VII
MONEY
When people begin exchanging by bartering goods one against another they at once find that there is an awkward obstruction to this kind of commerce; at least, they find it the moment there are more than two of them. It is this: That the person they are nearest to for the striking of a bargain may not want, at the moment, the particular thing they have to offer, but something else which a third party has who is not present.
For instance: John is a hunter who has a surplus of skins to offer. He can get skins easier than other people. William, farming good soil, has surplus wheat to offer, and Robert, living near a wood and skilled as a woodman, has extra wood to offer. John wants wood. He takes one of his furs to Robert and says: “I will give you this fur for a cartload of wood.” But Robert may answer, “I don’t happen to want a fur just now. What I do want is a sack of wheat.”
Either no transaction will take place on account of this hitch, or one of these two things will happen: Robert will take the fur from John and give him his cartload of wood, and will then take the fur over to William, and see whether William wants a fur in exchange for some wheat. Or John, very much wanting the wood, will go to William, and if William wants a fur, will exchange it for wheat; then John will take the wheat back to Robert, and exchange it for the wood that he wants.
That is the sort of complicated and clumsy come-and-go that will be continually happening even with quite a few exchangers, and with quite a small number of articles. When it came to a great number of exchangers and a great number of articles the trouble would grow impossible and exchange would break down.
But things arrange themselves thus: It is soon found that one of the things which are being exchanged is easier to carry than the rest, and perhaps lasts longer and also can be easily used in small or large amounts. For instance, in the case of our three producers, John, William and Robert, wheat might easily appear in this character. People always want wheat sooner or later. It keeps well. It is not very difficult to transport, and you can divide it into quite small amounts, or lump it up in large amounts.
So the chances are that when any of the three wanted to benefit by getting rid of some of his surplus produce he would get into the habit of taking wheat in exchange, even if he did not want it for the moment. For he would say to himself: “I can always keep it by me and then exchange it against somebody else’s produce when that somebody else happens to want wheat”. Soon you would find each one of the three would be keeping a little wheat by him for the purpose of saving tiresome journeys to effect complicated double exchanges, and the wheat so used by all three of them would be in effect MONEY. It would be used as a common medium of exchange to facilitate the disposal of goods one against the other, without the elaborate business of making special barters, after long search.
Mankind has found, in most cases, that where a very large number of articles were being exchanged two in particular naturally lent themselves to this particular use, and those two were GOLD and SILVER. They have also used bronze, and even iron and in some places rare shells, and all sorts of other things. But gold and silver came to be for nearly all mankind, and are now for all civilised mankind, the objects which most naturally are used as money.
The reason for this is as follows:
The thing which naturally becomes money out of all the things that are exchanged will be that which best combines a certain number of qualities, some of which we have already mentioned, and of which here is a list.
1. It must be portable, that is, a large weight of it must take up little room, so that quite considerable values can be taken easily from place to place—for money has to be always moving from one to another to effect purchases and sales.
2. It must be easily divisible, for one is always wanting to use it in all sorts of amounts, very little and very large.
3. It must keep. That is, it must not deteriorate quickly, or it would have very little use as Money.
4. It must be of an even quality, so that, wherever you come across it, you may count on its being pretty well always the same, and therefore weight for weight of the same value.
5. It must be more or less stable in value. It would be difficult to use as money some object which was very plentiful at one moment and suddenly scarce at another; very cheap this year, and very dear next year—such as are, for instance, agricultural products depending upon the season.
Now of all objects Gold and Silver best fulfil all these requirements. Precious stones are more portable, value for value. A £1,000 worth of diamonds takes up less space and is less heavy than a £1,000 worth of gold. And precious stones are fairly stable in value and also keep very well; but they are not easily divisible. Again, they are not of the same standard value in all cases. They vary in purity. But gold and silver have all the qualities required. Gold hardly decays at all through the passage of time, and silver very little; and each, but especially gold, is valuable for its bulk, and its value is fairly stable, and each is easily divisible and can therefore be presented in any amount, from a tenth of an ounce to a hundred pounds weight.
So, by the mere force of things, Gold and Silver became the Money of mankind. People kept gold and silver by them in order to effect their exchanges, and very soon a producer did not feel himself to be exchanging at all (in the sense of exchanging goods against goods), but thought of the affair as Buying and Selling. That is, of exchanging his produce, not against other produce, but against gold and silver, with the object of later re-exchanging that gold and silver for other things that he needed.
Money, once thus established, is called A MEDIUM OF EXCHANGE and also CURRENCY or THE CIRCULATING MEDIUM. It is called “currency” and “circulating” because it goes its round through society, effecting the exchanges, and this running around or circulating gives it its name: “That which is current” from the Latin for “running.” That which “circulates” from the late Latin word for “going the rounds.”
When gold and silver become the money of mankind it is important to be able to tell at once the exact amounts you are dealing with. This, under simple conditions, is done by weighing; but it is more convenient to stamp on separate bits of metal what weight there is in each, and that is called “coining the metal.” All that a Government does when it makes a sovereign is to guarantee that there is so much weight of gold in the round disc of metal which it stamps.
Money does not only fill this main function of being a medium of exchange, that is, of making a vast quantity of complicated exchanges possible, it also has great social value as a measurer or standard, and soon after money comes into use men begin to think of the economic values of things in terms of money: that is, in what we call “Prices.”
All things which men produce are fluctuating the whole time in value. There is now rather more of one article, and now rather less. A sack of barley at one moment will exchange exactly against a sack of wheat, and then in a few weeks against rather less than a sack of wheat. Meanwhile, where it used to fetch a lamb in exchange it may, in a few months, need two sacks for a lamb; and so with all the hundreds and thousands of other objects. When we have money the whole mass of transactions is referred to the current medium, and that is of immense social value. For no one could keep in his head all the changing exchange values of a multitude of articles one against the other, but it is easy to remember the exchange values against one standard commodity, such as gold. And whatever the exchange value is in gold we call the price of the article.
For instance, when you say that a house is worth £500, that that is the “price” of the house, you mean that the amount of gold you would have to exchange to get it is about Ten Pounds weight of the metal. And when you say that the price of a ticket to Edinburgh is £4, you mean that the service of taking you to Edinburgh in the train will be exchanged against about an ounce of the metal gold.
I now come to a most difficult point about money and prices which is rather beyond the elements of Economics, but which it is important to have some idea of, though it is very difficult.
There is a very interesting study in Economics called “The Theory of Prices,” showing why all prices on the average (what is called “General Prices,” that is the value of all goods in general as measured against gold) sometimes begin to go up and at other times go down: Why goods as a whole begin to get dearer and dearer in gold money, or cheaper and cheaper. It is a complicated piece of study, and people dispute about it. But the general rules would seem to be something like this: The exchange value of things against gold, or the value of gold, against the things for which it exchanges (that is prices) is made up of two things: First, the amount of gold present to do the work of exchange; Secondly, the amount of work you can make it do in exchange: The pace at which you can get it to circulate. It is obvious that one piece of gold moving rapidly from hand to hand will do as much work in helping exchanges to be carried out as ten pieces moving ten times more slowly.
If, for any reason, the total amount of gold becomes suddenly smaller or suddenly larger, or if the pace at which it is used changes very quickly, then prices fluctuate violently.
Supposing you could, in a night, take away half the gold in circulation. Then, of course, the remaining gold would become much more valuable. In other words, prices would fall. For if an ounce of gold is rarer and more difficult to get than it was, it will exchange against, that is, “buy” more than it did; this means that “the price of things has fallen.” We used to say, for instance, that a quarter of wheat was worth an ounce of gold. But if we suddenly change the amount of gold so that gold becomes much rarer and more valuable, perhaps an ounce of gold will buy not one quarter but two. The price of one quarter used to be an ounce of gold. Now the price is only half an ounce of gold. Wheat has become cheaper in proportion to gold, and “prices,” that is, values measured in gold, in money, have fallen.
The same thing would happen if you did not lessen the amount of gold in circulation but made the circulation much more sluggish. The amount of gold in circulation would be the same, but as it went its rounds more slowly it would be more difficult to get a certain amount of gold in any one place at any one time.
Prices, then, depend upon the actual amount of money that is present to do the work, and the pace at which it is made to go the rounds: or (to put it in technical terms), on the amount of the currency and its “efficiency in circulation.”
Now, there is in the human mind a very strong tendency to keep prices stable. We think of them by a sort of natural illusion as though they were absolute fixed things. We think of a pound, and a shilling, and five pounds as real, permanent, unchanging values. If we find that quite suddenly five pounds will buy a great deal more than it used to, or quite suddenly a great deal less, if we are met by a sudden and violent fluctuation in prices of this kind, our minds tend, unconsciously, to bring things back, as much as possible, to the old position; and I will show you how this tendency works in practice.
Supposing a very great deal of gold, for some cause, were to disappear. People suddenly find prices falling very rapidly. A man with a £1,000 a year can buy twice as many things, perhaps, as he used to buy. On the other hand, a man with anything to sell can only get half the amount he used to get. For gold has become rarer, and therefore more valuable as against other things.
What is the result? The result is a very rapid increase in the pace at which the gold circulates. Every purchaser feels himself richer. The gold is tendered for a much larger number of bargains, and though the mind, by this illusion it has of gold value as a fixed thing, cannot bring the actual gold back, what it can do is so to increase the second factor, Efficiency in Circulation, as largely as to make up for the lack of gold; and under the effect of this prices will gradually rise again. In the same way, if the mass of current medium by some accident becomes suddenly increased that should lead to an equally sudden rise in prices; but the unconscious tendency of the human mind to keep prices stable sets to work at once. Efficiency in Circulation slows down, the new large amount of currency works more sluggishly, and, though prices rise, they do not rise nearly as much as the influx of money might warrant.
We see, therefore, that the factor in the making of prices called “Efficiency in Circulation” works like a sort of automatic governor, tending to keep prices fairly stable; but of course it cannot prevent the gradual changes, and sometimes it cannot prevent quite sharp changes, as we shall see a little later on. For the moment, the interesting thing to note about Efficiency in Circulation is that we owe to this factor in prices the creation of paper money.
If, with only a certain stock of gold to work on, business rapidly and largely increases, if a great many more things are made and exchanged, then, as the gold will have a lot more work to do—and so become more difficult to obtain in any one time or place—that should have the effect, of course, of making it more valuable, that is, of lowering prices.
Now with the beginnings of modern industry, about a hundred and fifty years ago, a vastly greater number of things began to be made than had ever been made before, and the number of exchanges effected multiplied ten, twenty and a hundredfold. The stock of gold, though it was increased in the nineteenth century by discoveries in Australia and California, and later in South Africa, would have been quite unable to cope with this flood of new work, and prices would have fallen very much indeed, had it not been for the creation of Paper Money. Paper money was a method of immensely increasing Efficiency in Circulation.
This is how it worked.
A Bank or a Government (but especially the Bank of England, with the guarantee of the Government) would print pieces of paper with the words: “I promise to pay to the bearer of this Five Pounds.” Anyone who took one of these pieces of paper to the Bank of England could get Five Golden Sovereigns. But since this was publicly known, people were willing to take the piece of paper instead of the five sovereigns.
If you sold a man a horse for fifty pounds, you were just as willing to take ten five pound notes for him as fifty sovereigns. They were more convenient to carry, and you knew that whenever you wanted the actual gold you had only to go to the bank and get it.
Because people were thus willing to be paid in paper instead of in the actual gold, a large number of notes could be kept in circulation at any one time, and only a small amount of gold had to be kept in readiness at the Bank to redeem them. In practice it was found that very much less gold than the notes stood for was quite enough to meet the notes as they were brought in for payment. Much the most of the note circulation went on going the rounds, and in normal times it took a long time for a note on the average to be brought back to the Bank.
You can see that this dodge of paper money had the effect of increasing the total amount of the current medium in practice, and of greatly increasing its Efficiency in Circulation. Moreover, it made the Efficiency in Circulation very elastic, because in times of quiet business, more notes would go out of circulation and be paid into the bank, while in time of active business more notes would go on circulating.
So long as every note was redeemed in gold every time it was brought to the bank, so long as the promise to pay was promptly kept, the money still remained good; the paper currency did not interfere with the reality of the gold values, there was no upsetting of prices, and all went well.
Unfortunately, Governments are under a great temptation, when they have exceptionally heavy expenses, to falsify the Currency. People get so much in the habit of trusting the Government stamp on paper or metal that they take it as part of nature. What the Government is really doing when it coins a sovereign is giving a guarantee that this little disc of yellow metal contains 123 grains of gold with a certain known (and small) amount of alloy to make the gold hard. When the Government has to pay a large amount in wages, or for its Army and Navy, or what not, it is tempted to put in less gold and more alloy and keep the old stamp unchanged, and that is called “Debasing the Currency.”
For instance, the Government wants a hundred tons of wheat to feed soldiers with, and the price of wheat in gold at that moment is Ten Sovereigns a ton. It says to a merchant, “If you will give me a hundred tons of wheat, I will give you a thousand sovereigns.” But when it comes to paying the thousand sovereigns, instead of giving a thousand coins with 123 grains of gold in each, it strikes a baser coin with only a hundred or less than a hundred grains in each, and pays the merchant with these. It is a simple form of cheating and always effective, because the merchant thinks the sovereign is genuine. Only when these bad sovereigns get into circulation they naturally find their level in gold; for people begin to test them, and find that they have not got as much gold in them as they pretend to have. Then, of course, prices as measured in this new base coin rise. If the Government wants to buy another hundred tons of wheat it must offer more than a thousand of the base coins; it must offer, say, thirteen hundred of them. But again it is tempted to put even less gold into the coins with which it pays for the second lot of wheat, and so the coin gets baser and baser, until at last, perhaps, a sovereign will not really be worth half what it pretends to be. Governments in the past have done this over and over again, but it was not until our time that the worst form of debasing the coinage came in.
It came in as a result of the Great War, and we are all suffering from it to-day. This last and worst form of debasing coinage worked, not through cheating about the metal, but through a trick played with paper money.
Before the war, if you got a Five Pound note saying “I promise to pay Five Pounds” the promise was kept and the five golden sovereigns were there for you whenever you went with your note to the bank and asked for them; but when the Government had these very heavy expenses to meet on account of the war, they first began making difficulties about paying when people brought their paper to the bank, and at last stopped paying altogether. At the same time, they did everything they could to get the gold out of private people’s hands and to make them use paper money instead. The consequence was that, people being so accustomed to think of a paper guarantee of the Government exactly as though it were real money, readily took to the new notes and used them as money, thinking of these wretched bits of paper exactly as though they were so many golden sovereigns. The Government could go on printing as many bits of paper as it liked, and they would still be used as though they were real money. So long as the amount of paper printed was not more than would have been printed when the notes were redeemable, and when the currency was on a true “Gold Basis,” no harm was done; but of course it paid the Government to go on printing a great many more notes than that, because, when it could make money thus cheaply, it could pay for anything, however great the expense; but at the cost, of course, of debasing the currency more and more.
This kind of money, forced upon people, pretending to be the same as real money but actually without a Gold Basis, is called Fiat1 money, and that is the kind of money the whole world has to-day, except those countries which did not take part in the Great War, and the United States which did not ever give up its gold basis.
Of the different European fighting countries, however, ours did best in this matter. We are still living on Fiat money, and we have much more of it than we ought to have. But the French have more in proportion, so that prices measured in their money are now (1923) more than three times what they would be in gold. The Italians are worse off still. With them it is four times. With the Germans it is millions of times, and their currency has quite gone to pieces; a paper coin in Germany is worth (at the time I write, October, 1923) ten million times less than the real metal coin which it is supposed to represent.
This is one of the very worst things that has happened on account of the war, for as the money now being used all over Europe is not real money, no one feels certain whether he can get his debts really paid, or whether his savings are safe, or whether a contract made for a certain payment a few months hence will be really fulfilled or not. A man may lend a thousand francs or marks or pounds for a year, and then at the end of the year, when he is to be paid back, he may be paid in coin which has got so much worse that he is really receiving only half or a tenth or a thousandth of the real value he lent. A man in Germany sells a hundred sheep for so many marks, to be paid for in a month; and at the end of the month the marks will only buy ten sheep!
This piece of swindling, which has been the note of the last five years, is the first point we have touched on so far where a problem in Economics and the study of economic law brings one up against questions of right and wrong.
It is morally wrong for the Government to swindle people out of their property by making false money. What is the way out, allowing for Economic Law? It is morally wrong that some men should starve while other men have too much: allowing for Economic Law, what is the way out of such evils?
As you go on in the study of Economics you find quantities of questions where you have to decide whether economic laws render possible political actions which you would very much like to undertake, and which seem right and just. Many such actions, though one would like to undertake them, cannot be undertaken because our study of Economics has shown us that the consequences will be very different from what we hoped.
On the other hand, a great many people try to get out of what it is their duty to do politically by pleading that Economic Law prevents it.
Before ending these notes, then, we must go into the main questions of this kind, and see what there is to be said, in the light of economic knowledge, for our present system of society, which is called Capitalism; for other systems in the past such as Slavery; for Private Property; for the various theories of Socialism; for and against Usury, and so on.
It is necessary to go into these points even in the most elementary book on Economics, because the moment one begins the practical application of one’s economic science these questions at once arise; to answer them rightly is the most important use we can make of economic knowledge.