The Online Library of Liberty

A project of Liberty Fund, Inc.

• Preface.
• Conversation I.: Introduction.
• Conversation II.: Introduction — Continued.
• Conversation III.: On Property.
• Conversation IV.: On Property— Continued.
• Conversation V.: On the Division of Labour.
• Conversation VI.: On Capital.
• Conversation VII.: On Capital — Continued.
• Conversation VIII.: On Wages and Population.
• Conversation IX.: On Wages and Population. Continued.
• Conversation X.: On the Condition of the Poor.
• Conversation XI.: On Revenue.
• Conversation XII.: On Revenue Derived From Property In Land.
• Conversation XIII.: On Revenue Derived From the Cultivation of Land.
• Conversation XIV.: On the Revenue of Those Who Do Not Employ Their Capital Themselves.
• Conversation XV.: On Value and Price.
• Conversation XVI.: On Money.
• Conversation XVII.: Subject of Money Continued.
• Conversation XVIII.: On Commerce.
• Conversation XIX.: On Foreign Trade.
• Conversation XX.: Continuation of Foreign Trade.
• Conversation XXI.: Subject of Foreign Trade Continued.
• Conversation XXII.: On Expenditure.

CONVERSATION XVI.

ON MONEY.

mrs. b.

Having obtained some knowledge of the nature of value, we may now proceed to examine the use of money.

Without this general medium of exchange, trade could never have made any considerable progress; for as the subdivisions of labour increased, insuperable difficulties would be experienced in the adjustment of accounts. The butcher perhaps would want bread, at a time that the baker did not want meat; or they might each be desirous of exchanging their respective commodities, but these might not be of equal value.

caroline.

It would be very difficult, I believe, at any time to make such reckonings exactly balance each other.

mrs. b.

In order to avoid this inconvenience, it became necessary for every man to be provided with a commodity which would be willingly taken at all times in exchange for goods. Hence arose that useful representative of commodities, money, which, being exclusively appropriated to exchanges, every one was ready either to receive or to part with for that purpose.

caroline.

When the baker did not want meat he would take the butcher’s money in exchange for his bread, because that money would enable him to obtain from others what he did want.

mrs. b.

Various commodities have been employed to answer the purpose of money. Mr. Salt, in his Travels in Abyssinia, informs us, that wedges of salt are used in that country for small currency, coined money being extremely scarce. A wedge of rocksalt, weighing between two and three pounds, was estimated at 1-30th of a dollar.

caroline.

How extremely inconvenient such a bulky article must be as a substitute for money coined; the carriage of it to any distance would cost almost as much as the salt was worth.

mrs. b.

A commodity of this nature could be used for the purpose of money in those countries only where very few mercantile transactions take place, and where labour is very cheap. Tobacco, shells, and a great variety of other articles, have been used at different times, and in different countries, as mediums of exchange; but nothing has ever been found to answer this end so well as the metals. They are the least perishable of all commodities; they are susceptible, by the process of fusion, of being divided into any number of parts without loss, and being the heaviest, they are the least bulky of all bodies. These properties render them peculiarly appropriate for the purposes of commerce and circulation.

caroline.

The use of metals as money, must be very ancient, for mention is made in history of the iron coin of the Greeks, and the copper coin of the Romans.

mrs. b.

Nor are gold and silver coins of modern date: but they were scarce before the discovery of the American mines. The first gold coins were struck at Rome, about 200 years before Christ. Those of silver about 65 years earlier. Previous to that period the as, which was of copper, was the only coin in common use.

caroline.

It is said in the Bible that Abraham gave 400 shekels of silver for the purchase of the field of Machpelah, to bury Sarah in. — Was that, do you suppose, coined money?

mrs. b.

No: I believe there was no coined money of so ancient a date as the time of Abraham. The metals were originally used for the purpose of money in bars; and it is mentioned that Abraham weighed the silver for the purpose; which would have been unnecessary had it been coined. Before the invention of coining, the use of the metals as a medium of exchange was attended with great inconvenience; it being necessary not only to weigh, but also to assay the metal, to ascertain both its quantity and its degree of purity.

The invention of coining superseded this inconvenience; for coining money is affixing to a piece of metal a particular stamp or impression, which declares that it is of a certain weight and quality. Thus the impression on a guinea signifies that it is a piece of gold of a certain fineness, weighing 107 grains nearly.

caroline.

Money must also be of great use in fixing the value of commodities; before its introduction the butcher and the baker might dispute which was worth most, the joint of meat or the loaf of bread which they wished to exchange.

mrs. b.

Yes; money became useful not only as a medium of exchange, but also as a common measure of value. You will learn hereafter that it is not, any more than labour, a very accurate measure, when the values of one period are compared with the values of another distant period; but for the common purposes of traffic it answers sufficiently well.

Previous to the invention of money, men were much at a loss how to estimate the value of their property. In order to express that value they were necessarily obliged to compare it to something else, and having no settled standard, they would naturally choose objects of known and established value. Accordingly we read both in Scripture and in the ancient poets, of a man’s property being worth so many oxen and so many flocks and herds. Dr. Clarke informs us, that even at the present day, the Calmuc Tartars reckon the value of a coat of mail from six to eight, and up to the value of fifty horses. In civilised countries every one estimates his capital by the quantity of money it is worth; — he does not really possess the sum in money, but his property, whatever be its nature or kind, is equivalent to such a sum of money. For instance, a man who is worth a capital of 20,000l. may perhaps not be possessed of 20l. in money; but his property, whether land or commodities, if sold, would bring him 20,000l.

caroline.

When gold is brought into this country, pray how is it paid for? Something must be given in exchange for it; and yet that something cannot be money?

mrs. b.

Certainly not. A bullion merchant would derive no advantage from a trade in which he would be employed in exchanging a certain weight of gold and silver in one country, for a similar weight of gold and silver in another country: he would lose not only all the profits of trade, but the expenses of the freight, &c.; so that in fact he would be exchanging 100l. for 90l., or 95l.

We pay for gold and silver in woollen cloths, hardware, calicoes, and linens, and a variety of other commodities.

caroline.

Then we purchase gold with goods, just as we purchase goods with gold?

mrs. b.

Exactly; those who take our goods in exchange for gold bullion, buy goods with gold; only as the gold is not coined, it may rather be called an exchange of commodities than a purchase.

caroline.

And if the mines should prove less productive than usual, or any circumstance should render gold scarce, and thus raise its exchangeable value, we must export a greater quantity of goods to exchange for the same quantity of gold?

mrs. b.

Undoubtedly. The natural value of gold bullion, like that of any other commodity, may be estimated by the labour bestowed upon it, both to extract it from the mines, and bring it to the place where it is to be sold; and its exchangeable value fluctuates according to the proportion of the supply to the demand. This fluctuation, however, can be discovered only by the greater or smaller quantity of goods for which the same quantity of gold will exchange. For as gold and silver may be bought with any kind of goods, they are not susceptible of a standard of value like that of other commodities which is estimated in one particular article — money.

caroline.

As gold and silver are the standard of value of all other commodities, all other commodities, I conceive, must be affected by an alteration in the exchangeable value of gold and silver?

mrs. b.

And this is the reason why money is not an accurate standard of the value of commodities: for if money by its plenty diminish in value, less goods will be given in exchange for it; it therefore enhances the price of commodities, that is to say, their exchangeable value estimated in money, and renders them dearer. Whilst if money by its scarcity increase in value, more goods will be given in exchange for it: it therefore lowers the price of commodities, and renders them cheaper.

caroline.

A deficiency of any article raises its exchangeable value, and consequently its price, above its natural value; thus a deficiency of gold or silver would make a smaller quantity exchange for the same quantity of goods as before; and therefore a loaf of bread would sell for less money, or, in other words, would be cheaper.

mrs. b.

Yes; and not only bread, but meat, clothes, furniture, houses; in short, every thing would be cheaper, in consequence of the scarcity of the precious metals.

caroline.

It would appear, then, that a scarcity of money is advantageous to a country by rendering things cheap?

mrs. b.

When the cheapness of commodities arises from that plenty which results from a reduction of the cost of production, it is very advantageous; but not when it proceeds from a scarcity of money. In the latter case, the supply not being increased, commodities are lower in price, without any alteration in their general exchangeable value. They may, therefore, be considered rather as nominally than really cheaper. If, for instance, a loaf of bread should sell for a penny, though there should not be a single loaf more in the country than when it sold for a shilling, the cheapness would not make bread more plentiful.

caroline.

But if the price of bread were so low as a penny, though the supply should not be increased, the labouring classes would increase their consumption of it so considerably as to produce a scarcity, if not a famine, before the next harvest. This nominal, or I would call it false, cheapness, must, therefore, be prejudicial, instead of being beneficial, to a country.

mrs. b.

The consequence you have drawn from it is erroneous; for the labouring classes would not be able to purchase a greater quantity of bread than usual, owing to the scarcity of money. The wages of labour would not be exempted from the general fall in price which this scarcity would produce: the labourers, as well as the bread they eat, would be paid in pence instead of shillings, and their power of purchasing bread would neither be increased nor diminished.

caroline.

True; I did not consider that consequence. I suppose, then, that if the contrary case occurred, that is, if the quantity of money were considerably augmented, either by the discovery of a mine in the country, or by any other means, a general rise in the price of commodities would take place?

mrs. b.

Undoubtedly; but without producing any scarcity. Therefore, though commodities would rise in price, their value would not be increased, and the commodities being the same in quantity, the public would be equally well supplied; but as money fell or became depreciated in value from its excess, fewer commodities would be given in exchange for the same sum; or more money must be paid for the same commodity. A loaf of bread might cost two shillings instead of one, but as the wages of labour would at the same time be doubled, the labourer would suffer no privation from the increase of price. You now see the propriety of making the distinction between the value and the price of a commodity.

It is very possible for the price of a commodity to rise, whilst its value falls. A loaf of bread may rise in price from one to two shillings; but money may be so depreciated by excess that two shillings may not procure so much meat, butter, and cheese, as one shilling did before; therefore a loaf of bread would no longer exchange for so much of those commodities, and its exchangeable value, compared with other things generally, would have fallen; while its price, or exchangeable value estimated in money only, would have risen.

caroline.

And when the price alters, how can we distinguish whether it is the goods or the money which change in value?

mrs. b.

There is no point so difficult to ascertain as a variation of value, because we have no fixed standard measure of value; neither nature nor art furnishes us with a commodity whose value is incapable of change; and such alone would afford us an accurate standard of value.

caroline.

How useful such a commodity would be; for we cannot estimate the value of any thing without comparing it with the value of something else; and if that something else is liable to variation, it is but of little assistance to us: it is supporting the earth by the elephant, and the elephant by the tortoise; but we still remain in the same dilemma. When a man says he is worth 500 acres of land, we can form scarcely any judgment of his wealth, unless he tells us what the acres are worth: his land may be situated in the most fruitful parts of England, or it may be in the wilds of America, or the deserts of Arabia; and if he values his land in money, and says my acres are worth, or would sell for 1000l., we can form some notion of their real value, but not an accurate one; for we do not know what is the real value of the money, whether it is plentiful or scarce, cheap or dear; nor can we ever learn it unless we had some invariable standard by which to measure it.

mrs. b.

Now supposing money to be depreciated in value 25 per cent., and that the expense of manufacturing a piece of muslin, from some improvement in the process, fell from four to three shillings a-yard, at what price would the muslin sell?

caroline.

It would retain its original price of four shillings, though it would really be cheaper; for the diminution of the value of money would exactly counterbalance the diminution of the cost of production of the muslin.

mrs. b.

Very well. And if, on the contrary, money should become scarce at the same time as the cost of production of a commodity diminished, then these two causes, acting in conjunction instead of opposition, the commodity would be both nominally and really cheaper.

caroline.

The muslin in that case would fall from four to two shillings a yard.*

mrs. b.

In order still further to reduce the price of the muslin, we may suppose the supply to exceed the demand, so as to oblige the manufacturer to sell it below its cost of production; and thus the price might fall so low as one shilling, or even sixpence a-yard.

But of all these reductions of price, that which proceeds from a diminished cost of production is the only one from which general advantage is derived. That arising from the depreciation of money producing merely a nominal cheapness; and that which results from an excess of supply being decidedly an evil, inasmuch as it creates distress and discourages industry.

caroline.

It appears, then, from what you have said, that an increase or diminution of money in a country does not really affect the pecuniary circumstances of any one?

mrs. b.

I beg your pardon; all classes of men are temporarily affected when the change is abrupt; because the due level is not immediately ascertained, and until that takes place, the pressure falls unequally. But independently of this, there are many classes of people who would be very sensibly and permanently injured by an alteration in the exchangeable value of money.

Let us suppose, for instance, that the proprietor of a field lets it for a long lease at a rent of 20l. a-year: and that some years afterwards, money having risen in value, and he being in want of hay for his horses, purchases the crop of hay for 15l. In this case the landlord will continue to receive 20l. a-year for the rent, and yet pay but 15l. for the produce, so that the farmer will lose 5l., besides the profits of his capital. Is not this a very serious injury?

caroline.

No doubt; and this would be the case with all leases; for it is immaterial to whom the farmer sells his crops; if the market-price has fallen, he must be a loser.

mrs. b.

