The Online Library of Liberty

A project of Liberty Fund, Inc.

• Preface
• Chapter I: Barter
• Want of Coincidence In Barter.
• Want of a Measure of Value.
• Want of Means of Subdivision.
• Chapter II: Exchange
• Utility and Value Are Not Intrinsic.
• Value Expresses Patio of Exchange.
• Chapter III: The Functions of Money
• A Standard of Value.
• A Store of Value.
• Separation of Functions.
• Chapter IV: Early History of Money
• Currency In the Hunting State.
• Currency In the Pastoral State.
• Articles of Ornament As Currency.
• Currency In the Agricultural State.
• Manufactured and Miscellaneous Articles As Currency.
• Chapter V: Qualities of the Material of Money
• 1. Utility and Value.
• 2. Portability.
• 3. Indestructibility.
• 4. Homogeneity.
• 5. Divisibility.
• 6. Stability of Value.
• 7. Cognizability.
• Chapter VI: The Metals As Money
• Iron.
• Lead.
• Tin.
• Copper.
• Silver.
• Gold.
• Platinum.
• Nickel.
• Other Metals.
• Alloys of Metals.
• Chapter VII: Coins
• The Invention of Coining.
• What Is a Coin?
• Various Forms of Coins.
• The Best Form For Coins.
• Coins As Works of Art.
• Historical Coins.
• The Royal Attribute of Coining.
• Chapter VIII: The Principles of Circulation
• The Standard Unit of Value.
• Coin, Money of Account, and Unit of Value.
• Standard and Token Money.
• Metallic and Nominal Values of Coins.
• Legal Tender.
• The Force of Habit In the Circulation of Money.
• Gresham's Law.
• Extension of Gresham's Law.
• Chapter IX: Systems of Metallic Money
• Currency By Weight.
• Unrestricted Currency By Tale.
• Single Legal Tender System.
• Multiple Legal Tender System.
• Composite Legal Tender.
• Chapter X: The English System of Metallic Currency
• English Gold Coin.
• English Silver Coin.
• English Bronze Coinage.
• Deficiency of Weight of the English Gold Coin.
• Withdrawal of Light Gold Coin.
• Supply of Gold Coin.
• Supply of Silver Coin.
• The Royal Mint.
• Chapter XI: Fractional Currency
• Billon Coin.
• Composite Coin.
• Bronze Coin.
• English Bronze Coin.
• Weight of the Currency.
• Nickel, Manganese, Aluminium, and Other Metals and Alloys.
• Chapter XII: The Battle of the Standards
• The Double Standard.
• Compensatory Action.
• The Demonetization of Silver.
• Disadvantages of the Double Standard.
• The Monetary Systems of the World.
• Chapter XIII: Technical Matters Relating to Coinage
• The Alloys In Coin.
• The Size of Coins.
• The Wear of Coin.
• Methods of Counting Coins.
• Cost of the Metallic Currency.
• Chapter XIV: International Money
• Advantages of International Money.
• Disadvantages of International Money.
• Conflict of Monetary Systems.
• International Monetary Negotiations.
• Decimalization of English Money.
• The Future American Dollar.
• German Monetary Reform.
• Systems of Fractional Money.
• Final Selection of the Unit of International Money.
• Chapter XV: The Mechanism of Exchange
• Progressive Development of the Methods of Exchange.
• Representative Money.
• Cheque and Clearing System.
• Chapter XVI: Representative Money
• Early History of Representative Money.
• Reasons For the Use of Representative Money.
• Inconvenience of Metallic Money.
• The Weight of Currency.
• Saving of Interest.
• Chapter XVII: The Nature and Varieties of Promissory Notes
• Specific Deposit Warrant.
• General Deposit Warrant.
• Difference Between a Special and a General Promise.
• Pecuniary Promissory Notes.
• Principles of the Circulation of Representative Money.
• Chapter XVIII: Methods of Regulating a Paper Currency
• 1. Simple Deposit.
• 2. Partial Deposit.
• 3. Minimum Reserve.
• 4. Proportional Reserve.
• 5. Maximum Issue.
• 6. Elastic Limit.
• 7. Documentary Reserve.
• 8. Real Property Reserve.
• 9. Regulation By the Foreign Exchanges.
• 10. Free Issue System.
• 11. The Gold Par Method.
• 12. Convertibility By Revenue Payments.
• 13. Deferred Convertibility.
• 14. Inconvertible Paper Money.
• Over Issue of Paper Money.
• Want of Elasticity of Paper Money.
• Chapter XIX: Credit Documents
• Measurement of Credit.
• Bank-notes.
• Cheques.
• Bills of Exchange.
• Interest-bearing Documents.
• Definition of Money.
• Chapter XX: Book Credit and the Banking System
• Single Bank System.
• System of Two Banks.
• Complex Bank System.
• Branch Bank System.
• Bank Agency System.
• London Agency System.
• Country Clearing System.
• Chapter XXI: The Clearing-house System
• Transaction of Business At the London Clearing House.
• Manchester Clearing House.
• New York Clearing House.
• Extension of the Clearing System.
• Advantages of the Cheque and Clearing System.
• Proportion of Cash Payments.
• Cases to Which the Clearing System Is Inapplicable.
• Chapter XXII: The Cheque Bank
• Relation of the Cheque Bank to Other Banks.
• The Cheque Bank As a Monetary Agent.
• Payment of Wages By Cheques.
• The Cheque Bank As a Savings Bank.
• Results of the Cheque Bank System.
• Chapter XXIII: Foreign Bills of Exchange
• Origin and Nature of Bills of Exchange.
• Trade In Foreign Bills.
• The World's Clearing House.
• Centralization of Financial Transactions In London.
• Representation of Foreign Bankers In London.
• Chapter XXIV: The Bank of England and the Money Market
• Expansion of Trade.
• Competition of Bankers.
• The Bank Charter Act of 1844.
• The Free-banking School.
• Possibility of Over-issue.
• The Right of Coining Bank Notes.
• Scotch and English Banking.
• Cash Reserves of Bankers.
• Remedy For the Sensitiveness of the Money Market.
• Chapter XXV: A Tabular Standard of Value
• Corn Rents.
• A Multiple Legal Tender.
• Lowe's Proposed Table of Reference.
• Poulett Scrope's Tabular Standard of Value.
• Difficulties of the Scheme.
• Chapter XXVI: The Quantity of Money Needed By a Nation
• Quantity of Work to Be Done By Money.
• Efficiency of the Currency.
• Effects of the Cheque and Clearing System.
• Conclusion.

Final Selection of the Unit of International Money.

I will conclude this chapter by some remarks on the reasons which should guide us in selecting the monetary unit to be finally established as the basis of a future universal money.

I attribute very little weight to arguments concerning the absolute amount of the rival units. It is said that as the wealth of nations increases, and the value of gold at the same time sinks, we need a larger unit. The pound is recommended on this ground as clearly superior to the franc. If we count in francs our figures will be twenty-five times as large as in pounds sterling. It seems to be forgotten that the same unit can never suit the extremely different sums which we have to express, so that we must use multiples or submultiples of the actual unit. Just as we use inches, feet, yards, furlongs, miles, or diameters of the earth's orbit, according to the magnitudes to be measured, so we vary the unit with money. If we are discussing a workman's weekly wages, we count in shillings; if we speak of a clerk's yearly salary, we speak of pounds; if the fortune of a merchant or banker is in question, we take notice only of thousands of pounds; in matters relating to the revenue of the kingdom or the national debt, we give our exclusive attention to millions of pounds. The Portuguese unit of account, called the rei, is worth only about the nineteenth part of an English penny, and is probably the smallest unit in the world. Practically, however, the milreis, or thousand reis, worth 53 1/3d., becomes the unit. In the same way Indian merchants speak of lacs and crores of rupees. The French estimate their national debt in milliards of francs. No doubt it is puzzling to Englishmen to interpret exactly the meaning of a milliard of francs, but, to those accustomed to count in francs it is no more difficult than a million of pounds. Exactly the same considerations apply to units of weight; thus, though the French use so small an ultimate unit as one gram, or 15.43 grains, yet according to the magnitudes of the objects to be weighed, they use smaller or larger units, centigrams or milligrams on the one side, or decagrams and kilograms on the other. The absolute amount then of the ultimate unit seems to me to be entirely a matter of indifference in this point of view.

