55
MONEY
YOU now know more than most people about the money market. But it is not enough to know what settles the value of stocks and shares in spare money from day to day. All money is not spare money. Few of us spend as much on shares as on food and clothes and lodging. Most of us, having no spare money, would as soon dream of buying shooting lodges in Scotland as of investing or speculating on the Stock Exchange; yet we use money. Suppose there were no spare money on earth, what would fix the value of money? What is money?
Take a gold coin for instance. You are probably old enough to remember such things before the war swept them away and substituted bits of paper called Treasury notes; and you may be young enough to live until they come back again. What is a gold coin? It is a tool for buying things in exactly the same sense as a silver spoon is a tool for eating an egg. Buying and selling would be impossible without such tools. Suppose they did not exist, and you wanted to go somewhere in a bus! Suppose the only movable property you had was twenty ducks and a donkey! When the bus conductor came round for the fare you would offer him the donkey and ask for the change in potatoes, or offer him a duck and ask for the change in eggs. This would be so troublesome, and the bargaining so prolonged, that next time you would find it cheaper to ride the donkey instead of taking the bus: indeed there would be no buses because there would be nobody willing to take them, unless buses were communized and fares abolished.
Now it is troublesome to take a donkey about, even when it takes you, but quite easy to carry as much gold as a donkey is worth. Accordingly, the Government cuts up gold into conveniently shaped bits weighing a little over 123 grains of standard gold (22 carat) apiece, to be used for buying and selling. For transactions that are too small to be settled by a metal so costly as gold it provides bronze and silver coins, and makes a law that so many of these coins shall pass as worth one of the gold coins. Then buying and selling become quite easy. Instead of offering your donkey to the bus conductor you exchange it for its worth in coins; and with these in your pocket you can pay your bus fare in two seconds without having any words about it.
Thus you see that money is not only a necessary tool for buying and selling, but also a measure of value; for when it is introduced we stop saying that a donkey is worth so many ducks or half a horse, and say instead that it is worth so many pounds or shillings. This enables accounts to be kept, and makes commerce possible.
All this is as easy as A B C. What is not so easy is the question why the donkey should be worth, say, three-quarters of a sovereign (fifteen bob, it would be called at this price), or, to put it the other way, why fifteen bob should be worth a donkey. All you can say is that a buyer at this price is a person with fifteen shillings who wants a donkey more than she wants the fifteen shillings, and a seller at this price a person with a donkey who would rather have fifteen shillings than keep the donkey. The buyer, though she wants a donkey, does not want it badly enough to give more than fifteen shillings for it; and the seller, though she wants money, will not let the donkey go for less than fifteen; and so they exchange. Their respective needs just balance at that figure.
Now a donkey represents just a donkey and nothing else; but fifteen shillings represents fifteen shillingsworth of anything you like, from food and drink to a cheap umbrella. Any fund of money represents subsistence; but do not forget that though you can eat and drink and wear subsistence, you cannot eat or drink or wear Treasury notes and metal coins. Granted that if you have two shillings the dairyman will give you a pound of butter for it; still, a pound of butter is no more a round piece of metal than a cat is a flat iron; and if there were no butter you would have to eat dry bread, even if you had millions and millions of shillings.
Besides, butter is not always two shillings: it is sometimes two and twopence or even two and sixpence. There are people now living who have bought good fresh butter for fourpence a pound, and complained of its being dear at that. It is easy to say that butter is cheap when it is plentiful, and dear when it is scarce; but this is only one side of the bargain. If ten pounds of butter cost a sovereign on Monday and a sovereign and a quarter on Saturday, is that because there is less butter or more gold?
Well, it may be one or the other or both combined. If the Government were to strike off enough new sovereigns at the Mint to double the number in circulation we should have to pay two sovereigns for ten pounds of butter, not because butter would be scarcer but because gold would be more plentiful. But there is no danger of this happening, because gold is so scarce and hard to get that if the Government turned more of it into sovereigns than were needed to conduct our buying and selling, the superfluous ones would be melted down, and the gold used for other purposes, in spite of the law against it; and this would go on until sovereigns were so scarce that you could get more for gold in the form of sovereigns than in the form of watch chains or bracelets. For this reason people feel safe with gold money: the gold in the sovereign keeps its value for other purposes than buying and selling; and if the worst came to the worst, and the British Empire were annexed by the planet Mars, and only Martian money were current, the sovereigns would still be taken in exchange for as much butter or anything else as before, not as money, but as so much gold; so that the British sovereign would buy as much as a Martian gold sovereign of equal weight.
