The Natural Law of Money
By William Brough
William Brough was born in 1826 in Kelso, Scotland. In his early childhood, the family moved first to Canada and then to Vermont. He began to study medicine but gave it up for business. He moved to New York in 1849 and then to Pennsylvania, where he was a pioneer in the development of the oil industry. He became the first president of the Oil Producer’s Association, and was involved in some important U.S.-Russian oil ventures. He retired in 1885, devoting his time to the study of social and economic subjects and to the writing of two books on money. A chaired professorship at Williams College is named in his honor.In
The Natural Law of Money, William Brough argues forcefully that privately-supplied money offers benefits not offered by government-supplied money.Brough’s analysis includes a discussion of Gresham’s Law. Gresham’s Law is commonly summarized by the catchy phrase “bad money drives out good.” It is just as commonly misunderstood. To understand Gresham’s Law, just remember this one simple requirement for it to hold: Fixed exchange rates.Historically, coins minted of valuable metals like gold or silver frequently became “bad” when they were clipped or shaved, making them weigh less. Coin-defacers could profit by shaving bits off of good coins and then reselling the metal clippings. Shop-owners, too busy to weigh coins for every transaction, were generally content to accept clipped coins at face value, so long as they could later spend those coins at that same face value. In daily transactions, the clipped coins were identical to the unclipped coins–they traded 1 : 1. Once this cycle got started for a currency, the bad coins quickly replaced the good ones, as coin-defacers snapped up and clipped any good coins in circulation. Thus, a gold coin stamped by the government with the value of one dollar might typically contain increasingly less than a dollar’s worth of gold over its lifetime. Eventually a critical point would occur, as the holders of bad coins became worried that other sellers would no longer accept their degraded coin at face value. Those left holding the bag stood to lose a great deal.In the modern world of fiat paper currency, the exact same effect occurs if a money’s quantity is relatively increased by its issuing Central Bank. Its value declines in principle, but it may temporarily be accepted at its stamped face value by those using it for daily transactions or to purchase other currencies, in the expectation that it will retain or return to that stamped value so it can be spent without loss. If the government further requires that the bad currency be exchangeable with another (good) currency at face value (i.e., at a fixed exchange rate), the bad currency will most certainly replace the good one in circulation. Why not accept a piece of paper worth less than a dollar if you can instantly buy with it another currency worth a full dollar? Why not keep any good pieces of paper under your mattress, and simply spend–recirculate–the bad ones? “Good” currencies are hoarded by the knowledgeable or used in illicit trade (because black market transactions typically involve large quantities of cash, which has to be accumulated and held by someone, risking an interim decline in confidence in its value), leaving the “bad” currencies in daily circulation.Gresham’s Law, so obvious and disturbingly critical to daily life that it was discussed in the streets for centuries, does not seem very relevant today. Why not? Gold coins of verified weight are good currency–why do they not drive paper monies out of existence? Because Gresham’s Law requires fixed exchange rates–exchange rates between the “bad” and “good” money that are fixed either by law, custom, or expectations. When coins are clipped but their stamped values trade 1 : 1 with unclipped coins–a fixed exchange rate–the bad coins soon drive out the good ones. When fiat money values are eroded by the increased supply of one relative to the other, but their relative legal values for transactions are mandated by government restrictions, the inflated currency drives out any available uninflated one. If gold or silver coins are required by law–fiat–to exchange with paper money at a fixed rate, and afterwards the quantity of paper money increases relative to that of the precious metal, the paper money will supplant the coin in daily transactions. Many other historical examples abound. The key factor in every case is fixed exchange rates between the bad and good currencies.But if the currencies’ values are instead determined by the market–that is, if they “float” relative to each other–then the clipped or overly-supplied money simply loses value (“depreciates”). Instead of the bad currency supplanting the good one, both currencies can exist side-by-side in circulation, trading at the market rate of exchange. The market participants have an incentive to keep tabs on the relative supplies or market exchange rates because no one wants to accept at face value money that will be worth much less when it comes time to spend it.Consequently, today, flexible exchange rates, supplied by nations implicitly competing in world money markets and simultaneously allowing their citizens