The A B C of Finance

Newcomb, Simon
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New York: Harper & Brothers
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No doubt the reader thinks he knows nothing about the money and labor questions, and that they are quite beyond his understanding. If he has ever tried to learn anything, he has been so bewildered by opposing theories and opposing assertion as to feel that he knew less than he did before. He is, therefore, quite ready to leave these questions to the politicians, and to vote on them as they think best.


This ought not to be. Of course there are many profound financial principles which cannot be fully seen through without careful study, but in the issues now before the people only the A B C of the subject is involved. To understand them one only needs arithmetic enough to keep an account of the money he receives and spends, and common-sense enough not to buy a lottery ticket because just the very pair of trotting horses he wants are to be drawn in the lottery. The difficulty has been that writers and speakers dive so deeply into the principles of constitutional law and the functions of government that plain people cannot clearly follow them; and thus the said people are in the best state of mind to become the dupes of wild theorists and scheming politicians. It is the duty of every man to study subjects in which his own interests and those of the community are so deeply involved with all possible calmness, and without prejudice, that he may be able to give some good reason for the faith that is in him. The writer proposes, in this little book, not to write a treatise on the subject, but only to suggest some thoughts which may be partly new to the reader, and which, if he turns them carefully over in his mind, will enable him to form an intelligent judgment upon the issues now presented to him.


What Society Does for the Laborer.


I shall suppose myself speaking to some one who sympathizes with "labor movements" of the day, trades-unions, strikes, and so on, who thinks that capital is in some way at enmity with labor, and who believes in general that the laborer does not get his right share of the good things which he helps to produce. To one who thinks thus I wish to suggest a few new thoughts.


Whence came the shoes on your feet? The leather of which they are made came all the way from the plains of Texas; the hides were tanned with bark cut down by hardy wood-choppers hundreds, and perhaps thousands, of miles from where you live. The thread with which they are sewed has required the combined labor of farmers in Ireland or planters in the South to raise the flax and cotton, and of wood-choppers in North Carolina to raise the material for the wax with which the thread is strengthened. Drovers in Texas, tanners in Tennessee, wood-choppers in the West, manufacturers without number, with more ingenious machinery than either you or I can pretend to describe, are all busy in getting up material for the shoes which you and your children are to wear two years hence, while railroad men are planning railroads, freight-cars, and engines for bringing the materials within reach of you and your shoemaker.


If so much is true of so small an article as the shoe on your foot, how is it with every other article which surrounds you? Think of your various articles of clothing. However poor and insignificant you may be, you and your family are sheltered by some kind of a roof; and if you will climb up and examine all the materials of which that roof is made, and then learn where these materials came from, you will find that the labor of scores, nay, perhaps hundreds, of people—from the miners of Cornwall and the ship-builders of Maine to the house-carpenters who are your neighbors—has been called on to shelter you from the weather. If you are sick, you are supplied with medicine in the manufacture of which the skill of the great chemists of the world has been applied; and you never saw an industrious man so poor but that in a severe case he could avail himself of the services of a doctor in whose education the experience of whole generations of physicians had been drawn upon. The very men who complain most loudly of the oppression of labor are now in most respects better taken care of when sick than kings were a thousand years ago.


You see that the poorest laborer in the land has his wants ministered to by thousands of his fellow-men, scattered throughout the wide world, and separated by oceans the crossing of which is a marvel of human skill. How is such a result possible? It is by a system of social machinery, if I may use the expression, more wonderful and effective than any that the wildest communists ever dreamed of. In their ideal system, every man works for his neighbors of the community; but in the actual system, we may almost say that the whole world is working for every one else. Do you think there is going to be any great improvement made in the system which produces such results? No sudden one, certainly. I am so much afraid of its being injured by tinkering that I am willing to suffer anything rather than see men try to pull it to pieces in order to make it go better.


Every man who expects to make an honest living has an interest in keeping this social machinery in good working order. But there is something else in which he has a still higher interest, because without it the machine itself would cease to go, and the laborer would become a slave. That something is law and order and the right of property. Complaining people sometimes say that the laborer is no better off than he was centuries ago. So unblushing a misstatement is hardly worthy of refutation; but we may take a look back, not to refute it, but to see what the laborer of the present day owes to civilization. Could I only paint you a picture of the laborer in the time of William the Conqueror, the clothes he wore, the food he ate, the air he breathed, the hut he lived in, I think you would accept all the evils of the nineteenth century without one word of complaint. But the point I now make is, that the laborer was not then his own master, but his services, and those of his children, belonged to a lord whose battles he had to fight in war, and whose grounds he had to till in peace. Why is it not so now? Because advancing civilization, with philosophers as its mouth-pieces, proclaimed the rights of each man to be the master of his own destiny, and the owner of all property which he could gain by fair bargains with his fellow-men, while law and good government stepped in to enforce the principles of philosophy. From the right of free labor and free bargaining, thus enforced by law, arose the wonderful social machine which now places in every man's hands his share of the work of the world.


I now want you to think of just a single application of the great principle just enunciated. The same law which gives the workmen of a railroad the right to leave it when they are dissatisfied with their wages gives the owners of the railroad the right to employ whom they please to run it; and if you abolish this law, you will soon find that it will be the laborers, and not the railroad owners, who will suffer. They will belong to the railroad before the road will belong to them. No matter how much they may make others suffer, they will suffer more themselves. Thus, when men forcibly interfere with the running of the trains because they are not satisfied with the men whom the companies employ to run them, they violate the fundamental law to which they owe their freedom and the advantages which they enjoy, and take the most vigorous steps they are able to throw themselves into the condition of the laborer of past ages.


Capital and Labor.


We frequently hear of the oppression of labor by capital, and of antagonism between these two agencies. In order to judge how much foundation there is for this notion, let us inquire what capital really is. It seems as if a large portion of the labor party look upon it as some kind of instrumentality wielded by the rich for the purpose of injuring or oppressing the poor. Really, however, capital consists simply of the accumulated wealth of the past—houses, machinery, railroads, engines, mills, and everything which in any way produces the things that we want. It is one of the most important parts of the social machine described in my last lesson. I might say, indeed, that it is the whole material part of that machine. The ships which bring flannel shirts across the ocean for you to wear in winter; the factories in which those shirts were made; the railways which transport them to your city; the warehouses in which they are stored until you are ready to buy them; the roof which covers your head, and all the machinery designed for the transportation and preservation of the food you eat, are capital. To complain of these when one is suffering for the comforts of life is as if a naked and hungry man should complain that food and clothing were his enemies. Diminish or injure this capital, and the power of everybody, the laborer included, to get clothes to wear, food to eat, and shelter from the weather, will be diminished.


Let us now go a step further. Food, clothing, and shelter are the three great wants for which we all labor. To supply these wants in the best manner, both the labor and capital of others are necessary. For instance, taking all the people of the country together, they need, we may suppose, some three millions of houses to live in. These houses must be kept in repair; and, as population increases, a hundred thousand new ones must be built every year to accommodate our increasing numbers. The more labor which is put into buildings and repairs, the more perfectly will everybody, laborers included, be sheltered. So, if the house-carpenters all strike, or in any way prevent house building and repairing from going on, there will be fewer and poorer houses to shelter the population, and some one must go with less perfect shelter than he would otherwise enjoy. Perhaps you will think that in this case the loss would fall principally upon the rich, and that it would be the rich who would have to live in smaller or worse houses, rather than the poor. But the fact is directly the contrary. The rich man is able to have just such a house as he wants, and will have it without regard to the wages of carpenters; so that whatever suffering may result from the houses not being built, or enlarged, or repaired, has to be undergone by the laboring and the poorer classes, and not by the rich.


The same thing holds true of every article of food and shelter of which the laboring classes are so much in need. Let us take some examples. In the recent riot in Pittsburgh, an immense quantity of coal oil was destroyed by the rioters. The means of lighting the houses of our country were diminished by the quantity of oil thus destroyed. There is less oil in the market, and, in consequence of the destruction, a somewhat higher price must be paid for every gallon that is left. On whom do you think the loss will fall? On the rich? Not at all. They do not burn coal oil, and if they did, they would have their houses well lighted, no matter if they do have to pay a few cents a gallon more. It is the people with whom one cent a gallon is an important item who must economize in using the oil, and strain their eyes for want of good light; so that they are the real class who must suffer by the burning of the oil.


During the reign of the Paris Commune the Communists burned three or four houses belonging to M. Thiers, a man of great wealth. Did they damage his shelter? Not in the least. No matter how many houses he owned, he could only live in one. The people whose shelter was diminished by this destruction were not M. Thiers or his family, but the tenants who had to rent houses from him. If there were ten houses less in Paris, it was inevitable that the people must have lived in fewer houses than before.


In the Pittsburgh riot of which I have spoken, several hundred thousand bushels of wheat were burned. Somebody's supply of bread must be diminished by that movement. Whose will it be? That of the rich? Not in the slightest. They will have their full supply, no matter what it costs. Those who will suffer will be the poor, who will have to give higher prices in consequence of the destruction of the wheat. If the farm laborers should strike for higher wages, and thus diminish the supply and raise the price of grain, the result would be the same. It would be their fellow-laborers of the whole country who would have to pay the cost.


I hope you will now be able to see that all accumulated capital is for the advantage of the laborer or the non-capitalist, as well as the rich. If the capitalist expends his money in building a factory, that factory is making clothing for the poor as well as for the rich; probably more for the poor than for the rich, because the former will derive the greatest advantages from the cheapening of clothing thus produced. If he builds a railroad with it, that railroad will be employed in bringing hides from Texas to make shoes for the laborer's feet, or corn from Illinois for him to consume. The capitalist may or may not derive any benefit from it; but it is certain that the laborer will derive a benefit. If the capitalist builds a row of houses, the only use he can make of them is to get somebody to live in them. The amount of shelter that is available for laborers is thus increased, and they have just as much advantage of the houses while they live in them as if they owned them themselves; that is to say, as far as shelter is concerned, the house you live in is equally useful to you whether you own it or some one else owns it. But you say, perhaps, "The owner takes a tax from me in the shape of rent for living in it." This is true, and in the market this rent is the equivalent of the shelter; but it would not be the equivalent of the shelter if there were no capital to build houses at all. For every house which is burned down, and every house which is not built, the rent of the remaining ones is higher, while for every new house added the rent comes lower. However rents may vary, it is certain that if the number of houses is diminished from any cause whatever, there must be more people in one house, and thus more discomfort.


Again, what does the capitalist do with the money which you pay him for rent? Some part of it he may expend for his own exclusive benefit; but, as the world goes, the chances are that he puts the larger part of it into improvements which in some way benefit his fellow-men, laborers included. Some part of it goes to keep the very house in which you live in repair; another part, perhaps, to build new houses; another part to extend railroads, and so on. In all these ways, it is expended so as to increase the supply of food, clothing, and shelter available for the support of the laborer. Thus, all combinations among laborers to diminish or interfere with the development of capital amount to nothing but combinations to do the whole laboring class of the country, themselves included, as much harm as they can by interfering with the operation of the social system described in the first lesson.


We may now see that in spite of the antagonisms which from time to time arise between the employer and the employed, capital and labor are each indispensable to the other. How indispensable labor is to capital every one sees without argument, but many do not seem to see the other side of the truth. But this must be plain if you will reflect for a moment that every laborer or employé in the country is, under our present laws, perfectly at liberty to get along without the capitalist if he is able and willing to do so. If an engineer or fireman is dissatisfied with his wages, he is not compelled to remain and be oppressed; on the contrary, the whole world is before him where to choose. If a bricklayer or carpenter is not satisfied with what his employer pays him for his work, no law compels him to remain working for wages so low: he is free to build on his own account, and to combine with men in other trades to any extent to build houses for themselves. If the laborers of the country would combine in ever so feeble an effort to get along without the help of the capitalist, collecting all necessary capital for themselves, and working on their own account, they would at least show a laudable disposition to be independent. The very fact that they have never attempted this, and that during strikes they have remained idle, thus causing more suffering to themselves than to their employers, shows that the latter are really necessary to them.


One way in which the employer or capitalist is necessary to the laborer is this: when the two classes combine in any enterprise, say the building of a house, the former takes all the risk. Whether the house sells well or not, the men who build it get their wages, and thus are enabled to live, whereas it depends altogether on how the house sells whether the capitalist makes or loses. Thus, the men very wisely trade off their chances of large profit, which they might have if they built for themselves, for the sake of being certain of the means of living.


The best solution for these difficulties which so often arise between the two classes in question is to be found in some system of co-operation, whereby the laborer, besides having regular, but low wages, as a certainty, shall be allowed a share of the profits, if there are any. This plan has several times been tried, and always, I think, with success. If labor-unions generally would move for it, instead of waging a suicidal war by entirely refusing to work for weeks or months at a time, they would do more for their own well-being than by any other plan they have yet tried, and would show better than they ever have shown that they understood their own interests.


Starvation Wages.


A few weeks ago it was said that several railroads of the country lowered the wages of their men to the starvation point. Now, I confess that I do not know what the "starvation point" is, and so cannot say whether this is true or not; but I will remark, in passing, that there has been within the past year or two a great fall in the price of nearly everything necessary to the laborer's comfort; and that starvation wages will buy a great deal more than they would two or three years ago. Possibly if the railroad employés had devoted half the exertion to getting cheap food and clothing which they have devoted to prevent a fall of wages, they would find that their starvation wages would secure them as many of the comforts of life as the higher wages of two or three years ago did. But we need not stop to discuss whether this is so or not. We must pass only to some further considerations. The men were not satisfied with their wages, and refused to run the trains. Now, if the reduction of the wages was really unnecessary and unjustifiable, the men were quite right in thus refusing to work, provided that they did not seek to interfere with the rights or with the property of any one else. But the fact was, that there were a large number of other men, whom we will call Jones, and Brown, and so on, quite ready to take the places of those who would not work, and to run the trains for those starvation wages. They had a perfect right thus to accept the best employment they could get, and the road had an equal right to employ them. But the strikers drove them off, refusing even to let them have this poor opportunity to earn a little to keep their families from starving. Now, what does this show? Why, the very fact that Brown and Jones were willing to enter the service of the roads at those starvation wages shows that they could not get even those wages at other employments. They were either absolutely out of employment, or were working for something below the limit which the companies set, or else they would not be willing to enter their service under the circumstances. Thus the strikers by their action prevented these unfortunate men from even earning the miserable pittance for which they themselves refused to work. You think, perhaps, that the companies ought not only to have paid higher wages to those who were actually running their trains, but also to have taken a number of these starving Joneses and Browns in, in order to help them. But the means of the companies are necessarily limited. A company gets only a certain number of dollars from passengers and freight with which to pay its employés, and it cannot pay out more than this amount for any purpose whatever, any more than two and two can make five.


We all know that the gross receipts of nearly every railway in the country have greatly diminished during the past five years. It is therefore simply impossible to run the roads without cutting down the wages of some one. The very fact that there were so many poor fellows ready to run the trains at the diminished wages, because there was nothing else for them to do, seems to me to prove that there was no entirely unjustifiable reduction. I confess I do not think those who wish for the improvement of the laboring class should have anything like as much sympathy with the strikers as they should have with those poor men unable to earn the pittance of perhaps ninety cents a day. In interfering with their employment, the strikers showed themselves in the light of cruel tyrants, regardless of those laws of freedom and property which have been the means of keeping them from serfdom.


I must not be understood as seeking to justify the general management of the railroads during the last ten years, or as claiming that the men had no reasonable ground of complaint. Every one who has the cause of humanity at heart must hope for the time when there will be more sympathy between the laborer and his employer, and when the latter will look on the former as one in whose happiness he has an interest. But improvements like this go on very, very slowly, so that no one generation can ever see them brought about, and any attempt to hurry them only keeps them back. Sympathy and good feeling are not promoted by war of any kind, and least of all by a war like that of the railroad men against law, order, and civilization generally. However bad railroad managers in general may be, in this particular case they were in the right and the others in the wrong.


There is one very important feature of strikes and labor movements generally which people seldom notice, but which should seriously modify our opinions of them. We are apt to think of all these movements as made for the benefit of the great masses of unskilled laborers, or, at least, as being planned and executed by them. A very little reflection upon facts which we all know will show us that this is an entire mistake, and that strikes of the most numerous class of laborers—the unskilled ones—are rare and unimportant. In the late railway war, it was not the men willing to work for ninety cents a day who struck, but engineers and firemen possessed of such skill that they could, in ordinary times, earn more than was sufficient for their support, and belonging to an association which was boasted to command millions of dollars. All the other strikes of which we have so often heard have been by miners, bricklayers, masons, carpenters, hatters, and so on, but not by day-laborers. Now, this last is the class which should most command the sympathy of the philanthropist, because it is the most helpless class; but it is the very one against which the rules and customs of trades-unions operate most vigorously. The higher classes can take care of themselves, but these cannot so easily do so.


The worst part of the policy of trades-unions is that which seeks to limit the number of men who shall be allowed to learn a trade. Not only are vast numbers of men thus compelled to remain day-laborers who might otherwise attain skill in some trade, but all the articles which skilled labor produces are made scarcer. If these articles were used only by men of wealth, the men who sympathize with the laborer would not so much care. But such is not the case. It is mathematically certain that laborers cannot have more house-room than they now have till more houses are built for them, and this cannot be done without more bricklayers, carpenters, plasterers, and so on. The same remark will apply to nearly everything which the laborer needs to live in comfort. Skilled labor is necessary to produce it, and many skilled laborers are banded together to make their work as scarce and dear as possible.


There is one important lesson to be learned from all this. The progress of humanity from the time when the laborer was little better than a serf, living in a smoky cabin with its thatched roof and unwholesome air, eating black bread, and going to his work barefoot, up to the present, when the industry of a continent is at work supplying his wants, has been very slow and gradual. This course of progress has always encountered enemies more or less effective. But the worst and most destructive enemy it has ever encountered is to be found in those trades-unions which have been engaged in saving up money from the laborers' earnings in order, from time to time, to wage wars against production through strikes. That a certain small proportion of these movements may have been justifiable I do not deny; but the larger number of them have been carried through at the expense of an amount of privation, misery, and even death, as well as of injury to the productive power of the country, for which no good trades-unions have ever done can compensate. However we may admire the heroism of the men engaged, we must not forget that their war has generally been waged against the very instrumentalities designed to feed, clothe, and shelter them.


To proceed further with these questions, we must know something of the nature and functions of money. Here we come into a field where it is almost as necessary to unlearn as it is to learn. There are two entirely groundless ideas prevalent respecting the value of money, which have no more real foundations than the notions about witchcraft which prevailed a couple of centuries ago, and on which a large part of the fallacies of the subject is founded. Until these ideas are, so to speak, unlearned, no progress is possible.


One Dollar.


The first idea to which I allude is, that if anything is called a dollar by act of Congress, if every one passes and accepts it as a dollar, it must therefore have a definite and fixed value, and be for all practical purposes just as good as a gold dollar. You think, perhaps, that a dollar must be worth just one dollar, and neither more nor less; how, then, can its value be uncertain? I answer that two kinds of dollars can differ from each other in value just as much as two loaves of bread can in size and quality. You know very well, for instance, that during the past ten years our paper dollar has been worth from five to thirty per cent. less than the gold dollar. To explain the matter fully, I must perhaps be a little abstruse, and therefore ask a closer attention than I will elsewhere.


When I say that a paper dollar can have no definite and fixed value, I mean that it cannot be insured to buy you any fixed and definite quantity of the necessaries of life. Money has no value at all except for the things it will buy; you can neither eat it, drink it, nor wear it; nor can you even gain interest on it while it remains in your pocket. What you want of it is to buy things to eat, drink, and wear, and the number of these things it will buy, and not the number of dollars, is the measure of its value. You would not give a fig for a pocketful of dollars if you could buy only the half of a fig with them. If this year you had supported your family on five hundred dollars, but next year it should require one thousand dollars because, on the average, prices had doubled, people would say that the value of everything was twice as great as before. But this would be an incorrect use of language. Really the value of your dollars is only half what it was before. Please remember that this is the only sense in which I now use the word "value," and the only sense in which it has a definite practical meaning. Dollars and all other kinds of money are worth what they will buy you to eat and wear; and measuring value by any other standard is like trying to feed a hungry man on acts of Congress.


All the difficulty of this matter arises from the fact that value is something which cannot be seen nor felt. If Congress should enact that all the foot and yard measures of the country should be made of a kind of rubber which would shrink to nine inches in the course of a few months, but which were nevertheless stamped "One foot, by act of Congress," or "One yard," as the case might be, everybody would see at a glance how ridiculous it would be to require every one to buy and sell by such measures. If a man should boast of having grown a foot and a half in the course of a year, because last year he measured only five feet, while with the new india-rubber measures he was now six feet and a half by act of Congress, his neighbors would laugh at him. The fact that everybody might call the new rubber measures one foot, and might buy and sell by them, would not, in the view of any sensible man, make them as long as the old foot-rules.


The reason that these india-rubber measures would look so much more ridiculous than similar dollars is simply that their deficiency in length is obvious to the eye, whereas the depreciation of the dollar is not obvious. In reality, calling a thing one dollar, and legalizing it as such, no more makes it the equivalent of a gold dollar, or of anything else in value, than calling it a foot will make it a foot long, no matter what its real length may be. But we cannot see nor feel the depreciation of the dollar as we would see the shortening of the foot measure. We become aware of it only by the general rise of prices, and the general increase in the cost of living. This rise of prices, however, proves the depreciation in the same way that the little man measuring six feet six in his stockings would prove that the foot-rule with which he was measured was too short.


If, now, the reader will hereafter remember that "dollar" is only a word, not a thing; that calling a thing a dollar does not change its nature, and does not make it worth twenty-three grains of gold, any more than calling a piece of paper a horse, and having it declared and stamped a horse by act of Congress, would make it draw a carriage—if, I say, he will permanently remember this, he will have taken the first great step towards comprehending the financial question.


Value Cannot Be Given By Government.


The second notion to be unlearned is intimately associated with the former one. It is that governments possess some wonderful power of giving value to money, which every one must admit, but which no one can explain. Widely as this notion is extended, it is as pure a superstition as was the old notion that a witch could make her enemy sick by secretly making a wax image of him, and then by sticking pins into it, roasting it before the fire, and otherwise torturing it, could make him suffer corresponding tortures. The disproof of this theory by an appeal to facts is easy and conclusive. Every man of intelligence knows that the coined money of all nations is worth only the gold which is in it, except that the coin bears a slight premium, owing to the certainty that it is the real metal; whereas the gold may have to be assayed, and the cost of the assay must be deducted from its value. In other words, the coined money may bear a premium over the mere bullion equal to the cost of coinage. The stamp of Government goes for absolutely nothing, except a certificate of the weight and quality of the metal.


Now, if the common notion were correct, the coin might be vastly more valuable than the crude bullion out of which it was made, the premium depending on how great and powerful a nation put its stamp on it. But all nations are here on a dead level; their stamps, one and all, go for just nothing, so far as giving value is concerned. The dollars of the poorest South American states, the sovereigns of England, the napoleons of France, and the gold bars fresh from the mines without any Government stamp upon them, all exchange in the markets of the world according to the amount of gold in them, and nothing else. This fact is a conclusive refutation of the opinion that Government can confer value on anything by its stamp.


A maxim is often quoted which is true in one sense and not true in another, but which people are expected to believe in the sense in which it is not true. It is said that the dollar is anything which the law makes it. To see in what sense this is true, let us take the similar, but easier, case of a loaf of bread. Our city authorities may have the power to declare how much bread shall constitute a loaf, and this year they may provide that the loaf shall weigh one pound; next year, two pounds; and the year after, half a pound. They might also, from time to time, allow the baker to add corn or rye meal to his flour. We might then say that the loaf of bread was anything which the law made it. But it would not follow that the loaf of one year was the same as that of another, and it would be monstrous for the law to suppose them the same. It is the same with the dollar. If Congress provides a gold dollar this year, and a silver dollar next year, and a paper dollar the year after, there is no necessary relation of value between these different dollars any more than between the loaves of bread we have supposed.


If, now, the reader will remember that there is only one kind of value, namely, that measured by the necessaries of life anything will command in the market, and that the value of a gold dollar does not differ in any essential respect from that of the same quantity of gold in a nugget, he will have taken the second great step towards understanding the money question.

10 of 19


The Value of Paper Money.


With these two ideas unlearned, we are in a proper state of mind to inquire what gives value to paper money. You know that, practically, far the greater part of the business of the world is carried on by using paper or credit instead of gold. Only an insignificant fraction of mercantile payments are made by actually counting out gold. If one merchant has to pay another a thousand dollars in gold, he simply hands him a check for the amount, which the second merchant, perhaps, passes over to some one else. Here is a piece of paper, of no value whatever in itself, passed from hand to hand just as if its value were a thousand gold dollars. How is this? Can we say with correctness that the check has any real value? The answer is clear and simple. The value does not reside in the check itself, but in the 23,200 grains (say three pounds avoirdupois) of gold to which the holder of the check is entitled, and which he knows the bank is able and ready to pay him. That is all. If the bank is not bound to pay the check, no matter how many dollars may be marked on it, no matter how beautiful the engraving, it is worth nothing. If the check is not payable in gold, but in greenbacks, then it is worth not a thousand dollars in gold, but only in greenbacks. So it is with all the commercial paper money of the world, which circulates in such enormous quantities in place of money. Its sole basis is that responsible men are bound to pay it, and its only value depends upon the weight of the gold to which it entitles the holder, no matter whether it is called pounds, francs, or dollars.


Observe carefully that it is not sufficient that the paper "represents" so much gold, or that the firm which issues it is very wealthy or powerful. The holder of the paper must have an acknowledged right to the gold, which the bank is not going to dispute. If there is any doubt whether he himself, or any one to whom he may pass the check, will be able to get the gold for it, then the check will be depreciated. If it is certain that no one can ever get the gold for it, its value will be just that of a pretty picture for the children to play with, no matter how strongly it may be declared to represent a thousand dollars.


Now, with a single exception, which we shall consider presently, the value of Government paper money is determined in precisely the same way with that of mercantile paper. In itself it has no value at all. Congress may stamp it one dollar or one hundred dollars; but unless it entitles the owner to claim something, it is a mere piece of paper. If the owner can actually get a gold dollar with it, it is worth a gold dollar; otherwise it will be more or less depreciated in value, according to the hope of future payment which the holders may entertain. Of course Congress can make every one call it a dollar and receive it under that name, but we have seen in the first lesson that this does not give it real value—that is, purchasing power. If any one is compelled to take it, he simply puts up the price of everything he has to sell in proportion to the depreciation of the paper, so that the result is the same as if the paper passed at a discount.


We must now point out a fallacy by which the supporters of irredeemable paper money often try to get round these considerations. It is said that the greenbacks, or their proposed paper dollars, are to be issued "on the credit of the nation," and therefore must have value in proportion to that credit, even if the nation does not redeem them.


The word "credit" is here used in some peculiar sense (which no one can fully explain) wholly different from its commercial sense. In the world of business, "credit" includes the ability and the obligation to pay all demands in cash as they become due. A man or a firm that cannot do this has no credit, however excellent it may be in other respects. Suppose you should be travelling in a distant city, and, going to the cashier of your hotel for change, he hands you a ten-dollar bill on the banking firm of Spread, Brothers, & Co.


"Are you sure this bill is good?" you inquire.


"Good as gold, sir. The firm of Spread, Brothers, & Co. is the greatest in this State, possessed of unbounded wealth, and its operations extend over the whole globe."


"Then," you reply, "I suppose if I take this bill to their counter, they will pay it?"


"Pay it! Why, no, sir. You would be hooted by the small boys in the street, and laughed at by Spread's clerks. The credit of the firm is so excellent, and all its debts so well secured by real estate and bonds worth millions of dollars, that both the firm and the community concluded, ten or twelve years ago, that there was not the slightest need of their redeeming their bills, and they are never going to do it."


"I don't understand that kind of credit. In my state, credit paper is something which the party issuing is bound to pay when required; and if he does not pay, he has no credit, no matter how rich he is."


"Of course two-penny firms must pay. But we claim that a firm so great, powerful, and wealthy as that of Mr. Spread need not pay."


"Well, sir," you would reply, "I don't see what difference it makes to me how wealthy Spread's firm is, or how well their paper is secured, if I can't get any of their wealth in exchange for my bill. I always thought the advantage of having the paper of a wealthy firm was that it was surer to be paid; but if the richer the firm, the less the need of paying, I would rather have the bill of some smaller house."


"Ah, you know nothing about finance, I see; and I'll get you some foreign money rather than argue further with you."


If a hotel cashier should talk in this way to you, you would be a little puzzled to say whether he was joking or in earnest. And yet great statesmen do argue in just that way about our greenbacks. There are bills to the amount of four hundred millions of dollars afloat, reading, "The United States will pay the bearer —— dollars." Yet if you should take one of these bills to the Government's counter, asking that this promise be redeemed, the clerks would laugh at you. A year or two since some one did this very thing, and the newspapers speculated on the man's sanity, while a Treasury official thought he was only trying to make himself notorious. If a politician tries to justify permanent non-payment, he will talk about the credit and wealth of the nation exactly as the hotel clerk talked about Spread, Brothers, & Co. Now, it will be a very profitable mental exercise if the reader will ask himself what is meant by the promise, "The United States will pay the bearer —— dollars;" and if, also, for each theory of the subject he may form, he will consider how it will look for a banking firm to put that same interpretation on its promises. To give the reader time to think this matter over, I will here close this lesson.

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Why Has the Greenback Any Value?


In the last two lessons I have sought to show the fallacy of the various notions afloat that Government possesses some peculiar power of giving value to coined money or stamped paper. The reader who has informed himself on financial history will be familiar with many illustrations of the unpleasant truth of the views here maintained. In the history of the bills of credit which used to be issued by our colonies, and which have been issued by other governments in difficulties, the story has been told over and over again. But there are also some apparent exceptions—cases in which money, though for a greater or less space of time not redeemable, has not depreciated to nothing. Our greenbacks are a case in point. The reader may say, "On your theory greenbacks are mere pieces of paper, and ought not to be worth more than the paper on which they are printed. How do you explain the fact that they continue worth from eighty-five to ninety cents on the dollar in gold?"


I answer that there are two reasons for the continued value of the greenback. The first is, that everything which circulates as money in a community may have a certain value merely in virtue of its usefulness as currency. Even the value of gold is much greater than it would be but for its usefulness as money. There are certain conditions under which it is theoretically possible for unredeemed bills to be on a par with gold. These conditions, which it is very important to bear in mind, are:

1. That they shall actually pass current, and be received as "bankable funds."
2. That their quantity shall be so small that they are insufficient to form the entire circulating medium, so that some gold has still to be used. The universal experience of all nations and people who have ever tried it is, that as soon as the currency is issued in such quantities as entirely to displace gold, it begins to depreciate—that is, gold is at a premium.


This is the secret of the non-depreciation of the bills of the Bank of France during the last few years, while specie payments were suspended. There were not enough notes in Paris to transact its business, so that gold had constantly to be used in part. Had the American theory of plenty of currency been acted on, there is no knowing what would have been the result.


Now, although our greenbacks have been issued in a greater amount than was necessary for business, as is conclusively proved by their depreciation, yet the amount has been limited by law. It has been still further limited by the fact that the revenues of the Government have exceeded its expenditures, so that a large quantity of the greenbacks have not been in actual circulation. And so long as the total issue of greenbacks is strictly limited to its present amount, there is no danger of their total loss of value.


The second reason for the value of the greenback is, that there has been more or less expectation of its being redeemed sometime within the life of the present generation. Though no one has seen exactly how specie payments were going to be brought about, the general business sentiment of the country has been that we must reach them in some way. The greenbacks have always been counted as part of the public debt, which proceeding implies an obligation to redeem. In order to set at rest all doubt on this matter, Congress, in 1869, passed a law pledging the faith of the nation to the payment of the greenbacks in coin; and, in 1875, it set a date (January 1st, 1879) when this payment should commence.


To these two reasons, and to no others, are we to attribute the fact that our greenbacks have not gone the way of all previous systems of irredeemable paper money. The reader must carefully notice that neither of these reasons is based on the fact that the greenbacks are issued by a great government. The unredeemed paper of France was issued, not by the Government, but by a bank; yet, as we have seen, it was more successful than our Government paper. It is not the party which issues, but its quantity, and the prospect of its redemption, which determine its value. Indeed, bank paper is, under such circumstances, far less liable to depreciation than Government paper, for the reason that, if the public is determined, the bank can always be made to pay up, while the Government cannot. The case is just like your preference for the paper of a small house, which must pay, over that of a firm so rich and powerful that it is above paying.


You see at once that if the policy of the inflationists were permanently inaugurated, both of the reasons for the value of the greenback would be knocked from under it, and it would rapidly go the way of the Continental currency, and every other system of Government paper money that has ever been tried. With no intention to redeem in coin, a note would be a mere piece of paper; and if issued in such quantities as would be demanded, although every one might call them "dollars," their purchasing power would diminish without limit.

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The 3.65-Bond Plan


Some advocates of paper money have a more or less dim perception of the fact that a paper currency, to have real value, must be redeemable in something. At the same time they are conscious that paying out solid gold is a very disagreeable thing to be obliged to do. So they have a most ingenious plan for redeeming the currency in something vastly better than gold, and which will cost the Government nothing but the trouble of printing it. This something is to be Government bonds bearing interest at the rate of 3.65 per cent., both principal and interest being payable in the same paper, to redeem which the bonds are issued.


Now, I must say at the outset that if the principal and interest of these bonds were payable in gold, and if the rate of interest were so high that capitalists would be ready to invest in them—if, say, it were five, or even four and one-half, per cent—there would be nothing absurd in the plan. It would, indeed, be subject to the fatal objection that the currency of the whole country would be liable to suffer from any political crisis which might prevent the payment of interest on the bonds, but even then the currency would be in no worse predicament than it is now.


But when it is proposed that both principal and interest shall be payable in the very currency to redeem which the bonds are issued, it is very hard to approach the subject with due gravity. Look at it a moment. You have your pocketful of greenbacks, each promising to pay you so many dollars. You take them to the Treasury, and ask them to be paid. You receive in return a bond, promising "United States will pay the bearer —— dollars, with interest at 3.65 per cent. per annum." You go for your interest, and you receive greenbacks: "United States will pay the bearer —— dollars." You ask for your principal, and you receive the very same old formula. Nothing are you ever to get but paper stamped, "United States will pay the bearer —— dollars." You can only choose between promises with interest and promises without interest ad infinitum, the interest, you must remember, being also payable in promises.


What real value could such currency and such bonds have? As we have already seen, the value of bonds and notes of every kind is measured by that of the money in which they are to be paid. A bond payable in pounds sterling is worth more than one payable in the same number of dollars, because the pound is worth more than the dollar. A bond payable in gold dollars is worth more than one payable in paper dollars, in the proportion that gold is worth more than paper. The bonds being payable in paper, we cannot tell the value of them until we know the value of the paper in which they are to be paid. But we find that the value of the paper depends entirely on that of the bonds, because the notes are payable in nothing but bonds. You can exchange notes for bonds, and vice versa, as long as you please, but can never measure the value of either except by trying how much bread and meat it will buy in the market.


The principles on which this ingenious system of finance are based need not be confined to money; they can also be applied to navigation, so as to prevent shipwrecks. A ship's anchor frequently fails to hold her in a storm, and she may thus be driven on a lee shore. Scores of vessels are wrecked in this way every year. The new plan of anchoring, which is open to the world, is this: dispense with all such uncertain things as anchors, and send your ships out in pairs. Then, whenever your two ships—the Eagle and the Ocean Wave—are in danger of being blown on a lee shore in a gale of wind, lash the Eagle firmly to the Ocean Wave, so that the wind can't move her an inch. Then, lash the Ocean Wave firmly to the Eagle, so that she cannot move either. Then the two ships will bid defiance to the storm, and their crews will look on calmly as they see those unwise captains who trust in anchors drifting by them. You see the principles involved. The Eagle is the greenback, the Ocean Wave the bond. The greenback is based on the bond, as the Eagle is lashed to the Ocean Wave. The bond is based on the greenback, as the Ocean Wave is lashed to the Eagle. And thus we have in navigation, as in finance, a "subtle principle," which will regulate the movement of finance and of ships "as accurately as the motion of the steam-engine is regulated by its governor."


There is still another point of view from which it is worth while to look at this important question. We have already had occasion to mention the fact, which every one of intelligence knows, that the money of all the world exchanges exactly according to the weight of gold in it, and according to no other standard. The pound sterling, for instance, exchanges for about four dollars and eighty-five cents in gold, not because either Congress or the British Government ever agreed just what the relative value should be, but because there is as much gold in one pound as in four dollars and eighty-five cents. Our gold dollar, again, is worth four German marks, because it contains that many times the quantity of gold. But on the new system of finance we are to ignore the gold basis entirely, and our paper dollar is to have absolutely nothing in common with the gold dollar except the name. Does it seem to you that this paper dollar, which has nothing to do with gold, should be worth twenty-three grains of gold just because in former generations we used to put that much gold in a coin of the same name? You might as well think that if Congress would only stamp a piece of paper "This a loaf of bread," you could eat and digest it. The fact is, there is no more reason why it should buy twenty-three grains of gold in the markets of the world than ten grains or one grain. Its purchasing power might begin with fifteen or twenty grains, but it would be sure to sink from year to year to no one knows where.


Some may say, What difference does it make to me how much gold a dollar will buy? Let those who want gold pay the market-price for it. I answer that we are to consider not merely the quantity of gold which the paper dollar will buy, but the quantity of flour, beef, and shoes. Would you feel perfectly safe in binding yourself to give forty pounds of flour or three hours' work, a year hence, to any one who would agree to give you in exchange a piece of paper stamped "One Dollar" by act of Congress? If you are prudent, you certainly would not.

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