusal or demur, such payment is enforced by law against the issuer, to the utmost extent of his property. The issuer, whether a private or joint-stock banker, is considered to have failed. The circulation of his notes is at an end, and he is subject to the process usual in cases of insolvency.”—[“History of Prices.”] Compare this with the state of things disclosed by Mr. Raguet, in the footnote last preceding.

[∗]The principal features of the act of 1844, as affecting the circulation, are as follows: 1st. The Bank of England is allowed to issue notes, in a constant sum of £15,000,000, without any specie basis. For all notes above this, it must have, pound for pound, a specie reserve, of which one-fifth may be silver. [This last in consideration of the commercial and political relations of England with India, which has silver money.]

2nd. The issue department and the banking department of the Bank are completely divorced, becoming as separate as the Customs and the Internal Revenue bureaus of our own government.

3rd. No London bank can issue notes, nor can any bank chartered since 1844; while the issues of the English banks then existing are limited to their ordinary outstanding circulation prior to that date.