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• 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.

SECTION II.

VI.—

ON THE ORIGIN, SOURCE, OR CAUSE OF VALUE.

WE now come to the second branch of our inquiry—What is the origin, source, or cause of value? Or, in the language of Bacon—What is the form of value? And whence does it originate?

Now, when we are to search for the cause of value, it is necessary to understand what we are searching for. There are three distinct orders of quantities, each containing many varieties, which all have value. We have to discover some single cause which is common to them all; and ascertain what that single cause is by genuine induction. Bacon says:* “But the induction which is to be available for the discovery and demonstration of sciences and arts, must analyze nature by proper rejections and exclusions, and then, after a sufficient number of negatives, come to a conclusion on the affirmative instances.” Also:† “What the sciences stand in need of is a form of induction which shall analyze experience and take it to pieces, and by a due process of exclusion and rejection lead to an inevitable conclusion.” The first step in this process of induction is to make a complete collection of all the different kinds of quantities, of whatever nature they may be, which have value‡ —“For whoever is acquainted with forms [i. e., causes] embraces the unity of nature in substances the most unlike. From the discovery of forms [causes] results truth in theory and freedom in practice.”

Bacon earnestly inculcates as the foundation of all true science a careful collection of all kinds of instances in which the given nature is found:§ “The investigation of forms [causes] proceeds thus: a nature [such as value] being given, we must first of all have a presentation before the understanding of all known instances which agree in the same nature though in substances the most unlike; and such collections must be made in the manner of history, without premature theory.” Bacon then exemplifies his method by an investigation into the form, or cause, of heat. He gives tables of the divers instances agreeing in the nature of heat; also where it appears in different degrees:* “The work and effect of these tables I call the presentation of instances to the understanding; which presentation having been made, induction itself must be set to work; for the problem is upon a review of instances, all and each, to find such a nature as is always present or absent with the given nature, and always increases and decreases with it; and which is, as I have said, a particular case of a more general nature. We must, therefore, make a complete solution and separation of nature; not, indeed, by fire, but by the mind, which is a kind of divine fire. The first work, therefore, of true induction (so far as the discovery of causes) is the rejection or exclusion of the several natures which are not found in some instances where the given nature is present, and are found in some instances where the given nature is absent; or are found to increase in some instances where the given nature decreases, or to decrease where the given nature increases. Then, indeed, after the rejection and exclusion has been duly made, there will remain at the bottom, all light opinions vanishing in smoke, a cause affirmative, solid and true and well defined.”

As an indispensable part of induction is the rejection of erroneous causes,† “I must now give an example of the exclusion and rejection of natures, which, by the table of presentations, are found not to belong to the form or cause [of value], observing in the meantime not only each table suffices for the rejection of any nature, but even any one of the particular instances contained in any one of the tables. For it is manifest from what has been said, that any one contradictory instance overthrows a conjecture as to the cause.”

VII.—

INVESTIGATION OF THE FORM OR CAUSE OF VALUE.

Bacon has exemplified his process of induction by investigating the form, or cause, of heat; our present task is to investigate the form, or cause, of value. Following the example of the mighty master, we must begin by making a complete collection of all the instances of value. That is, we must enumerate all the different kinds of quantities, with all their varieties, which have value. These are:

I. Corporeal or material quantities. Under this species are comprehended the following varieties: lands, houses, trees, cattle, flocks and herds of all sorts, corn and all other fruits of the earth, furniture, clothes, money, minerals of all sorts, jewelry, pearls, manufactured articles of all sorts, fish, game.

II. Immaterial quantities; comprehending labor of all sorts—agricultural, artisan, professional, scientific, literary, trade secrets, news.

III. Incorporeal quantities; comprehending rights of action, credits or debts, the funds, shares in commercial companies, copyrights, patents, the goodwill of a business, a professional practice, tolls, ferries, tithes, advowsons, rents, shootings, fishings, market rights, and all other valuable rights.

