Honest Money

"If France and America had the same currencies as England, it would still happen, as now, that bills on Paris or New York would be at a discount or a premium. The amount of money wishing to go eastward across the Atlantic, and the amount wishing to go westward, would then, as now, settle how much was to be paid in London for bills on New York, and how much was to be paid in New York for bills on London."

It must be evident that if the people of one country have incurred debts to the people of another country expressed in foreign monetary units, nothing but such foreign money will satisfy the claim, and to procure it the debtors must ship some commodity in exchange for it. What this commodity will be, will depend on which is the cheapest—which one the debtor, everything considered, will have to give the least of in exchange for the necessary foreign money,—it may be claims against foreign merchants, or bankers, in the shape of drafts or bills of exchange, or it may be gold, if that is cheaper, or it may be wheat, or cotton, or any other commodity, but it will always be that which the debtor can purchase cheapest. If it be gold, it will be because the debtor can purchase enough gold to exchange for the required amount of foreign money for less of his own money (including transportation and other charges) than he can purchase a sufficient amount of any other commodity, and not because the foreign money is based on gold. In short, the gold differs in no way from any other commodity in such transactions; it is exchanged for the foreign money, which alone can satisfy the debt, precisely as any other commodity.

That both gold and silver may be a convenience at times in international trade is not denied; but they are not a necessity, and their convenience for this purpose is in no way enhanced by their coinage or by their use as a domestic money.

CHAPTER VII.
MONEY IN THE UNITED STATES.

Turning from the consideration of money systems in general to the particular case presented in our own country, we find a most curious system—if, indeed, anything bearing so little evidence of rational adaptation to its purpose is entitled to that name.

The unit of the system is the gold dollar, containing 25.8 grains of standard gold, nine-tenths fine, coined in five, ten, and twenty dollar pieces. There is also a silver dollar, containing 412½ grains of standard silver, nine-tenths fine, the ratio between the two being 15.988 grains of silver to one of gold.

The gold is coined free, in any amount presented. The silver coinage has been restricted for many years, and is now entirely stopped. The silver dollar, however, circulates at par with gold, though its bullion value is only about fifty cents measured in gold, which is the real basis of the system.

In addition to the coin, and circulating on a par with it, are a number and variety of issues of paper money.

(1) United States notes (or greenbacks),—secured only by the credit of the government, except that there is held in the Treasury about 30 per cent. of the amount of these notes in gold as a redemption fund.

(2) National bank-notes,—issued nominally by the various national banks of the country, but practically issued by the government; since they are secured by a deposit of government bonds, are guaranteed by the government, and rest as completely on the credit of the government as the greenbacks do, though in a different way.

(3) Silver certificates,—secured by a deposit of silver bullion.

(4) Gold certificates,—secured by a like deposit of gold.

(5) Treasury notes,—secured by deposits of silver.

(6) Currency certificates.

All of these kinds of paper money, as well as the silver coin, circulate on a par with gold; their utilities being equal, and the demand for money being an indiscriminate one, their values must be equal. As a domestic money, gold cannot have a higher value than the issues of paper money; though it may, however, have a greater value as a commodity for foreign shipment. It is not the fact that these other forms of money may be exchanged directly or indirectly for gold at the United States Treasury that makes their values equal to gold value, but the fact that their utilities are equal. They would remain of equal value with gold if the Treasury did not exchange gold for them, so long as any gold remained in circulation as money. A gold reserve, however, is necessary as a precaution in a gold-standard system, but only to the extent of the probable demand for gold for export.

The system as a whole is a ridiculous one, and nearly all its features are wasteful and uneconomic.

Gold coin, as a circulating medium, is not as good as paper; it has a high subjective value, and such use of it is wasteful; it should be kept as a reserve for export purposes. The gold certificates are better, but are also wasteful; since only a sufficient reserve is needed to meet possible demands for export, and this would be far less than dollar for dollar.

The silver coin is open to the same objection as the gold coin as a circulating medium, and the silver certificates to the same objection as the gold certificates, and to the further objection that the silver deposited to secure them is of no use whatever, even as a reserve, for no one would demand silver bullion of the government in exchange for paper money at the present coinage value, when they could purchase nearly twice as much in the open market for the same money. Unless, then, our money should fall in value some 50 per cent., not an ounce of silver will ever be called for at the Treasury in exchange for the paper issues based thereon; and the silver deposits are merely a clumsy and costly method of limiting the volume of the paper money.

The greenbacks, or United States notes, are economical, and if they were variable in volume and under proper control would be a good money.

The national bank-notes are wrong in principle, in allowing private corporations to make a profit from the issuance of paper money. This objection is of no practical importance, at present, as the restrictions and high bond prices have taken away practically all the profit to the banks on the issues, but in so doing have also taken away about the only merit such notes ever had, that of elasticity of volume to some extent. This was a most doubtful merit at best, as the issues were governed by considerations of private profit and not by any desire to make money of stable value. Whatever may have been the merits of the national banking system in the past, the war necessities of the government which gave birth to it, have long since passed away. It can be viewed now only in the light of its present usefulness, and as an issuer of money it is of no use whatever.

Paper money received by deposit of bonds instead of bullion is economical and correct in principle, if controlled in the interests of the public, and not left at the mercy of men whose private interests may be opposed to the public welfare. No such control of the volume of the money is attempted in the case of the national bank-notes, and they are no more secure than are greenbacks, since the ultimate foundation of both is the national credit in one form or another.

Of all our different kinds of money, the only ones susceptible of change in volume to meet the varying demands of commerce are, under existing laws, the gold coin and certificates. These can be changed only by the import or export of gold, or by the product of the mines over and above the amount needed for the arts and sciences, and which must be divided with other gold-standard countries.

The national bank-notes are theoretically elastic in volume, but actually are not so, to any appreciable extent. They require for their issue the purchase and deposit with the United States Treasurer of government bonds,—now at a large premium,—are subject to other charges and restrictions, and are not, as a rule, profitable enough to the banks to cause any increase of the issues above that required by law, except in urgent necessity, and that to a very limited extent.

