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
Qualities of the Material of Money
Many recent writers, such as Huskisson, MacCulloch, James Mill, Garnier, Chevalier, and Walras, have satisfactorily described the qualities which should be possessed by the material of money. Earlier writers seem, however, to have understood the subject almost as well. Harris explained these qualities with remarkable clearness in his “Essay upon Money and Coins,” published in 1757, a work which appeared before the “Wealth of Nations,” yet gave an exposition of the principles of money which can hardly be improved at the present day. Eighty years before, however, Rice Vaughan, in his excellent little “Treatise of Money,” had written a brief but satisfactory statement of the qualities requisite in money. We even find that William Stafford, the author of that remarkable dialogue of the Elizabethan age (1581), called “A Brief Conceipte of English Policy,” showed perfect insight into the subject. Of all writers, M. Chevalier, however, probably gives the most accurate and full account of the properties which money should possess, and I shall in many points follow his views.
The prevailing defect in the treatment of the subject is the failure to observe that money requires different properties as regards different functions. To decide upon the best material for money is thus a problem of great complexity, because we must take into account at once the relative importance of the several functions of money, the degree in which money is employed for each function, and the importance of each of the physical qualities of the substance with respect to each function. In a simple state of industry money is chiefly required to pass about between buyers and sellers. It should, then, be conveniently portable, divisible into pieces of various size, so that any sum may readily be made up, and easily distinguishable by its appearance, or by the design impressed upon it. When money, however, comes to serve, as it will at some future time, almost exclusively as a measure and standard of value, the system of exchange, being one of perfected barter, such properties become a matter of comparative indifference, and stability of value, joined perhaps to portability, is the most important quality. Before venturing, however, to discuss such complex questions, we must proceed to a preliminary discussion of the properties in question, which may thus perhaps be enumerated in the order of their importance:—
1. Utility and value. 5. Divisibility. 2. Portability. 6. Stability of value. 3. Indestructibility. 7. Cognizability. 4. Homogeneity.
1. Utility and Value.
Since money has to be exchanged for valuable goods, it should itself possess value, and it must therefore have utility as the basis of value. Money, when once in full currency, is only received in order to be passed on, so that if all people could be induced to take worthless bits of material at a fixed rate of valuation, it might seem that money does not really require to have substantial value. Something like this does frequently happen in the history of currencies, and apparently valueless shells, bits of leather, or scraps of paper, are actually received in exchange for costly commodities. This strange phenomenon is, however, in most cases capable of easy explanation, and if we were acquainted with the history of every kind of money the like explanation would no doubt be possible in other cases. The essential point is that people should be induced to receive money, and pass it on freely at steady ratios of exchange for other objects; but there must always be some sufficient reason first inducing people to accept the money. The force of habit, convention, or legal enactment may do much to maintain money in circulation when once it is afloat, but it is doubtful whether the most powerful government could oblige its subjects to accept and circulate as money a worthless substance which they had no other motive for receiving.
Certainly, in the early stages of society, the use of money was not based on legal regulations, so that the utility of the substance for other purposes must have been the prior condition of its employment as money. Thus the singular
peag currency, or
wampumpeag, which was found in circulation among the North American Indians by the early explorers, was esteemed for the purpose of adornment, as already mentioned, (p. 24). The cowry shells, so widely used as a small currency in the East, are valued for ornamental purposes on the West Coast of Africa, and were in all probability employed as ornaments before they were employed as money. All the other articles mentioned in Chapter IV., such as oxen, corn, skins, tobacco, salt, cacao nuts, etc., which have performed the functions of money in one place or other, possessed independent utility and value. If there are any apparent exceptions at all to this rule, they would doubtless admit of explanation by fuller knowledge. We may, therefore, agree with Storch when he says:—”It is impossible that a substance which has no direct value should be introduced as money, however suitable it may be in other respects for this use.”
When once a substance is widely employed as money, it is conceivable that its utility will come to depend mainly upon the services which it thus confers upon the community. Gold, for instance, is far more important as the material of money than in the production of plate, jewellery, watches, gold-leaf, etc. A substance originally used for many purposes may eventually serve only as money, and yet, by the demand for currency and the force of habit, may maintain its value. The cowry circulation of the Indian coasts is probably a case in point. The importance of habit, personal or hereditary, is at least as great in monetary science as it is, according to Mr. Herbert Spencer, in morals and sociological phenomena generally.
There is, however, no reason to suppose that the value of gold and silver is at present due solely to their conventional use as money. These metals are endowed with such singularly useful properties that, if we could only get them in sufficient abundance, they would supplant all the other metals in the manufacture of household utensils, ornaments, fittings of all kinds, and an infinite multitude of small articles, which are now made of brass, copper, bronze, pewter, German silver, or, other inferior metals and alloys.
In order that money may perform some of its functions efficiently, especially those of a medium of exchange and a store of value, to be carried about, it is important that it should be made of a substance valued highly in all parts of the world, and, if possible, almost equally esteemed by all peoples. There is reason to think that gold and silver have been admired and valued by all tribes which have been lucky enough to procure them. The beautiful lustre of these metals must have drawn attention and excited admiration as much in the earliest as in the present times.
The material of money must not only be valuable, but the value must be so related to the weight and bulk of the material, that the money shall not be inconveniently heavy on the one hand, nor inconveniently minute on the other. There was a tradition in Greece that Lycurgus obliged the Lacedæmonians to use iron money, in order that its weight might deter them from overmuch trading. However this may be, it is certain that iron money could not be used in cash payments at the present day, since a penny would weigh about a pound, and instead of a five-pound note, we should have to deliver a ton of iron. During the last century copper was actually used as the chief medium of exchange in Sweden; and merchants had to take a wheelbarrow with them when they went to receive payments in copper dalers. Many of the substances used as currency in former times must have been sadly wanting in portability. Oxen and sheep, indeed, would transport themselves on their own legs; but corn, skins, oil, nuts, almonds, etc., though in several respects forming fair currency, would be intolerably bulky and troublesome to transfer.
The portability of money is an important quality not merely because it enables the owner to carry small sums in the pocket without trouble, but because large sums can be transferred from place to place, or from continent to continent, at little cost. The result is to secure an approximate uniformity in the value of money in all parts of the world. A substance which is very heavy and bulky in proportion to value, like corn or coal, may be very scarce in one place and over abundant in another; yet the supply and demand cannot be equalized without great expense in carriage. The cost of conveying gold or silver from London to Paris, including insurance, is only about four-tenths of one per cent.; and between the most distant parts of the world it does not exceed from two to three per cent.
Substances may be too valuable as well as too cheap, so that for ordinary transactions it would be necessary to call in the aid of the microscope and the chemical balance. Diamonds, apart from other objections, would be far too valuable for small transactions. The value of such stones is said to vary as the square of the weight, so that we cannot institute any exact comparison with metals of which the value is simply proportional to the weight. But taking a one-carat diamond (four grains) as worth £15, we find it is, weight for weight, 460 times as valuable as gold. There are several rare metals, such as iridium and osmium, which would likewise be far too valuable to circulate. Even gold and silver are too costly for small currency. A silver penny now weighs 7¼ grains, and a gold penny would weigh only half a grain. The pretty octagonal quarter-dollar tokens circulated in California are the smallest gold coins I have seen, weighing less than four grains each, and are so thin that they can almost be blown away.
If it is to be passed about in trade, and kept in reserve, money must not be subject to easy deterioration or loss. It must not evaporate like alcohol, nor putrefy like animal substances, nor decay like wood, nor rust like iron. Destructible articles, such as eggs, dried codfish, cattle, or oil, have certainly been used as currency; but what is treated as money one day must soon afterwards be eaten up. Thus a large stock of such perishable commodities cannot be kept on hand, and their value must be very variable. The several kinds of corn are less subject to this objection, since, when well dried at first, they suffer no appreciable deterioration for several years.