We must now investigate the cause of value in all these different kinds of quantities, and in all their varieties, and in each one separately. We must first, by a due course of rejections and exclusions, eliminate all accidental and intrusive ideas which may in some cases be associated with value, and in other cases not; and after completing this course of rejections and exclusions, we must end by an affirmative; and discover that single general cause, which is common to all these different classes of quantities, which, being present, value is present; which, when it increases, value increases; which, when it decreases, value decreases; and which, being absent, value is absent.

VIII.—

MATERIALITY IS NOT NECESSARY TO VALUE.

Now, in examining these three classes of cases which all have value, we observe that the whole class of immaterial quantities, and the whole class of incorporeal quantities, have value, but have no materiality. Hence it is evident that materiality is not necessary to value; it is only in some cases the accident of value.

IX.—

PERMANENCE, OR DURABILITY, IS NOT NECESSARY TO VALUE.

We also observe that some things which have value last forever, like the land, the funds, precious stones, statues, coins. Other things may last a very long time, such as houses, watches, pictures. Other things have a very much less degree of durability, such as clothes, animals. Others have a very short degree of durability, such as food, flowers. But labor, which in many cases has very high value, perishes in the very instant of its production, and therefore has no durability, or permanence, at all. Thus, quantities which have value have all degrees of permanence, or durability. Now, among Bacon’s prerogative instances he mentions ultimity, or limit, and says:* “Nor should extremes in the lowest degree be less noticed than instances in the highest degree.” This is the doctrine of the law of continuity, which says: “That which is true up to the limit, is true at the limit.” From these principles it follows that things which have the lowest degree of permanence, or durability, which is o, are to be included in economics as well as those which have the degree, i. e., which last forever. Hence it is seen that permanence, or durability, is not necessary to value; it is only the accident of value.

X.—

DEMAND THE SOLE CAUSE OF VALUE.

It has now been shown that materiality and durability are in no way necessary to value, but are only in some cases the accidents of value. In what, then, consists the essence of value? The only thing which ancient writers, Aristotle, the author of the “Eryxias,” the Roman jurists, and in modern times the physiocrates, the Italian economists, Smith, Condillac, Whately, and hosts of others have observed—exchangeability. Each of the quantities in the table of instances may be bought and sold, or their value may be measured in money; each of them possesses the attribute of exchangeability, and that is the sole attribute which is common to all the classes of quantities, and to each separate quantity in each class. Hence, as the ancients unanimously held for 850 years, exchangeability is the sole essence and principle of wealth. Thus, by strictly and reverently following the precepts of the mighty master, by rejecting and excluding all accidental and intrusive ideas, we have at last obtained an affirmative issue.

Now, what is necessary in order that any quantity may be exchangeable? Evidently that someone else should demand it. If I offer something for sale, what is necessary that it should be sold? Simply that someone else should desire or demand it. It is, therefore, clear that demand is the sole cause of value, or exchangeability. Aristotle said long ago that it is χρεία, or demand, which binds society together. The author of the “Eryxias” over and over again points out that demand is the sole cause which constitutes anything wealth; and that anything is wealth, whatever its nature may be, so long as it is wanted and demanded, and no longer. He pointed out that the local money of different states is only wealth where it has power of purchase; where it has no power of purchase it is not wealth. It has been shown that the Greek word χρῆμα, which is one of the most usual words for wealth, is derived from χράομαι, to want, or demand; and that χρῆμα simply means anything which is “wanted and demanded”; and that things are only χρήματα where they are χρήϭιμα, or wanted and demanded; and that where they are not χρήϭιμα, they are not χρήματα.

Here it is quite evident that we have got to the origin, form, or cause, of value; it is demand, pure and simple. Value is not a quality of an object, nor is it the labor bestowed on obtaining it; it is an affection of the mind. The sole origin, form, or cause, of value is human desire. When there is a demand for things, they have value; when the demand increases (the supply remaining the same), the value increases; when the demand decreases, the value decreases; and when demand altogether ceases, value is altogether gone.

XI.—

CREDITS, OR DEBTS, HAVE VALUE BECAUSE THEY WILL BE PAID IN MONEY.