Suppose, however, you had a dishonest Government! Suppose the country and its Mint were ruled by a king who was a thief. Suppose he owed large sums of money, and wished to cheat his creditors. He could do it by paying in sovereigns which were made of lead, with just gold enough in them to make them look genuine. Henry the Eighth did it less crudely by giving short weight in silver coins; and he was not the only ruler who played the same trick when pressed for money. When such frauds are discovered prices go up and wages follow them. The only gainers were those who, like the king, had borrowed heavy money and were paying it in light; and what they gained the creditors lost. But it was a low trick, damaging English as well as royal credit, as all English debtors were inextricably and involuntarily engaged in the swindle as deeply as the king.
The moral is that a dishonest ruler is one of the greatest dangers a nation has to dread. People who do not understand these things make a great fuss because Henry married six wives and had very bad luck with most of them, and because he allowed the nobles to plunder the Church. But we are far more concerned today with his debasement of the coinage; for that is a danger that is hanging over our own heads. Henry’s trick is now played not only by kings, but by republican governments with Socialist majorities and by the Soviets of proletarian States, with the result that innocent women, provided comfortably for by years of self-denial on the part of their parents in paying insurance premiums, find themselves starving; pensions earned by lifetimes of honorable and arduous service lose their value, leaving the pensioners to survive their privations as castaways survive in a boat at sea; and enormous fortunes are made without the least merit by A, B, and C, whilst X, Y, and Z, without the least fault, go bankrupt. The matter is so serious and so menacing that you must summon all your patience while I explain it more particularly.
At present (1927) we do not use sovereigns. We use bits of paper, mostly dirty and smelly, with the words One Pound printed in large letters on them, and a picture of the Houses of Parliament on the back. There is also a printed notice that the bit of paper is a currency note, and that by Act of Parliament IV and V Geo. V, ch. XIV, if you owe anyone a pound you can pay him by handing him the bit of paper, which he must accept as a full discharge of your debt to him whether he likes or not.
Now there is no use pretending that this bit of paper which you can pass as a pound is worth anything at all as paper. It is too small and too crowded with print and pictures to be usable for any of the uses to which paper can be put, except that of a short title deed to a poundsworth of goods. Yet there is no law to prevent the Government, which owes 7700 million pounds to its creditors, from printing off 7700 millions of these one pound Treasury notes, and paying off all its home creditors with them, even though a thousand of them would not buy a cigarette.
You may say that this is too monstrous to be possible. But it has been done, and that quite recently, as I know to my cost. The German Government did it after the war when the conquerors, with insane spite, persisted in demanding sums of money that the Germans had not got. The Austrian Government did it. The Russian Government did it. I was owed by these countries sums sufficient to support me for the rest of my days; and they paid me in paper money, four thousand million pounds of which was worth exactly twopence halfpenny in English money. The British Government thought it was making Germany pay for the war; but it was really making me and all the other creditors of Germany pay for it. Now as I was a foreigner and an alien enemy, the Germans probably do not feel very sorry for me. But the same occurred to the Germans who were owed German money, whether by foreigners or by other Germans. Merchants who had obtained goods for bills payable in six months paid those bills with paper Marks and thus got the goods for nothing. Mortgages on land and houses, and debentures and loan stocks of every redeemable sort, were cleared off in the same way. And one very unexpected result of this was that German employers, relieved of the burden of mortgages and loans such as the English employers were bearing, were able to undersell the English even in the English market. All sorts of extraordinary things happened. Nobody saved money, because its value fell from hour to hour: people went into a restaurant for a five million lunch, and when they came to pay found that the price had gone up to seven millions whilst they were eating. The moment a woman got a scrap of money she rushed to the shops to buy something with it; for the thing she bought would keep its usefulness, but the money that bought it, if she kept it until tomorrow, might not purchase half so much, or a tenth so much, or indeed anything at all. It was better to pay ten million marks for a frying-pan, even if you had two frying-pans already, than to buy nothing; for the frying-pan would remain a frying-pan and fry things (if you had anything to fry) whatever happened; but the ten million marks might not pay a tram fare by five o’clock the same evening.
A still better plan in Germany then was to buy shares if you could get them; for factories and railways will keep as well as frying-pans. Thus, though people were in a frantic hurry to spend their money, they were also in a frantic hurry to invest it: that is, use it as capital; so that there was not only a delusive appearance of an increase in the national capital produced by the simple expedient of calling a spare loaf of bread fifty thousand pounds, but a real increase in the proportion of their subsistence which people were willing to invest instead of spending. But however the money was spent, the object of everyone was to get rid of it instantly by exchanging it for something that would not change in value. They soon began to use foreign money (American dollars mostly); and this expedient, eked out with every possible device for doing without money altogether by bartering, tided them over until the Government was forced to introduce a new gold currency and leave the old notes to be thrown into the waste paper basket or kept to be sold fifty years hence as curiosities, like the famous assignats of the French Revolution.
