A New Standard of Value
Walter Bagehot
[Originally published in The Economist,
November 20, 1875, reprinted from the Economic Journal, Vol.2,
1892]
Professor Jevons, of Manchester -- so well know in the economical
and statistical world by his researches on coal -- has written an
excellent treatise on 'Money and the Mechanism of Exchange', which
we strongly recommend to our readers. It is extremely clear, brief
without being dry, and contains a good deal of very interesting
information. And we may add that it is written in a style of
scientific modesty rare in currency books. Mr Jevons is perpetually
aware that the subject abounds in questions of nicety and
difficulty, on which he is quite ready to admit that he may be
wrong. It would be a happy thing if persons far less competent than
Mr Jevons to write on the subject, but who incessantly do so, could
be brought to that admission.
On one point, however, we are at issue with Mr Jevons: he has far
more hope from economical science than we have. He thinks that it
can point out to mankind a far better theoretical standard of value
than gold or silver, and believes that, though it is encumbered with
some difficulties, probably the new plan would on the whole, when we
got used to it, work better than our present one. But for ourselves
we much fear that political economy has no such boon to confer on
mankind, and that we must adhere to one or other of the precious
metals as a standard of value, like our forefathers. Mr Jevons shall
explain his fundamental idea in his own words.
'The question,' he says, 'thus arises whether the progress of
economical and statistical science might not enable us to devise
some better standard of value. We have seen (pp. 136-143) that the
so-called double standard system of money spreads the fluctuations
of supply and demand of gold and silver over a larger area, and
maintains both metals more unchanged in value than they would
otherwise be. Can we not conceive a multiple legal tender, which
would be still less liable to variation? We estimate the value of
one hundred pounds by the quantities of corn, beef, potatoes, coal,
timber, iron, tea, coffee, beer, and other principal commodities,
which it will purchase from time to time. Might we not invent a
legal tender note which should be convertible, not into any one
single commodity, but into an aggregate of small quantities of
various commodities, the quantity and quality of each being
rigourously defined? Thus a hundred pound note would give the owners
a right to demand one quarter of good wheat, one tone of ordinary
merchant bar iron, one hundred pounds weight of middling cotton,
twenty pounds of sugar, five pounds of tea, and other articles
sufficient to make up the value. All these commodities will, of
course, fluctuate in their relative values, but if the holder of the
note loses upon some, he will in all probability gain upon the
others, so that on average his note will remain steady in purchasing
power. Indeed, as the articles into which it is convertible are
those needed for continual consumption, the purchasing power of the
note must remain steady compared with that of gold or silver, which
metals are employed only for a few special purposes.'
And he goes on to explain that of course this kind of currency
could not, in practice, be used, as no one wishes to have all these
miscellaneous things, or could pass them away if he had them. But Mr
Jevons does not think this objection conclusive: he borrows from a
nearly forgotten writer of fifty years ago -- named 'Lowe' -- an
expedient which he thinks meets the difficulties satisfactorily.
"Mr Lowe', we are told, 'treats, in a very enlightened
manner, of the fluctuations in the value of money, and proceeds to
propound a scheme, probably invented by him, for giving a steady
value to money contracts. He proposes that persons should be
appointed to collect authentic information concerning the prices at
which the staple articles of household consumption were sold. In
regard to corn and sugar, authoritative returns were then, and have
ever since been, published in the London Gazette, and there seemed
to be no difficulty in extending a like system to other articles.
Having regard to the comparative quantities of commodities consumed
in a household, he would then frame a table of reference, showing in
what degree a money contract must be varied so as to make the
purchasing power uniform. In principle, the scheme seems to be
perfectly sound; but Lowe did not attempt to work out the practical
details, and his plan involves needless difficulties. A very similar
scheme was independently proposed, about eleven years later, by Mr
G. Poulett Scrope, the well-known writer on geology and political
economy. In a very able but now forgotten pamphlet called 'An
Examination of the Bank Charter Question, with an Inquiry into the
Nature of a Just Standard of Value." (London, 1833), Mr Scrope
suggests (p. 26) that a Standard might be formed by taking an
average of the mass of commodities which, even if not employed as
the legal standard, might serve to determine and correct the
variations in the legal standard. The scheme was also described in
Mr Scrope's interesting book on the Principles of Political Economy,
published in the same year (p. 406), and in the second edition of
the same book called Political Economy for Plain People, issued two
years ago (p. 308). The late Mr G.R. Porter, without referring to
previous writers, gave the same scheme in 1838 in the first edition
of his well-known treatise on The Progress of the Nation (Sections
III and IV, page 235). He added a table showing the average
fluctuations of fifty commodities monthly during the years 1833 to
1836. Such schemes for a tabular or average standard of value appear
to be perfectly sound and highly valuable in a theoretical point of
view, and the principal difficulties are not of a serious character.
To carry Lowe's and Scrope's plans into effect, a permanent
government commission would have to be created, and endowed with a
kind of judicial power. The officers of the department would collect
the current prices of commodities in all the principal markets of
the kingdom, and, by a well-defined system of calculation, would
compute from these data the average variations in the purchasing
power of gold. The decisions of this commission would be published
monthly, and payments would be adjusted in accordance with them.
Thus suppose that a debt of one hundred pounds was incurred upon the
1st of July, 1875, and was to paid back on the 1st July 1878; if the
commission had decided in June, 1878, that the value of gold had
fallen in the ratio of 106 to 100 in the intervening years, then the
creditor would claim an increase of 6 per cent in the nominal amount
of the debt. At first the use of this national tabular standard
might be permissive, so that it could be enforced only where the
parties to the contract had inserted a clause to that effect in
their contract. After the practicability and utility of the plan had
become sufficiently demonstrated, it might be made compulsory, in
the sense that every money debt of, say, more than three months'
standing, would be varied according to the tabular standard, in the
absence of an express provision to the contrary.' And Mr Jevons
rather boldly says that 'the objections to this scheme are not
considerable.'
