The Money Question

[An exchange of views appearing in The Standard, Vol.5, 4 May to 8 June 1889]

FROM: G.S.E. (Germantown, Kansas)

(4) Has not the contraction of our currency by our banks a great deal to do with hard times in the United States, and would it not be better for our government to issue our money without the intervention of banks? We suffer most severely, out here in Kansas by having to pay from two to five per cent per month for money.


(4) The contraction of our currency by our banks, by which I suppose you mean the contraction of the volume of national bank note currency, is an evil that is very much exaggerated. In the first place, out of the $1,700,000,000 of currency, only $150,000,000, or less than nine per cent is national bank note currency; and furthermore the banks have not the right, as they once had, to call in their money at a few days' notice and with it take out their bonds from the vaults at Washington. The law requires, I believe it is six months' notice of such withdrawal, so that a sudden contraction from this cause is impossible. Again, a large amount of currency does not mean that the rate of interest will be low. If money were made a thousand times as plenty as now the result would be simply that a dollar would purchase far less than now, and the farmer who wanted money to buy a threshing machine would have to borrow far more in order to pay for it than he does now. What he would pay for the money would be determined by other circumstances altogether. Moreover the abundance of money would not prevent its piling up in the hands of the few as long as the present laws which govern the distribution of wealth held good. Nevertheless, as you intimate, the issuance of national bank notes under the present law is a wrong. The government should issue all money.

18 May 1889

FROM: Hugo Bilgram (Philadelphia, Pennsylvania)

In reply to G.S.E., you say:

"If money were made a thousand times as plenty as now the result would be simply that a dollar would purchase far less than now."

Will you please give me your reasons for this statement as well as your refutation of the following demonstration that the value of the dollar will remain precisely the same no matter how many valid "prom- ises to pay a dollar" are issued and used as currency?

(1) Such an issue would not affect the demand or supply of gold and could therefore not change the value or the purchasing power of gold, which is determined by the "margin of the mining opportunities."

(2) John Locke's statement : "Money differs from uncoined silver only in this that the quantity of silver in each piece of money is ascertained by the stamp it bears, which is set there to be a public voucher for its weight and fineness," which is accepted by Ricardo, Mill, Walker, Newcomb, and others, shows that the value of a dollar equals its cost of production?

(3) The value of a promise to pay a dollar, unless made by an irresponsible or insolvent party or dishonestly repudiated by a solvent party, is independent of the number of such promises in existence.

It appears to me that your position can be held only if you can show that a multiplication of valid promises to pay dollars or their equivalents, when used as currency, will affect the cost of producing gold at the margin of mining opportunities.

I am aware that Ricardo, Mill, Walker, etc., can be quoted in support of your assertion; but as they fail to show how this doctrine agrees with their other proposition, I would be pleased to have you not only substantiate it by sound arguments, but also to show the error of the above demonstration to the contrary. Yours truly,


Of course, if the volume of gold and silver coined money is to be largely increased you must presuppose a large increase in the production of gold and silver, because a very large percentage of all the gold and silver in the world is already coined. And if the volume of bullion is largely increased it will be relatively a cheaper product, and will exchange for less than now, The question then is, Can a government issue an indefinitely large number of valid "promises to pay" gold and silver when the amount of gold and silver remains fixed without bankrupting itself. I hold that it cannot.

You say (3): "The value of a promise to pay a dollar, unless made by an irresponsible or insolvent party, or dishonestly repudiated by a solvent party, is independent of the number of such promises in existence." This is true so long as the payment can be made in whatever passes for currency, as, for instance, in a bank draft or check, and so long as the dates of payment are various. But suppose all such promises were notes issued by the government, and were promises to pay gold and silver, and all payable on demand. Suppose them, then, to be increased indefinitely in quantity. Would their value, then, be independent of their number if the amount of gold and silver remained fixed? I think not. A government that would issue an indefinitely large amount of such promises would soon be insolvent.

There is one other supposition, and that is that the government can issue an indefinitely large amount of fiat, irredeemable paper money. Supposing then that it could and did issue an enormous amount of such money, buying up the outstanding debt and paying for vast public expenditures therewith. I believe that even then if the amount were, say one hundred times as great as our present currency, the value of a dollar might decline, for the simple reason that for the great part of the money there would be no possible use. Bank credits would then, as now, perform the services of money in a far more expeditious and convenient way. This , however , is a point that I did not consider in writing the answer you refer to.