This process of debasement of the currency by a Government in order that it may cheat its creditors is called by the polite name, which few understand, of Inflation; and the reversal of the process by going back to a currency of precious metal is called Deflation. The worst of it is that the remedy is as painful as the disease, because if Inflation, by raising prices, enables the debtor to cheat the creditor, Deflation, by lowering them, enables the creditor to cheat the debtor. Therefore the most sacred economic duty of a Government is to keep the value of money steady; and it is because Governments can play tricks with the value of money that it is of such vital importance that they should consist of men who are honest, and who understand money thoroughly.
At present there is not a Government in the world that answers fully to this description. Between our own Government, which took advantage of the war to substitute Treasury notes for our gold currency, and the German and Russian Governments, which issued so many notes that a vanload of them would hardly buy a postage stamp, the difference is only one of degree. And this degree was not in the relative honesty of Englishmen, Russians, and Germans, but in the pressure of circumstances on them, and consequently of temptation. Had we been defeated and forced to pay impossible sums to our conquerors, or momentarily wrecked as Russia was by the collapse of the Tsardom, we should not have been any honester; for though the doubling of prices that occurred here seems to have been caused by scarcity of goods and labor rather than by an excessive issue of paper money, we still treat with great respect as high financial authorities gentlemen who recommend Inflation as a means of providing industry with additional capital. Whether these gentlemen really believe that we could double our wealth by simply printing twice as many Treasury notes, or whether they owe so much money that they would be greatly relieved if only they could be let pay it in paper pounds worth only ten shillings, is not always easy to guess. But if you catch your Parliamentary representative advocating Inflation, and ask him, at the risk of being told that you are no lady, whether he is a fool or a rogue, you will give him a salutary shock, and force him to think for a moment instead of merely grabbing at the illusion of enriching the nation by calling a penny twopence.
And now, if you agree with me that it is the duty of a Government to keep the value of its money always as nearly as possible at the same level, we are both up against the question, “What level?” Well, you may take it as a rule of thumb that the answer always is the existing level, unless it has been tampered with and has wobbled badly, in which case the easiest answer is “Whatever level it had before it began to wobble”. But if you want a real explanation and not a mere rule of thumb, you must think of coins and notes as useful articles which you carry about because without them you cannot take a bus or a taxi or a train, or buy a bun. There must be enough of them to supply you and all the other people who have purchases to make. In short, coins and notes are like needles or shovels; and their value is settled in the same way. If the manufacturers make ten times as many needles as anyone wants, then their needles will fetch nothing as needles, because no woman will pay anything for the one needle she wants if there are nine lying about to be had for nothing. So all that can be done is to take the nine worthless needles and use the steel in them to make something else (say steel pens), after which there will be no longer any useless needles, and the remaining useful ones will be worth at least what it cost to make them, because sempstresses will want them badly enough to be willing to pay that price. An intelligent community will try to regulate the supply of needles so as to keep their value at that level as nearly as possible. A Capitalist community, on the contrary, will regulate it so as to make needles yield the utmost profit to the capitalist. But anyhow the value will depend on the quantity available.
Now just as a needle is for sewing, and is of no legitimate use for anything else, so coins and notes are for enabling people to buy and sell, and no use for anything else. And one coin will do for many sales as it passes from hand to hand, just as one needle will do to hem many handkerchiefs. This makes it very difficult to find out how many needles and coins are wanted. You cannot say “There are so many handkerchiefs in the country which must be hemmed; so we will make a needle for every one of them”, or “There are so many loaves of bread to be sold every morning; so we will make coins or issue notes for the price of every one of them”. No person or Government on earth can say beforehand how many needles or coins will be enough. You can count the mouths you have to feed, and say how many loaves will be required to fill them, because a slice of bread can be eaten only once, and is destroyed by being eaten; but a needle or a sovereign or a Treasury note can be used over and over again. One pound may be lying in an old stocking until the landlord calls for it, whilst another may be changing hands fifty times a day and effecting a sale every time. How then is a Government to settle how many coins and notes it shall issue? And how is a needle manufacturer to decide how many needles he shall make?