But we confess they seem to us so many, and so important, that we
hardly know where to begin.
First -- it is wholly unfit for a nation which has a foreign
trade. A foreigner wants payment in a medium which he can use in his
own country, and he wants to be precisely sure how much of that
medium he will receive. Since the civil war the United States have
been excessively inconvenienced by the want of such a medium. A bill
drawn on New York for 1,000 dollars would be paid in greenbacks, but
greenbacks are of no use out of America; to be of use elsewhere they
must be changed into gold or silver, and the rate at which they can
be so changed is uncertain. And the 'tabular standard' is radically
faulty in the very same way. No one could tell what a draft, say for
£1,000 on London, would fetch; it might be £1,060, or
anything else. There would always be an uncertain percentage. Since
the Franco-German war London has become the exchange centre for
Europe far more than before, because the infinitesimally small
premium on gold as compared with Bank of France notes introduced an
uncertain element. But al the business so obtained we should lose,
and much more, under the 'tabular standard'. London would be unfit
for exchange business of any sort; there would always be a far
larger inscrutable element which would drive all such business away.
And, more generally, every importer of good into England would then
have to consider what would be his possible loss by fluctuations in
the currency -- which, as America has found to her cost, is the
greatest discouragement and check to trade.
Secondly, -- It would make banking impossible. A banker would
never know what he owed. At periodical intervals the Commissioners
would say that he owed less or more. And in the case of each debt he
must do a separate sum, since money might have changed in
'purchasing power', as respects the 'tabular' commodities, or less
according to the time at which each debt was contracted; it might be
more in six months, and less in three months, or just the contrary.
Then, again, on his unoccupied cash -- say on the £10,000,000
reserve in the Bank of England -- the loss or gain by fluctuations
would be prodigious; and the gain would be no compensation for the
loss, since it would turn the trade into a kind of gambling, by
introducing an incalculable element into it. And it would be quite
impossible to explain the matter to the ordinary and poorer
customers. Farmer A would always say he was cheated if he did not
get as much for his debt as farmer B, though if the two debts were
of different dates such would be the necessary effect of the plan,
and though the banker fully expounded it. No doubt too poor people
would be cheated, not of course by bankers, but by designing people
of every sort; an element incomprehensible by the people is fatal to
a popular currency, for it is essential to one that the people
should understand it -- should know when it was well used, and see
that it was not misused.
Probably our readers will think these objections enough, but we
have not finished; for thirdly, -- it would be necessary to preserve
most elaborate standards of the various articles which constitute
the standard, else we should, in so fine a matter, make the most
serious errors, for almost every article varies in quality as well
as in quantity, and its value depends nearly as much on one as on
the other. But as most articles are perishable you could not
preserve a standard of them. Nor could you define the quality in Act
of Parliament, so that it could be tested. Every one who has studied
our former sugar duties knows how difficult it was to give even a
rude definition of the sort of sugar intended. And if the law were
to try to fix the standard quality of 'fifty' different articles, it
would fail. No draughtsman could put the quality of beef, or pork,
or tea, into an Act of Parliament. Mr Jevons refers to the 'Gazette
average of corn' as if it helped his plan. But there is no better
instance to point this objection: the 'Gazette average' is not the
price of the same kind of corn at different times. It is made up
from the reported sales of 'British corn' in certain markets, or on
the average price of those sales, and consequently, if you compare a
time when much good and little bad wheat was sold with one at which
much bad was sold and little good, you will be comparing things
really different. For statistical purposes such calculations may be
used because they are the best which can be had, but currencies
cannot be framed, or real business transacted upon them.
And lastly, there is a fundamental fault of principle in the
scheme upon which the foregoing objections more or less depend. In a
good currency the paying medium ought either to be identical with,
or readily interchangable into, a definite quantity of the standard
of value. This is so, for example, so long as sovereigns are both
the standard of value and the paying medium, and so long as
banknotes are convertible at once for the number of sovereigns which
each note mentions. but in the 'tabular plan' the 'standard' is the
list of commodities in the table, and the paying medium is the gold
and silver which these commodities are equal to, at variable rates,
fixed from time to time. And in consequence, the paying medium is in
a state of incessant fluctuation, as compared with the standard. Sir
R. Peel's question. 'What is a pound?' is answered by saying: 'The
pound is a list of such and such articles; ' but then none of these
articles are in use; the only things in use are coins and banknotes
payable in coin -- so that the relation of the coinage to the
'standard' is in a state of incessant variation. And this is a
fundamental fault, because the relation of the actual money to the
abstract standard ought always to be the same, for concrete money is
the only means of bringing an abstract standard into action. A good
'standard of value' is of no use without the supplement of a good
paying machinery, and no such machinery can be good which shifts in
its relation to the standard.
This is the essential fault of an inconvertible currency, say, of
'greenbacks' for as no one can demand metal dollars for them, they
are sometimes at one value and sometimes at another. And so would
the paying media under the proposed tabular system; their relation
to the standard would be varied periodically, at the discretion of
Commissioners, and consequently, they would be unfit for the purpose
of commerce.
We cannot think, therefore, that this plan will be of any use in
practice. We must be 'Conservative', so far as an adherence to a
gold and silver coinage goes; but it is instructive to trace the
effects of such schemes, and they could not be discussed unless they
were proposed.