All portions of specimens of the substance used as money should be
homogeneous, that is, of the same quality, so that equal weights will have exactly the same value. In order that we may correctly count in terms of any unit, the units must be equal and similar, so that twice two will always make four. If we were to count in precious stones, it would seldom happen that four stones would be just twice as valuable as two stones. Even the precious metals, as found in the native state, are not perfectly homogeneous, being mixed together in almost all proportions; but this produces little inconvenience, because the assayer readily determines the quantity of each pure metal present in any ingot. In the processes of refining and coining, the metals are afterwards reduced to almost exactly uniform degrees of fineness, so that equal weights are then of exactly equal value.
Closely connected with the last property is that of divisibility. Every material is, indeed, mechanically divisible, almost without limit. The hardest gems can be broken, and steel can be cut by harder steel. But the material of money should be not merely capable of division, but the aggregate value of the mass after division should be almost exactly the same as before division. If we cut up a skin or fur the pieces will, as a general rule, be far less valuable than the whole skin or fur, except for a special intended purpose; and the same is the case with timber, stone, and most other materials in which reunion is impossible. But portions of metal can be melted together again whenever it is desirable, and the cost of doing this, including the metal lost, is in the case of precious metals very inconsiderable, varying from ¼
d. to ½
d. per ounce. Thus, approximately speaking, the value of any piece of gold or silver is simply proportional to the weight of fine metal which it contains.
6. Stability of Value.
It is evidently desirable that the currency should not be subject to fluctuations of value. The ratios in which money exchanges for other commodities should be maintained as nearly as possible invariable on the average. This would be a matter of comparatively minor importance were money used only as a measure of values at any one moment, and as a medium of exchange. If all prices were altered in like proportion as soon as money varied in value, no one would lose or gain, except as regards the coin which he happened to have in his pocket, safe, or bank balance. But, practically speaking, as we have seen, people do employ money as a standard of value for long contracts, and they often maintain payments at the same invariable rate, by custom or law, even when the real value of the payment is much altered. Hence every change in the value of money does some injury to society.
It might be plausibly said, indeed, that the debtor gains as much as the creditor loses, or
vice versâ, so that on the whole the community is as rich as before; but this is not really true. A mathematical analysis of the subject shows that to take any sum of money from one and give it to another will, on the average of cases, injure the loser more than it benefits the receiver. A person with an income of one hundred pounds a year would suffer more by losing ten pounds than he would gain by an addition of ten pounds, because the degree of utility of money to him is considerably higher at ninety pounds than it is at one hundred and ten. On the same principle, all gaming, betting, pure speculation, or other accidental modes of transferring property involve, on the average, a dead loss of utility. The whole incitement to industry and commerce and the accumulation of capital depends upon the expectation of enjoyment thence arising, and every variation of the currency tends in some degree to frustrate such expectation and to lessen the motive; for exertion.
By this name we may denote the capability of a substance for being easily recognized and distinguished from all other substances. As a medium of exchange, money has to be continually handed about, and it will occasion great trouble if every person receiving currency has to scrutinize, weigh, and test it. If it requires any skill to discriminate good money from bad, poor ignorant people are sure to be imposed upon. Hence the medium of exchange should have certain distinct marks which nobody can mistake. Precious stones, even if in other respects good as money, could not be so used, because only a skilled lapidary can surely distinguish between true and imitation gems.
Under cognizability we may properly include what has been aptly called
impressibility, namely, the capability of a substance to receive such an impression, seal, or design, as shall establish its character as current money of certain value. We might more simply say, that the material of money should be
coinable, so that a portion, being once issued according to proper regulations with the impress of the state, may be known to all as good and legal currency, equal in weight, size, and value to all similarly marked currency. We shall afterwards consider more minutely what is involved in the manufacture of a good coin.