As a result of these conditions, the country witnessed, during the recent panic of 1893, a resort to every kind of device known to banking and permissible by law, to increase the volume of the currency and meet the enhanced demand for money caused by the utter failure of credit. Certified checks, certificates of deposit, clearing-house certificates, and other devices were resorted to, and even then thousands of solvent institutions over the country were obliged to close their doors, and the industry of the whole country was paralyzed.

The events are of too recent occurrence to need rehearsal here. It is a sad commentary on the wisdom of our legislators that, notwithstanding all the tinkering and patching that our financial system has undergone, and the voluminous debates in and out of Congress for years past, the volume of our money has been so far from keeping pace with the demands of commerce that prices have been falling for a quarter of a century, culminating last year—a repetition, unhappily, of previous experience—in a collapse of the overstrained credit that was vainly trying to do the work of money, and bringing ruin and disaster to thousands.

The condition of our monetary laws to-day is such that, except by the slow increment of gold production, which must be shared by all the world, we possess no means of meeting either the increasing demand for money that expanding population and commerce bring, or the sudden demand that a failure of credit may bring at any time. This, obviously, is a blunder on the part of our law-makers that amounts to a crime.

It is not surprising that under such conditions the industries of the country are crippled and that thousands of men should seek work in vain. Still less surprising is it that in the face of a continually increasing value of money, or decreasing prices of nearly everything else, prudent men choose, as far as possible, to turn their capital into money, lock it up in safe deposit vaults, or let it lie idle in banks, rather than take the great risk that any active use of capital under such circumstances carries with it. When money is increasing in purchasing power from five to seven, and even a higher per cent. per annum, as has been shown to be the case many times in the past, it means that the man who locks his money up in a vault gets that percentage of return for letting it lie idle; or that the man who loans it, even at a low rate of interest,—if a loan with safe security can be found at such a juncture,—makes the five to seven per cent. resulting from the increased value, in addition to what he gets as interest.

Men cannot be blamed for declining to engage in productive enterprises under such conditions, nor for hoarding money instead of using it; the blame lies on the system that not only permits but compels such action.

There is evidently no inducement for men with money to invest it in any productive business with the certainty, under existing conditions, that the record of the past will be that also of the future, and that if a return of confidence again expands credit and stimulates business to a new activity, it is sure to be followed, at no distant day, by another collapse.

It must be conceded, with these considerations in mind, that the imperative need of this country is for a money that shall be at once more honest, more simple, and more elastic, and, at the same time, adaptable to the varying demands of commerce.

Any change in a money system must, of necessity, cause some disturbance of business, and such change should be so devised as to cause the least possible disturbance, and do as little injury to vested interests and existing obligations as possible.

The system chosen should, moreover, be adapted not only to the needs of the present, but also to the possible requirements of the future, so that no change of system will afterwards be called for to meet further changes in demand, and cause again a disturbance of commerce. In short, it should be a system logical, economical, scientific, and permanent,—not a makeshift, to be changed in the next Congress by the addition of another makeshift, in the manner in which our present crazy patchwork of money has been created and maintained.

CHAPTER VIII.
SOME PROPOSED CHANGES IN OUR MONEY SYSTEM.

Of the many plans that have been proposed to correct the evils of our existing money system, it is not necessary to notice here more than two or three. Most of the others are more or less temporary expedients which, even if meritorious, fall so far short of an adequate or permanent solution of the problem as to merit little attention.

The change which has been most urgently advocated is a return to the free coinage of silver.

It is not proposed to enter into any extended discussion of the merits or demerits of this proposition. Much has been written on the subject already, most of it, unfortunately, from a partisan standpoint, and ignoring all facts and principles, however well established, which did not agree with the views advocated. This, it may be said, is equally true of both sides to the controversy. It seems desirable, therefore, to point out how the principles we have already investigated apply to the question.

Those who advocate free coinage of silver claim that the value of gold has increased since free silver coinage was stopped, while the value of silver has remained more nearly constant. This claim, as we have seen, is correct. They claim not to desire to substitute silver for gold in the coinage, but to use both together at the ratio of 15.988 to 1, under a bi-metallic system, increasing the volume of money, and thereby raising prices to a higher level.

Their opponents say that free silver coinage will drive gold out of the country and the value of our standard will at once fall to the present bullion value of silver (about 50 to 60 cents, measured in gold), and that bi-metallism is only practicable by agreement between the leading nations.

That free coinage of silver would result in driving gold from the country has been largely denied by the advocates of that measure. In this denial they make a great mistake, not only because the statement is strictly true, as theory and experience in the past have alike shown, but also because it would accomplish what they are aiming at, and is the only way in which it can be accomplished through silver coinage. The increase in the volume of money here would raise prices, and the flow of gold to other countries would raise their prices also, and thus a general rise of prices and a lowering of the value of gold, would result.

The gold-standard advocates have also made an error in supposing that free silver coinage would result in the immediate fall of our standard to the present bullion value of the silver dollar.

It would be rather difficult to trace the immediate effects of such a measure, as several conflicting forces would be brought into play, the relative strengths of which could not be foretold. It seems probable, however, that the first effect would be a large rise in the price of silver bullion, and a hoarding of gold, followed by its export in exchange for silver. For a time this would cause a fall in prices of other commodities, followed by a rise, as the new coinage began to fill the place of the gold hoarded and exported. However this might be, it can hardly be doubted that the final result would be a rise in prices of commodities—including silver—as measured in gold, or a fall in the value of gold all over the world as measured by commodities. Our money would probably remain at a slight depreciation below our gold standard, while both together would gradually lower. This condition would be made manifest by gradually increasing prices, and would continue either until all the available gold had been exported, or until the rising value of silver met the falling value of gold at the coinage ratio of 15.98 to 1. Whichever of these results took place would depend on the relative amounts of gold available for export and of silver for import, and could hardly be foretold. It seems more than likely, however, that the gold would all be exported. In this case, the country would have the silver standard, and the value of the dollar would be somewhat lower than the value of a gold dollar then, and considerably lower than the value of a gold dollar now, but also considerably higher than the bullion value of the silver dollar is now.