There is only one way of doing it. The needle makers just keep on making needles at a fancy price until they find they cannot sell them all without charging less for them; and then they go on charging less and less, but selling more and more (because of the cheapness), until the price is so low that they would make less profit if it went any lower, after which they make no more needles than are necessary to keep the supply, and consequently the price, just at that point. The Government has to do the same with gold coins. At first, because gold is more useful for coins than for anything else, an ounce of gold coined into sovereigns will be worth more than an ounce of uncoined gold (called bar or bullion). But if the Government issues more sovereigns than are needed for our buying and selling there will be more sovereigns than are wanted; and their value per ounce of gold will fall below that of gold bullion. This will be shewn by all prices going up, including that of gold in bars and ingots. The result will be that gold merchants will find it profitable to melt down sovereigns into bars of gold to be made into watches and bracelets and other things than coins. But this melting down reduces the number of sovereigns, which immediately begin to rise in value as they become scarcer until gold in the form of sovereigns is worth as much as gold in any other form. In this way, as long as money consists of gold, and melting down cannot be prevented as soon as it becomes profitable, the value of the coinage fixes and maintains itself automatically. It is against the British law to melt down a British sovereign in the British Empire; but as this silly law cannot restrain, say, a Dutch goldsmith in Amsterdam from melting down as many British sovereigns as he pleases, it does not count.
Though this settles the value of gold money, and all prices can be fixed in terms of gold, a penny being the two hundred and fortieth part of a sovereign, half a crown the eighth part of a sovereign, and so on, yet you cannot have gold pennies or even sixpences: they would be too small to handle. Also, if you want to make or receive a payment of five thousand pounds, you would find five thousand sovereigns more than you would care to carry. We get out of the penny and sixpenny difficulty by using coins of bronze and silver, making a law that bronze pennies shall be accepted, provided not more than twelve are offered at a time, as worth the two hundred and fortieth part of a sovereign, and that silver coins shall pass up to £2. We get over the five thousand pound difficulty by allowing the Bank of England to issue promissory notes, payable at sight in gold at the Bank, for sums of five pounds, ten pounds, a hundred pounds, and so on. People hand these notes from one to another in buying and selling, knowing them to be “as good as gold”. Certain Scottish and Irish banks have the same privilege on condition that they hold sufficient gold in their cellars to redeem the notes when presented, and, of course, that they do not pay their debts in their own notes.
In this way we all get used to paper money as well as to bronze and silver coins: that is, we get used to pretending that a scrap of paper with a water mark is worth 615 grains of gold or thereabouts; that a bit of metal that is only half silver is worth a much larger piece of pure silver; that 240 bits of bronze are worth a sovereign, and so on. We find these cheap substitutes do just as well as gold coins; and we naturally begin to ask what is the use of having any gold money at all, seeing that we get on quite well without it. Paper is just as effective as an instrument of exchange, and much less heavy to handle. We measure prices in quantities of gold; but imaginary gold does for that as well as real gold, just as you can measure fluids by pints and quarts without having a drop of beer in the house. If only the honesty of Governments could be depended on, the use of gold for money would be a pure luxury, like using gold safety pins and diamond shirt studs instead of common ones, which fasten quite as well.
But that is a very large If. When there is a genuine gold currency, the purchasing power of the coins does not depend on the honesty of the Government: they are valuable as precious metal, and can be turned to other purposes if the Government issues more of them than are needed for buying and selling. But the Government can go on printing and issuing paper money until it is worthless. Where should it stop when the check of gold is removed? As we have seen, it should stop the moment there is any sign of a general rise of prices, because the only thing that can cause a general rise of prices is a fall in the value of money. This or that article may become cheaper by the discovery of new ways of making it, or dearer by a failure in the crops, or worthless by a change of fashion; but all the articles do not move together from these causes: some rise and others fall. When they all rise or fall simultaneously, then it is not the articles that are changing in value but the money. In a paper money country the Government should watch carefully for such movements; and when prices all rise together they should withdraw notes from circulation until prices all fall again. When all prices fall simultaneously the Government should issue fresh notes until they rise again. What is needed is just enough money to do all the ready money selling and buying in the country. When less is issued money gets a scarcity value; so that when you go into a grocer’s shop he will give you more for your money (falling prices); and when more is issued there is a glut of it and the grocer will give less for it (rising prices). The business of an honest and understanding Government is to keep it steady by adjusting the supply to the demand. When Governments are either dishonest or ignorant, or both, there is no safety save in a currency of precious metal.
