The Online Library of Liberty

A project of Liberty Fund, Inc.

• A History of Banking In Great Britain;
• Chapter I.: Banking In England.
• Section I.: A Record of Beginnings.
• Section II.: Foundation of the Bank of England.
• Section III.: An Era of National Development.
• Section IV.: State of the Irish Currency.
• Section V.: Failure of Currency Reform—inflation and Reaction.
• Section VI.: The Committee On Banking of 1840.
• Section VII.: On the Bank Acts of 1844 and 1845.
• Section VIII.: Commercial Crises.
• Section IX.: Monetary Panics.
• Section X.: General Conclusion.
• Chapter II.: Banking In Scotland.
• Chapter III.: The Theory and Mechanism of Banking.
• Chapter IV.: Definitions of Economic Terms.
• Chapter V.: The Theory of Value.
• Section I.
• Section II.
• Section III.
• Chapter VI.: The Theory of Credit.
• Section I.
• Section II.
• Banking In Russia.
• Chapter I.: The Early Stages of Money and Credit.
• Section I.: Prefatory.
• Section II.: Introduction of Paper Money.
• Section III.: Financial Reconstruction Under Alexander II. And the Founding of the State Bank.
• Chapter II.: Methods and Operations of the State Bank.
• Chapter III.: Banking Vicissitudes From 1862 to 1875.
• Chapter IV.: The Eastern War Period.
• Chapter V.: Private Banks.
• Chapter VI.: The Bourse.
• Chapter VII.: The Precious Metals.
• Chapter VIII.: Foreign Exchanges.
• Chapter IX.: The Debt and Finances of Russia.
• History of Savings-banks In the United States.
• I.
• II.
• III.
• IV.
• V.

CHAPTER IV.

DEFINITIONS OF ECONOMIC TERMS.

I.—

DEFINITION OF ECONOMICS.

ECONOMICS is the science of exchanges, or the science which treats of the scientific principles and mechanism of commerce in its widest extent and in all its forms and varieties.

The word economics is compounded of the Greek words οἷκος and νόμος. Οἶκος in Greek means property of every description. Throughout the whole range of Greek literature, from Homer to Ammonius, the word οἶκος is used as absolutely synonymous with πλοῦτος and χρῆμα, to denote wealth of every sort. It is the technical term in Attic law for a person’s whole substance, or estate, of every form. It includes not only such property as lands, houses, money, jewelry, corn, cattle, and such things of a material form; but also such property as consists only in the form of abstract rights—such as rights of action, debts, bank notes, bills of exchange, the funds, shares in commercial companies, the goodwill of a business, copyrights, patents, and many other kinds of abstract rights, which are termed in law incorporeal wealth.

Νόμος in Greek means a law; hence economics is the science which treats of the exchanges of all kinds of property which constitute commerce. Hence it may be defined as the science which treats of the principles and mechanism of commerce in all its forms. It is sometimes called the theory of value, or the science of wealth; or it may be called the science which treats of the laws which govern the relations of exchangeable quantities. Michel Chevalier did me the honor to say that he considered this to be the best definition of the science which has yet been proposed. Pure economics, then, is the science which treats of exchanges—of all exchanges, and of nothing but exchanges. And it is a fundamental law of the philosophy of science that when the concept of the science is once determined, all questions and problems in the science must be stated in accordance with that concept, and no other. Thus, economics being the science of exchanges, all economical questions and problems must be stated in the form of an exchange and in no other, such as that of addition or subtraction, or any other.

II.—

DEFINITION OF WEALTH, OR OF AN ECONOMIC QUANTITY.

Next, after clearly explaining the nature and purpose of a science, it is necessary to define clearly all the technical terms used in it. In almost every science a considerable number of the definitions used are taken from words of common discourse which have a variety of meanings. But in a formal scientific treatise it is indispensably necessary to select one of these divers meanings as suitable for the science, and to use it uniformly in that sense throughout the work. Nor is it sufficient to enumerate a number of isolated objects under a term or definition. As pointed out by Bacon long ago, a scientific definition essentially requires some principle or quality which is common to all the objects which are classed under it. It is not sufficient to allege that lands, houses, jewelry, money, cattle, corn, labor and services, debts, rights of action, the funds, etc., are wealth, without clearly defining the quality or principle which is common to them all, and which constitutes them wealth—i. e., that which constitutes the essence of wealth. This is what Whewell calls the colligation of facts. It is also a principle in framing definitions that, when once the quality, or principle, is agreed upon, which is the basis of the science, all quantities whatever which have that quality in common must be included in the definition, however diverse they may be in nature or form, and even though they possess no other quality in common but that single one. So Bacon earnestly inculcates as the foundation of all true science a careful collection of all kinds of instances in which the given nature, or quality, is found:* “The investigation of forms proceeds thus: a nature, or quality, being given, we must first of all have a muster or presentation before the understanding of all known instances which agree in the same nature, or quality, though in substances the most unlike. And such collection must be made in the matter of a history, without speculation.” This is what Plato designates as the one in the many—i. e., the same quality appearing in quantities of the most diverse forms. What, then, is the common property, or principle, which constitutes things wealth?

III.—

ARISTOTLE’S DEFINITION OF WEALTH.

Ancient writers for 850 years unanimously held that exchangeability, or the capability of being bought and sold or exchanged, is the sole essence and principle of wealth, and that everything whatever which can be bought and sold or exchanged is wealth, whatever its nature or its form may be. Thus Aristotle says, “Nicomach Ethics,” Book V.: “χρήματα δὲ λέγομεν πάντα ὅϭων ή ὰξία νομίσματι μετρεῖται.”—“And we call wealth all things whose value can be measured in money.” So Ulpian, the eminent Roman jurist, says: “Ea enim res est quæ emi et venire potest.”—“For that is wealth which can be bought and sold.”

All the most eminent modern economists have come to agree in this definition. Thus Mill says:* “Everything, therefore, forms a part of wealth which has a power of purchasing.” Here we have a perfectly good general concept, or definition, which contains only one general idea, and it is therefore fitted to form the basis of a great science. It is a concept as wide and general as the dynamical definition of force. That single sentence of Aristotle’s is the germ out of which the whole science of economics is to be evolved, just as the huge oak-tree is developed out of the tiny acorn.

A quantity means anything which can be measured; hence, an economic quantity means anything whatever whose value can be measured in money, or which can be bought and sold or exchanged. The sole criterion, then, of anything being wealth is, can it be bought and sold? Can it be exchanged separately and independently of anything else? Can its value be measured in money? This criterion may seem very simple; but, in fact, to apply it properly, to discern what can and what cannot be bought and sold separately and independently of anything else, or to perceive all things whose value can be measured in money, requires a thorough knowledge of some of the most abstruse branches of law and commerce.

IV.—

THE THREE SPECIES OF WEALTH, OR OF ECONOMIC QUANTITIES

Having, then, adopted exchangeability, or the capability of being bought and sold, as the sole essence and principle of wealth, we have next to discover how many different orders or species of quantities there are which satisfy this definition. First, there are material things of all sorts, such as lands, houses, money, jewelry, corn, cattle, etc., which can be bought and sold, or whose value can be measured in money. Everyone now admits all these things to be wealth, and therefore we need say nothing more about them here. There are, however, two other orders of quantities of a totally different nature—one of which may be typified by the term labor, and the other by the term credit—which can be bought and sold, or whose value can be measured in money; and in modern times there has been a vast amount of controversy as to whether they are to be admitted as wealth or not, and it is these species of quantities which we have now to consider.

V.—

ANCIENT DIALOGUE SHOWING THAT LABOR IS WEALTH.

There is a very remarkable work of antiquity extant which is the earliest treatise that we are aware of discussing an economical question. It is a dialogue called the “Eryxias; or, On Wealth,” and is frequently bound up with the works of Plato. It is attributed to Æschines Socraticus, one of the most distinguished disciples of Socrates. Critics, however, unanimously pronounced it to be spurious, without being able to assign it to any definite author. High authorities consider it was probably written in the early Peripatetic period. This dialogue is to the following effect: The Syracusans had sent an embassy to Athens, and the Athenians had sent a return embassy to Syracuse. As the Athenian ambassadors were entering the city on their return, they met Socrates and a party of his friends, with whom they entered into conversation. Erasistratus, one of the envoys, said he had seen the richest man in all Sicily. Socrates immediately started a discussion on the nature of wealth. Erasistratus said what he thought upon the subject, as everyone else did, and that to be wealthy meant to have much money. Socrates asked him what kind of money he meant, and he instanced the moneys of several countries. At Carthage they used as money leather discs in which something was sewn up, but nobody knew what it was, and he who possessed the greatest quantity of this money at Carthage was the richest man there. But at Athens he would be no richer than if he possessed so many pebbles from the hill. At Lacedæmon they used iron as money, and that useless iron. He who possessed a great quantity of this iron at Lacedæmon would be rich, but anywhere else it would be worth nothing. In Ethiopia again they used carved pebbles as money, which were of no use anywhere else. Among the nomade Scythians a house was not wealth, because no one wanted a house, but greatly preferred a good sheep-skin cloak. He showed that if anyone could live without meat and drink, they would not be wealth to him, because he did not want them.

Socrates showed that money is only wealth because it is exchangeable—because it can purchase other things. Where it is not exchangeable, where it cannot purchase other things, it is not wealth. He then asked why some things are wealth and other things are not wealth. Why are some things wealth in some places and not in other places? And at some times, and not at other times? He showed that whether a thing is wealth or not depends entirely upon human wants and desires; that everything is wealth which is wanted and demanded; that things are only wealth, χρήματα, where and when they are χρήσιμα—that is, where and when they are wanted and demanded; and that nothing is wealth when and where it is not wanted and demanded. Thus we see that though some persons might be puzzled at the meaning of the word wealth, there is no possibility of mistake when we refer to the Greek, because χρῆμα, which is one of the most usual words in Greek for wealth, comes from χράομαι, to want or demand. Consequently, the word χρῆμα, wealth, means simply anything whatever which is wanted and demanded, no matter what its nature or its form may be.

It is, then, human wants and desires which alone constitute anything wealth. Anything whatever which people want and demand and are willing to pay for is wealth. Everything, therefore, which can be bought and sold is wealth, whatever its nature or its form may be; and anything which no one wants or demands is not wealth.

Socrates then showed that gold and silver are only wealth in so far as they enable us to obtain or purchase what we want and demand; and that if anything else will enable us to purchase what we want and demand in the same way that money does, it is wealth for the very same reason that gold and silver are. He then instanced persons who gained their living by giving instruction in the various sciences. He said that persons are able to purchase what they want by giving this instruction, just as they are able to do with gold and silver. Consequently, he said that the sciences are wealth—αί ἐπίϭτημαι χρήματα οὖϭαι; and that those who are masters of such sciences are so much the richer—πλουϭιώτεροί εἰϭι. Now, in instancing the sciences as wealth—that is, of course, a general term for labor, because labor in economics is any exertion of human ability or thought which is wanted, demanded, and paid for—thus the author of this dialogue showed that labor is wealth.

Socrates showed that the mind has wants and demands as well as the body, and that the things which are wanted and demanded for the mind and are paid for are equally wealth as those things which satisfy the wants and demands of the body and are paid for. Thus all of the great professions—law, physic, surgery, engineering, and many others—are great estates, which produce utilities, which are as much wealth as the utilities which satisfy the wants of the body.

Now, labor cannot be seen nor handled; it cannot be transferred by manual delivery; but it may be bought and sold; its value may be measured in money; therefore it satisfies Aristotle’s definition of wealth. If any person wants any other to do any labor or service for him, and pays him for it, its value is measured in money as exactly as if it were a material chattel. Suppose that a person gives fifty guineas for a watch or a horse, and also fifty guineas for the opinion of an eminent advocate; the value of the opinion is measured in money as exactly as the value of the watch or the horse; and therefore they are all equally wealth.

So if a person earns an income of some thousands a year as the manager of a great mercantile company—banking, insurance, railway or any other—his services are as much wealth to him as corn or cattle to a farmer, or goods to any trader. Hence, the author of this dialogue showed that personal qualities in the form of labor are wealth, which no one perceived till Adam Smith; and thus he anticipated by about 2176 years one of the great extensions which Smith gave to the science.

VI.—

MODERN ECONOMISTS INCLUDE LABOR UNDER THE TERM WEALTH.

It has been shown that the economists expressly excluded labor, or services, from the term wealth. But, in accordance with the author of the “Eryxias,” Smith enumerates under the term fixed capital:* “The acquired and useful abilities of all the inhabitants or members of the society. The acquisition of such talents, by the maintenance of the acquirer during his education, study, or apprenticeship, always costs a real expense, which is a capital fixed and realized, as it were, in his person. These talents, as they make part of his fortune, so do they likewise that of the society to which he belongs.” So also he says: “The property which every man has in his own labor, as it is the original foundation of all other property, so it is the most sacred and most inviolable. The patrimony of a poor man lies in the strength and dexterity of his hands.”

J. B. Say dwelt with emphatic force on the doctrine that personal qualities are wealth. Among many other passages, he says:† “He who has acquired a talent at the price of an annual sacrifice enjoys an accumulated capital; and this wealth, though immaterial, is nevertheless so little fictitious that he daily exchanges the exercise of his art for gold and silver.”

“Since it has been proved that immaterial property, such as talents and acquired personal abilities, forms an integral part of social wealth, you see that utility, under whatever form it presents itself, is the source of the value of things; and what may surprise you is that this utility can be created, can have value, and become the subject of an exchange, without being incorporated with any material object. A manufacturer of glass places value in sand; a manufacturer of cloth places it in wool; but a physician sells us a utility without being incorporated in any manner. This utility is truly the fruit of his studies, his labor, and his capital. We buy it in buying his opinion. It is a real product, but immaterial.”

Say calls all species of labor and services immaterial wealth, because they are vendible products, but not embodied in any matter. This is an excellent name, and we shall adopt it to distinguish this order of economic quantities from material things and abstract rights.

We must, however, guard against an erroneous expression of Say’s. He says that the manufacturers of glass and cloth place value in sand and wool. This, however, is an error. The artisans place their labor in sand and wool, but it is the demand of the consumer which alone gives value to the glass and the cloth.

Senior has a long and eloquent passage to the same purpose:‡ “If the question whether personal qualities are articles of wealth had been proposed in classical times, it would have appeared too clear for discussion. [We have already seen that the question was discussed in classical times.] In Athens everyone would have replied that they, in fact, constituted the whole value of an ἔμψυχον ὄργανον. The only differences in this respect between a freeman and a slave are, first, that the freeman sells himself, and only for a period and to a certain extent; the slave may be sold by others and absolutely; and secondly, that the personal qualities of the slave are a portion of the wealth of his master; those of the freeman, so far as they can be made the subject of exchange, are part of his own wealth. They perish, indeed, by his death, and may be impaired or destroyed by disease or rendered valueless by any change in the custom of the country which shall destroy the demand for his services [thus Senior sees that value depends on demand and not upon labor]; but subject to these contingencies they are wealth, and wealth of the most valuable kind. The amount of revenue derived from their exercise in England far exceeds the rental of all the lands in Great Britain.”