The importance and the bearing of this investigation on our present subject is obvious. For it is the fatal doctrine that labor is the cause of all value, and that all wealth is composed of the materials of the globe and the product of land, labor, and capital that is at the root of all the difficulty to apprehend the subject of credit. If it be laid down that labor is necessary to all value, how could the notes of the Bank of England or any other bank have value? Or how could the bills of a solvent merchant have value? Everyone knows that a credit in a bank or a bank note has value because the bank will pay it in gold; a bill on a solvent merchant has value because he will pay it in gold when it becomes due. And the gold with which the banker or merchant pays his notes or bills is their value. So Mill, who is a devotee of Ricardo, says:* “An order or a note of hand, or bill payable at sight, for an ounce of gold, while the credit of the giver is unimpaired, is worth neither more nor less than the gold itself.” So Smith, Say, and Mill all class bank notes as under the head of circulating capital. Smith himself acknowledges that if money were not exchangeable it would have no value, as the author of the “Eryxias” showed.

We have already frequently shown that all jurists class rights of action, whether written or unwritten, as goods, chattels, commodities, merchandise, which can be bought and sold like any materials, chattels, or like money itself. And this species of goods, chattels, commodities, merchandise has value for exactly the same reason that any other merchandise or money has value, because it is exchangeable. Money has value only because it is exchangeable for products and services, and credits, or debts, have value because they are exchangeable for money. Thus we see that so long as ideas of value are mixed up and founded on labor, the subject is plunged into inextricable difficulties and contradictions. But as soon as we adopt exchangeability as test of value and the sole essence and principle of wealth, as the ancients unanimously did for 850 years, and modern economists are at last coming to do, all difficulties and obscurities are cleared up and dispersed like a fog before the morning sun.

XII.—

ON THE ERROR OF THE EXPRESSION “INTRINSIC VALUE.”

We have now to say something about an expression which has been the cause of enormous confusion in economics, which has been one of the chief stumbling-blocks in the apprehension of the subject of credit, and which must be cleared away. All ancient writers, as well as modern economists until Adam Smith’s deplorable confusion on the subject, clearly understood that the value of anything is some other thing external to itself, and there is not to be found in any of them the slightest trace of any such confusion of ideas as the expression “intrinsic” value. It is not easy to determine when the unfortunate expression intrinsic value came into use, but it seems to have arisen in this way: When unreflecting persons thought about value they thought of the quality of the thing which made it desirable, and they called that its value. They therefore gradually began to speak of intrinsic value. So long ago as 1696, an able writer (Barbon) pointed out the confusion which had arisen from mistaking the absolute qualities of an object for the quantity of things it would exchange for. He says:† “There is nothing which troubles this controversy more than for want of distinguishing between virtue and value. Value is only the price of things, and that can never be certain; because it must be there at all times and in all places of the same value; therefore nothing can have an intrinsic value. But things have an intrinsic virtue in themselves, which in all things have the same virtue—the loadstone to attract iron, and the several qualities that belong to herbs and drugs, some purgative, some diuretical, etc. But these, though they have great virtue, may be of small value, or no price, according to the place where they are plenty or scarce; as the red nettle, though it be of excellent virtue to stop bleeding, yet it is a weed of no value from its plenty. And so are spices and drugs in their native soil of no value but as common shrubs and weeds, but with us of great value, and yet in both places of the same excellent intrinsic virtue. * * * For these have no value in themselves; it is opinion and fashion brings them into use and gives them a value.” Barbon thus entirely refutes by anticipation the doctrine that utility is the cause of value, which has become rather common in the present day, and puts his finger on the phrase which has caused so much confusion in current economics—intrinsic value—which is to confound an intrinsic quality with an external relation. The following passage from Senior shows how easily even able men are beguiled into the error. He says:* “We have already stated that we use the word value in its popular (?) acceptation, as signifying that quality in anything which fits it to be given and received in exchange, or, in other words, to be lent or sold, hired or purchased. So, defined value denotes a relation reciprocally existing between two objects.” Now, the quality of a melon which fits it to be sold is its agreeable flavor; its flavor, therefore, according to Senior, is its value (!); and so defined, he says it means that it costs 5s.! That is, he defines the quality of the melon to be its price! This is exactly the confusion which the economists so carefully provided against. The quality which makes a thing desirable is its value in use, or its utility; and the economists repeatedly explained that economics has nothing to do with value in use or utility, but only with value in exchange, or market price.

This unhappy phrase, intrinsic value, meets us at every turn in modern economics; and yet the slightest reflection will show that to define value to be something external to a quantity, and then to be constantly speaking of intrinsic value, are inconsistent and self-contradictory ideas. Thus, over and over again it is said that money has intrinsic value, but that a bank note or a bill of exchange is only a representative of value. Money, no doubt, is the produce of labor; but Smith himself says that if money would exchange for nothing it would have no value; so he admits that exchangeability is the real essence of value. How, then, can the value of money be intrinsic? How can anything have intrinsic value unless it has the thing it will exchange for inside itself? Money will exchange for anything—lands, houses, corn, books, wine, jewelry, etc.; and each of these is a value of money; but which of these is its intrinsic value? Money remains exactly the same in itself wherever it may be placed. A hogshead full of sovereigns has immense value in the middle of London, but if a person had it by itself in a deserted ship in the middle of the Atlantic, or in a barren island, where would its value be? Yet if it has intrinsic value in one place it must have it equally in any other place. A bank note payable on demand is of the value of money; and why is it so? Simply because it is exchangeable for money. Hence, a bank note has value for exactly the same reason that money has—namely, because it is exchangeable for something else. Credit is the right to demand money, and money is the right to demand products and services.

Socrates, in the “Eryxias,” shows that it is only when and where that money can be exchanged that it has value; when and where it cannot be exchanged it has no value. So, when a bank note or a bill of exchange can be exchanged it has value; when it cannot be exchanged it has no value. Hence, the value of money and credits of all sorts is essentially of the same nature, though there may be different degrees of it. A credit, by the unanimous consent of all jurists, economists, and merchants, is an article of merchandise, and an exchangeable commodity, just like money, or any other material chattel; and this whether it exists only in the abstract form of a mere right or whether it be recorded on paper.

Who ever heard of intrinsic distance, or of an intrinsic ratio? The absurdity of these expressions is apparent at once; but they are not a whit more absurd than intrinsic value. If we speak of the intrinsic value of money, we may just as well speak of the intrinsic distance of St. Paul’s, or the intrinsic ratio of five. To say that money has intrinsic value because it is material and the produce of labor, and that a bank note, or a bill of exchange, is only the representative of value, is just as absurd as to say that a wooden yard-measure is intrinsic distance, and that the distance between two points one yard apart is only the representative of distance.

XIII.—

A STANDARD OF VALUE IS IMPOSSIBLE.

That unfortunate confusion of ideas between value being the quantity of any other commodity which any quantity will purchase, and the quantity of labor embodied, as it were, in the thing itself—which is chiefly due to Smith and Ricardo—has not only led to that mischievous expression, intrinsic value, the source of endless confusion in economics, but also to the search for something which the very slightest reflection would have shown to be impossible in the very nature of things—namely, an invariable standard of value.

It is as well to explain what those economists mean who are searching for an invariable standard of value. If we had a British yard and any foreign measures of length before us we could at once perceive the difference between them; and if we were told the measurement of any foreign buildings, however remote in age or country in foreign measures, we could, by a very simple calculation, reduce them to the standard of British measurement, and compare them with the size of our own buildings. Those economists who want an invariable standard of value want to discover and fix upon some single commodity by which they can compare the value of other things in all ages and countries. But the least reflection will show that such a standard is impossible in the very nature of things. Money, indeed, is termed the measure of value; and so it is in exchanges which are effected at the same time and place. If we are told that a quarter of corn is worth 40s., and that a sheep is worth 40s. at a certain time and place, we should say that they were then and there of equal value. But such matters are not the result of simple perception by the senses, as are the different measures of length and capacity. If a quantity of gold were placed beside a number of other things, no human sense could discern what their value would be. And the most violent changes in their several values might take place in the market without there being any visible sign of such a thing. Value is a mental affection; and values are not perceptible by ocular inspection, but they must be declared by the communication of minds.

Moreover, it is not possible to ascertain the different values of different quantities of gold obtained in different ages and countries. If a quantity of gold coin minted in the age of Augustus, an equal quantity minted in the reign of Elizabeth, and an equal quantity minted in China were placed side by side, what human sense could discern the difference in value between them? And yet that is what those economists require who want an invariable standard of value. They want something by which they can at once decide whether gold is of more value in ad 30, in ad 1588, or in ad 1893, in Italy, in England, or in China, without reference to anything else, just as we can discern the difference between British and foreign measures by laying them side by side. But the only test of value is an exchange; and unless we can effect an exchange there can be no value. How can we exchange an ounce of gold in the year ad 193 with one in the year ad 1593, or with one in the year ad 1893?

A measure of length or capacity is a single quantity, and can measure other single quantities, such as different lengths, or bodies of capacity. But value is a ratio, or a relation; and it is utterly impossible in the very nature of things that a single quantity can measure a ratio, or a relation. It is impossible to say that a : b :: x. It is manifestly absurd to say that 4 is to 5 as 8, without saying as 8 is to what; just as it is absurd to say that a horse gallops at the rate of twenty miles, without saying in what time.

XIV.—

BUT THERE MAY BE A MEASURE OF VALUE.

But though a standard of value is impossible by the very nature of things, there may be a measure of value.

Value being an affection of the mind, or the desire or demand of a person to acquire some object; the quantity of money he is willing to give to acquire it is the measure of his desire to obtain it, and, therefore, the measure of his value for it. But credit is also equally a measure of value as well as money. Neither a merchant nor anyone else will give more in credit, which he is bound to redeem in money, to acquire any commodity, than he would give in money itself. But if he wants anything, he will give just as much in credit as he would in money. Hence, credit is equally a measure of value, or desire, with money. Hence, money and credit are the measure of value; and, as it is universally admitted by all economists that purchases with credit affect prices in all respects equally with money, it follows that the aggregate of money and credit is the medium in which prices are measured, and that the aggregate of money and credit constitutes the circulating medium, or currency.

XV.—

VALUE EXISTS ONLY IN THE HUMAN MIND.

Value, then, like color, sound, and odor, exists only in the human mind. There is neither color, nor sound, nor odor in external nature; they exist only in the human mind.

According to the unanimous doctrine of ancient writers and all foreign economists, demand is the sole origin, form, or cause of value. It is demand, or consumption, and not labor, which gives value to a product. It is not the labor which gives value to the product, but the demand for the product which gives value to the labor. Hence, it is not labor which is the cause of value, but value which is the inducement to labor. It is not the labor of the producer which constitutes a thing wealth, but the demand of the consumer. We conclude, then, that it is not labor, but consumption, exchange, or demand which constitutes a thing wealth; and we trace the progress of a nation in wealth according as their wants and desires increase and multiply. First, the demand for the sustenance required by the body gives value to the material products of the earth, food, clothing, shelter, fuel. Then, as their tastes become cultivated and refined arises the demand for works of literature, art, and science; for painting, for sculpture, for architecture, for the drama, for music. And those who minister to these wants of the mind become wealthy, just as those who minister to the wants of the body do. It is the demand of the public alone which makes these things wealth. Hence, in order to be wealthy, a people must be inspired with strong and various desires and be willing to work to gratify those desires. And this shows the great importance, in an economical point of view, of national education. Heavy taxes can alone be borne by an industrious and wealthy people; and the multiplication of wants and desires multiplies industry, multiplies capital, multiplies incomes, multiplies the numbers of persons able to bear the burden of taxation; and renders the nation capable of great achievements, and of taking a leading position in the councils of the world.

[* ] Nov. Org., Bk. I., Aph. 105.

[† ]Distributio Operis.

[‡ ] Nov. Org., Bk. II., Aph. 3.

[§ ] Nov. Org., Bk. II., Aph. 11.

[* ] Nov. Org., Bk. II., Aph. 16.

[† ] Nov. Org., Bk. II., Aph. 18.

[* ] Nov. Org., Bk. II., Aph. 34.

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

[† ] A Discourse Concerning Coining the New Money Lighter, p. 6.

[* ] Political Economy, p. 13.