Remember, by the way, that modern banking makes it possible to do an enormous quantity of business without coinage or notes or money of any sort. Suppose Mrs John Doe and Mrs Richard Roe are both in business. Suppose Mrs Doe sells Mrs Roe five hundred pounds’ worth of goods, and at the same time buys goods from her to the value of five hundred pounds and one penny. They do business to the amount of a thousand pounds and one penny; yet all the money they need to settle their accounts is the odd penny. If they keep their accounts at the same bank even the penny is not necessary. The banker transfers a penny from Mrs Doe’s account to Mrs Roe’s; and the thing is done. When you have to pay a business debt you do not give your creditor the money: you give him an order on your banker for it (a cheque); and he does not go to your bank and cash the cheque: he gives it to his own banker to collect. Thus every bank finds every day that it has to pay a heap of money to other banks which hold cheques on it for collection, and at the same time to receive a heap of money for the cheques it has received for collection from the other banks. These cheques taken together may amount to hundreds of thousands of pounds, yet the difference between the ones to be paid and the ones to be collected may be only a few pounds or less. So the banks began by setting up a Clearing House, as they call it, to add up all the cheques and find out what each bank ought to pay or receive on balance. This saved a great deal of money handling, as the transfer of a single pound from one bank to another would settle transactions involving huge sums. But it presently occurred to the banks that even this pound might be saved if they all kept an account at the same bank. So the banks themselves opened accounts at the Bank of England; and now their accounts with oneanother are settled by a couple of entries in the Bank of England’s books; and trade to the amount of millions and millions is done by pure figures without the use of coinage or notes. If we were all well enough off to have banking accounts money might disappear altogether, except for small transactions between strangers whose names and addresses were unknown to oneanother: for instance, you give an order and pay by a cheque in a shop because you can count on finding the shopkeeper in the same place if there is anything wrong with the goods; and he can count on finding you similarly if there is anything wrong with your cheque; but if you take a taxi on the way home, you can hardly expect the driver to open an account for you; so you settle with him by handing him his fare in coin.
This need for pocket money (change) is greatly reduced by Communism. In the days of turnpike roads and toll bridges every traveller had to keep a supply of money to pay tolls at every turnpike gate and bridge head. Now that the roads and bridges are communized he can travel by road from London to Aberdeen in his car without having to put his hand in his pocket once to pay for the roads, because he has already paid when taking out the communal license for his car. If he pays his hotel bills by cheque he needs no money for his journey except for tips; and when these fall into disuse, as the old custom of making presents to judges has done, it is easy to conceive motoring trips, in the Communist future, being carried out in the greatest luxury by highly prosperous but literally penniless persons.
In this way actual money is coming to be replaced more and more by money of account: that is, we still count our earnings and our debts in terms of money, and value our position in the same way, earning hundreds of pounds, paying hundreds of pounds, owning hundreds of poundsworth of furniture and clothes and motor cars, and yet never having more than a few pounds and a handful of silver in our pockets from one end of our lives to the other. The cost of providing coins and notes for the nation to buy and sell with is dwindling continuously to a smaller and smaller percentage of the value of the goods bought and sold.
It may amuse you to realize that when coinage disappears altogether it does not matter whether we call our debts sovereigns and pennies and shillings or millions and billions and trillions. When the Germans were paying millions for tram fares and postage stamps, no harm was done by the apparent magnitude of the price: poor men could still ride in trams and send letters. If only those prices could have been depended on to stay put, so that the poor man (or the rich one for that matter) could have felt sure that his million mark note would buy as much tomorrow as today, and as much next year as this year, it would not have inconvenienced him in the least that the million mark note used to be a bronze coin. Germany has now stabilized her currency at the old rate of twenty marks to the English pound. Austria stabilized hers at first at the startling rate of 300,000 tenpences to the English pound but had to alter this to 34½ sevenpenny schillings later on. Except for the look of the thing the change made no great difference to the marketing housekeeper. When prices are in millions she soon gets into the habit of dropping the six noughts in conversation across the counter. Such prices seem silly to us because we are not accustomed to millionaire scavengers and beef at billions a pound. We are accustomed to pounds worth 160 ounces of butter; but pounds worth half a grain of butter or ten tons of butter will do as long as they are stabilized at that, and as long as the money is either money of account, existing only as ink marks in ledgers, or paper notes of no intrinsic value. If a tram ticket costs a million pounds it can be paid more cheaply than by a penny, provided the million pounds be only a scrap of paper costing less than a disk of bronze.
To sum up, the most important thing about money is to maintain its stability, so that a pound will buy as much a year hence or ten years hence or fifty years hence as today, and no more. With paper money this stability has to be maintained by the Government. With a gold currency it tends to maintain itself even when the natural supply of gold is increased by discoveries of new deposits, because of the curious fact that the demand for gold in the world is practically infinite. You have to choose (as a voter) between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold.