The Natural Law of Money
WE have seen that the improvement in money as a medium of exchange began with the substitution of one commodity for another, because the incoming commodity was better adapted for the service required than the outgoing, and we have seen that silver and gold, having gradually established their superiority over all other commodities, became the only money of the civilized world. Since the adoption of these two metals, the improvement of money through displacement has proceeded very slowly. Silver being more plentiful than gold, and better adapted to the limited trade of early times, was the predominant money for many ages; but as trade developed into commerce, gold came more and more into use, and is now the chief money of all the more advanced commercial nations, while silver continues to be the chief money of nations second in advancement. This condition is in strict accord with the general march of development.
In the larger and more complex transactions of modern traffic, gold has two qualifications that render it superior to silver; these are, that very much less of gold than silver, in bulk and weight, is required to perform a given service, and that gold has more stability than silver and is therefore a more trustworthy measure of values.
Thus far, it may be noted that all the improvement in metallic money coming through natural displacement, seems to culminate in the supremacy of gold; but while this inference is probably correct, it is certain that improvement of money generally will not cease so long as trade and commerce continue. He deceives himself who believes that such constant improvement as we see around us, in all the implements and appliances of every department of industry, could be possible if the one instrumentality upon which all such advancement depends, and without which it would stop, had remained stationary. We may rest assured that money has continually improved in efficiency, except in places and at times when the industrial organism of society was disordered by warfare, or when arbitrary rulers interfered with the natural order of progression. This view is supported by the testimony of history.
While the question as to the superior serviceableness of silver or of gold was still unsettled, forces of a more subtle character than those that had produced displacement, came into play to augment indefinitely the monetary efficiency of these metals; these, in brief, were intelligence and integrity. It may not be obvious at first sight that a people's sense of what constitutes fair-dealing has anything to do with the amount of metallic money needed by them to conduct their business, but we shall see as we extend our inquiry that as man rises in the moral scale he requires relatively less and less of the money-metals. Nothing more truly shows the degree of civilization attained by a people than their estimate of what constitutes right and wrong; it is upon this sense that credit must rest, and it is to credit that we must look for the further growth and efficiency of money.
Let us now see how this new element of credit became not only an indispensable quality of money, but the only quality by which its efficiency could be enhanced when improvement by natural displacement ceased. Take, for example, a community arrived at the silver and gold stage of monetary advancement, but still hoarding all its idle money or hiding it in the ground for safe-keeping. This money would be used only by the owners of it, and as every transaction in trade would require a sum equal in value to the commodity exchanged, the volume of money employed, as compared with the volume of transactions, would be at its maximum. From this stage, improvement would progress when the owners of idle money lent it to those who would put it to use. This would be the beginning of credit, and the consideration paid by the borrower would be the beginning of interest. Thus, by the introduction of credit—by lending instead of hoarding—the same money would be made to repeat its service indefinitely; the presence of the precious metals would still be required in every transaction, but by turning the money oftener, the volume of money employed, as compared with the volume of transactions, would be lessened, and the cost of maintaining the medium of exchange would thereby be cheapened. To continue to hoard money and to supply the demands of growing trade by increasing the stock of precious metals, would not be monetary advancement; the burdens of trade would not be lightened in the least, and there would come a time when this slow and labored growth would be arrested by the mere physical inability of the people to handle the metals.
At this stage of development, it is only by the cultivation of intelligence and integrity that any monetary advance can be made; in trading with one another, men are impelled, by the incentive of profit, to exercise these higher qualities of their natures. Through trade they are brought into closer relationship, and the distrust that led them to hoard their money, is gradually changed into confidence by the amenities of commercial intercourse. With the lending and borrowing of money fairly established, there would soon arise the need of a middle-man to promote and facilitate these transactions; and the need would develop the banker. A competent, responsible, trustworthy person, having the confidence of the community, would find his services in demand; he would become the depositary of lendable money; practically, he would himself become the borrower from those who wished to lend, and the lender to those who wished to borrow. His profit would be derived from charging a higher rate of interest than he paid; when metallic money was deposited with him, he would give his receipt for it, and as he possessed the public confidence, his receipt would pass from hand to hand, performing the function of money with greater ease than could the metal itself. Here we have a second refinement of money through the agency of credit—the banker's receipt, as the beginning of paper-money.