As regards the subdivision of the unit there are considerations of more importance. The subdivision ought of course to be decimal, and it ought to be so contrived that the lowest submultiple shall correspond to the smallest sum which is thought worthy of being recorded in mercantile transactions. Now the franc is divided into 100 centimes, so that the centime has a value of less than the tenth of a penny. Though bronze pieces of one and two centimes were coined to the amount of about 5 per cent. of the whole bronze currency, it is found that they hardly circulate. Even if they were used in the smallest retail transactions at baker's shops, they would not be entered in account books. Thus the lowest entry which a French accountant makes is five centimes, and the next lowest ten centimes, corresponding to our penny. A needless complexity is thus introduced into small accounts. It is indeed so inconvenient to have to call the smallest coin in general use cinq centimes that it is still common to speak of it as a sou, in spite of the ninety years during which the decimal system has existed in France. The Portuguese rei is so small a unit that it is not represented by any coin at all. It nevertheless has a place in Portuguese mercantile accounts, and thus needlessly adds a figure to all pecuniary statements.

In England the smallest coin in actual use is the farthing, but in accounts little notice is taken of farthings or halfpennies, so that the penny is the lowest money of account. The post-office, in the regulations of the savings bank business, refuses to recognize any coin less than the penny. But the penny is inconveniently related to the pound, the hundredth part of which is 2.4d., and the thousandth part about a farthing. Thus the decimal system applied to our pound would oblige us to record as the lowest money of account an inconveniently small coin, namely, the mil. In this respect, indeed, the pound, and mil scheme is superior to the franc and centime system. Thus 12s. 6d. may be expressed as 625 mils; but in French money (at twenty-five francs to the pound) it would become 15.625. Taking the ten-franc piece as the principal unit, it would become 1.56 units, or 156 metrical pennies. In many cases it would require less figures to express a sum in pennies than in mils or centimes.

The American system is unexceptionable in this respect. The dollar is divided into one hundred cents, each of which has the value of about one halfpenny. Although half-cents have been coined, and may be used in some trifling purchases, they need never be entered in ordinary accounts. The cent thus seems to me to correspond to the smallest sum which need be treated in accounts, so that money statements are reduced to the greatest possible simplicity. The question may well be asked whether the lowest coin actually recorded is not truly the unit, of which all other coins are multiples. Perhaps the best answer would be to say that the unit is indifferently the cent, or the dollar, or the eagle. In English money it matters not whether we regard the pound, or its twentieth part, or its two hundred and fortieth part, as the unit. The absolute amount of the unit, I repeat, is totally a matter of indifference, and the only point we have to consider is whether it, or any decimal part of it, corresponds to the smallest sum of which we need take account. In this respect the dollar is the best existing unit; but it might admit of discussion whether the double dollar, or ten-franc piece of gold, equal to eight shillings, or one hundred pence, would not be better. If the wealth of nations continues to grow, and the value of gold to fall, even the cent will be too small a coin to appear conveniently in accounts, and the penny will be a better lowest unit. In this case the hundred pennies, or the ten-franc piece, would become the best unit. The choice thus seems to me to lie between the five-franc and the ten-franc piece in gold as the ultimate unit of international money. In favour of the ten-franc piece it may be added, that it would make a convenient gold coin of the smallest size which it would be well to issue. The gold dollar and five-franc piece are too small, and suffer great abrasion.

Chapter XV

The Mechanism of Exchange

Having now sufficiently discussed the subject of metallic money, we pass on to consider the devices which naturally develop themselves in a highly organized commercial nation, for the purpose of economizing the precious metals, or even avoiding the use of coins altogether. No sooner have a people fully experienced the usefulness of a good system of money, than they begin to discover that they can dispense with it as a medium of exchange, and return to a method of traffic closely resembling barter. With barter they begin and with barter they end; but the second form of barter, as we shall see, is very different from the first. Purchases and sales continue to be made in terms of gold and silver coin, but equivalent quantities of goods thus estimated are made to pay for each other. If ownership in gold or silver intervenes at all, it is in the shape of warrants or representative documents with which gold can be procured, if desired, but which are seldom used to procure it.

At the outset we found that money performed at least two, and probably four distinct functions (Chapter III.); and, in a simple state of industry, it is convenient that the same metallic substance should fulfil all these functions concurrently. But it does not follow that this union of functions is the best possible arrangement under all conditions. We shall find that gold or silver always continues to be the common denominator of value, but that these metals cease to a great extent to be the actual medium of exchange which is passed about between buyer and seller. In a later part of the book (Chapter XXV.) I shall further show that money may with great advantage be replaced in its function as a standard of value for long periods of time by a Tabular Standard.