Yes. Were money raised to double its former value, the rent would purchase double the quantity of commodities that it did before; for 100l. in money would exchange for a quantity of goods which was reckoned worth 200l. previous to the alteration; so that rent, though nominally the same, would in reality be doubled, and it would be so much unjustly taken out of the pocket of the tenant to put into that of the landlord.

caroline.

This evil, however, admits of a remedy when a new lease is made?

mrs. b.

True; but should the old one have several years to run, the farmer may be ruined first; and though it is true that it does not violate any law, it is a manifest infraction of the security of property, which we have observed to be the foundation of all wealth, and the strongest motive for its accumulation. There is not a more active and steady stimulus to industry than the certainty of reaping the fruits of our labour.

caroline.

Then I suppose that when money is depreciated in value, in consequence of being more plentiful, the case would be reversed; the farmer would be benefited and the landlord would be the loser; for the rent would not be really worth so much as it was before?

mrs. b.

Undoubtedly. Another class of people who are materially affected by an alteration in the value of money, are the unproductive labourers. Their pay is generally a regular stipend, not liable to the same variation as the wages of productive labourers. The pay of the army and navy, of all the officers under government, and of the learned professions, is fixed; those persons must therefore suffer all the evil, or enjoy all the benefit arising from an alteration in the value of money.

caroline.

The higher classes of the unproductive labourers might be able to support the hardship resulting from a depreciation of the value of money; but how can the common sailor or soldier do so? It is absolutely necessary that their pay should enable them to procure a suitable subsistence.

mrs. b.

They are usually paid, partly in money and partly in provisions and clothing, and are not therefore such sufferers by a depreciation of money as they would be if paid entirely in currency. It has nevertheless been found necessary of late to augment the pay of both army and navy.

caroline.

The value of money has then fallen?

mrs. b.

Yes, it has; but I must defer explaining the reason of this fall till our next interview. A third class of people who are considerably injured by a depreciation of the value of money, are those who have lent money at interest for a long period of time, persons who live on annuities, and particularly the stockholders in the public funds. Not only is the interest they receive depreciated, but also the value of their capital. The interest they receive for their stock remains nominally the same, whatever diminution may have taken place in the value of money; and their income being thus apparently stationary, they partake in the general disadvantage of the rise of prices, without being enabled to avail themselves of the compensation arising from the greater abundance of money. Professional men, and all those who receive salaries, have ultimately the remedy of an increase of pay; but the stockholder has no resource: his income wastes away, and he perceives his means of procuring his accustomed enjoyments gradually diminish, without being able to trace the source from whence the evil springs; for as his income remains nominally the same, he is not aware of any diminution of wealth.

caroline.

How very much I have been mistaken in my idea of money! Instead of being the only, or at least the principal article which (as I thought) constituted wealth; it seems, on the contrary, to be the only one which is unworthy of that title, since it does not contribute to the riches of a country. An excess of money renders other things dear; a deficiency of it makes them cheap; but it appears to me that a country is not one atom the richer for all the money it possesses. Money, therefore, I think, cannot be called wealth, but merely its representative, like the counters at cards; and its chief use seems to consist in its affording us a convenient medium of exchange, and a useful, though imperfect standard of value.

mrs. b.

Money cannot with justice be compared to counters, for it is not, like them, a sign or representative of value, but really possesses (or ought to possess) the value for which it exchanges. A banknote, which has no intrinsic value, is simply a sign of value; but when you purchase goods for a guinea, you give a piece of gold of equivalent value in exchange.

In order to judge whether money forms any part of the wealth of a nation, let us refer to our definition of wealth. I believe we said that every article, either of utility or luxury, constituted wealth. Now I leave you to judge whether money, considered either as a medium of exchange, or as a standard of value, is not eminently useful; since by facilitating the circulation of commodities it indirectly contributes to their multiplication.

caroline.

That is true, certainly, with regard to the money actually required for circulation; but should it exceed that sum, the surplus would be of no value to us.

mrs. b.

The same might be said of a superfluous quantity of any kind of wealth; more tables and chairs, or a greater quantity of gowns and coats than are wanted, would be equally useless, and would equally be depreciated in value.

caroline.

But then we could export such commodities, and exchange them for goods which we did want.

mrs. b.

And why should we not do the same with money? When we have more money than is required for the purpose of circulation, we should export it, by purchasing foreign goods; without this resource, a superfluity of money is perfectly useless, and will no more contribute to the production of wealth, than a superfluous number of mills would contribute to the production of flour.

caroline.

I had always imagined that the more money a country possessed, the more affluent was its condition.

mrs. b.