If the two dollars reached a parity at their coinage ratio before all the gold was exported, the country would have not only a bi-metallic standard, but would practically force such a standard on the rest of the world, as long at least as the gold supply held out. If foreign nations returned also to the free coinage of silver, they would either have to change their ratio to agree with ours, or, if they kept their present ratio of 15½ to 1, the silver would gradually leave us in exchange for their gold.

The fear of a sudden fall in the value of the dollar, as a result of free silver coinage, is not justified. The value of the dollar would fall gradually as the volume of the money increased,—as would be made manifest by gradually rising prices,—except that this fall would be more or less counteracted at the start by a hoarding of gold, which would decrease the supply of money, and perhaps by a disturbance of credit, which would increase the demand for it. The first effects might be, therefore, an increase instead of a decrease of money value.

It would probably not make so very much difference whether bi-metallism or the single silver standard was the final result. The value of the dollar would not be greatly different in the two cases. Before we reached a silver basis we would have exported some five or six hundred millions of gold, and bought its equivalent in silver, securities, and commodities, and the result would necessarily be a great advance in the value of silver, and a corresponding fall in the value of gold,—the reverse, in fact, of what happened when Germany and other nations changed from a silver to a gold basis. Whether, therefore, this country were able or not to restore the parity of the two metals at the present coinage ratio, the departure from such parity would not be nearly so great as it now is. Provided that the volume of the uncovered paper money remained the same as now, and that, when the change was finally accomplished, credit were used to the same extent as before, the value of the dollar would be somewhere between the present bullion values of the gold and silver dollars, and probably nearly as high if the result were the single silver standard as it would be if bi-metallism were accomplished.

The merits and demerits of the plan may be summed up as follows:—

The change would necessarily cause a great disturbance of business, which might result, at first, in a lowering of prices, but would eventually result in a gradual but considerable increase of general prices, and a stimulation of industry.

Debtors would be benefited considerably, and creditors wronged considerably, especially in short-time obligations; though the long-time ones—those that had run for a number of years—would not be affected so much.

Once established, the money value would probably be less variable than gold has been, and rather more variable than silver has been in the past, but this could not be said with certainty, as the money value would continue to be the result of a variety of forces, of which no one could predict or control the strength.

The inconvenience of so bulky a metal in large amounts would almost necessitate its deposit in vaults and the issue of paper money in its place for actual circulation. If this paper were issued only to the amount of the silver deposited, it would be a most uneconomical system, since the greater part of the silver might evidently just as well be in the ground from which it was dug, so far as any real use was concerned. If paper were issued in excess of the silver deposited, it would not make a market for very much more silver than we now use, and the value of silver would be raised but little.

The value of the money would therefore depend largely on the use that was made of paper in connection with it. Without some control of the volume of the money besides the control the supply of silver would give, its value would continue to fluctuate at all times, and greatly so in times of panic, as it always has done. With proper control the silver is wholly unnecessary, as its only use is to limit the volume of the money, and this can be done far more cheaply and efficiently in other ways.

Little need be said of the "Greenback" or fiat money proposals, so prominent some years ago, though they are seldom advocated now. Their only merit was a dim perception of the fact that gold and silver are not necessary to a money system. Their errors were that they failed to provide any standard by which money value could be tested, or any control had of its volume. They also failed to recognize the fact that money value is wholly dependent on money volume.

Various plans have been proposed for changing our money system by increasing the issues of bank-notes. One of these plans is to repeal the present prohibitory tax on State bank-notes, which would, of course, result in the issue of such notes to any extent that was profitable.

Several other plans propose to increase the issue of national bank-notes by removing some of the present restrictions, and allowing the banks to pledge other securities than United States bonds as a guarantee of their circulation, or by allowing their capital to serve, in part, as such guarantee.

All of these plans are merely makeshifts, and merit little attention. Considered, however, only as makeshifts, and with reference solely to the claims they advance, they are of no permanent benefit to the public. They only allow the banks to make a profit that should go to the community. It is claimed that the money volume will be made more elastic by these issues. This claim does not appear to be justified by an analysis of most of them, and, so far as it holds good in any of them, it is a most dangerous feature. If the issues are made profitable to the banks,—and otherwise there would, of course, be no issues, as they are not compulsory,—then the banks would undoubtedly increase them to the full limit allowed by law at any time. If they were limited so as to be profitable only when interest rates were high, then, when times were prosperous, prices rising, and profits large, the interest rate would be high, and the increased issues would enhance the "boom." When, however, the inevitable reaction came, and prices began to fall, and credit to be withdrawn,—the time, most of all, when more money would be needed,—the banks would not only be helpless to increase their issues, but would very likely reduce them, because of the increased risk at such times, and the fact that, in times of depression and declining prices, interest rates are apt to be low also.

Elasticity of volume is a most necessary feature of a money system, when it is rigidly controlled, to make money value constant; but it would be a most dangerous feature when the control was governed by the desire only to make the most profit. It would simply result in a greater fluctuation of money value than there is now.

We have, so far, examined these various plans for amending our faulty money system rather in regard to the truth of their pretences than in regard to the requirements of an honest money. In this latter respect, all the plans ignore the necessity for an invariable standard of value, and provide no method for controlling the volume of money, and adjusting it to the demand, as might be done, to some extent, even with the gold standard. The general decline of prices could not be prevented, though some of the fluctuations might.

The fact must be faced, that any attempt to increase the volume of money in this country, and thereby raise our prices above those of other countries, or to maintain our prices in gold constant, while those of other countries are declining, can result only in the export of gold. This might not happen at once, for it takes time for Gresham's law to operate, but it would be inevitable. It would probably be delayed somewhat by foreign speculation in our securities,—always a powerful factor in determining the value of our money,—but it would come; and the resulting depression would be all the greater for the delay and the height of the prosperity that preceded it.

So long as our money is based on a metal that forms a part of the money of other countries, under a free coinage system, so long will the value of our money fluctuate under the influence of foreign monetary legislation, wars, panics, and a hundred forces beyond our control.

Only by divorcing our money from that of other countries can we control it, and only by controlling it can it be made honest money.

CHAPTER IX.
A NEW MONETARY SYSTEM.

In the development of commerce from simple barter between savages up to its present complicated form and enormous volume, an evolution is apparent, similar in character to that which has taken place in the organic world. In both the change has been from the simple and homogeneous to the complex and heterogeneous. In both it has been a differentiation of the functions of the several parts, accompanied by an increased sensitiveness of the whole.

The primitive form of commerce, direct barter, may be compared to one of the lowest forms of animal life, in which all parts are alike mouth and stomach, and which if cut into pieces, will exist, severally, as a complete animal; while modern commerce, with its various parts, each with a separate function, and its highly sensitive organism, is more like a human being, in which each part is adapted to the work it has to perform and is dependent on all the others, so that the failure of any one to do its work cripples all the rest.

Just as the cutting or maiming of a low form of animal life is of little damage to it, while a far less injury, relatively, would kill or seriously maim a man, so an injury to commerce, that in a primitive form would amount to little, in our modern highly developed system would cripple it greatly. Money is one of the most important parts of our industrial system,—the very life-blood, in fact,—and if, for any reason, it fails to perform its functions fully and completely, the consequences are far more disastrous than they would have been under the more primitive systems of the past.

Along with the evolution of commerce in general has gone an evolution of money and the mechanism of exchange. As the volume of traffic grew larger, the use of the bulkier commodities as money was gradually abandoned for the more valuable metals. In time, even these became too bulky and inconvenient for use as a medium of exchange, and credit, in its various forms, now does the work of money, as to this function, to a far greater extent than money itself does, and even the money itself is mostly a paper money,—a sort of certified credit.

As previously stated, about 95 per cent of the bank deposits are in forms of credit, and of the actual money deposits only about one-tenth is gold, the balance being paper money and silver; so that, on the strength of these estimates, only .6 per cent of the exchanges of commodities are effected through the direct use of gold.

This evolution of money, however, has been almost wholly confined to the one function, a medium of exchange; there has been no advance for centuries in regard to the other function, a measure of value. Men have continued to cling to the fiction that gold was a standard of value, and that, so long as their monetary system was based on that metal, their unit was of invariable value. We have seen how little ground there is for this claim; that a gold basis for our money is not necessary to our foreign commerce; and how small a part gold really plays in domestic commerce as a medium of exchange. Is it not about time, then, to abandon the fiction that gold is either a standard of value or a medium of exchange, in any proper sense of the terms, and to take a forward step in the evolution of money by adopting a more scientific standard of value, and making the money, as a measure of value, conform thereto?

Professor Jevons, in "Money and the Mechanism of Exchange," in the chapter on "A Tabular Standard of Value," inquires whether it is not possible to have a standard based on a large number of commodities,—a "multiple legal tender," as he terms it,—and concludes that the plan would resolve itself into those severally proposed by Joseph Lowe in 1822, and, independently, by G. Poulett Scrope in 1833, and by G. R. Porter in 1838. These plans were practically alike. Recognizing the fluctuations of money value, and the injury done especially to long-time debts thereby, they proposed that tables be prepared showing the variations from year to year of the prices of the principal commodities, taking into account, also, the amounts sold. These tables were to be used for reference, to ascertain in what degree a money contract must be varied so as to make the purchasing power of the money returned equal to that loaned. The plans seem to have been only suggestions, and the details not worked out. Professor Jevons speaks favourably of them, as perfectly sound in principle, and the difficulties in the way as not considerable. He suggests a method by which the average prices of the commodities could be computed, and closes with the statement: "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 crisis would be mitigated, because, as prices fell, the liabilities of debtors would decrease approximately in the same ratio."

Prof. F. A. Walker, referring to these schemes, and to similar ones proposed by Count Soden and by Professor Roscher in Germany, criticises them as too cumbersome for general use, but thinks they might be advantageously employed for long-time contracts. The criticism is evidently just; not only are the plans too cumbersome, but they only partially accomplish what is needed. They contain, however, the germ of a plan which it is believed would be both more effective and less open to the criticism mentioned. Long and short time contracts, and cash transactions, are too intimately connected to make it possible in practice to use different and varying standards for each.

Since the values of all commodities constitute the only true standard of value, as close an approximation to this standard as possible should be adopted as our standard of value.

Since the value of the circulating medium—the money—depends on supply and demand, the supply should be so controlled that the value of the money would always correspond with that of the standard adopted, and since paper money is the cheapest, the most convenient, and the only money entirely free from outside influences affecting its volume and value, our currency should be a paper money.

The following is given as the outline of a plan embodying these features and requirements.

The Standard of Value.

Let a commission be appointed by Congress to select a sufficient number of commodities, say, one hundred, to be used as a standard of value.

This selection should comprise the commodities most largely bought and sold and most independent of each other in their values; preference should be given to those which are products of this country,—but foreign products should also be included,—and to those which are reliable in quality and of which the prices are regularly quoted—such, for instance, as wheat, corn, oats, rye, barley, cotton, wool, tobacco, rice, gold, silver, lead, copper, tin, iron, steel, cotton and woollen cloths, leather, hides, lumber of various kinds, sugar, beef, pork, mutton, etc.

The aim should be, while not including all commodities, which would of course be impossible, to include a sufficient number and of such varied kinds as to fairly represent all. Less than a hundred might be sufficient, or it might be better to take more than that number.

With the aid of statisticians, the average price of each of the commodities selected, in their principal markets for a few years past, should be ascertained and tabulated. The commodities, of course, should be of specified grade and quality, and in a specified market, but not necessarily the same market for all.

The length of time over which the average of prices should extend would be determined as closely as possible by the average length of time that existing indebtedness had run. (The reason for this will be explained later.) In addition to the average prices of each commodity, the approximate amount or value annually consumed in this country, should be ascertained.

From these data, a table should be prepared showing the amount one dollar would have purchased, on the average, of each of the commodities for the time determined, and from this a final table should be made taking such multiples of the amounts found in the previous table as should represent their proportionate consumption,—in other words, their relative importance in trade.

For example, suppose the time selected were five years, as representing twice the average time existing debts had run; that during that time one dollar would have bought, on the average, 1.25 bushels of wheat, or 3 bushels of corn, or 100 pounds of pig iron, or 10 pounds of cotton, all of specified grade in specified markets; that, further, the importance of each of these commodities in the trade of this country was in the approximate proportions of 5, 3, 2, and 1, respectively.

Then the final table would show:—

Considering these four commodities only, the dollar, as the unit and standard of value of our system, would be defined by law as one-eleventh of the sum of the values of 6.25 bushels of wheat, 9 bushels of corn, 200 pounds of pig iron, and 10 pounds of cotton. This illustrates the method of arriving at, and the definition of, the standard. Extended to all the commodities selected, the definition would be the same with the substitution of the proper figures.

This would evidently provide a standard that would closely represent the average purchasing power of one dollar for the time selected. As to the length of time over which this average should extend, if there were no such thing as existing debts, it would clearly be of little importance what the value of the unit selected was, just as it would be of no importance now whether the foot or the pound had been originally fixed at greater or less than their present length and weight; but because of the vast amount of existing indebtedness, the value of the unit that is to be made permanent should be most carefully fixed at the value it had when such indebtedness was created, so as to do as little violence as possible to outstanding obligations. The fact that in the past the debtors have been wronged to the advantage of creditors, by an increasing value of money, furnishes no excuse for a reversal of this injustice and a wronging of creditors by permanently fixing the value of the dollar at what it was twenty or thirty years ago. The debtors and creditors of to-day are not the same individuals who stood in those relations at any time in the past, and two wrongs do not make a right.

The object should be, therefore, to determine as closely as possible how many years, on the average, existing debts have run, and take twice that period for the total length of time over which our prices should be determined. The average of the prices would then correspond with what it was when average debts were incurred.

This would doubtless work a slight injustice to those whose debts were of longer standing,—though a less injustice than they are subject to now,—and would be a slight injustice to the creditors of more recent date; but as some time would be occupied in getting the system to work, so that the actual value of the money would correspond with the standard, the injustice would be more or less distributed, and would at most be slight. It would be substituting only a gradual rise in prices for the decline that has been going on, until prices were back to the level of perhaps two or three years before, and then fixing the level at that point.

The Medium of Exchange.

After the statistical work outlined above had been completed, Congress should repeal the present monetary laws, substituting for the definition of the "dollar" the new definition agreed upon. It should then provide a currency or money to take the place of that now used. This currency should be a paper money similar to our "greenbacks." It should be a legal tender for all debts public and private (except, of course, such as by their terms are payable in gold). In fact, the only difference between such notes and existing "promises to pay" of the government would be that the new notes, as is evident from the new definition of the dollar, would be promises to pay a definite value, and not a definite quantity of one commodity of uncertain value.

The notes could be made redeemable in any commodity at its current market price, and should contain a pledge, on the faith of the government, that the amount of the currency in circulation would be at all times so controlled by the government that its actual purchasing power would conform to the standard on which it was based.

To carry out this pledge, it would be necessary to have a small corps of statisticians who would receive and tabulate the current market prices for each day; and who would calculate therefrom the aggregate prices of the specified quantities of all the commodities constituting the standard,—in similar form to the final table before mentioned, and of which an example has been given. If this aggregate for any clay were more or less than the total of the standard table, it would show that prices in general had risen or fallen, and some money should be withdrawn from circulation, or more issued until the daily total corresponded with the standard total.

Doubtless several plans might be proposed for putting such a money into circulation and controlling its volume. The following seems to commend itself by its simplicity and effectiveness of control, for at least a part, if not all, of the issues, viz.: The money to be loaned by the government on approved securities, such as their own bonds; other bonds of states, counties, cities, railroads, etc.; warehouse receipts, gold and silver deposits, etc. First-class commercial paper, when guaranteed by solvent banks, might also be taken, especially in case of threatened panic. In short, such securities as would be considered the safest for banks and trust companies to loan upon, all under such proper restrictions and safeguards as would insure their safety as collateral. The rate of interest charged for such loans to be a variable one, decreasing as prices tended to fall, and increasing as they tended to rise, and without other restriction. This would absolutely control the volume of money, within narrow limits, since more would be borrowed at a lower, and less at a higher rate, of interest, yet the control would be elastic.

While the loans should be for short time, they could be renewed at pleasure, and as often as desired, at the current rate of interest, the security remaining good.

Such a plan would not interfere with general banking business to any considerable extent. In order to prevent monopoly, the loans should be open to all on equal terms, and the list of approved securities acceptable as collateral should be made as wide as possible, consistent with safety. It would probably be found by experience, however, that the principal borrowers direct from the government would be the banks, who would re-loan the money (at a sufficiently higher rate to pay them for their trouble) to their customers, on local securities, commercial paper, etc., as they now do.