It will be seen, and should be noted here, that the banker is himself an essential factor in the refinement of money through the agency of credit; to illustrate his importance in this respect, we will trace this development one step further before proceeding to consider paper-money. We may suppose that, through the stimulus to interchange developed by more efficient money, the trade of the community has so far increased as to require the services of several bankers to transact the business; and that when metallic money, receipted for by one banker, is lent by him, the borrower deposits it with another banker, who also gives his receipt for it, thus furnishing two receipts which circulate as, and perform the function of, money, though representing one and the same metallic base. Here we have a third refinement in the growth of money through the agency of credit.
In thus tracing the growth of money from improvement by natural displacement to improvement by credit, it has been with a view to greater brevity and a clearer outlining of principles that we have illustrated the process by a concrete example; but the delineation is drawn from actual history. Credit, as a factor in monetary improvement, opened a new era of industrial growth, which may be classified as only second in importance to the adoption of a medium of exchange.
History records that the goldsmiths of London were the first bankers and the first issuers of paper-money in that city.
The superiority of paper-money over metallic money consists: first, in its cheapness; second, in the readiness with which its volume may be expanded or contracted; and third, in the ease with which it may be handled and transferred. Beyond these three important qualifications, it has no monetary function that is not derived from the commodity in which it is redeemable. It may be issued against any property that has the qualifications to serve as a medium of exchange, but if the thing selected is deficient in any of the essential qualifications of money, the paper-money will be similarly deficient. For example, paper-money cannot be issued against land, for land itself has no adaptability for use as money. Mortgages on real estate, government, state, or railroad bonds, cannot perform the service of money, and therefore are unfitted to be a basis for paper-money.
As paper-money is but a "promise to pay on demand," the thing in which it is payable must itself have all the essential qualifications of money, and these qualifications, as we have seen, are possessed in the highest degree by silver and gold. It is these metals that perform all the essential duties of money; but by the introduction of paper, simply as their representative, the volume of money is increased and its efficiency enhanced.
To have a paper-money of high efficiency, two conditions are essential: it must rest upon its only true basis—the precious metals, and it must be bank, and not government, paper-money.
We saw that when our banker lent a portion of his metallic money, against which notes had been issued, it went to another banker, who also issued notes against it; but the fact must now be noted that when our banker lent the money, he received from the borrower an equivalent in value as security for its safe return; consequently, although these notes exceeded in amount the metallic money against which they were issued, the security held fully insured their redemption. In the regular order of banking this is what always takes place; no paper-money issued by a bank ever finds its way into circulation until there is an equivalent in value deposited somewhere to secure its redemption.
The banker who issues paper-money is its natural guardian; it is he who, impelled by the incentive of profit, assumes all the responsibility of its prompt redemption when presented for payment; his property and his integrity are pledged to its redemption; why then should the state interpose to relieve him from the responsibility of his own act? Such interference can have no other effect than to lower the standard of banking integrity. The banker is the one man especially competent to judge of the character of the security that shall protect his notes while in circulation, and his interest lies in protecting them.
Bond-security as a basis for bank-notes is another example of false theory in our monetary legislation; but the public mind has unfortunately become charged with the belief that such security is essential to a sound circulating medium, though no phase of the theory can be presented that will stand intelligent scrutiny. A bank is a dealer in money only; if it should permit all its money to go into long-time securities, its banking capabilities would be exhausted; if it is obliged to invest a portion of its capital in this way to secure its note-issue, its ability to serve its customers is crippled to that extent.
One important function of a bank is to gather up the idle money of its neighborhood and to keep it in active employment, and this is a bank's main source of profit. Exclusive of savings-banks deposits, the amount of money thus gathered and kept actively at work in the United States is almost three times as great as the total sum of the capital invested in the banking business. This money is generally subject to immediate call; a bank must be ready to pay the checks of its depositors whenever they are presented. It finds, however, that on the principle of general averages, it can lend the greater part of the money, and still meet all demands upon it; but in order to do so, it can lend on short time only, and it must have the right, if a loan be not paid when it becomes due, to sell the pledged securities of the defaulting debtor at his risk. These conditions may seem hard, but they are not of the banker's making—they are inherent in the business; a banker is of all men the least of a monopolist; he is much more the servant of his customers than their master. Indeed, banking is in a special sense a public business; a bank may be owned by only a few individuals, but the community where it is located has the larger interest in it, and the larger power over it as well. Most occupations may be conducted independently of each other, but this one is linked to all of them, and its prosperity is dependent upon their prosperity; it is bound to them by ties of mutual interest.
When improvement in money through displacement ceased to meet the requirements of trade, the banker and his paper-money became a necessity; the distrust which called for metallic money in every transaction had to give place to confidence, or trade could grow no faster than the volume of the precious metals increased. It is the confidence reposed in the banker that has created and that sustains his occupation; for a bank cannot exist in an atmosphere of distrust. Through credit the banker gathers up idle money and keeps it employed; through credit he issues his paper-money, which enables him to expand and contract the volume of money to meet the actual requirements of trade, and while profit is his prime incentive, his interest is also entirely in accord with legitimate trade and industry. It is to his intelligence and integrity that the world is indebted for the enhanced efficiency of money beyond the mere subdivision of the precious metals. But as the chief function of the banker in the industrial world is to facilitate exchanges, he does not fail to use such methods as tend to accomplish this with the greatest safety, in the shortest time, and with the least labor. Beginning with paper-money, he next introduces checks, every one of which effects an exchange more safely and speedily than any kind of money can; more recently he has originated the clearing-house, which is another step in the same direction.
In the city of New York the daily transactions in trade are numbered by the millions, and ninety-four banks are required to make the exchanges. At the clearing-house on every business day these banks are represented by their accountants, and ninety-five per cent. of the business transactions of the previous day are settled, entirely by the exchange of checks and balancing of accounts, no other medium being used; this clearing is accomplished in about an hour's time, the volume of business thus settled each day averaging one hundred and twelve million dollars.*2 The remaining five per cent. is settled with money, but it is mainly paper-money, coin being called for only when it is actually needed.
In estimating the growth of money in the world, it is impossible to ignore the services of the banker, for it is through his instrumentality that metallic money has been made to meet every legitimate demand upon it; the industrial progress of the English speaking people for the past two hundred years has been largely dependent upon the banker's methods of monetary refinement. The mere recital of these methods should be sufficient to satisfy us that unless the banker is unduly restricted by legislative enactments, industry can never again languish for want of the means to effect exchanges. It may safely be said that the volume of business transactions throughout the world, now settled economically, securely, and speedily, through the agency of paper-money, checks, bills of exchange, banks, and clearing-houses, infinitely exceeds any volume that could be settled with metallic money alone, even if the earth were emptied of its precious metals and every ounce of them converted into coin. It would simply be a physical impossibility to transact this enormous business with the metals alone.
That the existing monetary methods adopted by the banker are the result of natural development is so obvious that the only wonder is that any intelligent person can be found to question it. Every step of this development lessens the volume of precious metals needed to transact a given amount of business; yet we must not infer from this that they can be dispensed with altogether; indeed, the need of them seems to be increased by the magnitude of the work they are made to perform. They are the standard of measurement in every transaction as much now as when they were the only money in use, and the mechanism whereby their usefulness has been so greatly enhanced revolves wholly upon the degree of certainty with which they can be had when actually needed and called for; it is thus that, by the logic of events, monetary growth has come to be dependent upon individual honesty. As metallic money is but a medium of exchange, every instrumentality whereby its work is accomplished becomes money in the larger sense, and as all these instrumentalities are bound by the inexorable law of equity, the only terms upon which industrial progress can be made, are exact dealing and strict adherence to the word of promise. Paper-money, the bank, the check, the bill of exchange, the clearing-house, all owe their existence to the observance of the principle of reciprocal justice between man and man; this whole fabric of credit, which has already produced such wonderful results, began with the individual, is of individual growth, and still clings to the personality of the individual.
It was the fundamental idea of the fathers in framing our Constitution that the people should retain, as far as possible and consistent with political unity, the management of their affairs; that no power should be delegated to the county that could as well be exercised by the town; that no power should be delegated to the State that could as well be exercised by the county; and in like manner, that no power should be delegated to the federal government that could as well be exercised by the State. To make an application of this principle to the subject in hand—banking,—it may be stated that no power which can be exercised by a community should be delegated to the general government, and that banking is especially of such quality. All our monetary enactments since the issue of greenbacks, in 1862, have been in conflict with this principle. The Legal-Tender Act, the act taxing State-bank notes out of existence, the act closing the mints to free coinage of silver, and the act by which silver was mechanically injected into the currency, are all calculated to contract and obstruct the only avenue of monetary growth that is open to the people, and tend therefore to bring them into helpless subjection to the government at Washington. And these enactments are equally in conflict with the natural law of money, which is in perfect accord with, and promotive of, popular government.
It has already been said that government paper-money is not adaptable to the industrial needs of our country. In order to indicate with more exactness why this is so, and to show the superiority of a bank-note currency, it will be necessary for us to clearly demonstrate the importance of elasticity as a property of money. The volume of trade fluctuates widely, and even under normal conditions has seasons of activity and of dulness; money should therefore be adaptable to these fluctuations. By the term "elasticity," when applied to money, is meant its responsiveness to trade demands; it is said to have more or less elasticity in proportion to the ease and readiness with which its volume may be increased or diminished at a given point. Now, as the volume of metallic money cannot be readily expanded or contracted, its elasticity depends mainly upon the ease with which it may be moved from places where it is not needed to places where it is needed. On the other hand, paper-money—by which is meant bank-notes issued under a free system of banking—may be increased or diminished in volume at every point whence it is issued; consequently its elasticity is not so dependent on freedom of circulation as that of metallic money is.
As will presently be shown, our government paper-money does not possess these elastic qualities, and as a natural consequence, the supply of money at all points of industrial production away from the commercial centres has been so uncertain as to produce a widespread unrest among our people. They realize fully the restrictions imposed upon their productive powers by this defective money, but they do not seem to understand that a government paper-money cannot be made adaptable to their local wants.
Bank-notes being credit-money, their circulation is necessarily limited to localities where they are known to be good, and if they wander beyond this range, they are sent home, even if their expenses have to be paid; whereas, coin of full intrinsic value is returned only when there is a profit in returning it; hence, paper-money is inherently local in character. All paper-money needs supervision; it cannot be turned out-of-doors, as metallic money may be, without acquiring vagrant habits; metallic money is self-constituted and self-sustaining; it has established its status in every land; but paper-money is as yet dependent and in a state of tutelage; what its capabilities may become in the future, it is not now within our province to inquire; as it has already out stripped all other money as a factor in wealth production, the important questions for us are: From what source does it derive its wonderful efficiency, and what are the terms upon which it will render its best service? In answering these questions, we shall find that the fact of its being local money is the basic reason for its efficiency, and that its terms for most effective service are that it shall work under the supervision of its issuer, whose interest is to keep it in productive employment.