And that usually is the case. The error lies in mistaking the cause for the effect. A great quantity of money is necessary to circulate a great quantity of commodities. Rich flourishing countries require abundance of money, and possess the means of obtaining it; but this abundance is the consequence, not the cause of their wealth, which consists in the commodities circulated, rather than in the circulating medium. Specie, we have just said, constitutes wealth, so far as it is required for circulation; but if a country possess one guinea more than is necessary for that purpose, the wealth which purchased that guinea has been thrown away.

caroline.

Yet what a common observation it is, that plenty of money animates the industry of a country, and encourages commerce; and this seems to be proved by the miserable and barbarous state of Europe previous to the discovery of the American mines.

mrs. b.

The discovery of America was certainly a very efficient cause in rousing the industry of Europe from the state of stagnation into which it was sunk by ignorance and barbarism. But had America possessed no mines, I doubt whether the advantages we have derived from our connection with that country would not have been almost equally great: we could easily find a substitute for the specie with which she supplies us, but never for the abundance and variety of wealth which she is incessantly pouring in upon us. The increase of European comforts, of affluence, of luxury, is attributed to the influx of the treasures of the new world — and with reason; but those treasures are the sugar, the coffee, the indigo, the tobacco, the drugs, &c. which America exports, to obtain which we must send her commodities that have been produced by the employment of our poor. Gold and silver, though they have greatly excited our avarice and ambition, have eventually contributed but little to stimulate our industry.

It is not to the multiplication of the precious metals that we are indebted for our improved agriculture, our prosperous commerce, and the variety and excellence of our manufactures; nor do I believe that it was their scarcity which deprived our ancestors of these advantages. It was because they were ignorant and barbarous, and that we are comparatively enlightened and civilized; — comparatively I may indeed say, for error is still active in retarding the progress of improvement, and this is no where more evident than in the anxiety of governments to prevent the exportation of specie, although it is now nearly forty years since Adam Smith fully proved the impolicy of this prohibition.

caroline.

If the exportation of specie be prohibited, the only use that can be made of a superfluous quantity of it, is to melt it down and re-convert it into bullion.

mrs. b.

But melting the coin is, in this country, equally illegal. A superfluous quantity of money, therefore, (were these laws never infringed,) would be necessarily added to the circulation, and depreciate the value of the whole.

How different is the situation of a country where no such prohibitory laws exist! There, no sooner does money accumulate so as to occasion a depreciation of its value, or, in other words, an advance in the price of commodities, than the merchants of that country export specie, and purchase with it foreign goods; while at the same time foreign merchants send their goods to the country where prices have risen, and exchange them, not for other goods, which are dear, but for money, which is cheap.

caroline.

That is to say, they will sell, but not purchase?

mrs. b.

Precisely: — it is thus that a country is drained of its superfluous specie; as this traffic goes on, money rises in value, commodities fall in price, and foreign merchants again exchange their goods for commodities of the country, instead of receiving payment for it in specie.

No apprehension need therefore be entertained of ill consequences arising either from the melting down or exporting the coin of the country. This exportation will take place secretly whenever there is a superfluity, however severe the law may be against it; the only difference is, that instead of being carried on in an open and regular manner by merchants of respectability, it is thrown into the hands of men of despicable character, who are tempted by extraordinary profits to engage in this illicit traffic.

Could Spain and Portugal, countries which receive all the precious metals imported from America to Europe, have carried into effect the absurd restrictive laws by which they attempted to keep their gold and silver at home, those metals would eventually have become of little more value to them than lead and copper.

If you have understood what I have said, you will now be able to tell me what effect will be produced in the mercantile transactions of a country, which is not shackled by restrictive laws, when a scarcity of money produces a fall in the price of commodities.

caroline.

In that case the very reverse will happen of what we before observed. Foreign merchants will come and buy goods, and instead of offering merchandise in exchange, will bring money in payment; for they will be willing to make purchases, but not sales at a cheap market.

mrs. b.

It is thus that gold and silver are diffused throughout all parts of the civilised world, wherever there is a deficiency, it flows in from every quarter; and wherever there is a redundancy, the tide sets in an opposite direction. It is the regular diffusion of the precious metals, and their constant tendency to an equality of value, which renders them so peculiarly calculated for a general standard. Were money as liable to variation of value as the commodities for which it serves as a medium of exchange, it would be totally unfit for a standard.

[* ]Accurately calculated the muslin would sell for 2s. 3d. a yard, because the rise in the value of money would be reckoned upon the reduced cost of production.