access to those international money markets, enable people to substitute quickly their holdings of their domestic currencies for other currencies if they lose faith. The euro competes daily with the British pound, the U.S. dollar, and the currencies of Asia, Eastern Europe, and any other currency that gains a reputation for retaining its value–all of which helps keep values and monetary policies in line. Having suffered through enough fixed-exchange-rate tribulations and inflationary crises, many nations float their exchange rates and allow citizens to hold and use other currencies, at least to limited extents. Emigration allows further competition in money choices; and improved communication via computers allows instant access to information about international conditions affecting money supplies and demands. Thus, Gresham’s Law does not often rear its head in discussions. But Gresham’s Law still holds when rates of exchange are fixed; and it remains an Achilles’ Heel in discussions of returns to gold standards, unified currencies, or fixed (including managed) exchange rates. In money, as in all goods, market competition helps keep supply and demand in line.Does international competition in currencies effectively substitute for private competition? What conditions optimally determine the areas over which a single currency–the most extreme example of fixed exchange rates–can effectively operate? These questions excite international economists today.William Brough is one of only a few writers from the late 1800s who correctly explained Gresham’s Law, as well as many other matters concerning money supplies and these exciting matters of competitively supplied money. For more works on money supply from the late 1800s-early 1900s, see:Primary resources (historical order):
Lombard Street (first published 1873)
The ABC of Finance (first published 1877)
Laughlin, J. Laurence,
The History of Bimetallism in the United States (first published 1885). Empirical evidence on Gresham’s Law.
The Natural Law of Money (first published 1896)
Mises, Ludwig von,
The Theory of Money and Credit (first published 1912)
“The Application of the Theoretical Apparatus of Supply and Demand to Units of Currency” (first published 1921)
Suggested Secondary Resources (alphabetical by author):
Timberlake, Richard H.,
“The Government’s License to Create Money” (
Cato Journal, The Cato Institute, Fall 1989). Online pdf file with helpful discussions of Brough, plus useful bibliography.
White, Lawrence H.,
“Competing Money Supplies,”The Concise Encyclopedia of Economics. Online at the Library of Economics and Liberty.
White, Lawrence H. and George Selgin,
“Why Private Banks and Not Central Banks Should Issue Currency, Especially in Less Developed Countries” Online at the Library of Economics and Liberty, April 19, 2000.
Editor, Library of Economics and Liberty
August, 2003Special thanks to George Selgin, Associate Professor of Economics at the Terry College of Business, University of Georgia, for biographical information on William Brough.
First Pub. Date
New York: G. P. Putnam's Sons
The text of this edition is in the public domain.
IT may be well to explain at the outset what is meant to be conveyed by the phrase “the natural law of money.” While it is true that money is a product of man’s labor, and that it derives all its usefulness from the actions of men, it was not planned and brought into existence with an intelligent prevision of its nature and workings. It would be more correct to say that it came into use because it possessed inherent properties which fitted it for certain services, and that men appropriated it when they felt the need of the services. This they did individually, without any concert of action, for money was circulating everywhere in the world before men even thought of making laws for its regulation.
When an individual uses money, he is governed in what he does with it purely by his own interests, and he does not concern himself about what becomes of it after it passes out of his possession; thus it circulates indefinitely, impelled always by the motives and interests of individuals acting independently of each other; yet it is found to move and perform its functions with the regularity of a natural law.
The material of which money is composed may be almost any product of man’s labor; it becomes money only when it is used as the common medium of exchange. Before the appearance of money in the world, exchanges of commodities were made in a very crude way. If a man had a dog that he wanted to exchange for a sheep, he could not make the exchange until he found some one who had a sheep and wanted a dog. But in the course of time man discovered that, among the commodities produced by him, there was always some one commodity in more general use and demand than others, and this he seized upon as his medium of exchange,—it became his money. Having done this, he was no longer obliged to wait until he found some one who had the particular commodity he wanted, and who also wanted his commodity; he stood ready to accept the commodity in general demand, because
he could more readily exchange it for the commodity he wanted, and so, by a double turn, could save time and better accomplish his purpose.