So also Senior says: “Even in our present state of civilization, which, high as it appears by comparison, is far short of what may be easily conceived or even of what may be confidently expected, the intellectual and moral capital of Great Britain far exceeds all the material capital, not only in importance but in productiveness. The families that receive mere wages probably do not form a fourth part of the community; and the comparatively larger amount of the wages even of these is principally owing to the capital and skill with which their efforts are assisted and directed by the more educated members of the society. Those who receive mere rent, even using that word in its largest sense, are still fewer; and the amount of rent, like that of wages, principally depends on the knowledge by which the gifts of nature are directed and employed. The bulk of the national revenue is profit; and of that profit the portion which is merely interest on material capital probably does not amount to one-third. The rest is the result of personal capital, or, in other words, of education. It is not in the accidents of the soil, in the climate, in the existing accumulation of the instruments of production, but in the quantity and diffusion of this immaterial capital that the wealth of a country depends. The climate, the soil, and the situation of Ireland have been described as superior, and certainly not much inferior to our own. Her poverty has been attributed to the want of material capital; but were Ireland now to exchange her native population for seven millions of our English north-countrymen, they would quickly create the capital that is wanted. And were England north of the Trent to be peopled exclusively by a million of families from the west of Ireland, Lancashire and Yorkshire would still more rapidly resemble Connaught. Ireland is physically poor, because she is morally and intellectually poor. And while she continues uneducated, while the ignorance and the violence of her population render persons and property insecure, and prevent the accumulation and prohibit the introduction of capital, legislative measures, intended solely and directly to relieve her poverty, may not, indeed, be ineffectual, for they may aggravate the disease the symptoms of which they are meant to palliate, but undoubtedly will be productive of no permanent benefit. Knowledge has been called power; it is far more certainly wealth. Asia Minor, Syria, Egypt and the northern coast of Africa were once among the richest, and are now among the most miserable countries in the world, simply because they have fallen into the hands of a people without a sufficiency of the immaterial sources of wealth to keep up the material ones.”

So Mill says:* “The skill and energy and the perseverance of the artisans of a country are reckoned part of its wealth no less than its tools and machinery.” And why not the skill and energy and perseverance of other classes as well as of artisans? He also says: “Acquired capacities, which exist only as a means, and have been called into existence by labor, fall exactly, as it seems to me, within that designation.” So Madame Campan inscribed over the hall of study in her establishment at St. Germain: “Talents are the ornaments of the rich and the wealth of the poor.” So Cardinal Newman says:† “If gold is wealth, power, influence; and if coal is wealth, power, influence, so is knowledge.”

We have, then, already found two distinct kinds of things which can be bought and sold, or whose value can be measured in money: (1) Material things which can be seen and handled, such as money, corn, cattle, lands, houses, etc., which can be transferred by manual delivery. (2) Things like labor and knowledge, which can neither be seen nor handled, but which can be bought and sold; and though these two kinds of things have nothing in common besides the capability of being bought and sold, they are each for that reason comprehended under the term wealth.

VII.—

DEMOSTHENES SHOWS THAT PERSONAL CREDIT IS WEALTH.

But personal qualities may be used as purchasing power in another method besides that of labor. If a merchant enjoys good “credit,” as it is termed, he may go into the market and buy goods, not with money, but by giving his promise to pay money at a future time—that is, he creates a right of action against himself. The goods become his property exactly as if he had paid for them in money. It is a sale or an exchange. The right of action is the price he pays for the goods; it is termed a credit—in French, a créance—because it is not a right to any specific sum of money, but only a right of action to demand a sum of money from the merchant at a future time. Hence, a merchant’s credit is purchasing power, exactly as money. The merchant’s purchasing power is his money and his credit. They are both, therefore, equally wealth, by Mill’s definition. When a merchant purchases goods with his credit, instead of with money, his credit is valued in money, because the seller of the goods accepts his credit as equal in value to money; his credit is valued in money exactly as his labor may be. Hence, by Aristotle’s definition of wealth, which is now universally accepted, the merchant’s personal credit is wealth.

So Demosthenes says:‡ “δυοῖν ὰγαθοῖν ὄντοιν πλούτου τε καὶ πρὸς ἄπαντας πιϭτεύεϭθαι, μεῖζόν ἑϭτι τὸ τῆς πίϭτεως ύπάρχον ᾑμῖν.”—“There being two kinds of wealth—money and general credit—the greater is credit, and we have it.” So also again.* “εἰ δὲ τοῦτο ὰγνοεῖς ὅτι Πίϭτις Ἀφορμὴ τῶν παϭῶν ἐϭτι μεγίϭτη πρὸς χρηματιϭμὸν πᾶν ἂν ὰγνοήσειας.”—“If you were ignorant of this—that credit is the greatest capital of all toward the acquisition of wealth, you would be utterly ignorant.” Thus Demosthenes shows that personal credit is ἁγαθά—wealth, property, goods, and chattels—and ὰφορμή, or capital.

Thus, though personal credit, like labor, can neither be seen nor handled nor touched, yet it can be bought and sold, or exchanged; its value can be measured in money; it is purchasing power, and therefore it is wealth. And as we have seen that Adam Smith declares that a man’s labor is his most sacred possession, of which no person has the right to despoil him, so to all bankers, merchants and traders, their credit is their most sacred possession, of which no one has the right falsely to despoil them. Hence the personal credit of all bankers, merchants, and traders is an integral and colossal portion of the national wealth—just as the industrial faculties of workingmen of all kinds are. So also the credit of the State, by which it can purchase money and other things by giving persons the right to demand a series of future payments from it, is national wealth.

VIII.—

MODERN ECONOMISTS INCLUDE PERSONAL CREDIT UNDER THE TERM WEALTH.

It has been shown that the economists steadfastly refused to admit that personal credit is wealth; because they alleged that, to allow that would be to maintain that wealth can be created out of nothing. But contemporary, general, and mercantile writers were entirely against them on that point. Thus Daniel de Foe says:† “Credit is so much a tradesman’s blessing that it is the choicest ware he deals in, and he cannot be too chary of it when he has it, or buy it too dear when he wants it: it is a stock to his warehouse; it is current money in his cash-chest.” So that keen metaphysician, Bishop Berkeley, who has many searching questions on economics in his “Querist,” asks (Quest. 35): “Whether power to command the industry of others [i. e., credit] be not real wealth?” So Melon says:‡ “To the calculation of values in money there must be added the current credit of the merchant and his possible credit.”

So Dutot says:§ “Since there has been a regular commerce among men, those who have need of money have made bills, or promises to pay money. The first use of credit, therefore, is to represent money by paper. The usage is very old; the first want gave rise to it. It multiplies specie considerably; it supplies it where it is wanting, and which would never be sufficient without the credit; because there is not sufficient gold and silver to circulate all the products of nature and art. So there is in commerce a much larger amount in bills than there is in specie in the possession of the merchants. A well-managed credit amounts to tenfold the funds of a merchant, and he gains as much by his credit as if he had ten times as much money. This maxim is generally received among all merchants. Credit is, therefore, the greatest wealth to everyone who carries on commerce.”

So Smith says:* “Trade can be extended as stock increases, and the credit of a frugal and thriving man increases much faster than his stock. His trade is extended in proportion to the amount of both [i. e., his stock and his credit], and the sum or amount of his profits is in proportion to the extent of his trade, and his annual accumulation in proportion to his profits.” So Junius says: “Private credit is wealth”; and Franklin says: “Credit is money.” Smith expressly includes “natural and acquired abilities” under the term fixed capital. Now, mercantile character or personal credit evidently comes under the designation of “natural and acquired abilities.” Hence personal credit is included by Smith under the term capital.

No person has more explicitly declared that personal credit is wealth than Mill. He says, in the preliminary remarks: “Everything, therefore, forms a part of wealth which has a power of purchasing.” He then says:† “For credit, though it is not productive power, is purchasing power.”

“The credit, which we are now called upon to consider as a distinct purchasing power.” He also says:‡ “The amount of purchasing power which a person can exercise is composed of all the money in his possession, or due to him (i. e., the bank notes, bills, and credits he has), and of all his credit. Credit, in short, has exactly the same purchasing power with money.” And many other passages to the same effect. Now, if Mill lays down as the fundamental definition of wealth, “Everything that is purchasing power is wealth,” and if he says, “Credit is purchasing power,” then the necessary inference is that credit is wealth. That is a syllogism in which Mill is safely padlocked, and from which there is no escape.

IX.—

ON ABSTRACT RIGHTS AS WEALTH.

But there is yet another or a third order of quantities which can neither be seen nor handled, but which can be bought and sold, or exchanged, and whose value can be measured in money; and these are abstract rights of various sorts—rights and rights of action. Suppose that a person pays in a sum of money to his account at his banker’s, what becomes of that money? It becomes the absolute property of the banker. The customer cedes the absolute property in the money to the banker, but he does not make him a present of it. He gets something in exchange for it—and what is that something? In exchange for the money the banker gives his customer a credit in his books, which is a right of action to demand back an equivalent sum of money whenever he pleases. But it is not a title to any specific sum of money in the banker’s possession. It is a mere abstract right of action against the person of the banker to demand a sum of money from him. The transaction is a sale or an exchange; the banker buys the money from his customer by issuing to him in exchange for it a right of action; and the customer buys this right of action with gold. Furthermore, the banker agrees that his customer may transfer this right of action to anyone else he pleases, by means of a bank note or cheque. So this right of action may pass through any number of hands, and effect any number of exchanges, exactly like an equal amount of money, until the holder demands payment of it, and it is extinguished. When the holder of the cheque demands payment of it from the banker, the banker buys up the right of action against himself with gold; and the holder of the cheque sells his right of action for gold. The transaction is therefore a sale or an exchange, and an act of commerce. Hence the whole series of these transactions are sales or exchanges. When the customer pays in money to his account it is an exchange; when he pays away his cheque in commerce it is an exchange; every time the cheque is transferred it is an exchange; and, finally, when payment is demanded from the banker it is an exchange. All these transactions are acts of commerce.

This right of action is termed a credit; because anyone who chooses to take it in exchange for goods or services knows that it is not a title to any specific sum of money in the banker’s possession; but it is only an abstract right to demand a sum of money from him; and the person who takes it only does so because he has the belief or confidence that the banker can pay if required. It will be convenient to state here that this right of action is also termed a debt; and that both in law and common usage the words credit and debt are used quite indiscriminately to mean a creditor’s right of action against his debtor. The reason of this will be explained in a future section. Similarly, when a merchant sells goods “on credit,” as it is termed, to a trader, he cedes the property in the goods to the trader, exactly as if he had sold them for money. And in exchange for the goods the trader gives the merchant his promise to pay, or a right of action to demand money at a future time—say three months after date. This right of action is also termed a credit or a debt. It is the price the trader pays for the goods. And if it be recorded on paper in the form of a bill of exchange, it may be exchanged against other goods, and circulate in commerce, exactly like an equal sum of money, any number of times, until it is paid off and extinguished. Again, suppose that the State wants to borrow money for any public purpose—such as a war or for some great public work. It buys money from those who are willing to sell it, and in exchange for the money it gives them the right to demand a series of payments from the State, either forever or for a certain limited time. This right to demand a series of future payments is termed an annuity, and is the price the State pays for the money. In popular language, they are termed the funds. And the owners of these rights may sell them again to anyone they please. They are salable commodities, just like any material goods.

Suppose, again, that a person subscribes to the capital of a joint-stock company—banking, railway, insurance, canal, dock, or any other. He pays the money to the company, which is a distinct person, quite separate from any individual shareholders, and receives in exchange for it the right to share in the future profits of the company. These rights are termed shares; and they are also salable commodities; they may be bought and sold like any material chattels. So, when a trader has established a successful business, he has the right to receive the future profits to be made by the business. This right to receive the future profits is a property quite distinct and separate from the house or shop, and the actual goods in them. It is additional to them. It is the product of labor, skill, thought, and care as much as any material chattels, and is a part of the trader’s assets. It is termed the goodwill of the business, and is a salable commodity.

Thrale, the great brewer, appointed Johnson one of his executors. In that capacity it became his duty to sell the business. When the sale was going on, says Boswell, “Johnson appeared bustling about, with an inkhorn and pen in his button-hole, like an exciseman; and on being asked what he really considered to be the value of the property which was to be disposed of, answered, ‘We are not here to sell a parcel of vats and boilers, but the potentiality of growing rich beyond the dreams of avarice.’ ” This latter phrase was merely Johnsonese for the goodwill of the business. The price realized was, we are told elsewhere, £135,000.

When the banking house of Jones, Loyd & Co. sold their business to the London and Westminster Bank, it was said in the papers that the price paid was £500,000. Similarly, every successful business has a goodwill attached to it which is a salable commodity and an asset of the trader’s.

Now, these abstract rights cannot be seen nor handled nor touched. But they can be bought or sold or exchanged. Their value can be measured in money. They can be transferred from one person to another as easily as any material chattels. Therefore, they satisfy Aristotle’s definition of wealth. They all possess that quality of exchangeability which ancient writers unanimously, and modern economists now at last agree, is the sole essence and principle of wealth. And, therefore, by the fundamental laws of natural philosophy, these abstract rights are all wealth.

X.—

GENERAL RULE OF ROMAN LAW THAT RIGHTS ARE WEALTH.

Now, in the Pandects of Justinian, which are the great code or digest of Roman law, it is laid down as a fundamental general rule: “Pecuniæ nomine non solum numerata pecunia, sed omnes res tam soli quam mobiles, et tam corpora quam jura continentur.”—“Under the term wealth, not only ready money, but all things, both immovable and movable, both corporeal things and rights are included.” So the eminent Roman jurist Ulpian says:* “Nomina eorum qui sub conditione vel in diem debent, et emere et vendere solemus. Ea enim res est quæ emi et venire potest.”—“We are accustomed to buy and sell debts payable at a certain event or on a certain day. For that is wealth which can be bought and sold.”

So it is also said:* “Æque bonis adnumerabitur si quid est in actionibus.”—“Rights of action are properly reckoned as goods.” So also:† “Rei appellatione et causæ et jura continentur.”—“Under the term property both rights and rights of action are included.”

So Sir Patrick Colquhoun says:‡ “The first requisite of the consensual contract of emptio et venditio is a Merx, or object to be transferred from the buyer to the seller, and the first requirement is that it should be in commercio—that is, capable of being freely bought and sold. Supposing such to be the case, it matters not whether it is an immovable or a movable, corporeal or incorporeal, existent or non-existent, certain or uncertain, the property of the vendor or another: thus a horse or a right of action, servitude or thing to be acquired, or the acquisition whereof depends on chance. A purchaser may buy of a farmer the future crop of a certain field; wine which may grow next year on a certain vineyard may be bought and sold at so much a pipe, or a certain price may be paid, irrespective of quantity or quality, and the price would be due, though nothing grew, or for whatever did grow. In the second case the bargain is termed emptio spei, and in the first and last emptio rei speratæ, which all such bargains are presumed to be in cases of doubt. The cession of a right of action being legal in the Roman law, the right of A to receive a debt due by B may be sold to C.”

Thus it is clearly seen that abstract rights of many various sorts, including rights of action, which in law, commerce, and economics are termed credits, or debts, are expressly included under the terms Pecunia (wealth), Res (property), Bona (goods or chattels) and Merx (merchandise) in Roman law.

XI.—

GENERAL RULE OF GREEK LAW THAT RIGHTS ARE WEALTH.

