Money and the Mechanism of Exchange
By William Stanley Jevons
In preparing this volume, I have attempted to write a descriptive essay on the past and present monetary systems of the world, the materials employed to make money, the regulations under which the coins are struck and issued, the natural laws which govern their circulation, the several modes in which they may be replaced by the use of paper documents, and finally, the method in which the use of money is immensely economized by the cheque and clearing system now being extended and perfected.This is not a book upon the currency question, as that question is so often discussed in England. I have only a little to say about the Bank Charter Act, and upon that, and other mysteries of the money market, I refer my readers to the admirable essay of Mr. Bagehot on
“Lombard Street,” to which this book may perhaps serve as an introduction. [From the Preface]
First Pub. Date
New York: D. Appleton and Co.
Westminster (authorized) edition.
The text of this edition is in the public domain. Picture of William Stanley Jevons: Photogravure after a photograph of W. Stanley Jevons, taken by Maull & Co., London., courtesy Liberty Fund, Inc.
- Chapter I. Barter
- Chapter II. Exchange
- Chapter III. The Functions of Money
- Chapter IV. Early History of Money
- Chapter V. Qualities of the Material of Money
- Chapter VI. The Metals as Money
- Chapter VII. Coins
- Chapter VIII. The Principles of Circulation
- Chapter IX. Systems of Metallic Money
- Chapter X. The English System of Metallic Currency
- Chapter XI. Fractional Currency
- Chapter XII. The Battle of the Standards
- Chapter XIII. Technical Matters Relating to Coinage
- Chapter XIV. International Money
- Chapter XV. The Mechanism of Exchange
- Chapter XVI. Representative Money
- Chapter XVII. The Nature and Varieties of Promissory Notes
- Chapter XVIII. Methods of Regulating a Paper Currency
- Chapter XIX. Credit Documents
- Chapter XX. Book Credit and the Banking System
- Chapter XXI. The Clearing-House System
- Chapter XXII. The Cheque Bank
- Chapter XXIII. Foreign Bills of Exchange
- Chapter XXIV. The Bank of England and the Money Market
- Chapter XXV. A Tabular Standard of Value
- Chapter XXVI. The Quantity of Money Needed by a Nation
Systems of Metallic Money
We are now in a position to analyse the construction of the various systems of metallic money which have existed, or do exist, or which might be conceived to exist. The systems actually brought into operation are more numerous than is commonly supposed, and I have nowhere met with an adequate classification of them. M. Courcelle-Seneuil, indeed, has satisfactorily described some of the principal systems, and MM. Chevalier, Garnier, and other writers, both continental and English, have given other brief classifications. But we must now take a comprehensive view of the possible ways in which two, three, or more metals may be employed in the construction of a more or less useful monetary system.
There seem to be five distinct modes in which a government may deal with metallic money.
1. It may confine itself to providing a system of weights and measures, and may then allow the precious metals to be passed about from hand to hand, like other commodities, in terms of the national weights and measures, and in the form which individuals find to be most convenient. This we may call the system of
currency by weight.
2. To save the trouble of frequent weighing, and the uncertainty of fineness of the metal, it may coin one or more metals into pieces of certain specified weights and fineness, and may afterwards allow the public to make their contracts and sales in one or other kind of coin, as they deem expedient. This may be described as the system of
unrestrictd currency by tale.
3. To prevent misunderstandings, the government, while emitting various coins, in various metals, may ordain that all contracts expressed in money of the realm shall, in the absence of express provision to the contrary, be taken to mean money of one kind of metal, specially named, while other coin shall be left to circulate at varying market rates compared with this principal kind of coinage. This is
the single legal tender system.
4. The government may emit coins of two or more kinds of metal, and enact that money contracts may be discharged in one or other kind, at certain rates fixed by law. This is the
multiple legal tender system.
5. While maintaining one kind of coin as the principal legal tender, in which all large money contracts must be fulfilled, coins of other kinds of metal may be ordered to be received in limited quantities, as equivalent to the principal coin. For this the name
composite legal tender system may be proposed.
Currency by Weight.
The order in which I have enumerated the principal systems of metallic money, is not only the logical order, but it is the historical order in which the systems have, for the most part, been introduced. There is overwhelming evidence to prove that simple currency by weight is the primitive system. Before the invention of the balance, lumps and grains were no doubt exchanged according to a rude estimation of their bulk or weight; but afterwards the balance became a necessary instrument in all important transactions. In the Old Testament we find several statements clearly implying that the ancient Hebrews used to pass money by weight. In Genesis (xxiii. 16) Abraham is represented as weighing out to Ephron “four hundred shekels of silver, current money with the merchant,” but the silver in question is believed to have consisted of rough lumps or rings not to be considered coin. In the Book of Job (xxviii. 15) we are told that “wisdom cannot be gotten for gold, neither shall silver be weighed for the price thereof.”
Aristotle, in his Politics (Book I., chap. ix), gives an interesting account of his view of the origin of money, and distinctly tells us that the metals were first passed simply by weight or size, and Pliny makes a similar assertion. That it was so, we may infer from the remarkable fact that, even when no use was made of it, the custom of bringing a pair of scales survived as a legal formality in the sale of slaves at Rome.
There can be little doubt that every system of coinage was originally identical with a system of weights, the unit of value being the unit of weight of some selected metal. The English pound sterling was certainly the Saxon pound of standard silver, which was too large to be made into a single coin, but was divided into two hundred and forty silver pennies, each equal to a
pennyweight. In the English and Scotch pounds, and the French
livre, we have the vestiges of a uniform international system of money and weights, the establishment of which is attributed to Charlemagne, but which unfortunately became differentiated and destroyed by the various depreciations of the coinage in one country or another. Most of the other principal units of value were originally units of weight, such as the shekel, the talent, the as, the stater, the libra, the mark, the franc, the lira.
In the Old Testament the notion of money is expressed three times by the Hebrew word kesitah, which is translated in certain old versions into words meaning
lamb. This might seem to be an additional proof of the former use of cattle as a medium of exchange; but I am informed by my learned friend, Professor Theodores, that this translation probably arises from an accidental blunder, and that the original meaning of the word kesitah, was that of “a certain weight,” or “an exact quantity.” The corresponding word in the Arabic, kist, is said to denote a pair of scales.
Currency by weight still exists among considerable portions of the human race. In the Burman empire, for instance, three kinds of metal are current, namely, lead, silver, and gold, and all payments are made by the balance, the unit of weight for silver being the tical. In the Chinese Empire and Cochin China, there is indeed a legal tender currency of
sapeks but gold and silver are usually dealt in by weight, the unit being the tael. A very interesting account of Chinese money, by M. le Comte Rochechouart, will be found in the
Journal des Economistes for 1869 (vol. xv. p. 103). According to this writer, both gold and silver are treated simply as merchandise, and there is not even a recognized stamp, or government guarantee of the fineness of the metal. The traveller must carry these metals with him, as a sufficient quantity of strings of
cash would require a waggon for their conveyance. Yet in exchanging silver or gold he is sure to suffer great losses, both from the falsity of balances and weights, and the uncertain fineness of the metal. In buying a tael of gold the traveller may have to give eighteen taels of silver; but in selling it he will often not obtain more than fourteen taels.
Whatever be the inconveniences of the method, currency by weight is yet the natural and necessary system to which people revert whenever the abrasion of coins, the intermixture of currencies, the fall of a state, or other causes destroy the public confidence in a more highly organized system. Though the silver penny among the Anglo-Saxons was supposed to correspond with a
pennyweight, there was a practice of giving
compensatio ad pensum, which really amounted to taking the coins by weight, to allow for abrasion and inaccurate or false coinage. The
as was at first equal in weight to a Roman pound, but it was rapidly lessened, so that at the epoch of the First Punic War, it did not exceed two ounces, and by the time of the Second Punic War it had sunk to one ounce. The Roman people had naturally reverted to weighing the metal, and the
aes grave was money reckoned by weight instead of by
In the present day currency by weight is far more extensively practised then might be supposed, because, in many parts of the world, the currency consists of a miscellaneous assortment of old gold, silver, and even copper coins, which have been brought thither from other countries, and have been variously worn, clipped, or depreciated. In such countries the only means of avoiding loss and fraud is to weigh each coin, and the impress passes for little more than an indication of the fineness of the metals. In all large international transactions, again, currency by weight is the sole method. The regulations of a state concerning its legal tender have no validity beyond its own frontiers; and as all coins are subject to more or less wear and uncertainty of weight, they are received only for the actual weight of metal they are estimated to contain. The coin of well-conducted foreign mints is bought and sold by weight without melting; but the coin of minor states, which have occasionally depreciated their money, is melted up and treated simply as bullion.
Unrestricted Currency by Tale.
The simplest way for a state to manage its money might seem to be to revert to the primitive notion of a coin, and issue pieces of gold, silver, and copper, certified to be equal to units of weight, leaving all persons free to make contracts or sales in terms of any of these metals. These pieces of certified metal would then be so many commodities thrown into the markets and allowed to take their natural relative values.
Such appears to have been the system intended to be established by the French Revolutionary Government in terms of the abortive law of Thermidor, an III. Discs of ten grams each were to be struck in gold, silver, and copper, and then put in circulation, without any attempt to regulate their currency. If I understand his meaning correctly, M. Garnier has recently brought forward a somewhat similar scheme, proposing to make the gram of gold at nine-tenths the unit of value, and to coin pieces of one, two, five, eight, or ten grams concurrently with standard silver pieces, which are in France already multiples of the gram. M. Chevalier’s proposed system of international money, partially at least, involves the same notion; for he considers that the principal currency should consist of decagrams of gold. But, as Mr. Bagehot has well remarked, there is no object whatever, as regards the greater mass of the population, in having coins simply related to the system of weights, because most people never need take any account of the weight at all. They need only know how many copper coins are equal to one silver coin, and how many silver to one gold coin. Now, if we carry out M. Chevalier’s scheme consistently and fully, and make all the coins multiples of the gram, we shall oblige all people to be constantly working complex arithmetical sums. No one could give exactly correct change without calculating how many silver ten-gram pieces are, at the market price of silver, equal to one gold ten-gram piece. The necessity for calculation occasions needless loss of time and trouble, and a factitious gain is sure to accrue to the expert and unscrupulous at the expense of the poor and ignorant.
Owing to these obvious objections no government has ever, I believe, carried into practice a system of money of the kind described. Nevertheless, currencies approximating to it in nature have come to exist in many parts of the world by the intermixture of coinages of different states. There are many half-civilized nations which have no national coinage, but employ the coins which happen to reach them in the course of trade. On the West Coast of Africa the Spanish dollar is the best known coin, but Danish, French, or Dutch coins also circulate. In several of the South American states the currency is in a state of complete confusion, consisting of a mixture of American eagles, gold doubloons, silver dollars, English sovereigns, piastres, etc., together sometimes with several different issues of coinage of the South American states variously depreciated. Even in British possessions we find the same state of things. In the British West Indian Islands, American, Mexican, Spanish, and other dollars, circulate concurrently with English money; but it should be added that in most cases the Spanish dollar is treated as the standard of value, and other coins are quoted in terms of it.
In Eastern countries there is a similar intermixture of coinage. In Singapore the Indian rupee mingles with Spanish and Mexican dollars. Persia has a rude coinage of its own, so uncertain in weight that it has to be dealt in by the balance, but Russian, Turkish, and Austrian gold coins circulate by tale. Some of the best-regulated nations have allowed, or even promoted, the currency of various foreign coins. In Germany, French and English gold coins used to be accepted, according to a well-recognised tariff. The circulation of English, French, Spanish, Mexican, and other gold coins in the United States was legalized by an Act of June 28th, 1834, repealed by an Act of February 21st, 1857, which however allows certain foreign coins to be received at government offices.
In England we have for many generations enjoyed a very pure currency, so that we are unconscious of the inconveniences arising from a confusion of coins of different values. But in the early part of this century Spanish dollars were put into circulation for a time in England.
In former centuries the mixture of coinages was far more common than at present. No country had a currency free from strange coins. It is impossible to open an old book on commerce without finding long tables of coins which the merchant might expect to meet with; and the business of money-changing was a lucrative and common one.
It will be understood, that only so long as coins are known by the fresh sharp appearance of the impression to be of full weight, and are accepted according to tariff, does the system of currency by tale or number exist. The silver dollar, being a large coin, is subject to comparatively little abrasion, so that people learn to receive dollars of various species at certain well-established rates. Thus the dollar has practically been for several centuries the international money of the tropical countries. But so soon as coins bear evidence of wear or ill-treatment, they must be circulated by weight, and we revert to a more primitive system.
M. Feer-Herzog has described, as the system of
parallel standards, that in which a state issues coin in two or more metals, and then allows them to circulate by tale at ratios varying according to the market values of the metals. He cites, as recent examples, the rixdaler in silver, employed as the internal money of Sweden in combination with the ducat in gold, serving as international money. The government of India, again, has on several occasions tried to introduce a parallel standard of gold alongside of the single silver legal tender now existing there. Gold mohurs have long been more or less in circulation in India, and are supposed to form at present about one-tenth part of the coinage. They are of exactly the same weight and fineness as the silver rupee, and are usually valued at from 15 to 15 2/3 rupees. It seems probable, however, that what M. Feer-Herzog calls the system of parallel standards will coincide according to circumstances, either with that which I have described as the system of unrestricted currency by tale, or that of a single legal tender, with an additional commercial money of varying value. The Indian currency must certainly be classed under the latter head. There cannot in fact be two different parallel standards used both at the same time; and though it is not uncommon for a state to coin moneys in two metals, and leave its subjects to pay in one or other at will, yet one of the two is generally recognized as the standard of value.
Single Legal Tender System.
The system of currency naturally adopted by the first coiners of money was that of a single legal tender. Coins of one kind of metal, or even a single series of coins of uniform weight, were at first thought sufficient. Iron in small bars was the single legal tender in Lacedæmon, and possibly in some other early states.
Aes was undoubtedly the legal tender among the Romans for a length of time. In China the sole measure of value and legal tender to the present day consists of brass
sapeks, strung together in lots of a thousand each. In England silver was the only metal coined from the time of Egbert to that of Edward III., with the doubtful exception of a very few small pieces of gold. Silver was the sole legal tender and measure of value, and few coins except silver pennies were issued. In Russia and Sweden, during part of last century, copper was the sole legal tender.
A single metal currency has the great advantages of simplicity and certainty. Every one knows exactly what he is to pay or receive, and when the coins are of one size or of a few sizes, simply related to each other, like the early English coins, no one is subject to loss by errors of calculation. But there is the obvious disadvantage that, according as the metal chosen is cheap or dear, large or small transactions will be troublesome to effect. To pay a few hundred pounds in Swedish copper plates, or Chinese strings of
cash, a cart would be required for conveyance, and the counting of
cash is almost impracticable. A silver coinage again does not admit of coins sufficiently small for minor transactions. It is difficult to understand how retail trade was carried on when the silver penny weighed 22½ grains, and the precious metals were far more precious than at present. The penny was, indeed, cut up into halfpence and farthings,
i.e. four-things; but even the farthing must have been equal in purchasing power to our threepenny or fourpenny piece. The mass of the currency appears to have consisted of silver pennies.
Accordingly it is found that, if a government issue coins only of a single metal, the people will introduce and circulate coins of other metals for their own convenience. In Anglo-Saxon tines gold byzants from Byzantium were used in England, and the gold coins of Florence, thence called florins, were much esteemed both here and in other parts of Europe. In later centuries, too, in the absence of a legitimate copper coinage, tradesmen’s tokens came into general circulation.
Multiple Legal Tender System.
Out of a single legal tender naturally grow up systems of a double or even a multiple legal tender. The Plantagenet kings of England, for instance, finding that though they coined only silver the people made use of gold, eventually began to issue gold coins, and fixed the rates at which they should be exchanged for silver coins. In the absence of any special regulations to the contrary this constituted a double tender system. As, after a time, the ratio of values of the metals would fail to coincide with that involved in the relative weights of the coins, it became requisite to fix by royal proclamation a new value for one metal in terms of the other. From 1257 to 1664 the gold and silver currency of England was thus regulated, no coins of copper or any inferior metal being then issued. From 1664 to 1717 no proclamations were made upon the subject, and the value of the guinea was allowed to vary in terms of the shilling. At one time it rose nearly to 30
s., owing partly to the decreased value of silver, but chiefly to the clipped and worn state of the silver money. During this interval, then, the country had a single silver standard.
In the early part of the last century a great deal of discussion took place upon the unsatisfactory state of the silver currency, and Sir Isaac Newton, the Master of the Mint, was requested to report upon the best measures to be adopted. In 1717 he made a celebrated report, recommending that the government should revert to the practice of fixing the price of the guinea, and he suggested 21
s. as the best rate. His advice being accepted, the guinea has ever since been valued at 21
s. Then there was again a double standard in England, any one being at liberty to pay in either kind of coin. In practice, however, it is almost impossible that the commercial value of the metals should coincide with the legal ratio. At the rate adopted by Sir Isaac Newton, gold was overvalued by rather more than 1½ per cent.; to that extent it was more valuable as currency than as metal. Therefore, in accordance with the Law of Gresham, and the principles laid down in Chapter VIII., the full weight silver coin was withdrawn or exported, and gold became the practical measure of value, which it has ever since continued to be.
In every other part of the world, where attempts have been made to combine two metals as concurrent standards of value, similar results have followed. In Massachusetts, in 1762, gold was made a legal tender, as well as silver, at the rate of 2½
d. per grain; but, being overvalued as much as 5 per cent., the silver coinage rapidly disappeared from circulation. Various laws were passed to remedy this inconvenient state of things, but without success so long as this valuation of gold was maintained.
In these and many other cases which might be quoted, a government had attempted to combine a circulation of gold with that of silver, without being aware of all the principles involved in the experiment. It was hardly, perhaps, till the time of the French Revolution that the double standard system was consciously selected as the best method. Since the celebrated law, known as “La loi du 7 Germinal, an XI.,” was adopted by the Revolutionary Government, the system has become identified with the policy of the French economists. The history of the origin of this law was almost unknown, until M. Wolowski described it in a series of valuable articles published in the
Journal des Economistes for 1869.
As early as 1790 Mirabeau presented to the National Assembly a celebrated memoir on monetary doctrines, in which, amid a curious mixture of true and false views, he decided in favour of silver as the principal money, on the ground of the greater abundance of silver compared with gold. He proposed to make silver the
constitutional money, that is, the legal tender, and to employ gold and copper as
additional signs of value. These ideas were only so far carried out that the franc was defined first as ten grams of silver by the decree of the 1st August, 1793, and was afterwards definitively fixed at five grams by the law of the 28th Thermidor, an III. The old gold pieces of twenty-four and forty-eight livres continued to circulate, while the ten-gram gold pieces ordered by the decree to be struck were not really issued.
In the year IX. Gaudin proposed that the ratio of 15½ to 1 should be adopted in fixing the weight of the gold coins relatively to the silver ones. Thus, while the franc was defined as consisting of five grams of silver nine-tenths fine, the twenty-franc gold piece was to contain 6.451 grams of gold of equal fineness. He seems to have thought that this ratio was sufficiently near to that of the markets to allow the coins to circulate side by side for a long time, and in case of a change, he thought that the gold pieces could be melted and reissued at a different weight. After a great amount of discussion, in which Berenger, Lebreton, Daru, and Bose took the most prominent part, the proposals of Gaudin were carried out, but not precisely on the ground indicated by him. It appears to have been thought unwise either to demonetize gold altogether, which would have seriously diminished the circulating medium, or to leave the value of the gold coins uncertain, which would give rise to disputes.
The ratio adopted by the legislators of the Revolution happened to overvalue silver in some degree, and hence the currency of France came to consist principally of the heavy five-franc pieces, or écus. Not until the Californian and Australian discoveries caused gold to be the cheaper money in which to make payments, did this heavy silver money gradually disappear. The action of the double standard system will be further considered in Chapter XII.
Composite Legal Tender.
We have seen that with a single metal currency there is inconvenience in making small or large payments, according as the metal chosen is dear or cheap. If two or more series of full-weight coins be issued in different metals, and allowed to vary in relation to each other, the difficulty of calculation intervenes. If they both be made legal tenders at a fixed ratio, the currency will tend to become composed alternately of one or the other metal, and money-changers will make a profit out of the conversion.
There yet remains another possible system, in which coins of one metal are adopted as the standard of value and principal legal tender, and subordinate token coins of other metals are furnished for the purpose of subdivision, being recognized as legal tender only for small amounts. The values of these token coins now depend upon that of the standard coins for which they are legally exchangeable, and care is taken to make their weights such that the metallic value will always be less than the legal value. No profit can ever be made by melting such coins, or removing them from the country, and their ratio of exchange with the principal coins is always a simple ratio fixed by law.
The composite legal tender rises naturally out of the double standard system; for, as we have seen, if, under the latter system, gold be overvalued at the legal rate, all full-weight silver coins will be withdrawn and exported by degrees, so that there will remain practically a token currency of light silver. Lord Liverpool, having in his thorough investigation of the subject of metallic money observed the superior convenience of the composite legal tender to the double legal tender, advocated its adoption in England in the most conclusive manner. His arguments will be found in his admirable “Treatise on the Coins of the Realm in a Letter to the King” (Oxford, 1805), and his recommendations, as carried into effect in 1816, are the foundation of our present monetary system.
A composite system of currency has frequently existed in one country or another without being specially designed or recognized. It comes into existence whenever coins of gold and silver are current at rates fixed by law or custom, but the silver coins are reduced by abrasion or clipping below the corresponding weight. From the year 1717, when the guinea was fixed at 21
s., until the present system was instituted in 1816, the English currency was based theoretically upon the double standard system. Practically, however, the silver coins were so scarce and worn that they served but as tokens. The tradesmen’s copper tokens, too, being always of light weight, and exchangeable by custom for a certain proportion of silver coins, formed the third term in the series. But Lord Liverpool appears to have been the first to apprehend and explain the principles on which such a composite system worked, and there can be no doubt that the system, as he expounded it, is the best adapted for supplying a convenient and economical currency.
Most of the leading nations have now adopted the composite legal tender in a more or less complete form. France, Belgium, Switzerland, and Italy still adhere to the double standard in theory, but have reduced all coins of less value than five francs to the footing of token money, by reducing the fineness of the silver from 900 parts to 835 parts in 1000, or by 7¼ per cent., and by limiting the amount for which they are legal tender. The copper money of France had previously been restricted as a legal tender to sums below five francs in any one payment. In the United States, when metallic currency was generally employed, the double standard system existed in theory, but was reduced to a composite standard by the excessive overvaluing of the gold money. Moreover, by a law of 21st February, 1853, the smaller silver coins were reduced in weight, and made legal tender only for sums not exceeding five dollars. The silver three-cent pieces, and the several copper, bronze, or nickel coins, issued from the United States’ mints, were also token money with various limits as regard legal tender.
The new German monetary system is perfectly organized as a composite legal tender.