In fact, the present system of national banks could be made, with few changes in the regulations governing them, a most valuable adjunct to the plan as a distributing agency, and the plan is one that it would seem ought to meet with approval. They would, it is true, lose their present note circulation, but that, under existing laws and conditions, is of little or no profit to them. They would gain by its being unnecessary for them to keep so large a reserve of cash on hand as they are often obliged to do now; for not only would the whole financial system be more stable than now, but they might safely be allowed to carry a part of the present 15 to 25 per cent. reserve, required by law, in such securities as they could at all times use as collateral with the government. They would gain even more by the security such a system presents against panics and senseless runs, which so often compel solvent banks to close their doors. In short, the government would act toward the banks, not as a competitor, but rather in the relation that the New York clearing-house has several times acted toward its members in times of panic, by the issue of clearing-house certificates,—a quasi-money that helped them in time of need. The government would not be subject to the limitations of the clearing-house, however. The money it loaned would be, unlike clearing-house certificates, a legal tender everywhere; and the protection would extend to all the banks of the country. The government would act toward the banks in somewhat the same way as they act toward individuals, or as the Bank of England acts towards the other English banks, as a sort of reserve agent. In this case, however, the resources as to money would be unlimited. In the manner of regulating the volume of money, also, this plan would resemble that of the Bank of England, since that institution attempts in a feeble way, and prompted doubtless by self-interest, to regulate the volume of money, to some extent, by raising the discount rate when the volume is decreasing, as evidenced by exports of gold, and lowering the rate when gold is being imported.

If it were impossible or inexpedient to loan in the above manner all the money the country required, a sufficient amount could be so loaned as to give an absolute control of the volume, and to regulate its value at all times, and the balance could be issued in exchange for the present greenbacks, and for interest-bearing bonds of the government, thus converting a part of the interest-bearing debt into a permanent non-interest-bearing one.

It is evident that the control of such a system should rest with the government, and not be left to any banking institution; for a bank would be more influenced by considerations of profit than of proper control in the interests of all. The interest received by the government would be a minor consideration, the control of the volume being the main object, and the rate of interest a means merely to that end. The people, besides, would have at all times a greater confidence in notes issued directly by the government than they could have in notes issued by any bank, however strong.

The department of the government to be charged with this issuing function should, of course, be entirely distinct and separate from the other departments. Its sole business should be the maintenance of an honest money. It should have no connection with the general expenditures of the government, further than to pay into the Treasury such profits, in the way of interest, as might be received. The government expenses should be met, as they now are, by the receipts from taxes and duties, or, if these were insufficient at any time, by borrowing money on its bonds. Under no circumstances should money from the issuing department ever be taken for the expenses of government, except in the same way that banks or individuals might receive it, and never then to an extent that would raise average prices.

The legal tender provision of the notes would be necessary only as specifying the medium in which payment of debts should be made, to prevent misunderstanding, and for the protection of debtor and creditor alike. The new dollar being a quantity of value, and not of a specified commodity, a loan might be returned in any commodity of that value but for some such provision.

The provision could in no case wrong a creditor, for what he would receive in payment of the debt would be a positive guarantee to deliver him the value specified in any commodity he chose. Making the money redeemable in any of the commodities on which it is based would be only a form, and might be omitted; it is suggested merely as obviating any objections to an irredeemable money. Of course the government would never be called upon to so redeem money, since the holder of it could exchange it for the commodity wanted in the open market to equal advantage. No reserve of commodities of any kind need be kept, therefore, for redemption purposes. One great difference between this plan and existing systems will, of course, be seen at once: the present system promises a definite amount of gold, and must, therefore, keep a gold reserve; but as no one really wants the gold, except to exchange for commodities, this plan proposes to do away with the necessity for a gold reserve by guaranteeing that the money can be directly exchanged for such commodities at the current market price,—which is all that can be done with the gold,—and that the average purchasing power of such money shall not vary as gold does.

It must not be supposed that this plan contemplates any control of individual prices. Such will be free to fluctuate in accordance with the law of supply and demand, as they now and ever must do, regardless of the monetary system used. It would not be desirable, even if it were possible, to make individual prices constant; but what is desirable and possible, and what it is believed this system would accomplish, is to relieve the prices of all commodities from the fluctuations due to changes in value of the one commodity by which all others are measured; to make the money—the one commodity which no one wants except for measuring the value of and exchanging for other commodities—of constant value. The prices and values of gold and silver would then depend on their use for other than money purposes, or for money purposes in other countries, and if the value of either metal should fall, or fail to continue to rise, there would be no room for complaint that it was being discriminated against by the laws, since all commodities would be treated alike, and the demand for none increased over what it would otherwise be by its selection for monetary uses.

It is evident that gold could still be used as a hoard of value, if desired, but such use would in no way interfere with the volume of money, as it now does. Neither would the hoarding of money itself affect prices and cause business stagnation as is the case now. The reasons for such hoarding would be mostly done away with, but if any should remain and the money be hoarded, the government would at once issue as much more as was needed to supply the deficiency so created, thus maintaining its value constant, and when the money hoarded was again put in circulation the government would withdraw a portion of it if it were excessive in amount.

The exchange of the new money for the existing kinds would be a matter of practical financiering, presenting no unusual difficulties. This need not be enlarged upon.

The gold certificates should be redeemed with the gold now held for that purpose. This gold, as well as that now in private hands, would thereafter take care of itself.

The silver dollars, and all forms of paper money, should be redeemed in the new money, dollar for dollar; the paper money should be cancelled, and the bullion—both gold and silver—sold gradually, with due regard to the effect of such sales on the prices of gold and silver, especially the latter. The proceeds of such sales in the new money should also be retired from circulation.

As a final result, the new money issued would all be in the form of loans to banks or individuals, except to the amount used in redeeming the uncovered paper now outstanding, less the reserve fund (and some loss that would result from the sale of silver below the price paid for it). This net balance of the new money issued, above what was issued as a loan, could be left as an uncovered paper issue, as it now is; but for the sake of uniformity it would be better to make all the money a loan issue, in which case it would be necessary to issue bonds to take up such amount. It represents now, of course, a remnant of our war debt, not refunded. No increase of interest charges would result from funding it in bonds, for the interest on the bonds would be offset by the interest on the equal amount of extra money that would be loaned in that case. It would make no difference as regards this general plan which of the two methods were adopted.

This plan should not be confounded with any "fiat money" or unlimited "greenback" proposals. Its main point is directly the opposite of these, to secure a more complete control of money volume. It is not an attempt to make something out of nothing, or to create value by government fiat or authority where none existed before, or to coin the government's credit,—although there is no valid objection to doing the latter when properly limited.

It is simply an exchange of credit, analogous to the operation of every bank. The government would loan a command over immediate goods (represented by its promise to deliver such goods on demand) in exchange for a promise to return such command over goods at a future time, and secured by a deposit of collateral; and in payment for the difference between the value of present and future goods it would charge interest. This is precisely what the loan department of every bank does. Every man who accepted the money in payment for goods would deposit, for the time being, with the government the command over commodities in general which he owns; the money being his certificate of deposit. This would constitute the fund from which the loans were made, just as the deposits in a bank constitute, in the main, its loan fund. When the money was used to purchase goods, it would be redeemed, so far as the purchaser was concerned, and the claim would be transferred to the seller of the goods, who in turn would become a depositor.

Like every bank, the government would rely on the probability that all claims against it would not be presented for payment at once, but this probability would amount to a certainty in the case of the government, for there would be no probability of any of the claims being presented for direct redemption, as every one who had goods to sell would redeem the notes, so far as the holder was concerned.

The honesty of the government as an agent for all the people is, of course, assumed in this plan; but the credit of the government, in any other than a trust capacity, is neither assumed nor involved, since it would hold secured claims against others for every dollar issued (unless, of course, a portion of the money was left as an unsecured issue, which, as above stated, is no necessary part of the plan).

Money, in its ultimate analysis, is simply a claim which the holder has against society for goods in general. It is the faith that such claim will be recognized, and its value be stable, that gives currency to all money.

This faith, in the case of coin, is based wholly on long custom and usage; in the case of paper money, it rests on such custom joined to the pledge—express or implied—of the issuer of the paper.

Selling is simply the exchange of a particular thing for a command over things in general, and the reverse—buying—is the exchange of the general command over goods for some particular good.

In all existing moneys, this claim is one only of usage, and its value is variable. In the plan proposed it becomes a definite promise of such goods in general, and to a definite value, the government being the guarantor.

The plan closely resembles the present national banking system, but broadened and improved, and with the objectionable features of that system removed.

CHAPTER X.
MERITS AND OBJECTIONS CONSIDERED.

The foregoing chapter is only an outline, but is believed to be a sufficiently definite one to show the feasibility of the plan.

Merits of Plan.

The merits of the plan are believed to be:—

(1) It furnishes a standard of value as nearly invariable as it is possible to obtain in practice.

(2) It gives a medium of exchange conforming in value closely to the standard, one which is cheap, convenient, elastic, and to be had in any amount needed.

(3) It would prevent panics. This may seem an extravagant assertion, but further consideration will show that it is well founded. A panic, whatever the cause, manifests itself as an unreasoning fear and distrust, which prevents credit from doing its usual work, and creates an excessive demand for money; not only because the money is then needed by each individual who demands it, but because each is afraid if he does not get it then he will not be able to get it when he does need it. It means a hoarding of money, a great rise in its value, or, as generally expressed, a great fall in prices. All this is enhanced by the knowledge of the limited amount of money; in fact, the fear is not so much of the ultimate solvency of banks and business institutions as of the fact that there may not be money enough to go round, and that those who are not first will be at a disadvantage. The plan proposed will, in the first place, prevent the growth of any such fear up to the panic point, by the knowledge that the government stands ready to furnish any amount of money that may be needed to maintain prices; and, in the second place, if by any chance such a fear should arise, its first manifestation would be falling prices, which would at once bring an increase of money volume to meet the demand. It is well known that nothing will so effectively prevent a panic that is impending, or check one that has already begun, as the assurance that the institutions involved stand ready to meet any demands that may be made upon them. A run could hardly originate on a bank, believed to be solvent, were it known that it could obtain at any moment all the money needed for the emergency. An element of certainty and stability would, by this protection, be given to all banks, and through them to all solvent and legitimate business institutions, which is now sadly lacking; and business men would be relieved of much of the anxiety and worry that at times harass them under present conditions.

(4) The proposed plan would tend to prevent those alternating periods of stimulation and depression of business known as "good times" and "bad times." It is not to be expected that any money system, however perfect, can wholly prevent excessive speculation, or development beyond the needs of the people, of particular industries; nor can it prevent such action from being followed by its natural consequences of disaster and loss. Wasted labour, like wasted force of any kind, can never be regained. Alternations of prosperity and adversity, of confidence and distrust, will probably always continue, as they always have; but much can be done to lessen the extent of the fluctuations. A money volume adjusted to keep prices constant, as a whole, will evidently operate to prevent prosperity from developing into a "boom" (sure to be followed by a more intense reaction), and will prevent the ensuing depression from reaching its extreme in panic.

(5) The adoption of the scheme would do no violence to existing business. It would act rather as a mild stimulant by a slight raising of prices, and as a greater stimulant, through the confidence it would give. It would do no violence to the habits and customs of the people. Accustomed, as they already are, to a half dozen different kinds of paper money, the issue of a new one by the same authority to take the place of the others would hardly be noticed, especially as the change could be and ought to be made gradually.

If any change were necessary at a future time in the list of commodities constituting the standard, it could be made in the same manner that the standard was first fixed upon, with no disturbance of business, or perceptible change in money value.

(6) The interest received for such money would probably more than pay the interest on the outstanding government bonds, and would be as fair and equitable a form of taxation for that, or any other purpose, as could be devised.

(7) The coin and bullion we now use could be mostly shipped abroad in payment of our private debts,—represented by American securities held there,—and much interest money be saved to this country.

(8) Last, but not least, the plan would be a measure wholly American. This country would stand alone, free from the disturbing effects of foreign monetary legislation. Not that our foreign commerce would be lessened, or would be free from the effects of commercial disturbances in other countries: commerce is such a world-wide and intricate network that it would be impossible, even if it were desirable, for one country not to be affected by changes in others; but our money, the prices of commodities, as a whole, in that money, and the relations of debtor and creditor in this country would be free from foreign influences.

There are many minor merits in the plan, such as its tendency to equalize interest rates on the same, or on equally good, security all over the country; the facility with which money would flow from the central source to the point where it was needed, and return when not needed, instead of having to filter through many banks with much loss of time and expense, as it now does; the saving of what is now lost by abrasion of coin, etc.; but these points need not be enlarged upon.

Objections Answered.

It is to be expected that many objections would be raised to a plan, seemingly so radical as a whole, although it is in reality composed of old and tried methods in most of its parts. It may be well, therefore, to anticipate some of the objections likely to be brought forward and to endeavour to answer them.

Probably one of the first points to be raised against the plan, and one that, judging from recent discussion in magazine articles, would be strongly urged, is that it would have a bad effect on our foreign trade, and would divorce our prices from those of foreign countries.

It has already been shown, in the chapter on foreign commerce, that such fears are wholly unfounded, and that it makes no difference what the money is based on; if it is reasonably stable in value, foreign trade will not be disturbed.

In any event, ceasing to use gold in our domestic commerce would only leave a larger amount available for foreign commerce if it were needed. Gold would continue to be a commodity produced by this country, and dealt in as all commodities are, and if it were a necessity or convenience for the transaction of foreign business, the bankers engaged in such business would keep a sufficient amount on hand for their requirements. It is not believed, however, that any such necessity would be felt, either by the bankers doing a foreign business, or by the government in providing for the payment of interest on its bonded debt. The latter would probably have to be calculated in gold, in accordance with the terms of the contract, but could be paid as well in the current money. All such bonds would in a few years be redeemed, and any inconvenience from this source would be short-lived and slight at most.

As to divorcing our prices from those of other countries, the objection would have no weight. The values of any of our commodities, compared with those in other countries, would in no way be affected. No legislation can affect or determine the amount of one commodity that will exchange for another, either at home or abroad, except as it may alter the relations of supply and demand affecting them, by tariffs or taxes, or by the selection of some special one for a particular use, as is now done in the case of gold for money uses.

The values of gold, and of silver (to a less degree), would be the only things affected by the proposed change. All others would remain the same: the money of our own or any other country would continue to be used as a measure of such values, and if our prices rose as measured in such money, so also would foreign prices by the same measure. The exchange rates would vary as they now do, and between wider limits; but the variations would, probably, not be rapid enough to affect foreign trade injuriously. Our money would be constant in value, and if the gold varied, the slight inconvenience it might be to the few directly engaged in foreign trade would be a small matter compared with doing violence to our immense domestic commerce, by using such a variable standard.

In regard to all obligations that are made payable specifically in gold, they should, of course, be paid on that basis; but as the value of gold would be lessened by the shipment of it abroad, if we abandoned it as a money basis, the makers of such obligations would suffer less than they now do, or are likely to do in the future, because of the appreciation of gold value. Gold could always be had to meet such obligations by paying its current price, and that price would represent less of commodities in general than it now does.

It does not seem as if there could be any objection raised to the plan on the ground of unconstitutionality, since the greenbacks were, and are, held to be constitutional, and the new notes would be promises to pay gold and silver, as well as other commodities, if they were included in the list on which the money was based, not, to be sure, in a definite quantity, but in a definite value.

A more valid objection might be urged, in the danger of entrusting to public officials so great a power as the control of money value would seem to be.

In reply to this it may be said, that an inefficient, or to some extent even dishonest, control would be far preferable to no control at all,—which is the present condition. The greater concentration of capital in our modern industrial system, and the increasing values handled, necessitates the entrusting of greater responsibilities to individuals, in both public and private business, and it has not been found that the men selected for the higher positions of trust in public life were often recreant to the trust reposed in them, or inadequate to its responsibilities, even where much was left to their discretion. In the plan proposed, however, almost nothing would be left to the discretion of the officials in charge.

The act of Congress putting the plan in force could provide for any contingencies likely to arise, and the duties of the officials would be mandatory, so far as the adjustment of the volume of money was concerned and the method of accomplishing it. Beyond that, errors of judgment, or even of intention, could do little harm. Surely it is not expecting too much of a public official, that he shall carry out his mandatory instructions, especially as any variation therefrom would be liable to immediate detection, and could be corrected before harm was done.

It might be objected that the government should not go into the banking business, that it is not one of its legitimate functions.

Avoiding the question of what the legitimate functions of government are,—about which there is room for a large difference of opinion,—it may be said that the plan does not contemplate the government entering the banking business as a competitor of existing banks, but rather as a regulator of them. This function it already exercises, and the popular demand is rather for an increase of such control. Furthermore, the Treasury, under the present system, is the largest holder of cash in the country, and its action is at any time of vital interest to the banks. It has more than once come to their aid in perilous times, to the extent of its ability, and had its ability been greater it could, and doubtless would, have done so more frequently. At times, moreover, the actual money held in the Treasury has been excessive, and by diminishing the volume of money in circulation this has badly affected business.

The proposed plan would prevent this, and while not materially enlarging the functions now exercised by the government, would make its control of the banking system more direct and effective, to the benefit alike of the banks and the public. Our present banking system, admittedly, shows much weakness in times of panic. Each bank expands its credits to the full limit in times of prosperity, for its own profit, and in time of distress contracts them for its own safety, thus increasing the distress at such times. Under this plan its safety, if solvent, would be assured without the need of contracting its credits.

As to controlling the volume of money, this either is, or is not, a proper governmental function. If it is, then justice demands that the control be efficient, and in the interests of an honest money. If it is not,—if the sole duty of government is to certify to the weight and fineness of pieces of metal by coining them,—then it has no right to refuse to coin any amount that may be presented of any metal the people or any section of them desire to use as money; no right to issue, or authorize others to issue, on government credit, any paper money; and no right to forbid, or prevent in any way, banks, firms, or individuals from issuing, on their own credit, any money they chose. All of these acts are a control of money volume. The mere statement of such an alternative is a sufficient refutation of the claim. It would simply be financial anarchy. The government must control money volume, and the control should be real, effective and honest.