Government paper-money, in the wide range of its circuit, acquires something of a nomadic character; it has no local attachments or home-ties; nobody indeed has any interest in it but its immediate possessor, and his interest ceases with the spending of it: bank-notes, on the other hand, will return frequently to their issuer to remind him of his obligations, and to keep alive the reality of their convertibility. When money is spent, the spender's interest in it ceases; but when it is lent, the lender's interest in it increases. Government money, when issued, is always spent money, no Treasury official having the least interest in it after it leaves his hands; whereas, money issued by a bank is invariably lent money, the banker's interest following it and keeping watch over the uses to which it is put.
The issuance of paper-money is properly a function of banking; the political mechanism of our government is not adaptable to banking, as the Treasury can pay out and take in money only through its regularly authorized expenditures and collections; it is powerless to adjust the volume of its money to the fluctuations of trade, hence we say government paper-money is deficient in elasticity; and the fact of its having a national circulation is another disqualification, so far as the industrial needs of the nation are concerned. In this vast country, government bills have but one point of issue, and that not an industrial, commercial, or financial one; they are sent off on their wanderings as spent money, and are soon caught up by the general drift that carries all such money into speculative dealings at the great financial centres. Nor could this money be made to serve industrial production with the efficiency of local bank-notes, even if a sub-Treasury with power of issue and redemption were planted in every town in the Union, because there would still be lacking that one supreme underlying motive power which turns all the wheels of industry—the incentive of profit.
Wherever paper-money has had a free individual growth, it will be found adapted to the occupations of those employing it: the banker's bill of exchange is the paper-money of international commerce, and the volume of transactions annually settled with this medium cannot be less than sixteen thousand million dollars; yet these monetary transactions proceed so quietly as to attract little attention beyond the circles immediately concerned in them. The bill of exchange is a free growth of individual credit; as its range of circuit is outside of national boundary lines, it has escaped the politician's meddling.
Nothing has done so much to obstruct the growth and improvement of paper-money in general, and to prejudice people against its use, as the making it a legal tender; this legislation was the means in colonial times of engendering for paper-money a distrust that still survives among the better educated people, while the common people are comparatively free from it. We may even now find among economic writers the opinion that the issuance of paper is wrong, notwithstanding the fact that they do not, and cannot, point out any possible means by which we can get along without it.
To explain this prejudice we must let the light of the colonists' experience with paper-money fall upon the facts of to-day. We shall see that the shadow of the king's mandate rested upon the colonies during the whole period from the first issue of paper-money by the General Court of Massachusetts in 1690, down to the day, in 1780, when, in sympathy with an aroused public sense of justice, the Continental Congress by resolution begged the States to repeal their legal-tender enactments, and to make an equitable settlement with the holders of Continental bills. In view of what was and what might have been, the story of the struggles of the people of the colonies with paper-money, looked at from an economic standpoint, becomes pathetic. There was not, from first to last, any proper conception of the real nature of paper-money: that to give it stability, it must be redeemable in coin on demand—that it is a growth of individual credit—that it must have a local habitation and personal supervision—had not yet entered the minds of the most advanced monetary students; the people lived out their lives, generation after generation, in mental slavery to the idea that it was the duty of the state to supply their medium of exchange.
We need not recite the many fruitless attempts of the colonists to produce an efficient paper-money; the story forms an interesting and instructive chapter in the history of our country. Nothing is plainer to the thoughtful reader who is looking for causes, than the fact that metallic money in the colonies became inadequate to the demands of their growing trade, and that this inadequacy created a condition which threw the balance of advantage into the scale of the money holder. The time had indeed come for the people to use credit-money, but they did not understand its governing principles; they did not realize that the stability and efficiency of this kind of money are dependent upon public confidence, and that public confidence is simply an aggregation of the individual confidence; that individual confidence is a thing of spontaneous growth which can never be brought into being at sovereign command. The colonists looked to the state as the only power that could supply their medium of exchange, and had not the least idea that it was to themselves they should look—that the state could do nothing to aid them beyond preventing fraud and certifying fact.
Notes for this chapter
These figures give the average daily clearings for the year 1892.
End of Notes
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