For nearly 500 years after Constantine removed the seat of government from Rome to Constantinople, the language of the Court was Latin, but the people were Greek. Consequently, as the official language was Latin, it was unintelligible to the mass of the people. The great code of Roman law, termed the Pandects, was published in ad 530, but all the pleadings in the courts were carried on in Greek. The Latin Pandects soon fell into desuetude; they were superseded by Greek treatises, translations, and compilations. The Latin Institutes of Justinian did not hold their place in the curriculum of legal education for more than ten years. They were superseded by the paraphrase of Theophilus, one of the Professors of Law who were charged with the compilation of the Institutes; and this paraphrase became the text-book for the education of law students throughout the Eastern Empire. At last, in the ninth and tenth centuries, under the Basilian dynasty, all the Pandects, Institutes and Legislation of Justinian were set aside as obsolete. A reformed digest or code was published in Greek, which was called the Basilica, which may mean either the Imperial Constitutions or the Code of the Basilian dynasty, like the Code Napoléon, and this henceforth became the law of the Eastern Empire, and has remained to the present time as the common law of all the Greek population in the East, and is the common law of the modern Kingdom of Hellas. And the Roman definition of wealth is adopted and confirmed.

Thus it is said:* “τῷ ὀνόματι τῶν Χρημάτων οὺ μόνον τὰ χρήματα, ἁλλὰ πάντα τὰ κινητὰ καὶ ἀκινητὰ, καὶ τὰ ϭωματικὰ καὶ Δίκαια δηλοῦται.”

“Under the term χηήματα, or wealth, * * * rights are included.” Also† “τῇ τοῦ πράγματος προϭηγορίᾳ καὶ Αἴτιαι καὶ τὰ Δίκαια περιέχεται.” Under the term πράγματα, goods and chattels, both rights of action and rights are included.

Thus it is seen that by express enactment in Greek law, the words χρήματα and πράγματα include rights and rights of action. These rights and rights of action are also included under the terms Ἀγαθά (goods), περιουϭία (estate), Ἀφορμἡ (capital), Οὺϭία and Οἶκος (wealth), and other similar words; they are also called οὺϭία ἀφανής (invisible wealth). And these words include all the three orders of economic quantities.

XII.—

GENERAL RULE OF ENGLISH LAW THAT RIGHTS ARE WEALTH.

It is exactly the same in English and every other system of law; abstract rights or property are included under the term “Goods,” “Goods and Chattels,” “Chattels,” “Merchandise,” “Vendible Commodities,” “Incorporeal Chattels,” and “Incorporeal Wealth” in English law. And under similar terms in every other system of jurisprudence. And under wealth and capital in economics.

A chattel means any property of any sort which is not freehold.

Thus Sheppard says:‡ “All kinds of emblements, sown and growing, grass cut; all money, plate, jewelry, utensils, household stuffs, debts, wood cut, wares in a shop, tools and instruments for work, wares, merchandise, carts, ploughs, coaches, saddles and the like; all kinds of cattle, as horses, oxen, kine, bullocks, goats, sheep, pigs; and all tame fowl, swans, turkeys, geese, capons, hens, ducks, poultry and the like, are accounted as chattels. All obligations, bills, statutes, recognizances, judgments shall be as a chattel in the executor. All right of action to a personal chattel is a chattel.”

So in Ford’s case§ it was resolved by Popham, Chief Justice of England, and the Court, that: “Personal actions are as well included within the word ‘goods’ in an Act of Parliament as goods in possession.” So Lord Chancellor Hardwicke said:∥ “The chattels are * * * the debts (i. e., rights of action) due and to be due, * * * and debts come within the words and meaning of the act, and would pass in a will thereby.”

Burnet, J., said: “A bond debt is certainly a chattel * * * the conclusive case is Ford’s case, that personal actions are included in the word goods in an Act of Parliament as goods in possession.” Parker, L. C. B., said: “But goods and chattels include debts (rights of action). * * * Goods and chattels comprehend things-in-action in the construction of any Act of Parliament.” Lee, C. J., said: “The inquiry is whether choses-in-action are not included under goods and chattels? And I agree, choses-in-action will be included herein.”

So Blackstone says:* “For it is to be understood that in our law, chattels, or goods and chattels, is a term used to express any property, which having regard either to subject-matter, or quantity of interest therein, is not freehold.” * * * “Property, or chattels personal, may be either in possession or action. * * * Property in action is where a man has not the enjoyment (either actual or constructive) of the thing in question, but merely a right to receive it by a suit or action-at-law.” So Mr. J. Williams says:† “Personal estate is divided in English law into chattels real and chattels personal; the latter are again divided into choses-in-possession and choses-in-action.”

We are dealing exclusively with the commerce in rights of action—i. e., their creation, transfer and extinction—which constitutes the great system of credit; and, therefore, we shall henceforth confine our attention to them. Rights of action, then, being now shown to be goods and chattels, it is absolutely necessary to observe that it is the abstract right of action itself which is the “goods” or “chattels,” and not any material upon which it may be written down. Rights of action, i. e., credits, or debts, may be bought or sold with perfect facility even in the abstract state. It is, however, very usual to write them down on paper in the form of bank notes, cheques, bills of exchange, and other instruments. By doing this they become capable of manual delivery, and are transferable from hand to hand like money or any other material chattel. Abstract rights of action are incorporeal chattels; but when written down on paper they become corporeal chattels or material commodities, exactly like money. Hence, the reader must observe that writing a right of action down on paper in no way alters its nature. Doing so is merely a convenient form of rendering it capable of being transferred in commerce. But it is exactly of the same nature and effect whether written down on paper or not.

XIII.—

MODERN ECONOMISTS INCLUDE RIGHTS OF ACTION, i. e., CREDITS, OR DEBTS, UNDER THE TERM CIRCULATING CAPITAL.

It has been shown that the economists steadfastly refused to admit credits, or debts, i. e., rights of action, to be wealth. But it has been shown in the introduction that Smith expressly classes bank notes and bills of exchange under the term circulating capital; hence Smith expressly recognizes the three orders of exchangeable quantities, and that credits are wealth and capital. Thus Smith expressly includes money under the term circulating capital. And under money he includes bank notes, bills of exchange, etc., which he terms paper money—which term is not quite correct because, though under certain circumstances, bank notes and bills of exchange may be, and in an immense number of cases are money, as will be seen further on, still they are not absolutely money. But they are all included under the term paper currency. Among several passages, it will be sufficient to quote one here:* “Suppose that different banks and bankers issue promissory notes payable to bearer on demand to the extent of one million, reserving in their different coffers £200,000 for answering occasional demands. There would remain therefore in circulation £800,000 in gold and silver, and £1,000,000 in bank notes; or, £1,800,000 of paper and money together.” He also observes that credits in the Bank of Amsterdam were termed bank money. Thus we see that Smith in this and numerous other passages places paper credit exactly on the same footing as money, as independent property, and of the same value as gold and silver.

So J. B. Say says:† “The exclusive possession, which in the midst of society clearly distinguishes the property of one person from that of another in common usage, is that to which the title of wealth is given [not unless this property is exchangeable]. * * * Under this title are included not only things which are directly capable of satisfying the wants of man, either natural or social, but the things which can satisfy them only indirectly—such as money, instruments of credit (Titres de créance) and the public funds.” Thus Say expressly includes instruments of credit and the funds, which are mere rights of action, under the term wealth; and he also includes bills of exchange, bank notes, and bank credits—which are all credit—under the term capital. Thus he says that if a bank can maintain in circulation a greater quantity of notes than it retains specie in reserve, it augments by so much the capital of the country. So he also says:‡ “We must include under capital many objects which have a value, although they are not material. The practice of an advocate or notary, the custom of a shop, the representative of a sign-board, the title of a periodical work, are undoubtedly property (Biens); they may be bought and sold, and be the subject of a contract, and they are also capital, because they are the fruit of accumulated labor.” How are bank notes and bills of exchange, which Say admits to be capital, the fruit of accumulated labor?

So Mill says:§ “We have now found that there are other things such as bank notes, bills of exchange, and cheques [which are credit] which circulate as money, and perform all the functions of it.” He also designates bank notes as productive capital.

Whately is the only English economist that we are aware of who has drawn especial attention to incorporeal property. He says:* “The only difficulty I can foresee as attendant on the language I have been now using, is one which (i. e., defining political economy as the science of exchanges) vanishes so readily on a moment’s reflection as to be hardly worth mentioning. * * * In many cases, where an exchange really takes place, the fact is liable (till the attention be called to it) to be overlooked, in consequence of our not seeing any actual transfer from hand to hand of a material object. For instance, when the copyright of a book is sold to a publisher, the article transferred is not the mere paper covered with writing, but the exclusive privilege of printing and publishing. It is plain, however, on a moment’s thought, that the transaction is as real an exchange as that which takes place between the bookseller and his customers who buy copies of the work. The payment of rent for land is a transaction of a similar kind, though the land itself is a material object; it is not this that is parted with to the tenant, but the right to till it, or to make use of it in some other specified manner. Sometimes, for instance, rent is paid for a right of way through another’s field, or for liberty to erect a booth during a fair, or to race or exercise horses.”

And Whately says in a note to this passage: “This instance, by the way, evinces the impropriety of limiting the term wealth to material objects.” Thus in this passage is found the first dim perception, that we are aware of, that all exchanges consist of the exchange of rights against rights, as will be shown further on.

The stupendous importance of this doctrine, that rights and rights of action are goods, chattels, merchandise, vendible commodities and wealth, consists in this: that modern commerce is almost exclusively carried on by means of rights of action, credits, or debts. Money is only used to such an infinitesimal degree that it may almost be neglected. The principal use of money in commerce now is to keep such a stock of it as may be necessary to maintain the convertibility or value of the circulating credits. Moreover, in recent times, rights in the form of securities of various sorts, and rights of action in the form of public and private debts, form a most important article of import and export between countries, and have exactly the same effects on the foreign exchanges and the movements of bullion as material goods, as will be shown further on.

XIV.—

THERE IS NO SUCH THING AS ABSOLUTE WEALTH.

The preceding considerations show that there is no such thing as absolute wealth—that is, there is nothing which is in its own nature, and in all circumstances, in all places and in all times, wealth. The sole essence and principle of wealth is exchangeability. For anything to be exchangeable it is necessary that someone besides its owner should desire and demand it, and be willing to give something to obtain it. It is only, therefore, human desires and wants, and the capacity to give something to obtain it, that constitute anything wealth. Things are wealth only in those places and in those times where and when they are wanted, demanded, and paid for; and consequently they cease to be wealth when they cease to be wanted and demanded. Therefore, the very same things may be wealth in some places and not in others; and at some times and not at others; and become wealth more or less as the demand for them increases or decreases. Hence the amount of wealth in any country is simply the mass of exchangeable commodities in it.

XV.—

ECONOMICS, OR COMMERCE, CONSISTS OF SIX DISTINCT KINDS OF EXCHANGE.

It has now been shown that, for 1300 years, ancient writers unanimously held that exchangeability is the sole essence and principle of wealth. That anything whatever which possesses the principle or quality of exchangeability; everything whatever which can be bought or sold or exchanged; everything whose value can be measured in money, is wealth, no matter what its form or its nature may be. The ancients also showed that there are three distinct orders of quantities which possess the quality of exchangeability, or whose value can be measured in money—namely, (1) material things; (2) personal qualities, both in the form of labor and credit; (3) abstract rights. And reflection will show that there is nothing which can be bought and sold, or whose value can be measured in money, which is not of one of these three forms; either it is a material thing or it is a personal service or quality, or it is an abstract right. Hence, as it is positively known that there is nothing which possesses the quality of exchangeability, or whose value can be measured in money, beyond these three orders of quantities, the science is now complete.

Now, if all material things be symbolized by the word money; if all personal services be symbolized by the word labor, and if all abstract rights be symbolized by the word credit, these three distinct orders of economic quantities may be symbolized by the words money, labor, and credit. And all commerce in its widest extent, and in all its forms and varieties—that is, the science of pure economics—consists in the exchanges of these three orders of quantities. There being, then, three, and only three, distinct orders of economic quantities, it is evident that they may be combined two and two in six different ways. These six different kinds of exchange are: 1. A material thing for a material thing; as when gold money is given in exchange for lands, houses, corn, jewelry, etc. 2. A material thing for labor; as when gold money is paid as wages, fees, or salary, for any service done. 3. A material thing for a right; as when gold money is given to purchase a bank credit, a bill of exchange, copyrights, patents, shares in commercial companies, the funds, or any other valuable right. 4. Labor for labor; as when persons agree to perform certain amounts of reciprocal services for each other. 5. Labor for a right; as when a person performs services for another, and is paid in bank notes, cheques, or bills of exchange. 6. A right for a right; as when a banker buys one right of action, such as a bill of exchange, and gives in exchange for it a credit in his books, which is another right of action; or when a person purchases copyrights, patents, or any other abstract right, and gives in exchange for them bank notes, cheques, or bills of exchange.

The economists only admitted material products to be wealth, and only treated of one species of exchange—that of products for products. Beccaria admitted that services are wealth, and said that all exchanges consist of the exchanges of products for products, products for services, and services for services, thereby admitting three kinds of exchange. But, as a matter of fact, there are three orders of economic or exchangeable quantities, and therefore there are six distinct kinds of exchange. The business of banking consists in the exchanges of credit for money, and of credits for credits. An operation “on credit” is one in which one or both of the quantities exchanged is a credit or debt. The system of credit means the commerce in rights of action, credits, or debts, and is the subject-matter of this work.

XVI.—

ON THE MEANING OF THE WORD PROPERTY.

There being, then, three orders of quantities which possess the quality of exchangeability, they must, by the laws of natural philosophy, by the unanimous doctrine of ancient writers, and at last by the acknowledgment of all modern economists, all be included under the term wealth. The next thing to be done is to find a general term which will include them all. And this general term will be found in the word property. And when we understand the true and original meaning of the word property, it will throw a blaze of light over the whole science of economics and clear up all the difficulties which the word wealth has given rise to. In fact, the meaning of the word property is the key to the whole sciences of jurisprudence and economics. Most persons, when they hear the word property, think of some material things, such as lands, houses, cattle, corn, money, etc. But that is not the true and original meaning of the word property. Property, in its true and original meaning, is not anything at all material or otherwise, but it is the ownership or absolute right to something. Savages have very feeble notions of abstract rights. Their ideas of wealth are something which they can lay hold of—something which they can only acquire by violence and which they can only retain by bodily force. They have no idea of abstract rights separated from anything material. So in archaic jurisprudence, wealth or property is described as anything material, which can only be retained by manual force and transferred by manual delivery. In early Roman jurisprudence a person’s possessions were called mancipium; because they were supposed to be acquired by the strong hand, and if not held with a very firm grasp would probably be lost. But as civilization and firm government succeed, men’s ideas are transferred from the actual material things to the personal rights in them. Thus, in the course of time, the word mancipium, which originally meant the material things which were held by the hand, came to mean the absolute right to them; and in early Roman law, mancipium came to mean absolute ownership. Thus Lucretius says:* “Vitaque mancipio nulli datur, omnibus usu.”—“And life is given in absolute ownership to none, but only as a loan to all.”

In process of time the word property came to be denoted by a term which meant a pure abstract right. All the possessions of the family belonged to the family (domus) as a whole; but the head of the house (dominus, δεϭπότης) alone exercised all rights over them. He alone had the absolute ownership of his familia, or household, including his wife, children, slaves and all its possessions. Hence this right was called dominium, δεϭποτεήα, and dominium was always used in Roman law to denote absolute ownership. So long as the patria potestas subsisted in its pristine rigor, no member of the family could have any individual rights to things; but in the times of the early emperors the extreme rigor of the patria potestas was relaxed. In some cases individual members of the family were allowed to have rights to possessions independently of the head of the house and its other members, and this right was termed proprietas. Sometimes the dominus granted the exclusive rights to certain things to his sons and slaves. This right was termed peculium. The emperors Augustus, Nero, and Trajan enacted that the sons of the family might possess in their own right, and dispose of by will, as if they were domini, what they acquired in war. This was termed castrense peculium. This right of holding possessions independently of the other members of the family was considerably extended by subsequent emperors, and was always called proprietas. Proprietas, therefore, in Roman law, meant the absolute and exclusive right which a person had to anything independently of anyone else, and was synonymous with dominium. Neratius, a jurist of the time of Hadrian, says: “Proprietas, id est, dominium.”—“Property, that is, ownership.” So Gaius says: “Non solum autem proprietas per eos quos in potestate habemus adquiritur nobis.”—“Not only, therefore, do we acquire absolute property through those whom we have in our power.” So also Justinian: “Transfert proprietatem rerum.”—“Transfers the property in the goods”; and in other instances too numerous to cite.

Thus the word proprietas in Roman law never meant a material thing; it meant exclusively the absolute right to it; the thing itself was termed materia.

XVII.—

MEANING OF THE WORD PROPERTY IN ENGLISH.

So also in early English the word property invariably meant a right and not a thing. Thus grand old Wycliffe says: “They will have property in ghostly goods where no property may be, and have no property in worldly goods where Christian men may have property.” So Bacon invariably uses the word property to mean a right and never a thing. He says one of the uses of the law “is to dispose of the property of their goods and chattels.” He explains the various methods by which property in goods and chattels may be acquired. So he speaks of the “property or interest in a timber tree.” In Comyns’ great digest of the law there is not a single instance of the word property being applied to material things. He uses it invariably to mean absolute ownership. Thus up to the middle of the last century property was invariably used to mean absolute ownership, and was never applied, at least in any work of authority, to material substances.

Every jurist knows that the true meaning of the word property is a right and not a thing. Thus Erskine says:* “The sovereign or real right is that of property, which is the right of using and disposing a subject as our own, except so far as we are restrained by law or paction.” This meaning of property has been understood by economists as well as by jurists. Thus Mercière de la Rivière, one of the most eminent of the French economists, says:† “Property is nothing but the right to enjoy. * * * It is seen that there is but one right of property—that is, a right in a person, but which changes its name according to the nature of the object to which it is applied.” Nor is the word property in any way restricted to the rights to material substances, but it is also applied to the rights to abstract rights.

Thus landed property means rights to lands and houses; real property means rights to realty; personal property means rights to personal chattels. Funded property is the right to demand a series of payments from the State; literary property is the right to the profits from works of literature; artistic property is the right to profits from works of art; dramatic property is the rights to the profits from dramatic representations; newspaper property is the right to the profits from publishing certain newspapers. So there are many other kinds of incorporeal property, such as shares in commercial companies of all sorts, the goodwill of a business, a professional practice, patents, tithes, advowsons, shootings, fisheries, market rights, and many other kinds of valuable rights. So, when a person has sold goods “on credit,” and has acquired a right of action in exchange for them, termed a credit, or a debt, he has a property in this right of action and can sell it like any material chattel.

This appears still more clearly in the law of Scotland, in which what is termed real property in England is termed heritable rights, because the rights to them pass to the heir; and what is termed personal property in England is termed movable rights in Scotland, because the rights to them pass or move to the executor; and under the term movable rights, credits, debts, or rights of action are included. Hence, abstract rights are the subjects of property exactly in the same way as material chattels. When the Socialists and Communists wish to destroy property it is not the material things they wish to destroy, but the exclusive rights which private persons have in them.

We shall find further on that there is a whole class of words which, like mancipium, in early times and in classical Latin meant material things, have in the progress of civilization and jurisprudence and in modern mercantile law come to mean abstract rights; and by a reverse process, most unfortunately, many words which really mean abstract rights have been perverted to mean material things, to the great confusion of jurisprudence and economics.

The word property means absolute, entire, and exclusive ownership. It is the absolute right to deal with the objects material, immaterial, and incorporeal in any way the owner pleases, except in so far as he is restrained by law.

The term property comprehends:

1. The jus possidendi, or the right of possession of the object.

2. The jus utendi, or the right of using it in any way the owner pleases.

3. The jus fruendi, or the right of appropriating any fruits or profit from it.

4. The jus abutendi, or the right of alienating or destroying it.

5. The jus vindicandi, or the right of recovering it, if found in the wrongful possession of anyone else.

Property or dominion, then, does not mean any single right, but an aggregate or bundle of rights; it comprehends the totality of rights, which can be exercised over anything.

XVIII.—

ON THE RIGHT OF PROPERTY AND THE RIGHT OF POSSESSION.

But though all property is a right, it must be observed that all rights are not property. There is an essential distinction between the right of property and the mere right of possession or of use. Thus, where one person lends his horse or a book or other chattel to another; or delivers goods to him as a common carrier by sea or land, to be carried from one place to another; or deposits goods or valuables with him as a warehouseman for the mere purpose of being safely kept, or by way of pledge or lien; or hires a house, a horse, or land or plate or any chattel; or finds valuable goods,—in these and other cases he has the mere right of possession of the various things, and he can bring an action against anyone who deprives him of their possession; but he has no right to use the goods except in the way and for the specific purpose for which they were delivered to him. He has, therefore, only a specific right to hold them, and not the absolute ownership in them, to deal with them in any way he pleases. Some of the most subtle and important doctrines in economics are based entirely on the distinction between right of property and right of possession.

XIX.—

APPLICATION OF THE POSITIVE AND NEGATIVE SIGNS TO PROPERTY.

Economic quantities or economic rights are, then, of three distinct orders: (1) Rights or property in some material thing which has been already acquired; (2) rights or property in labor or services; (3) rights or property in something which is only to be acquired at some future time.

Now, we observe that the first and the third of the economic quantities or rights enumerated above are inverse or opposite to each other. Property, like Janus, has two faces placed back to back. It regards the past and the future.* We may buy and sell a right to a thing which has already been acquired in time past; and we may also buy and sell a right to a thing which is only to be acquired in time future.

Now, it is one of the innumerable applications of the algebraical signs + and −, that if any point in time be taken as 0, then time before this epoch and time after this epoch are denoted by the opposite signs, + and −, which sign is used to denote either time being a matter of pure convention. Let us denote time present by 0, time past as + and time future by −. It will then be represented thus: + 5, + 4, + 3, + 2, + 1, 0, − 1, − 2, − 3, − 4, − 5, etc.; and it is evident that the totality of time from any year preceding the given era 0, to any year subsequent to the given era, will be the sum of the positive and negative years. Thus, if we take the Christian era as 0—years before it as positive and years after it as negative—then the total period from the foundation of Rome to the present time will be + 753 years, together with − 1893 years, or 2646 years altogether.

Hence, the products which have already been acquired in the past or positive years may be termed positive products; and the products which are to be acquired in the future or negative years may be termed negative products. Now, in all mathematical and physical sciences, it is invariably the custom to denote similar quantities, but of opposite qualities, by the opposite signs + and −. Hence, as a matter of simple convenience, and following the invariable custom in mathematical and physical science, if we denote property in a product which has been already acquired in time past as positive, we may, as a mark of distinction, denote property in a product which is only to be acquired in time future as negative. Now, property in a thing which has already come into possession in time past is corporeal property; and, as we have assumed above, time past as positive, corporeal property may be termed a positive economic quantity; and, as property in a thing to be acquired at some future time is incorporeal property; and, as we have above denoted time future as negative, incorporeal property may be aptly designated as a negative economic quantity. And, as in all mathematical and physical sciences, the whole science comprehends both positive quantities and negative quantities, so the whole science of economics comprehends both positive economic quantities and negative economic quantities, both corporeal property and incorporeal property. By this means we double the field of economics as usually treated, and we do in economics what those have done in the various mathematical and physical sciences who introduced negative quantities into them. By this means we are enabled to obtain the solution of problems which have hitherto baffled all economists, and it is by this means only that the theory of credit can be explained.

XX.—

EVERY SUM OF MONEY IS EQUIVALENT TO THE SUM OF THE PRESENT VALUES OF AN INFINITE SERIES OF FUTURE PAYMENTS.

The investigation of the theory of the value of land demonstrates a proposition of great importance in economics. It is seen that the £100,000 given to purchase the estate in land expected to produce £3000 a year, is in reality the sum of the rights to its future products forever. Each annual product has a present value, and the value of the land is simply the sum of this infinite series of present values. But the same is evidently true of every sum of money. Hence, every sum of money is not only equal in value to a certain quantity of material goods, or to a certain quantity of services, but also to a perpetual annuity. An annuity is the right to receive a series of future payments. The lowest form of an annuity is the right to receive a single future payment, such as a bank note, a cheque, or a bill of exchange. The highest form is the right to receive an infinite series of future payments, such as the land or the funds. And there may be also the right to receive a limited number of future payments intermediate between the other two, which is called a terminable annuity. Hence, an annuity or the right to receive a series of future payments is an economic quantity, which may be bought or sold or exchanged, or whose value may be measured in money, like any material chattel. As when a sum of money is given to purchase land, or the funds, or municipal or other obligations, such as railway debentures. So an annuity may be paid to secure a certain sum of money at a given time, or on a given contingency, such as a life or fire insurance.

It is thus seen that economics comprehends three great departments: (1) material things, (2) personal qualities, (3) annuities.

The first school of economists restricted their attention to the first of these departments and refused to take any notice of the other two. Adam Smith, J. B. Say, and J. S. Mill have given much attention to the second, and treated labor as a marketable commodity; they have also noticed the existence of the third department, but they never made any attempt to exhibit the commerce in rights. And yet, at the present day, it is the most extensive of any, because it comprehends the whole theory of the value of land, the funds, mercantile credit, banking, the foreign exchanges, shares in commercial companies, and all other incorporeal wealth.

XXI.—

PERSONAL CREDIT—A SUCCESSFUL TRADER IS AN ECONOMIC QUANTITY, ANALOGOUS TO THE LAND.

Now, a person exercising any profitable business or profession is an economic quantity exactly analogous to land. The land has produced profits in the past, but it has equal capacity to produce profits in future. So a merchant or a professional man may have accumulated a quantity of money as the fruits of his skill, industry, and ability in the past. But, over and above his accumulated money, he has the same skill, industry, and ability to earn profits in the future. His capacity to earn profits in the future is exactly the same as his capacity to have earned profits in the past. And, of course, he has the right or property in his expected profits of the future. And he may trade in two ways—he may trade, with the money he has already acquired, the profits of the past; or he may trade by purchasing goods by giving in exchange for them the right or property to demand payment at a future time out of the profits he expects to earn in the future. Personal character used to trade in this way as purchasing power is termed credit. And, as we have seen that anything which has purchasing power is wealth, it follows that money and credit are equally wealth. But it is evident that money and credit are inverse and opposite to each other. Hence, if money is a positive economic quantity, credit is a negative economic quantity.

XXII.—

ALL ANNUITIES ARE NEGATIVE ECONOMIC QUANTITIES.

Hence, it is seen that all annuities or rights to receive a series of future payments, whether the right be to receive a single future payment or a limited or an infinite number of them, are negative economic quantities. These negative economic quantities comprehend all mercantile and banking credit, such as bank notes, cheques, bills of exchange, and all instruments of credit; exchequer bills, navy bills, dividend warrants, etc.; the land, the funds, terminable annuities, shares in commercial companies, the goodwill of a business, a professional practice, copyrights, patents, tolls, ferries, market rights, advowsons, benefices, shootings, fisheries, leaseholds, policies of insurance of different kinds, and many other valuable rights; amounting in value to scores of thousands of millions in this country, of which there is scarcely a notice in the usual text-books on economics.

XXIII.—

WEALTH IN ECONOMICS IS AN EXCHANGEABLE RIGHT.

It follows from the preceding considerations that the true definition of wealth in economics is an exchangeable right. Now, there are three kinds of rights or property which can be bought and sold, or whose value can be measured in money.

I. Corporeal or material property or rights. There may be the right or property in some specific material substance which has already come into existence, and has come into the actual possession of the owner. This species of property in Roman and English law is termed corporeal property, because it is the right to certain specific corpus. It is also called material property, because it is the right to certain specific matter. Hence, we term this species of property corporeal or material wealth.

II. Immaterial property. The property which a man has in his own mental and intellectual qualities, in his own labor, or in his capacity to render any sort of service. As Smith says: “The property which every man has in his own labor, as it is the original foundation of all other property, so it is the most sacred and inviolable.” Now, a person may sell the right to demand some labor or service from him. As all these services, though they require some bodily instrument to give effect to them, are in reality operations of the mind, we may call them immaterial property, or immaterial wealth, as J. B. Say, the French economist, does.

III. Incorporeal property. There is lastly a third kind of property or right, wholly separated and severed from any specific corpus, or matter in possession. It may either be in the possession of someone else at the present time, and may only come into our possession at some future time; or it may be even not in existence at the present time. Thus we may have the right or property to demand a sum of money from some person at some future time. That sum of money may no doubt be in existence at the present time, but it is not in our possession; it may not even be in the present possession of the person bound to pay it. It may pass through any number of hands before it is paid to us. But yet our right to demand it at the proper time is present and existing, and we may sell or transfer that right to anyone else for money. We may also have the right to something which is not yet even in existence, but will only come into existence at a future time. Thus, those who possess lands, cattle, fruit, trees, etc., have the right or property in their future produce. This produce is not in existence at the present time; it will only come into existence at a future time; but the right or property to it when it does come into existence is present and existing, and may be bought and sold like the right to any material product. This species of property is called in Roman law and English law incorporeal property, because it is a right, but separated from any specific corpus. Hence, it is called incorporeal wealth. But all these three different kinds of rights possess the quality of exchangeability; they can all be equally bought and sold or exchanged; the value of each of them can be measured in money; they are all equally merchandise, or articles of commerce. They are each, therefore, Pecunia, Res, Bona, Merx; χρήματα, πράγματα, οἵκος, οὐϭία, ἀγαθά, etc., goods, chattels, merchandise, vendible commodities, wealth, in the jurisprudence of all nations. And, as it is the quality of exchangeability which alone constitutes anything wealth, and is the sole quality which economics regards, it follows that all these three kinds of rights are equally wealth in economics. And all the fundamental concepts and definitions, and all the laws of economics, must be enlarged and generalized, so as to comprehend indifferently the exchanges of these three orders of rights.

XXIV.—

ECONOMICS, OR COMMERCE, IS THE SCIENCE OF THE EXCHANGES OF RIGHTS.

We have found that the true meaning of wealth in economics is an exchangeable right, and that there are three orders of these exchangeable rights; hence, these three orders of rights may be exchanged in six different ways.

1. The right or property in a material thing may be exchanged for the right or property in another material thing, as when the property in so much gold is exchanged for the property in so much corn or cattle, timber, jewelry, etc.

2. The right or property in a material thing may be exchanged for the right to demand so much labor or service, as when the property in so much gold is exchanged for the right to demand so much labor in any form.

3. The right or property in a material thing may be exchanged for the right to an abstract right, as when the property in so much gold is exchanged for the right to a bank note, cheque, bill of exchange, the funds, or any other incorporeal property.

4. The right or property in so much labor or service may be exchanged for the right to demand so much labor or service from someone else, as when persons agree to perform reciprocal services for each other, which are estimated as equivalent.

5. The right or property to demand so much labor or service may be exchanged for an abstract right, as when labor or service of any kind is paid for in bank notes, cheques, or bills.

6. The right or property in one abstract right may be exchanged for the right or property in another abstract right, as when a banker buys or discounts a bill of exchange, which is an abstract right, by giving in exchange for it a credit in his books, termed in banking language a deposit, which is another abstract right; or, as when a publisher buys the copyright of a work by giving bills of exchange for it.

Thus it is seen that all exchanges are of rights against rights, and these six kinds of exchange constitute commerce in all its forms and varieties, or the science of pure economics.

XXV.—

ON MONEY AND CREDIT.

In the early ages of the world there was no such thing as money. When persons traded, they exchanged the products directly against each other; as is the custom at the present day with savage people. Thus in Iliad, vii., 468, we have:

• • “Νῆες δ’ἐκ Αήμνοιο παρέϭτασαν οἷνον ἄγουσαι”
  • . . . . . . . . . .
  • “ἔνθεν ἄῤ οἰνίζοντο κάρη κομόωντες Ἀχαιοί,
  • ἄλλοι μὲν χαλχῷ, ἄλλοι δ’ αὶθωνι ϭιδήρῳ,
  • ἄλλοι δὲ ῥινοῖς, ἄλλοι δ’αὐτῇϭι βόεϭϭιν,
  • ἄλλοι δ’ ἀνδραπόδεϭϭι.”
• • “From Lemnos’ isle a numerous fleet had come
  • Freighted with wine. . . .
  • . . . All the other Greeks
  • Hastened to purchase, some with brass and some
  • With gleaming iron; some with hides,
  • Cattle and slaves.”

This exchange of products against products is termed barter. And the inconveniences of this mode of trading are obvious. What haggling and bargaining it would require to determine how much leather should be given for how much wine! how many oxen or how many slaves! In the Homeric poems there is not the faintest allusion to anything of the nature of money. But even in those days it had been discovered that it would greatly facilitate commerce if the products to be exchanged were referred to some common measure of value. There are several passages in the Iliad which show that, while traffic had not advanced beyond barter, such a standard of reference was used. We find that various things were frequently estimated as being worth so many oxen. Thus in Iliad, ii., 448, Pallas’s shield, the ægis, had one hundred tassels, each of the value of one hundred oxen. In Iliad, vi., 231, Homer laughs at the folly of Glaucus, who exchanged his golden armor, worth one hundred oxen, for the bronze armor of Diomede, worth nine oxen. In Iliad, xxiii., 703, Achilles offered as a prize to the winner in the funeral games in honor of Patroclus, a large tripod, which the Greeks valued among themselves at twelve oxen, and to the loser a female slave, which they valued at four oxen. But it must be observed that these oxen did not pass from hand to hand like money. The state of barter continued; just as at the present day it is quite common to exchange goods according to their value in money, without any actual money being used.

XXVI.—

ON THE NECESSITY FOR MONEY.

The necessity for money arises from a different cause. So long as the products exchanged were equal in value there would be no need for money. If it could always happen that the exchanges of products or services were exactly equal, there would be an end of the transaction. But it would often happen that when one person required some product or service from another person, that other person would not require an equal amount of product or service from him in return; or even perhaps none at all. If, then, such a transaction took place between persons with such an unequal result, there would remain over a certain amount of product or service, due from the one to the other. And this would constitute a debt; that is to say, a right or property would be created in the person who had received the less amount of service or product to demand the balance due at some future time. And at the same time a correlative duty would be created in the person of the other, who had received the greater amount of product or service, to pay or render the balance due when required. Now, among all nations and persons who exchange or traffic with each other, this result must inevitably happen. Persons want some product or service from others; while those others want either not so much, or even perhaps nothing at all, from them. And it is easy to imagine the inconveniences which would arise if persons could never get anything they wanted, unless the persons who could supply these wants wanted something equal in value in return at the same time.

In process of time all nations hit upon this plan; they fixed upon some material substance, which they agreed to make always exchangeable among themselves, to represent the amount of debt. That is, if such an unequal exchange took place among persons, so leaving a balance due from one to another, the person who had received the greater amount of service or product gave a quantity of this universally exchangeable merchandise to make up the balance; so that the person who had received the lesser amount of service or product might obtain an equivalent from someone else. Suppose a wine-dealer wants bread from a baker; but the baker wants either not so much wine, or even no wine at all, from the wine-dealer. The wine-dealer buys the bread from the baker, and gives him in exchange as much wine as he wants, and makes up the balance by giving him an amount of this universally exchangeable merchandise, equivalent to the deficiency; and if the baker wants no wine at all, he gives him the full equivalent of the bread in this merchandise. The baker wants perhaps meat, or shoes, but not wine. Having received this universally exchangeable merchandise, from the wine-dealer, he goes to the butcher or the shoemaker, and obtains from him the equivalent of the bread he has sold to the wine-dealer. Hence the satisfaction that was due to him from the wine-dealer is paid by the butcher or shoemaker.

This universally exchangeable merchandise is termed money; and these considerations show its fundamental nature. Its function is to represent the debts which arise from unequal exchanges among men, and to enable persons who have rendered any sort of services to others, and have received no equivalent from them, to preserve a record of these services; and of their rights or title to obtain an equivalent product or service from someone else, when they require it.

XXVII.—

ARISTOTLE, BISHOP BERKELEY, THE ECONOMISTS, ADAM SMITH, THORNTON, BASTIAT, MILL, AND JURISTS HAVE SEEN THE TRUE NATURE OF MONEY.

The true nature of money is now apparent. It is simply a right or title to demand some product or service from someone else.

Now, when a person accepts money in exchange for products, or services rendered, he can neither eat it, nor drink it, nor clothe himself with it; nor is it any species of economic satisfaction for the service he has done. He only agrees to accept it in exchange for the services he has rendered, because he believes, or has confidence, that he can purchase some satisfaction which he does require at any time he pleases. Money is therefore what is termed credit. A whole series of writers from the earliest times have perceived that the true nature of money is merely a right or title to acquire a satisfaction from someone else—i. e., a credit. Thus Aristotle says:* “ὑπὲρ δὲ μελλούϭης ἀλλαγῆς (εἰ νῦν μηδὲν δεῖται, ὅτι ἔϭται ἐάν δεηθῇ) τὸ νόμιϭμα οἷον Ἐγγυητής ἐϭτιν ἡμῖν. δεῖ γὰρ τοῦτο φέροντι εἷναι λαβεῖν.”—“But with regard to a future exchange (if we want nothing at present, that it may take place when we do want it) money is as it were our security. For it is necessary that he who brings it should be able to get what he wants.”

So a London merchant, F. Cradocke, in the time of the Commonwealth, says: “Having now pointed out the inconvenience of these metals (gold and silver) in which the medium of commerce, or universal credit, hath formerly been placed. * * * Now that credit is as good as money will appear, it is to be observed that money itself is nothing but a kind of security which men receive upon parting with their commodities, as a ground of hope or assurance, that they shall be repaid in some other commodity; since no man would either sell or part with any for the best money, but in hopes thereby to procure some other commodities or necessary.” So an old pamphleteer in 1710 saw the same truth. He says:† “Trade found itself unsufferably straightened and perplexed for want of a general specie of a complete intrinsic worth, as the medium to supply the defect of exchanging, and to make good the balance where a nation or a market, or a merchant demands of another a greater quantity of goods than either the buyer hath goods to answer, or the seller hath occasion to take back.” So the great metaphysician, Bishop Berkeley, says in his “Querist”:

It is one of the special merits of the economists that they clearly saw the true nature of money. Among many others, Baudeau, one of the most eminent of them, says:* “This coined money in circulation is nothing, as I have said elsewhere, but effective titles on the general mass of useful and agreeable enjoyments, which cause the well being and propagation of the human race. It is a kind of bill of exchange or order, payable at the will of the bearer. Instead of taking his share in kind of all matters of subsistence and all raw produce annually growing, the sovereign demands it in money, the effective titles, the order, the bill of exchange, etc.” So Edmund Burke† speaks of gold and silver as “the two great recognized species that represent the lasting credit of mankind.” So Smith says:‡ “A guinea may be considered as a bill for a certain quantity of necessaries and conveniences upon all the tradesmen in the neighborhood.” So Henry Thornton, the eminent banker, one of the authors of the Bullion Report, says:§ “Money of every kind is an order for goods. It is so considered by the laborer when he receives it, and it is almost instantly turned into money’s worth. It is merely the instrument by which the purchasable stock of the country is distributed with convenience and advantage among the several members of the community.”

This great fundamental truth was also very clearly seen by Bastiat. He says:∥

So Mill says: “The pounds or shillings which a person receives weekly or yearly are not what constitutes his income; they are a sort of ticket or order, which he can present for payment at any shop he pleases, and which entitles him to receive a certain value of any commodity that he makes choice of. The farmer pays his laborers and his landlord in these tickets, as the most convenient plan for himself and them.”

It is so clearly understood that money is, in reality, nothing more than the right or title to demand something to be paid or done that some jurists expressly class it under the title of incorporeal property. Thus Vulteius says: “Nummus in quo non materia ipsa, sed valor attenditur.”—“Money, in which not the material, but the value is regarded.” That is, we desire or demand other things for the direct satisfaction they give us; but we only desire money as the means of purchasing other things.

Gold and silver money, therefore, may be justly termed metallic credit.

Thus it is seen that writers of all classes, philosophers, merchants, bankers, economists, and jurists, are all perfectly agreed upon the nature of money. It represents indebtedness or services due to the owner of it, and it represents the right or title which its owner has to demand some product or service in recompense for some service he has done for someone else.

XXVIII.—

ON SUBSTANCES USED AS MONEY.

The necessity for money has arisen among all nations, the most barbarous as well as the most civilized. As soon as the members of any community, however barbarous, begin to exchange among themselves, unequal exchanges must necessarily arise, and therefore indebtedness is created. And some substance is hit upon to represent these services due, and the rights which its holders have to demand some product or service, in satisfaction of the services they have done to someone else. A great many different substances have been used by different nations to represent this universal want. The Hebrews, we know, used silver. No money was in use in the times of the Homeric poems; but some time after them, though we cannot say when, copper bars or skewers were used as money throughout Greece, which Pheidon of Argos, in the eighth century, bc, superseded by silver coins. The Æthiopians used carved pebbles; the Carthaginians used leather discs with some mysterious substance sewn up in them. Throughout the islands of the Eastern Ocean, and in many parts of Africa, shells are still used. In Thibet and some parts of China, little blocks of compressed tea are used as money. In the last century dried cod was used in Newfoundland, sugar in the West Indies, tobacco in Virginia. Smith says that in his day nails were used as money in a village in Scotland. In some of the American colonies powder and shot; in Campeachy, logwood, and among the North American Indians belts of wampum were used as money. We read of another people who used cowries as small change, and the skulls of their enemies for large sums. It is said that in Virginia, in 1667, the proprietors were reduced to such straits as to use dried squirrel-skins as money, and many other things have been used in various countries for the same purpose.

But when we consider the purposes for which money is required, it is easily seen that no substance possesses so many advantages as a metal, The use of money being to preserve the record of services due to its possessor for any future time, it is clear that money should not alter by time. A money of dried cod would not keep very long, nor would it be easily divisible. Not many bankers would care to keep their accounts in dried cod, tobacco, sugar, logwood, or dead men’s skulls. One of the first requisites of money is that it should be easily divisible into very small fragments, so that its owner should be able to get any amount of service he pleases at any time. Taking these requisites into consideration, it is evident that there is no substance which combines them so well as a metal. Metal is uniform in its texture. It can be divided into any number of fragments, each of which shall be equal in value to any other fragment of the same weight; and, if required, these fragments can always be reunited, and form a whole again of the value of all its parts, which can be said of no other substance. All civilized nations, therefore, have adopted metal as money; and of metals gold, silver, and copper have been chiefly preferred.

XXIX.—

THE CHINESE INVENTED PAPER MONEY.

We have now to treat of a material used as money which, in latter times at least, has had incomparably more influence in the world than all the gold and silver—namely, paper.

The Romans invented the business which in modern language is termed banking. The Roman bankers invented cheques and bills of exchange, but they did not invent bank notes. The use of cheques and bills of exchange by the Romans was extremely narrow, restricted to the immediate parties, and they were never made transferable, as far as we are aware, so as to get into general circulation and serve the purposes of money.

The invention of paper to be used as circulating money is due to the Chinese. In the beginning of the reign of Hiantsong of the Dynasty of Thang, about the year 807 ad, there was a great scarcity in the country. The Emperor ordered all the merchants and rich persons to bring their money into the public treasury, and in exchange for it gave them notes called fey-thsian, or flying money. In three years, however, this money was suppressed in the capital, and was current only in the provinces. In 906 ad Thait-siu, the founder of the Soung Dynasty, revived this practice. Merchants were allowed to deposit their cash in the public treasuries, and received in return notes called pian-thsian, or current money. The convenience of this was so great that the custom quickly spread, and in 997 there was paper in circulation to the amount of 1,700,000 ounces of silver, and in 1021 it had increased to 2,830,000 ounces. At this period a company of sixteen of the richest merchants were permitted to issue notes payable in three years. But at the end of that time the company was bankrupt, which gave rise to much public distress and litigation. The Emperor abolished the notes of this company and forbade any more joint-stock banks to be founded. Henceforth the power of issuing notes was kept in the hands of the Government. These notes were also called kiao-tsu, and were of the value of an ounce of silver. In 1032 there were kiao-tsu to the value of 1,256,340 ounces in circulation. Subsequently banks of this nature were set up in each province, and the notes issued by one provincial bank had no currency in any other. These were the first bank notes on record—that is to say, notes issued in exchange for money, or convertible into money, and not paper money or paper created without any previous deposit of specie. Besides these bank notes the Chinese issued paper money to a vast amount.* It would be too long here to give a complete history of the paper money of China, but we have given some full notices of it elsewhere.† But it may interest our readers to know the process of its manufacture.

About 1288, Marco Polo traveled in China, and discovered the existence of this paper money. In Book II., c. 18, he gives an account of its manufacture. He says that it was made in Kambalu. The inner rind of the mulberry-tree was steeped and pounded in a mortar, and then made into paper, resembling that made from cotton, but quite black. It was then cut into pieces nearly square but of different sizes. The smallest were of the value of a denier tournois, the next for a Venetian groat, others for two, five, and ten groats, others one to ten gold besants. Several officers had to subscribe their names and place their seals on each note, which was then stamped with the royal seal dipped in vermilion. Counterfeiting was a capital offence. It had then a forced currency, and no one dared to refuse it on pain of death. Caravans of merchants arrived with their goods, which they laid before the King, who selected what he pleased, and paid them in this money. When anyone wished to exchange old money for new, it was done at the mint at a charge of three per cent. If anyone wanted gold or silver for manufacture, he could obtain bullion at the mint in exchange for the paper. Marco Polo mentions many cities where he observed this money in circulation.

Credit and paper, either payable in specie or inconvertible, now forms the great circulating medium or currency of the world, and as we shall show hereafter, amounts to nearly one hundred times the quantity of specie in this country.

XXX.—

THE FUNCTION OF CREDIT IS TO BRING INTO COMMERCE THE PRESENT VALUES OF FUTURE PROFITS.

The true function of credit is now apparent.

It is a very common idea that credit is the “goods” which are “lent,” or the “transfer” of them. Such ideas are wholly erroneous. In all cases whatever, a credit is the present right to a future payment. And the true function of credit is to bring into commerce the present values of future profits.

When an estate in land is sold, the present value of all its future profits is expressed, and brought into commerce by the money paid for it. The total amount of the shares in any commercial company—banking, insurance, railway, or any other—denotes the value of the existing property of the company, together with the total present value of their future profits. So the money paid for the goodwill of a business, a copyright, patent, a professional practice, etc., is the present value of the future profits. So when a merchant or trader trades on “credit,” he brings into commerce the present value of a future profit. He buys the goods or the labor, and gives as their price the right to demand a sum to be paid out of the expected future profits. So when the State contracts a loan for any public purpose it buys the money, and gives as its price the right to demand a series of payments out of the future income of the people. So when municipal corporations and other public bodies contract loans for public purposes, they buy money by giving as its price the right to demand a series of payments out of the future revenues of their constituents. That is, they bring into commerce the present value of their future income. So credit in all its forms, and to whatever purpose it is applied, simply brings into commerce the present value of a future profit. The famous French wit, Rivarol, well said: “Man conquers space by commerce, and time by credit.”

XXXI.—

THE FUNDAMENTAL CONCEPT OF MONETARY SCIENCE.

The preceding considerations now enable us to perceive the fundamental concept of monetary science.

We have seen that writers of all classes are agreed as to the fundamental nature of money. It represents debts which are due to persons who have done services to others, and have received no equivalent services in return. It merely represents the right to demand these equivalent services when they please; and its special function is to measure, record, and preserve these rights for future use, and to transfer them to anyone else. If all the services exchanged in society exactly balanced, there would be no need for money. Supposing, then, that there was nothing but metallic money in use, the following axiom is evident: The quantity of money in any country represents the quantity of debt which there would be if there were no money. But as we have seen that, in civilized countries, these debts, or rights, are recorded in the simple form of rights against particular persons, whether written or unwritten, as well as in metallic coin, which are rights against the general community, the terms circulating medium, or currency, include these debts in both forms. Hence, it is clear that the circulating medium, or currency, represents nothing but transferable debt; and that whatever represents transferable debt is circulating medium, or currency, whatever its nature or form may be, either metal or paper, or anything else. Consequently this proposition necessarily follows: Where there is no debt there can be no currency.

All erroneous theories of currency have been founded on not perceiving the fundamental nature of currency; and the greatest monetary disasters the world has ever seen have been produced by violating this fundamental axiom.

XXXII.—

ON THE DISTINCTION BETWEEN MONEY AND CREDIT.

It has now been shown that money and credit are essentially of the same nature, money being only the highest and most general form of credit. They are each a right or title to demand some product or service in future. Nevertheless, there is a very important distinction between money and credit, which must now be pointed out. In economics all money is credit, but all credit is not money. No one can compel anyone else to sell him anything for money or credit. When, therefore, anyone has taken money in exchange for anything, it is in reality only credit, because he only takes it in the belief that he can exchange it away for something else. But suppose that a sale has taken place, and that a debt has been incurred thereby, public policy requires that the debtor should be able to compel the creditor to accept something in discharge of his debt. It would cause infinite misery if creditors could arbitrarily refuse anything they pleased in payment of their debts. Hence, in all countries the law declares that, if a debt has been incurred, the debtor can compel the creditor to accept some specific thing in payment of it. Whatever that something is which a debtor can compel a creditor to accept in payment of a debt which has been incurred, is money or legal tender. From this it follows that some things may be money in some cases and not in others. Gold coin in this country is money or legal tender in all cases, and to any extent. Silver is only money or legal tender to the amount of 40s. If a creditor chooses to accept of payment of a larger amount than 40s. in silver, it is entirely of his own free will.

In England, as between the public and the Bank of England, bank notes are nothing but credit. The bank cannot compel anyone to receive its notes, and any holder of its notes can compel the bank to cash them on demand. Between private persons, a bank note for £5 is not money or legal tender for that exact amount of debt. But in debts above £5, bank notes are money or legal tender. But even this is only so long as the bank pays its notes in cash on demand. If the bank were to stop payment, its notes would cease to be legal tender in any case. In Scotland and Ireland, Bank of England notes are not legal tender in any case.

If two persons are mutually indebted to each other in equal amounts at the same time, each may compel the other to accept the debt he owes as legal tender for the debt which is due to him. Each debt is therefore money or legal tender, in respect of the other, and neither party can demand specie from the other. So, if a creditor voluntarily accepts payment from his debtor in a country bank note without indorsement, he makes it money even though the bank should fail; or, if he voluntarily accepts a cheque from his debtor, and has the credit transferred to his own account, he makes it money, and it is a final closing of the transaction even though the bank should fail immediately after. This is a principle of supreme importance in modern commerce, as will be shown more fully hereafter.

XXXIII.—

REASON WHY PAPER CAN SUPERSEDE MONEY.

The reason why paper can supersede money is now apparent.

An order to receive a coat could never serve as a substitute for a coat, because it cannot serve the same purpose as a coat. An order to receive meat or bread or wine cannot supersede meat, bread, or wine, because it cannot serve the same purpose as meat, bread, or wine; and so on regarding orders for other material chattels. An order for such things can never serve as a substitute for the things themselves; because they are heterogeneous quantities of a totally different nature, and cannot serve the same purpose as the things themselves. But an order to pay money can serve the same purpose as money, because they are homogeneous quantities. A piece of money, like a piece of paper, is nothing more than an order to receive a useful, material chattel; and, provided that the order is sure to be obeyed on demand, it is of no consequence whether it be of metal or paper. Consequently, the exchange of paper for money is nothing more than exchange of a particular right for a general right. As Daniel Webster, the eminent American jurist, said: “Credit is to money what money is to goods.” That is, credit is an order for money and money is an order for goods. To be useful, money must be exchanged away for other things just as paper is. And if paper can be exchanged away for exactly the same things that money can, paper has exactly the same value as money. As the Italians say: “Che oro vale, oro è.”—“That which is of the value of gold is gold.”

XXXIV.—

THE SAME QUANTITY MAY REQUIRE TO BE REGARDED IN DIFFERENT ASPECTS IN DIFFERENT SCIENCES.

We have now a most important observation to make. The same quantities may be common to different sciences and require to be regarded in different aspects in each. Thus jurisprudence and economics are inseparably allied; and money and bank notes, bills of exchange and abstract rights, are both juridical and economical quantities; but they differ in some respects according as they are regarded in a juridical or an economical aspect. Thus, in jurisprudence, money is the absolute payment and satisfaction of a debt, and a closing of the transaction; and bills of exchange are not the closing of the transaction, unless they are accepted as such. Also, in jurisprudence, money is corporeal property; abstract rights and rights of action are incorporeal property; but if these rights and rights of action are recorded on paper, parchment, or any other material, they become corporeal or material property, just like money. But, in economics, a payment in money is not the closing of the transaction. The economists held that a complete exchange is the obtaining a satisfaction for a satisfaction. In economics, money is only an abstract right recorded and preserved in gold to obtain a satisfaction. Money, in economics, is only a bill of exchange in gold. So in economics, rights, whether purely abstract or recorded on paper, are exactly of the same nature. A piece of money is no more an economic satisfaction than a piece of paper. Hence in economics, money and rights of action, whether written or unwritten, are of exactly the same nature. They are all simply rights to demand something in future; hence, as many jurists have seen, they are all, in economics, equally incorporeal property, or credit. But, as they all possess the quality of exchangeability, they are all equally wealth.

XXXV.—

THERE IS NO NECESSARY RELATION BETWEEN THE QUANTITY OF MONEY IN ANY COUNTRY AND THE QUANTITY OF COMMODITIES AND THEIR PRICE.

We have now to demonstrate a proposition of the greatest importance in economics, and on which errors of the most serious nature are very prevalent. Many writers on economics have supposed that the quantity of money in a country bears some necessary relation to the quantity of commodities in it; and many more think that the prices of commodities are determined by the ratio which the quantity of metallic money bears to the quantity of commodities. That this is a very serious error may easily be shown. Suppose that A and B are mutually indebted; that A owes B £10, and B owes A £13. Then, it is quite clear that their debts may be settled in three different ways:

1. Each may send a clerk to demand payment of his debt from the other in money; this method would require £23 in money to discharge the two debts.

2. A may send £10 to B to discharge his debt, and B may send back to A the same £10, with £3 additional to discharge his debt. This method would require £13 to discharge the two debts.

3. They may meet together and set off their mutual amounts of debt and pay only the difference in money. By this means the two debts would be discharged by the use only of £3.

Now, it is quite clear that a very different quantity of money would be required to carry on any given amount of business, according as either of these methods of settling debts was adopted. Between the first and the third methods there is a difference of £20. These £20 would not influence prices, but would only be required to settle debts in a clumsy way. So that it is clear that by a simple change in the method of doing business, £20 might be withdrawn from its employment, and set free to be applied to new transactions. The adoption of the third method of settling debts in the place of the first would in no way affect prices, because these amounts of money would have to be retained for the sole purpose of settling debts, and would in no way enter into the sales of commodities, and therefore in no way affect their prices. At the same time, it would greatly alter the ratio between money and commodities. Now, when these transactions are multiplied by millions, it is evident that there may be large quantities of money in a country which may exercise no influence on prices; and the ratio between money and commodities may vary greatly, according as one or other of these methods of doing business is adopted. Now, if a country which habitually used the first method were to change its custom and adopt the third method, it is quite evident that a very large quantity of money might be disengaged from its usual employment and applied to promote new operations; and, therefore, for all practical purposes, it would be equivalent to an addition to the previously existing quantity of money, as by this improvement in the method of settling debts many times the same quantity of business might be done on the same basis of specie. Hence, the various methods of economizing the use of money are, for all practical purposes, to be considered as an increase of the resources of the nation.

But the methods of proving this proposition are by no means exhausted. I was examined as a witness before the Gold and Silver Commission of 1887, and I somewhat startled the Commission by saying that, though every system of credit must rest on a basis of specie, there is no necessary relation between the basis of specie and the superstructure of credit raised upon it. The proof of this is extremely simple, and may be best illustrated by a practical example. Before bankers discounted bills of exchange, there used to be fairs at the great Continental cities, Lyons, Nuremberg, and many others, held every three months. Merchants in France and other countries did not make their bills payable at their own houses, where they must have kept large sums in specie to meet them, but they made them payable only at these great fairs. In the meantime their bills circulated throughout the whole country, and performed all the functions of money. On a fixed day of the fair the merchants met together and exchanged their acceptances against each other. By the principle of compensation, which will be more fully described in a future chapter, these acceptances exchanged, reciprocally paid, discharged, and extinguished each other. Boisguillebert, the morning star of French economics, says that at the fair of Lyons 80,000,000 of bills paid and discharged each other without the use of a single coin. Hence, when all debts balance each other they may all be settled without the use of a single coin. Now, this is equally true whether there were 80 or 800 or 8000 millions of debts to be settled. Hence, it is evident that so long as the debts to be settled exactly balance, there is no use for any money, however large they may be in actual amount. In such a case money is only required in case there should be any undischarged balances of debts.

Again, suppose that creditors and debtors have accounts at the same bank. The debtor gives his creditor a cheque on his account. The creditor pays it into his own account; and the banker transfers the credit from the account of the debtor to that of the creditor, and this is a complete payment of the debt without the use of money. This operation is termed a novation. Now, it is evident that the larger a bank is, the more of its customers will deal with each other, and the greater will be the number of transactions settled by means of novations, without the use of money. But the system has been carried to a greater degree of refinement still, by a device called the clearing system, which will be more fully described in another chapter.

XXXVI.—

ON BARTER.

When material products are exchanged directly for material products the transaction is termed barter.

XXXVII.—

ON SALE OR CIRCULATION.

To understand economics as a science, we must revert to the original concept of it by its founders, the economists, as the science of exchanges, or of commerce, to which all the most intelligent economists in the world are now reverting, as the only one by which it can be created into a science, after the temporary confusion into which it was thrown by the unfortunate system of J. B. Say and John Stuart Mill, which is rapidly sinking into oblivion.

The economists only admitted an exchange to be where a material product was exchanged for material product, i. e., a barter; that is, where each side obtained a satisfaction. But, in modern times, such exchanges are comparatively rare. Persons usually want to obtain things from others, while these others want nothing from them. To obviate the inconveniences which would arise if no one could get what he wanted, unless he could supply the other party at the same time with what he wanted, people hit upon the plan of adopting some particular commodity, which should be universally exchangeable. The buyer, therefore, gave the seller in exchange for his product an equivalent in this universally exchangeable merchandise, so that he could get any satisfaction he pleased from anyone else who could render it. This universally exchangeable merchandise is termed money. The person who has got the money has not got a satisfaction; his desire is not consummated or completed. In order to obtain a satisfaction, he must exchange away the money for some product he does desire. Hence, the economists termed a sale a demi-exchange. Le Trosne says:* “There is this difference between an exchange and a sale, that in an exchange everything is consummated or completed (consommé) for each party. They possess the thing which they desired to procure, and they have only to enjoy it. In the sale, on the contrary, it is only the purchaser who has attained his object, because it is only he who is in a position to enjoy. But everything is not ended for the seller.” And again: “Exchange arrives directly at its object, which is completion (consommation); it has only two terms, and is ended in one contract. But a contract in which money intervenes is not completed (consommé), but it is necessary that the seller should become a buyer, either himself or by the interposition of the person to whom he transfers the money. There are, therefore, to arrive at completion (consommation), which is the ultimate object, at least four terms, and three contractants, of whom one intervenes twice.” When, however, the person who had sold his product for money, and, therefore, furnished a satisfaction to the other party, had himself exchanged away the money and obtained a product for it, he, too, had acquired a satisfaction, which he could enjoy, and the exchange was completed (consommé). For this reason, money was called the medium of exchange. This “sale” the economists termed circulation. Sale or circulation, therefore, the economists defined to mean the exchange of a product for money. Circulation, therefore, meant purchase with money; in contradistinction to exchange of products, or barter.

But credit is used in all respects in the same way as money to purchase or circulate commodities. Hence, sale or circulation always denotes an exchange in which one or both of the quantities exchanged is money or credit. The sum total of these sales is properly termed the circulation. Hence, any sum of money or credit may add considerably to the circulation, because every time it is transferred it is a sale, and, therefore, it augments the circulation. Just in the same way, the circulation of a newspaper is not properly the number of copies sold, but the number of its readers. Hence, the circulation is the quantity of money and credit multiplied into the number of their transfers.

As the use of money and credit is to set industry in motion; and, inasmuch as they have no use unless they do that, their beneficial effects are not measured by their actual amount, but by the industry which they generate. Money lying locked up in a box, or credit unused, only represents latent power, and not actual power. They may be called power or wealth in the latent state, they resemble the steam-engine of a mill which is not going, and which is of no use until it is set in motion. And, as the produce of the mill is measured by the quantity of the motion of the engine, so the useful effect of money and credit is measured by their quantity of motion, which is called the circulation. The circulation, which is the sole test of their useful effect, is, therefore, the product of their amount multiplied into the velocity of their circulation. The quantity of motion of the engine is called its duty. Hence, the circulation of money and credit may be called its duty. It is so essential to have a clear conception of the useful effect produced by any amount of money or credit, that we may add another illustration. The effect produced by any body in motion is measured by its weight or mass multiplied into its velocity, which is termed its momentum. If the mass be diminished, yet by increasing its velocity, the effect or momentum may still be the same. If a body weighing 100 lbs. move with a velocity 1, its momentum will be 100; but if we diminish the weight to 50 lbs., and can double its velocity, the effect or the momentum will still be the same—100. The useful effects of money and credit are exactly analogous. Their useful effect is the result of their combined amount and velocity of circulation, which is termed circulation. If we can make £50 circulate with twice the velocity of £100, the useful effect or circulation will be the same. Hence, it may be said that the circulation is the momentum of money and credit.

XXXVIII.—

ON EXCHANGE.

An exchange is the interchange of things of a like nature; either products for products, or money or credit for money or credit. Thus we speak of the foreign exchanges or the value of the money of one country in terms of the money of another. Or we ask for the change (i. e., the ’change or exchange) of a £5 note or a sovereign. A bill of exchange is a right of action to be exchanged at the proper time for money. So we exchange one book for another, or a picture for a statue. So in “Lear,” when Albany throws down his glove to the traitor Edmond, the latter, throwing down his own, says: “There’s my exchange”; and a little further on Edgar says to Edmond: “Let’s exchange charity.” So in “Hamlet,” Laertes says: “Exchange forgiveness with me, noble Hamlet.” When the interchange is between products and money or credit, the one who gives the money or credit is said to buy the product, and the one who gives the product is said to sell it, and the quantity of money given is termed the price. When the exchange is between money or credit for money or credit, each side is said to buy and sell, and each quantity of money or credit exchanged for the other is termed the price of the other. Thus we buy a horse or a house or land or a bill of exchange with money or credit. An officer formerly bought a commission in the army, but he exchanged from one regiment into another.

XXXIX.—

ON THE MEANING OF CIRCULATING MEDIUM AND CURRENCY.

We have now to consider two terms, circulating medium and currency, which are both of comparatively recent origin, which have in recent times given rise to many controversies, but which are admitted to be synonymous, and, consequently, if we can positively determine the meaning of one of them, that will also necessarily determine the meaning of the other. The term circulating medium does not occur in Adam Smith. It seems to have come into use in the last decade of the last century. The first occasion on which we have met with it is in the debate on the Bank Restriction Act of 1797. Mr. Fox said:* “He wished that gentlemen, instead of amusing themselves with new terms of ‘circulating medium’ and the like,” etc., which shows that it must then have been of very recent origin. Mr. Pitt, in his reply, said: “As so much had been said on the nature of a circulating medium, he thought it necessary to notice that he did not, for his own part, take it to be of that empirical kind which had been generally described. It appeared to him to consist of anything that answered the great purposes of trade and commerce, whether in specie, paper, or any other term which might be used.” It is quite evident, therefore, that Mr. Pitt included under the term circulating medium or currency, money and credit in all its forms. Which continued to be the invariable usage in all Parliamentary debates, until Lord Overstone perverted men’s minds with a fantastic definition of his own, which he beguiled Sir Robert Peel into adopting.

The verb to circulate, like many others in English, has both an active and a neuter meaning. 1. It means that which circulates commodities, i. e., which causes commodities to circulate, where it is an active verb. 2. That which circulates itself, where it is a neuter verb. Smith uses the word circulate in both senses in different passages. Thus, speaking of gold and silver, he says: “Their use consists in circulating commodities. The great wheel of circulation is altogether different from the goods circulated by it. The revenue of the society consists altogether in these goods and not in the wheel that circulates them.” In these two passages circulates is active. A little further on, he speaks of the different sorts of paper money, but he says that the circulating notes of banks and bankers are best known, where circulates is neuter. In the following sentence both senses occur: “Let us suppose, for example, that the whole circulating money of some particular country amounted at a particular time to one million sterling, that sum being sufficient for circulating the whole annual products of their land and labor.”

The ordinary meaning of words in scientific language leaves no possible doubt as to which is the true meaning of circulate, in the expression circulating medium. A medium, in scientific language, means some middle thing by which something else is effected. Thus, money is termed the medium of exchange, because it is the medium by which exchanges are effected. Hence, the circulating medium is the medium by which the circulation of commodities is effected. Now, it has just been shown that by circulation the economists meant sales. And how are sales effected? By the means or medium of money and credit. Buying with money effects the circulation of commodities; but buying with credit equally effects the circulation of products; in whatever form the credit may be, either written or unwritten. Hence, money and credit are equally circulating medium; and the total amount of the circulating medium means the total amount of money and credit in all its forms.

XL.—

ON THE MEANING OF CURRENCY.

The meaning of the word currency, which all writers admit to be synonymous with circulating medium, is much more recondite, and has given rise to protracted controversies in modern times, which, however, we shall not notice at present. We shall in this section merely explain the true meaning of the word. The word currency is, in fact, a technical term in mercantile and constitutional law, and the following is the true meaning of “current” and “currency” in English law: It is a general rule of law that a person cannot transmit to another any better title to a thing than he has himself. As it is said:* “Nemo plus juris ad alium transferre potest quam ipse haberet.”—“No one can transfer to another a greater right than he has himself.” It is also a general rule of law that, if a person loses a thing or has it stolen from him, he does not thereby lose the property in it. Consequently, he can not only recover it from the finder or thief, but also from anyone else in whose possession he may find it, even though that person bought it or took it in pledge honestly and in good faith and gave full value for it, and not knowing that it was not the lawful property of the seller or pledger. This right of recovery is termed the Jus vindicandi in Roman law. But to this rule of law, money always was, from the very necessity of the case, an exception. If the true owner of the money finds it in the possession of the finder or thief, he can reclaim it. But if the finder or thief has once purchased goods with it, and the shopkeeper has taken it honestly, in the usual way of business, and without knowing it has been stolen, he can retain it against the true owner, even though he should be able to identify it. That is, the person who acquires money honestly, in the way of business, has a good title to it, even though the transferer had not. Thus it is said in law that “the property in money passes by delivery.” Thus, after the money has once been passed away in commerce to an innocent receiver, the true owner has lost his Jus vindicandi. It is this peculiarity which affects the property in money, which passes by delivery, which is denoted by the words “current” and “currency” in English law. And when an Act of Parliament declares that any instrument shall be “current,” it means that the property in it shall pass by delivery to the innocent purchaser. This quality of currency is also called negotiability. And when the representatives of money, such as bank notes, cheques, bills of exchange, etc., came into use, the law merchant applied the same principle of currency to them. They are like money so far as this, that the property in them passes like the property in money. Thus, if they are lost or stolen the true owner may recover them if he can find them in the hands of the finder or thief, but if the finder or thief succeeds in passing them away for value in the ordinary course of business to an innocent purchaser, that innocent purchaser acquires the property in them, and may retain them against the true owner and enforce payment of them from all the parties liable on them. This doctrine has been affirmed in a whole series of cases in the courts of law which we shall notice shortly. It follows from this that in strict law this principle of currency can only be applied to those rights of action which are recorded on some material. An abstract right cannot be lost, mislaid or stolen or passed away in commerce. For a right of action to be currency in strict law, it must be recorded on some material, so as to be capable of being carried in the hand, or in the pocket, or put away in a drawer, or dropped in the street, or stolen from the drawer or the pocket and carried off by the finder or thief, and transferred in commerce.

So far, then, as regards mercantile law there is no difficulty; the meaning of the word is perfectly clear. But if the word currency is used to denote a certain class of economic quantities, synonymous with circulating medium, a difficulty arises; because there is an immense mass of credit which has produced exchanges, and has circulated commodities, and is, therefore, circulating medium, which is not recorded on any material at all, in such a way that it can be lost or stolen and carried off, and transferred in commerce by manual delivery. Thus the gigantic mass of banking credits and the book debts of traders have all effected a sale or circulation, and therefore they are all circulating medium; but they have not the attribute of currency in a legal sense, because they cannot be mislaid, lost or stolen and picked up and passed away in commerce by manual delivery. So also private debts between persons, termed verbal credits; they only arise from the transfer of goods or money, and they exist equally whether they are recorded on paper or not. They are equally circulating medium. Private debts among traders affect prices and effect sales exactly like so much money. Consequently, though they are not currency in strict law, yet if that word is still to be retained as a scientific term denoting a certain class of economic quantities, synonymous with circulating medium, they must all be included under that term, because they can all be recorded on paper at pleasure and put into circulation, when they do actually become currency in strict law; and their nature and effects are exactly the same, whether they are recorded on paper or not.

In the great discussions in Parliament which arose out of the suspension of cash payments by the Bank of England, no attempt was made to define the term currency; but all the speakers assumed that it comprehended money and credit in all its forms. This truth was well expressed by Lord Titchfield in the House of Commons in the debates of 1822. Speaking of the various forms of credit used as substitutes for money, he said:* “When it was considered to how great an extent these contrivances had been practised in the various modes of verbal, book, and circulating credits, it was easy to see that the country had received a great addition to its currency. This addition to the currency would have the same effect as if gold had been increased from the mines.”

XLI.—

THE DIFFERENT FORMS OF CURRENCY.

Adopting, then, the terms circulating medium and currency as absolutely identical and synonymous and as designating a certain class of economic quantities, its different forms are: 1. Coined money—gold, silver, and copper. 2. The paper currency—bank notes, cheques, bills of exchange, promissory notes, exchequer bills, dividend warrants, and all orders and promises to pay money. 3. Simple debts of all sorts, not recorded as circulating paper, such as credits in bankers’ books termed deposits, book debts of traders and private debts between persons; because all these debts may be recorded on paper at the will of the parties and thrown into circulation; moreover, simple debts can be transferred with perfect facility without being recorded on paper. All these denote that a transaction has taken place and are a title to future payment. From these considerations it follows that the circulating medium or currency of any country is the sum total of all the debts or titles to future payment belonging to every individual in it—that is, all the money and credit in it.

Postage stamps must also be included under the term currency. They are a most usual form of remittance; they pass in small payments, and since the post-office is bound to cash them, they are in fact penny notes. Though the point has not been actually decided at law, there can be no doubt that if anyone were to steal postage stamps, and they were taken honestly in payment, it would be held that they possess the attribute of currency; hence they are in every sense strictly currency.

XLII.—

ON PRICE.

When any economic quantity is exchanged for any other economic quantity, each is termed the value of the other. But when one or both of the quantities exchanged is money or credit, it receives a special name—it is termed price. Price, therefore, always is value expressed in money or credit. Now, the value of money is any other economic quantity which can be obtained in exchange for it—either a material chattel, or a service, or a right, such as a debt. If money be taken as the fixed quantity, the more of the other quantity which can be obtained in exchange for it, the greater is the value of money. The less of the other quantity which can be obtained for it, the less is the value of money. Or if the other quantity be taken as the fixed quantity, the less the money given for it, the greater is the value of money; and the more the money given for it, the less is the value of money. Hence it is seen that the value of money varies inversely as price.

But credits, or debts, are commodities or merchandise, which are brought into commerce and bought and sold or exchanged like any other merchandise. Now, when any commodities or merchandise are brought into commerce they are always divided into certain units for the convenience of sale. Coals are sold by the ton, corn by the quarter, tea and sugar by the pound, cloth by the yard, wine and other liquids by the gallon, quart, or pint, etc. So, for the convenience of commerce, bullion is divided into units called coins. In a similar way, when the commodity or merchandise termed credit or debt is brought into commerce it must, for the convenience of trade, be divided into units. The unit of credit or debt is the right to demand £100 to be paid one year hence. The sum of money given to purchase the unit of debt is also termed its price. And as in all other sales, the less the quantity of money given to purchase the unit of debt, the greater is the value of money; and the greater the quantity of money given to purchase the unit of debt, the less is the value of money. Hence the value of money, with respect to debts, varies exactly in the same way as it does with respect to any other merchandise. But in the commerce of debts it is not usual to estimate the value of money by the quantity of debt it will purchase. As money naturally produces a profit, it is clear that the value or price of a debt to be paid only one year hence must be less than the actual amount of the debt. The difference between the present value or the price of the debt and the amount of the debt is the profit made by buying it. This difference or profit is termed discount.

XLIII.—

THE VALUE OF MONEY VARIES INVERSELY AS PRICE, AND DIRECTLY AS DISCOUNT.

To discount a debt is to buy it by paying down the present value of its amount payable at a future time. Hence it must be observed that the term value of money has two distinct meanings in commerce. There are three great branches of commerce; the commerce in material commodities, the commerce in labor, and the commerce in debts. And the expression “value of money” has two distinct meanings, as it is applied to these three branches of commerce. In the commerce of material commodities and in the commerce of labor it means the quantity of the commodity or of the service which money can purchase; in the commerce of debts it means the discount or profit made by buying the debt.

XLIV.—

ON INTEREST AND DISCOUNT.

Profits made by trading in debts are made in two ways:

(1) When the person who buys the debt agrees to defer receiving the profit until the end of the time agreed on.

In this case the profit is termed interest. Thus, when a person buys a debt of £100 payable one year hence, at £5 per cent. interest, he pays down the £100, and receives in exchange for it the right to demand £105 at the end of the year. The debt is the price of the money, and the money is the price of the debt. When the debtor pays the debt he brings the £105 in money to his creditor, and buys up the right of action against himself. Thus every “loan” of money, as it is called, is a sale or an exchange; the lender transfers the property in the money to the “borrower,” and in exchange for it receives the right of action to demand the principal and interest at the end of the year. This right of action is a new creation of property, and is the credit, or the debt. All “loans” of money are sales or exchanges; they are acts of commerce, and, therefore, enter into the science of economics.

(2) Where the difference, or profit, is retained at the time of the purchase of the debt.

In this case the profit is termed discount. But discount itself is of two kinds: (a) In the ordinary books of algebra it is said that discount is where the profit is retained at the time of the purchase; and the sum paid for the debt is such a sum as, improved at the given rate of interest, should be equal to the full amount of the debt at the end of the period of advance. It is, therefore, the present value of the sum agreed upon at the agreed upon rate of profit. This may be called algebraical discount. It is used by insurance companies in determining the present value of future payments and in some other cases. (b) But this kind of discount is never used by bankers and dealers in money. In banking it is invariably the custom to retain the full amount of the profit agreed upon at the time of purchasing the debt. Thus, if a banker discounts a bill of £100 for a year at five per cent., he deducts and retains the full £5 at the time of the purchase, and gives his customer a credit for £95. That is, he creates a right of action of £95 to purchase the right to £100 at the end of the year. As this method of discount is invariably used in banking and money lending, it may be termed banking discount.

The rate of interest or discount is the ratio of the profit to the amount of the debt, made in some given time, as the year. The profits made by interest and algebraical discount are exactly equal, but banking discount is more profitable; because in the example given in the former case, a profit of £5 is made on the advance of £100, in the latter case on the advance of £95.

So long as the rate of discount is low, there is not much difference in the profits by way of interest or banking discount. But as the rate increases, the profit increases at a very rapid ratio, as may easily be seen. If a person “lends” £100 at twenty per cent. interest, he advances £100, and at the end of the year receives £120, which is a profit of twenty per cent. If he discounts a bill for £100 at twenty per cent., he advances only £80, and at the end of the year receives £100, which is a profit of twenty-five per cent. If he lends £100 at fifty per cent. interest, he advances £100, and at the end of the year he receives £150, which is a profit of fifty per cent. If he discounts a bill of £100 at fifty per cent., he advances only £50, and at the end of the year receives £100, which is a profit of 100 per cent. So, discounting a bill of £100 at sixty per cent. is a profit of 150 per cent. If a person lends £100 at 100 per cent. interest, at the end of the year he receives £200, which is a profit of 100 per cent. If he discounted a bill of £100 at 100 per cent., he would advance nothing, and at the end of the year he would receive £100, or his profit would be infinite.

It would be out of place here to investigate the whole theory of banking discount; but we have given a full exposition of the subject in our Theory and Practice of Banking and Elements of Economics.

XLV.—

ON PAYMENT AND SATISFACTION.

The words payment and satisfaction are often supposed to be synonymous, but they are not so. The word payment means anything whatever which is taken in exchange for anything else. It originally came from the Sanskrit paç, which is the same word as the Greek πήγω, Doric πάγω, ϰήγνυμι. In old Latin this was pago or paco, the same as paciscor, and also pango, pegi or panxi, pactum; to covenant, agree with, or come to terms with. Thus it is said in the Laws of the XII. Tables: “Rem ubi pagunt, orato.”—“If they come to terms, let it be settled as agreed upon.” “Ni pagunt, in comitio aut in foro ante meridiem causam conjicito.”—“If they do not come to terms, bring on the cause before midday either in the comitium or the forum.” Hence, pacare is to come to terms with, to appease; hence the Italian pagare and our pay.

When one person has parted with anything else to another person, or done him a service, he is entitled to receive from him some equivalent, unless it was meant as a donation. But at the same time he has the right to accept anything he pleases as an equivalent. Thus, where two persons agree to exchange any material products, each is payment for the other; because each product satisfies and appeases the claim of the other for an equivalent. When goods are paid for in money, it is sometimes supposed that it is only the money which is payment for the goods. But the goods are equally payment for the money, because each person has got what he agreed to take in exchange for his product. So when money is paid as wages for work done, the money is payment for the work, but the work is equally payment for the money. So when persons agree to exchange different kinds of work, each is payment for the other. So when a merchant agrees to take a trader’s bill at three months in exchange for goods, the bill is payment for the goods; it appeases the claim of the merchant because he has agreed to take a right of action in exchange for the goods. And the goods are equally payment for the right of action. When the bill becomes due, the trader has to pay his bill; that is, he has to appease the claim which the holder of the bill has for money. And when he pays the bill he buys up the right of action against himself.

The money is the payment for the right of action; and the right of action is payment for the money. Hence to pay means simply to appease. When a man pays his debt he appeases the right or claim which his creditor has to demand a sum of money from him. When he pays his rent he appeases the right which the owner of the house or land has against him for compensation for its use. But it does not follow that a payment is a final closing of the transaction. The only legal word which denotes a final closing is satisfaction. If a bill is taken in exchange for goods it is payment; but it is not satisfaction (unless it is expressly received as such) until the bill itself is paid. If, however, the owner of the bill neglects to follow up his legal remedy, the bill becomes not only payment, but satisfaction; by doing so the owner of it has made it money. And economists go further; they say that money itself is only a higher order of bill; that, though when a person has received money it is payment, yet it is not satisfaction until he has exchanged away the money for some object he desires. Thus, though a shoemaker is paid when he has got money for his shoes, yet he has not got a satisfaction until he has got bread or meat or clothing or something else he desires for the money.

XLVI.—

ON CAPITAL.

Adam Smith’s use of the word capital strikingly exemplifies the defect of his definitions. He enumerates as capital—(1) Material things; (2) personal qualities; (3) abstract rights, such as bank notes, bills of exchange, etc., which are credit. That is, he enumerates all the three orders of economic quantities as capital. Now, when we are told that all these things are capital we have no more notion of what capital is than if we were told that they are all abracadabra. We do not want an enumeration of what things are capital; but we want a definition of what capital is.

The word capital is derived from the Latin caput, which means the source of a spring or the root of a plant—namely, the source from which any increase flows. Thus Plautus says: “O scelerum caput.”—“O source, or fountain, of crimes.” “Perjurii caput.”—“O fountain of perjury.” Stephen, in his Thesaurus, thus defines the word: “Κεφάλαιον—Caput unde fructus et reditus manat.”—“Capital, the source from which any profit or revenue flows.” So Senior says: “Economists are agreed that whatever gives a profit is properly termed capital.” And de Fontenay says: “Wherever there is a revenue you perceive capital.” This is a good general definition; and the “whatever gives a profit” must be interpreted in as wide and general a sense as the “anything whose value can be measured in money” is in the definition of wealth. The definition of capital is, therefore, this: “Capital is an economic quantity used for the purpose of profit.”

XLVII.—

ANY ECONOMIC QUANTITY WHATEVER MAY BE USED AS CAPITAL.

Now, as Aristotle pointed out, any economic quantity whatever may be used in two different ways—(1) The proprietor may use it for his own personal enjoyment; (2) he may trade with it—i. e., he may use it so as to produce a profit. When any economic quantity whatever is used so as to produce a profit—i. e., is traded with—it is termed capital.

Economic quantities, it has been shown, are of three distinct orders—(1) Material things; (2) personal qualities, both in the form of labor and credit; (3) abstract rights. And each of these quantities may be used in either of the above ways.

I.Material Things.—Suppose that a person has a sum of money. If he expends it on his own personal gratification or household expenses, such money is not used as capital, because he makes no profit by it. But if he lends it out at interest, or if he buys goods with it for the purpose of selling them again at a profit, or if he buys into the funds, or the shares of any commercial company, then he uses his money as capital; and the goods are also capital, because he intends to sell them again at a profit; and the funds and the shares are also capital, because they produce him an annual revenue. So, if the owner of land lives on it himself and uses it for his own personal enjoyment, he does not use the land as capital. But if he lets it out to farmers or to builders to build houses upon and receives a rent for so doing, then he uses the land as capital. Some great noblemen possess large tracts of land upon which part of London is built; that land yields them enormous revenues, and therefore it is capital to them. And so any material thing whatever may be used as capital. So, if a person spends money merely on a general education, of which he makes no profitable use, that money is not used as capital. But if he spends his money in acquiring a professional education, such as that of a schoolmaster, an advocate, a physician, a surgeon, or an engineer, or any profession by which he intends to earn an income, then he uses the money as capital. And the professional knowledge which he has thus acquired is capital to him, because he makes an income by trading with it.

II.Personal Qualities.—Personal qualities may also be used in both ways. But personal qualities are of two forms; they are of the form (a) of labor and (b) of credit.

(a)Personal Qualities as Labor.—If a man digs in his own garden for his amusement, or if he sings, acts, or gives lectures for the delectation of his friends, such labor is not used as capital. But if he sells his labor in any way for money, then he uses his labor as capital. Thus Huskisson said he had “always maintained that labor is the poor man’s capital.” So Mr. Cardwell, speaking to his constituents, said: “Labor is the poor man’s capital.” So a writer in a daily paper said: “The only capital they possess is their labor, which they must bring into the market to supply their daily wants.” And speaking of them the “Economist” said: “They have no capital but their labor.” So Froude said in “Oceana”: “And the land would be within the reach of poor men who have no capital except their labor.” So Cardinal Manning said: “I claim for labor the rights of capital. It is capital in the truest sense. * * * The capital of money and the capital of strength and skill must be united together.” So his knowledge, skill, and abilities are capital to anyone who earns an income as an advocate, physician, actor, engineer, or as manager of a great commercial company, or in any other profession. His services are wanted, demanded, and paid for by his clients; their value is measured in money; hence they are χρήματα, or wealth; and as he makes an income by their employment they are capital. This income is measurable and taxable, just in the same way as if he made an income by selling corn, cattle, or any other material chattels. All modern writers admit that labor is a marketable commodity which can be bought and sold like any material chattel, and consequently it is wealth; and as a person can sell his labor for a profit, and make an income thereby, it may be used as capital.

(b)Personal Qualities as Credit.—So personal credit may be used in two ways. If a person buys goods on credit for his own enjoyment, as for household use, such credit is not used as capital. But a merchant may use his credit for the purpose of profit, and therefore as capital. He may use it for the purpose of purchasing goods or materials or in employing labor, by giving a promise to pay at a future time, instead of actual money. He sells the goods and makes a profit by so doing, just as if he had paid for them in money. Or he may employ laborers by means of his credit, and sell the products for more than they cost, and so make a profit; in these ways he uses his personal credit as capital. When personal qualities, either in the form of labor or of credit, are used in this way to produce a profit, they are termed personal capital.

III.Rights.—When personal credit is used as a purchasing power, a right of action or an economic quantity of the third order is created. And as this right of action may be bought and sold or exchanged, like any material chattel, it is a marketable commodity. The traffic in these rights of action is the most colossal branch of modern commerce. It is in buying and selling these rights of action that bankers make their profits. But as the commerce in these rights of action is the subject-matter of this work, we shall say no more about them here. But any other right may be used as capital. If a man buys the funds or shares in any commercial company, or municipal or other obligations, such as railway debenture stock, all these and many other classes of rights produce him a profit, hence they are capital to him. So the copyright of a successful work is capital to the author, and if he sells it to a publisher it becomes fixed capital to him. There is a class of traders whose especial business is to buy and sell rights, such as shares in all kinds of commercial companies and public securities; they keep a stock of this kind of property on hand, just as other traders keep a stock of material goods. These persons are termed stock jobbers.

XLVIII.—

THERE IS NO SUCH THING AS ABSOLUTE CAPITAL.

It has been shown that there is no such thing as absolute wealth—that is, there is nothing which is in its own nature wealth, and that whether anything is wealth or not depends entirely upon human wants and desires. So, also, it must be carefully observed that there is no such thing as absolute capital. As Mill justly observes, the distinction between capital and non-capital does not lie in the kind of commodity, but in the mind of the owner; that is, that whether anything is capital or not, in no way depends on the nature of the thing itself, but solely and exclusively on its method of use.

Many writers, from an imperfect consideration of the subject, say that capital is simply the accumulation of the products of past labor. But this is a vital error which must be carefully guarded against; because all the accumulated products of past labor are not capital, but only that portion of them which is traded with or used for the purposes of profit. Moreover, many things may be used as capital which are in no way the accumulated products of past labor. As Senior says: “Economists are agreed that whatever gives a profit is properly termed capital.” Now, it has been shown that any economic quantity may be used as capital. Not only may many material products be used as capital which are not the products of past labor, such as the land, but personal qualities both in the form of labor and credit may be used as capital. Now, how is labor itself the accumulated product of past labor? How is personal credit the accumulated product of past labor? Also incorporeal quantities may be used as capital or for the purposes of profit, as well as any material chattels. Now, how are banking credits, bank notes, cheques, bills of exchange, etc., the accumulated product of past labor? In fact, in this great civilized country the enormously greater amount of capital is purely personal and incorporeal.

Some statisticians, indeed, endeavor to estimate the amount of capital in the country. But it is evident that such attempts are wholly futile. How can they form any estimate of the amount of capital unless they tell us what they reckon as capital? Because it is utterly impossible to estimate the amount of economic quantities which are being used as capital at any given instant. The very same quantity may be used as capital at one instant and as income at the next. And it has been shown that persons trade with, and make capital of, not only the realized profits of the past, but also the expected profits of the future.

[* ] Nov. Org., Bk. II., Aph. 11.

[* ] Preliminary Remarks, p. 5.

[* ] Wealth of Nations, Bk. II., ch. i.

[† ]Cours, Considérations Générales

[‡ ] Political Economy, p. 10.

[* ] Principles of Political Economy, Bk. I., ch. iii.

[† ] Historical Sketches, Free Trade in Knowledge, p. 50.

[‡ ] Against Leptines, 484, 20.

[* ] For Phormion, 958.

[† ] The Complete English Tradesman, ch. xvii.

[‡ ]Essai Politique sur le Commerce, ch. xxiv.

[§ ]Réflexions sur le Commerce et les Finances, ch. i., art. 10.

[* ] Wealth of Nations, Bk. I., ch. x.

[† ] Principles of Political Economy, Bk. III., ch. xi. § 3.

[‡ ] Ibid., Bk. III., ch. xii. § 3.

[* ]Liber 34, ad Edict.

[* ] Digest, 50, 16, 49.

[† ] Digest, 50, 16, 23.

[‡ ] Summary of Roman Law. Digest, 18, 34, § 1, 2.

[* ] Basil., II., 2, 214.

[† ] Basil., II., 2, 21.

[‡ ] Grand Abridgment, Part I., s. v., Chattels; also Touchstone, Vol. II., p. 468.

[§ ] 12 Co. 1.

[∥ ] Ryall v. Rowles, 1 Vesey, 348.

[* ] Bk. II., Pt. I., ch. v.

[† ] Encyl. Brit., vol. xviii., art. Personal Estate.

[* ] Wealth of Nations, Bk. II., ch. ii.

[† ]Traité d’Economie Politique, p. 1.

[‡ ]Cours d’Economie Politique, Part IV., ch. v.

[§ ] Principles of Political Economy, Bk. III., ch. xii., § 1.

[* ] Lectures on Political Economy, p. 6.

[* ]De Rerum Naturâ, III., 971.

[* ] Institutes of the Law of Scotland.

[† ]L’Ordre Naturel des Sociétés Politiques, ch. xviii.

[* ] See Maynz, I., 197, on Droits Futures.

[* ] Nicomach, Eth., B. V.

[† ] An Essay on Public Credit, p. 25.

[* ]Introduction à la Philosophie Economique.

[† ] Reflections on the French Revolution.

[‡ ] Wealth of Nations, Bk. II., ch. ii.

[§ ] An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, p. 80.

[∥ ]Œuvres, Vol. II., Maudit Argent, p. 80.

[¶ ]Harmonies Economiques, Capital, p. 209.

[† ]Harmonies Economiques, Organisation Naturelle, p. 25.

[* ] Klaproth, Journal Asiatique, Vol. I., p. 256.

[† ] Dictionary of Political Economy, art. Currency, p. 666.

[* ]De l’Intérêt Sociale, p. 905, 916.

[* ] Parliamentary History of England, Vol. XXIII., p. 340.

[* ] Digest, 50, 17, 54.

[* ] Parliamentary Debates, N. S., Vol. IX., p. 868.