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
A Tabular Standard of Value
At the outset it was observed that money, besides serving as a common denominator of value, and as a medium to facilitate exchange, was usually employed likewise as the standard of value, in terms of which contracts extending over long series of years are expressed. In letting land on long or perpetual leases, in lending money to governments, corporations, and railway companies, it is the general practice to make the interest and capital repayable in legal tender gold money. But there is abundance of evidence to prove that the value of gold has undergone extensive changes. Between 1789 and 1809, it fell in the ratio of 100 to 54, or by 46 per cent., as I have shown in a paper on the Variation of Prices since 1782, read to the London Statistical Society in June, 1865. From 1809 to 1849 it rose again in the extraordinary ratio of 100 to 245, or by 145 per cent., rendering government annuities and all fixed payments, extending over this period, almost two and a half times as valuable as they were in 1809. Since 1849 the value of gold has again fallen to the extent of at least 20 per cent.; and a careful study of the fluctuations of prices, as shown either in the Annual Reviews of Trade of the
Economist newspaper, or in the paper referred to above, shows that fluctuations of from 10 to 25 per cent. occur in every credit cycle.
The question arises whether, having regard to these extreme changes in the values of the precious metals, it is desirable to employ them as the standard of value in long lasting contracts. We are forced to admit that the statesmen of Queen Elizabeth were far-seeing when they passed the Act which obliged the colleges of Oxford, Cambridge, and Eton, to lease their lands for corn rents. The result has been to make those colleges far richer than they would otherwise have been, the rents and endowments expressed in money having sunk to a fraction of their ancient value.
I believe that there is no legal impediment in the way of a landlord leasing his lands at present for a corn rent, or an iron, or coal, or any other rent. All that the law requires is that the contract shall be perfectly definite, and of exactly determinate meaning, so that the kind of commodity intended, and the quantity of that commodity, shall be exactly ascertainable. But the law, in defining legal tender money, provides against misapprehensions concerning money payments, whereas there is no security that mistakes and difficulties will not arise in taking other commodities as the matter of rents. Moreover any single commodity, such as corn or coal, undergoes considerable fluctuations from year to year, and as regards periods of ten or twenty years, might prove not to be so good a standard as silver or gold. Commodities which are comparatively steady in value on the average of long periods may be subject to great temporary variations of supply or demand.
A Multiple Legal Tender.
The question thus arises whether the progress of economical and statistical science might not enable us to devise some better standard of value. We have seen (pp. 136-143) that the so-called double standard system of money spreads the fluctuations of supply and demand of gold and silver over a larger area, and maintains both metals more unchanged in value than they would otherwise be. Can we not conceive a multiple legal tender, which would be still less liable to variation? We estimate the value of one hundred pounds by the quantities of corn, beef, potatoes, coal, timber, iron, tea, coffee, beer, and other principal commodities, which it will purchase from time to time. Might we not invent a legal tender note which should be convertible, not into any one single commodity, but into an aggregate of small quantities of various commodities, the quantity and quality of each being rigorously defined? Thus a hundred pound note, would give the owners a right to demand one quarter of good wheat, one ton of ordinary merchant bar iron, one hundred pounds weight of middling cotton, twenty pounds of sugar, five pounds of tea, and other articles sufficient to make up the value. All these commodities will, of course, fluctuate in their relative values, but if the holder of the note loses upon some, he will in all probability gain upon others, so that on the average his note will remain steady in purchasing power. Indeed, as the articles into which it is convertible are those needed for continual consumption, the purchasing power of the note must remain steady compared with that of gold or silver, which metals are employed only for a few special purposes.
In practice, such a legal tender currency would obviously be most inconvenient, since no one would wish to have a miscellaneous assortment of goods forced into his possession. He who wanted corn, would have to sell to other parties the iron, beef, and other things received along with it; gold, or other metallic money, would doubtless be used as the medium in these exchanges. This scheme would, therefore, resolve itself practically into that which has been long since brought forward under the title of the Tabular Standard of Value.
Lowe’s proposed Table of Reference.
Among valuable books, which have been forgotten, is to be mentioned that by Joseph Lowe on “The Present State of England in regard to Agriculture, Trade, and Finance,” published in 1822. This book contains one of the ablest treatises on the variation of prices, the state of the currency, the poor-law, population, finance, and other public questions, of the time in which it was published, that I have ever met with. In Chapter IX. Lowe treats, in a very enlightened manner, of the fluctuations in the value of money, and proceeds to propound a scheme, probably invented by him, for giving a steady value to money contracts. He proposes that persons should be appointed to collect authentic information concerning the prices at which the staple articles of household consumption were sold. In regard to corn and sugar authoritative returns were then, and have ever since been, published in the
London Gazette, and there seemed to be no difficulty in extending a like system to other articles. Having regard to the comparative quantities of commodities consumed in a household, he would then frame a
table of reference, showing in what degree a money contract must be varied so as to make the purchasing power uniform. In principle the scheme seems to be perfectly sound; but Lowe did not attempt to work out the practical details, and his plan involves needless difficulties.
Poulett Scrope’s Tabular Standard of Value.
A very similar scheme was independently proposed, about eleven years later, by Mr. G. Poulett Scrope, the well-known writer on geology and political economy. In a very able but now forgotten pamphlet, called “An Examination of the Bank Charter Question, with an Inquiry into the Nature of a Just Standard of Value” (London, 1833), Mr. Scrope suggests (p. 26) that a standard might be formed by taking an average of the mass of commodities which, even if not employed as the legal standard, might serve to determine and correct the variations of the legal standard. The scheme was also described in Mr. Scrope’s interesting book on the Principles of Political Economy, published in the same year (p. 406), and in the second edition of the same book, called “Political Economy for Plain People,” issued two years ago, (p. 308). The late Mr. G. R,. Porter, without referring to previous writers, gave the same scheme in 1838, in the first edition of his well-known treatise on “The Progress of the Nation,” (Sections III, and IV. p. 235). He added a table showing the average fluctuations of fifty commodities monthly during the years 1833 to 1837.
Such schemes for a tabular or average standard of value appear to be perfectly sound and highly valuable in a theoretical point of view, and the practical difficulties are not of a serious character. To carry Lowe’s and Scrope’s plans into effect, a permanent government commission would have to be created, and endowed with a kind of judicial power. The officers of the department would collect the current prices of commodities in all the principal markets of the kingdom, and, by a well-defined system of calculations, would compute from these data the average variations in the purchasing power of gold. The decisions of this commission would be published monthly, and payments would be adjusted in accordance with them. Thus, suppose that a debt of one hundred pounds was incurred upon the 1st of July, 1875, and was to be paid back on 1st July, 1878; if the commission had decided in June, 1878, that the value of gold had fallen in the ratio of 106 to 100 in the intervening years, then the creditor would claim an increase of 6 per cent in the nominal amount of the debt.
At first the use of this national tabular standard might be permissive, so that it could be enforced only where the parties to the contract had inserted a clause to that effect in their contract. After the practicability and utility of the plan had become sufficiently demonstrated, it might be made compulsory, in the sense that every money debt of, say, more than three months’ standing, would be varied according to the tabular standard, in the absence of an express provision to the contrary.
Difficulties of the Scheme.
The difficulties in the way of such a scheme are not considerable. It would, no doubt, introduce a certain complexity into the relations of debtors and creditors, and disputes might sometimes arise as to the date of the debt whence the calculation must be made. Such difficulties would not exceed those arising from the payment of interest, which likewise depends on the duration of the debt. The work of the commission, when once established and directed by Act of Parliament, would be little more than that of accountants acting according to fixed rules. Their decisions would be of a perfectly
bonâ fide and reliable character, because, in addition to their average results, they would be required to publish periodically the detailed tables of prices upon which their calculations were founded, and thus many persons could sufficiently verify the data and the calculations. Fraud would be out of the question.
The only real difficulty which I foresee, is that of deciding upon the proper method of deducing the average. According to the method which I should advocate, a considerable number of commodities, say 100, should be chosen with special regard to the independence of their fluctuations one from another, and then the
geometrical average of the ratios in which their gold prices have changed would be calculated logarithmically. This is the method which I employed in my pamphlet on the “Serious Fall in the Value of Gold, etc.” and in the paper on the Variations of Prices since 1782, previously referred to (p. 323). A somewhat similar method had been previously employed by Mr. Newmarch. In the annual Commercial History and Review of the
Economist newspaper, there has, for many years, appeared a table containing the Total Index Number of prices, or the arithmetical sum of the numbers expressing the ratios of the prices of many commodities to the average prices of the same commodities in the years 1845-50. Whatever method were adopted, however, the results would be better than if we continued to accept a single metal for the standard, as we do at present.
The space at my disposal will not allow me to describe adequately the advantages which would arise from the establishment of a national tabular standard of value. Such a standard would add a wholly new degree of stability to social relations, securing the fixed incomes of individuals and public institutions from the depreciation which they have often suffered. Speculation, too, based upon the frequent oscillations of prices, which take place in the present state of commerce, would be to a certain extent discouraged. The calculations of merchants would be less frequently frustrated by causes beyond their own control, and many bankruptcies would be prevented. Periodical collapses of credit would no doubt recur from time to time, but the intensity of the crises would be mitigated, because as prices fell the liabilities of debtors would decrease approximately in the same ratio.