This first way of making exchanges has been named barter, and the second, trade.
Here we see how money first came into use in the world. A great variety of articles has been appropriated for use as money at one time or another. We cannot mark the dates in history when these various commodities came to be used, as it was not the age, but the stage of development of the particular country, that created the need for them. We may find in the world to-day among primitive communities the crudest kinds of money that have ever been used. Step by step, and keeping even pace with increasing knowledge, have man’s wants multiplied, and his implements for supplying those wants improved. He did not need money while he was hunting with his dog in the primeval forest, and living upon edibles already in existence; nor did he need it when he began to herd animals and to till the soil. Living in tribal isolation, and having no other bond of sympathy with his fellow-man than kinship, it was not until he was impelled by his necessities to exchange commodities with other tribes that he began to use money.
We can hardly overestimate the importance of money as a civilizing agent in the world; there can be no trade or commerce without it; man must have it, or go back to barbarism. By employing one of his commodities as a medium of exchange, he made a big stride forward; a new era was begun. His small beginnings were the seeds of the industrial progress we see around us. Impelled by want, producer meets producer, each having what the other needs for his own use or for the use of the tribal family; an exchange takes place, which is barter; and this form of traffic goes on increasingly until the need is felt for a medium of exchange; when that medium is found, man has become a trader. He has discovered that there is profit in these exchanges, and he no longer confines his trading to his immediate wants, but trades for profit as well. Every want that he satisfies stimulates into being other wants, and so his trading goes on increasing and extending. He has found in profit a new incentive to industry, a spur to continued exertion. But to succeed in his new occupation he must live in peace; his strength must not be wasted in the petty, but deadly, warfare he has hitherto carried on with neighboring tribes; he endeavors therefore to keep on good terms with them. He
has already begun to add other ties to the bond of blood-relationship,—ties of self-interest, which grow gradually into friendship, into the merging of tribe with tribe, into a large political community, and finally into a nation.
We see from what has been said that man had no preconception of money: he felt the want of something, and the thing was ready to his hand,—a product of his own creating, but made for other uses. He appropriated it to supply the want, and so long as it was employed in that capacity, he called it “money.”
In this brief outlining of the way in which money came into use, some things are to be especially noted and kept in mind. We have seen that money is a product of man’s labor,—a commodity, and that it is not any one specific thing, but may be almost anything, and is money only by reason of its fitness at the time for the service to be performed. In any given community there is a limit to the number of articles produced, and in earlier times this limit was very much narrower than now; but however limited the number of commodities may be, there are always one or two that supply the money-want more efficiently than others. Now, as almost any commodity may be used as money, such a thing as a lack of it
is not possible so long as man continues to be a producer of commodities, although he may by false legislation corrupt his money or throw restrictions around it, and thus lessen its efficiency; all over the world there have been examples of such false legislation whenever governments conceived it to be their function to regulate the value of money.
Money fluctuates in value in sympathy with supply and demand, as all other commodities do. As all values are relative, the only way to decide whether money has risen or fallen is to compare it with other commodities, and if the comparison covers several years, the result will be all the more accurate. If it is found that nearly all the staple commodities can be bought with less money than formerly, we may be sure that money has risen in value; if more is required, then it has fallen.
After adopting a commodity into use as money, man begins to lose sight of its fluctuations in value; these fluctuations appear to him to be altogether in the commodities that he buys; he looks upon money as stationary, and regards it as a fixed standard by which he can measure the value of other commodities. Money is a definite measure, but not a fixed measure, like a yard-stick.
There can be no fixed measure for values. As all values are relative,
it is only by comparing the price of one commodity with that of another that we get any idea of value; hence, to regard money as a fixed, and not as a fluctuating measure, produces the same kind of misconception that one would have of the solar system who regarded the earth as stationary. Until such delusions are dispelled, the one individual can no more understand the law of money than the other can realize the fact of the earth’s orbit.
Since there can be no fixed measure for values, obviously it becomes of essential importance that the commodity selected for use as money should fluctuate as little as possible. The colonists of Virginia used tobacco as money until after the Revolution; there was always a ready sale for it, therefore people took it freely in exchange for other commodities; it was easily exchangeable for money or commodities in foreign as well as in the home markets. Wampum was used as money by the colonists of Massachusetts, not only in trading with the Indians, but for a short time among themselves, though only for limited amounts; it was the money of the Indians, and had no value to the colonist except as he might use it in trading with them, so it soon went out of use. As tobacco had intrinsic value and was readily exchangeable, it continued for a long time to
be used as a medium of exchange; but as it was cumbersome and unsteady in price, it too went out of use. The commodity employed as money does not go out of use until it is superseded by one of superior qualifications for the service. This is the natural law that governs the change from one kind of money to another.
The fact that the Virginia colonist used tobacco as money was no indication of the stage of civilization he had reached; he merely used it to bridge over a period of scarcity of his own money,—which was silver, though gold was also in use in Virginia. His experience proves that if in our own case all our gold and silver were driven from the country, we should not be without money, though our new money would not have the efficiency of the old; we should have taken a step backward; while we would doubtless show great ingenuity in selecting new commodities for use as money, we should be in the position of a nation that had thrown away its improved tools and implements to take up those already cast aside. We might then accept the proposition of the Farmers’ Alliance, and issue certificates against cattle, wheat, and corn, to be used as money. With the introduction of this money would come a new occupation, but an occupation without produc
tiveness. Some of us would be detailed to go out and watch our new money, to see that the grain was not spoiling in the barns, and that pleuro-pneumonia had not got among the cattle. Our government might adopt excellent devices for the protection of this new money, but it could not prevent the sense of insecurity which pertains to a money of defective character. Should we adopt the Farmers’ Alliance plan, it would not be the first time that cattle had done service as money. History records that this was the first form of money used in the world.
Wherever the metals came into use as money, they soon supplanted all perishable and clumsy commodities, being particularly adapted to such use, in which nearly all of them have done service at one time or another. They have great durability, being almost indestructible; they can be divided into convenient-sized pieces for handling and for the pocket, and can be run back into bars, if desired, without loss of value. The final test of coined money is that it shall be worth as much when run into bars as when it is in coin. If it will stand that test, it is world-money,—and all coined money should stand it. Coin in constant circulation loses value by abrasion, but this does not alter the rule; the loss from wear must be made good in return for the service
rendered, or the coin will become discredited money. There is but one exception to the otherwise inflexible rule that coin shall possess full intrinsic value, and that is as to the small coin used for change; this is purposely made light in order to keep it at home. In speaking of coin, or money, this
token-money, will not be again referred to, unless specifically mentioned.
We have seen that wherever metallic money came into use, it displaced all the cruder forms of money. But the line of advance did not end there. One metal displaced another, the incoming one always having greater efficiency than the outgoing one. Copper was the money of Rome in her earlier days, and is the legal money of China to-day. If we could know all the forms of money in the world, we should doubtless find that the baser metals are still in use in some places. The order of progress is that each in turn shall drop out of use as money, and be put to other uses for which it is better fitted. The ever-increasing demand for more things and better things, calls for better implements and more and more intelligent methods of workmanship. The forces that control this movement are beyond our reach, as we shall do well to recognize, and so bring our feeble attempts at monetary legislation
into harmony with them, instead of struggling to overcome them. If silver is now going out of use as money, in the natural way, we must let it go; we cannot stay it, and the attempt to do so can only involve us in trouble. If, when iron was in use as money, man had piled it away in vaults—as we have done with silver—and had kept it out of other uses, is it not plain that his action would have retarded the progress of civilization?
In the development of a money adapted to the wants of man, silver and gold have come to be the money metals of the most advanced nations. The superior efficiency of these metals has been established by ages of use, but their qualifications are different. In the earlier stages of mercantile enterprise, silver sufficed for all the requirements of trade, but it proved inadequate to the demands and exigencies of that larger and more complex trade which we call
commerce. Gold met these requirements more effectively, and it has become the money of commerce. The monetary similarity of silver and gold prevents the rapid displacement of the one metal by the other, while their monetary differences make both the metals useful at the same time in one country; so that we find silver retained in use by nations like England and
Germany, though gold is the monetary standard. Indeed, it is hard to see how any nation could altogether discontinue the use of silver as money.
Gold has always been more valuable than silver, hence less time is required to weigh or to count a given amount in gold, and when money has to be transported from one place to another, the carriage of gold costs less. It is because of such nice differences as these that the changes from one money to another have taken place, man always seizing upon the agency that will most effectually serve his purpose and supply his need. Without gold, it would now be hardly possible to transact the volume of business that is done in the world. To be compelled to use only silver money would be a check upon enterprise and a burden to commerce.
If a nation that had reached the gold stage of industrial development should adopt the single silver standard, it would surely be at a disadvantage in its commercial transactions with gold-standard nations. Silver is not only more cumbersome than gold, but has always been more fluctuating—of late years much more so than formerly. If we should adopt the single silver standard, it would put us on the monetary basis of Mexico and Russia; with these nations we should be at no disadvantage in our commercial
intercourse, but with such nations as England, France and Germany we should be at great disadvantage. In their dealings with us, they would charge us for the risk they incurred in accepting a less stable money than their own; this charge would be added to the cost of goods imported, and deducted from the price of goods exported by us. It would not only increase the cost of our imports and reduce the price of our exports, but it would also reduce the price at home of all those commodities of which we produce a surplus; our entire products of cotton and of wheat, for example, would be measurably lowered in price. Everybody knows that when the price of wheat goes up or down abroad, it correspondingly rises or falls at home, for the price at home is governed by the price that we can get for the surplus that goes abroad. The risk from fluctuations of our silver money would be as constantly present in all commercial transactions with gold-money countries as is the risk of the sea-carriage, and would have to be insured against in the same manner, with the difference only that in the case of the sea-risk the cost is borne equally by the buyer and the seller, whereas in the case of our fluctuating money the cost would fall entirely upon us.
The fundamental requisite of metallic money is that it shall have full intrinsic value. From the beginning of money, through all its forms down to the introduction of paper-money, this rule has governed inflexibly at all times, except when abrogated or interfered with by rulers and law-makers. The term “intrinsic value,” as here used, means that a coin contains its full denominational worth of precious metal; in other words, that its nominal and its actual exchangeable values are the same. If coin contains its full complement of precious metal when issued from the mint, and if its free circulation be not thereafter interfered with, it will have intrinsic value, which, combined with freedom of circulation, will give it stability and elasticity.
stability of coin must rest upon the value of the bullion it contains, as then it will fluctuate only with the fluctuations of the bullion market, which is the highest degree of steadiness it can possibly acquire. It will then gain access to the marts of the world, and this wide range of circuit will enhance its “elasticity,” which term is used to express the readiness with which money responds to the demands upon it. The importance of this quality in money will be
treated in more detail when we come to speak of paper-money.
It is obvious that the larger, broader, and more open the market for any commodity, the more steady will be the price of that commodity. These are marked characteristics of the bullion market; consequently, to give to coin all the elements of efficiency it can possess, it is only necessary to start it into circulation with its full weight and fineness of precious metal, and let it go where it will. Here we have the natural law of
metallic money in all its simplicity; the complexities are of our own making.
The miner of California in 1849 made his purchases with gold dust, weighing it in scales. It was thus, doubtless, that the metals were measured when they first came into use as money. In coining money for the people, our government performs a very important service; the bullion is minted in convenient forms for handling and for expressing value, thus dispensing with scales and saving time; but the service rendered has a still higher significance. The stamp of the government is a sufficient assurance that the coin contains the required amount of the precious metal: if coining were left to individuals, there would arise doubt on that score that would greatly lessen the efficiency of the money.
If money is to be efficient, there must be no uncertainty as to its quality, for the questioning doubt will limit its usefulness. A sense of security gives mobility to money, and the lack of that sense cripples it. No intelligent community was ever deceived by debased money; nor has there ever been a community so ignorant that it would not in course of time discover the deception. Emerson has said that not even a tree is so stupid but that if the earth is taken from its roots, it will find it out.
Following this line of thought, we perceive that it was the questioning doubt that led to the coinage of metals; for, as the operation of assaying is both difficult and tedious, it would become necessary, in order to facilitate exchanges, that the operation should be performed and verified by an unquestioned authority; and this work the people would naturally require their government to do for them. We know that it was the fineness, not the weight, of the metal that was stamped on the first rude coins, the people weighing them for themselves in making their exchanges. The next improvement in coinage was to stamp the weight on the coins, and these pieces were designated by their weight. The Roman “pondo” was a pound of copper, the English “pound” a pound of silver, and the English “penny” a
pennyweight of silver. Money passed from hand to hand by tale; but when a large sum was to be transferred, it was weighed, because that could be done more easily and accurately. The practice of weighing large amounts of coin still prevails.
The next step in coinage was a step backward. The coinage came to be known as “king’s money”; it bore the effigy of the sovereign; and the pieces were more artistically minted; but they were given names that had no reference to their weight or fineness. This irrelevant naming was misleading, and people soon lost sight of money as a commodity, and came to regard the stamp and denomination as its valuable part. The superstitious awe in which kings were then held made it but a short step from the belief that a king’s touch would cure disease, to the belief that his effigy and superscription gave value to the coin. By this last change in coin, which obliterated the meaning of money, the people lost control of their coinage,—that control had passed into the hands of the kings. Let us see what they did with it.
It may be stated as an axiom that, down to modern times, kings have been lavish and wasteful in their expenditures, and that, with few exceptions, they have been governed altogether by cupidity in
their dealings with their subjects; these were kept in a constant conflict with their rulers to retain in rightful possession the product of their toil and labor; the one power that should have protected them in that right, was the power they dreaded most. The long conflict developed into a struggle for political supremacy, and while it went on, the wealth-producing capacity of the people was maintained or diminished in proportion as the contest went in their favor or against them. When resistance to the demand of the ruler ceased altogether, the people sank into poverty and serfdom; when this resistance was successful, the people rose to affluence and political independence. The people of England, after a long monetary struggle with their kings, succeeded in appropriating to themselves exclusive control of the revenues and expenditures of the kingdom; the coining of money continued to be a prerogative of the king, but gradually it came under the direction, and finally under the absolute control, of Parliament.
A common and favorite method adopted by rulers to raise money was to abstract from the coinage a portion of its precious metal, and to substitute therefor a cheaper metal; when resistance was made to receiving such money, its circulation was enforced by mandate. This doubtless seemed to the rulers a ready road to wealth, but nothing could have been
more destructive of the prosperity of their people, or of their own prosperity. A debased coinage seems to have entered into the experience of every civilized nation at some period of its history. Among the Romans, the pondo decreased to a half ounce of copper, in England the pound sterling to less than one-third of a pound of silver, and some coins in Scotland were reduced to less than one-sixtieth of their normal value. That the rulers have been chiefly responsible for this debasement will be seen when we come to consider the Gresham law.
There is an interesting chapter in Macaulay’s
History of England which describes how the clipping and sweating of coin gradually so lowered the standard of money as to bring great distress upon the nation. This was in the time of William III.; the vigorous and intelligent action of Parliament corrected the evil; no less a personage than Sir Isaac Newton was appointed Warden of the Mint, while the famous philosopher John Locke expounded his theory of money.
We have long ceased to regard the king’s person as more sacred than that of a subject; nevertheless, a remnant of that old superstitious belief in the potency of sovereignty found its way to the New World, and is here with us still, to tangle our thoughts and blur our perceptions.