8 June 1889

FROM: Hugo Bilgram

PHILADELPHIA.-Will you favor me with your reply to a few questions supplementary to my inquiry which you kindly answered in Volume v, No. 20, from which you will see why your rejoinder fails to quite satisfy me;

(1) If in your opinion the government can not issue an indefinitely large number of valid "promises to pay" gold and silver when the amount of gold and silver remains fixed without bankrupting itself, how is it that people can issue "promises to pay" in the form of mortgages, promissory notes, bonds, etc., far in excess of all the silver and gold in existence without a fear of depreciation as long as behind each individual promise there is marketable Wealth, other than gold or silver, in excess of the nominal value promised.

Mercantile indebtedness being not limited by the amount of gold extant , why should notes used for currency be so limited?

(2) From your answer I presume that your assumption of a depreciation of currency in case of an expansion of its volume is explained on the score of insolvency. This case was carefully excluded in my question. What reason have you to assume insolvency to necessarily follow an expansion of credit money? Will the value of a dollar be affected by an expansion of currency as long as it remains within the bounds of sound credit?

(3) What do you mean by fiat or irredeemable paper money? In its verbal meaning such a thing is to me inconceivable. Paper that is virtually irredeemable is worthless. The so-called inconvertible notes, though not instantly convertible into coin, are redeemed in services when accepted by the issuer for taxes. They are promises, but the promise of redemption is only implied, and based upon the "confidence in the government," This looseness of contract is a constant temptation to partially repudiate, to which unfortunately too many governments have yielded.

(4) How can the value of a dollar decline while there is no use for a portion of the money as such if, according to John Locke, the value of money is not due to the use of gold as money, but to the commodity value of gold? Will the commodity value of that wealth to which the holder of the note has a right of action be wiped out of existence if more such valid claims are permitted to be used as currency than are needed to carry an the commerce of the world?

(5) What is the object of a tax of ten per cent annually on the use of bank credits as currency, i. e., on the issue of currency notes by any but the national banks, if, as you say, bank credits can take the place of currency?


(1) There seem to me to be only two ways for a government to issue money other than gold or silver; one is to issue promises to pay gold or silver, and the other is to issue paper money which does not promise anything except, perhaps, that it will be received from the holder for taxes or debts. To say that the government has wealth "other than gold or silver" behind its notes is not drawing a parallel case to that of a man who issues a note secured by a definite piece of land or definite article of wealth, such as a house. The promissory notes, bonds, etc., you speak of are mostly secured by definite and tangible securities. Moreover, a government's notes would all be payable on demand, while private notes are payable some to-day, some to-morrow, some a month or a year from now.

(2') For the reason that men are apt to doubt the solidity of any corporate body that goes overwhelmingly into debt unless it is compelled to; and if a government were compelled to by war there would be a still greater reason for distrusting its solvency.

(3) By fiat money I mean just what you have described, i. e., paper money which does not promise to pay the holder anything, but may be receivable for taxes.

(4) I was speaking of paper money not secured by any property. If there were an over abundance of such money I think it very probable that the unit value would decline simply by reason of the over abundance.

(5) The object of such a tax is to give the national banks a monopoly. It can only be defended by defending the unjust system by which a government transfers its own powers to a few individuals.

FROM: Walter Manning (Boston, Massachusetts)

The statement of W.B.S. that should the government issue one hundred times the amount of currency now in circulation the value of the dollar might decline because we should have no use for it, bank credit performing the function of money seems to me to be open to reasonable objection.

No doubt the increase of currency "abnormally" would decrease the .purchasing value of a dollar in the rise of prices of articles to be purchased, but any excess of currency always finds its way into the bank vaults to be used as a basis for loans and discounts. It no doubt would have a tendency to lower the rate of discount, by creating an easy money market. But to say that a solvent government like United States could over issue a legal tender circulating medium, redeemable in any and and all necessities of life, unhampered by gold or silver redemptive clauses, or that such legal tender could over lose its full unit value in exchange, would imply an issue in exeess of its prerogative of taxation. The case in point is illustrated by the seeming appreciation of our greenbacks during and after the war. The fluctuations registered were the erratic movements of gold which was practically demoralized by the bankers by the suspension of specie payments, converting it into a commodity, but yet the law of the land declared that twenty-five and eight-tenths grams of gold was the unit dollar. Is it not a severe commentary upon the financial legislation of that time that the only party that refused the greenback was the government that issued it, and had the influence of the lobby been less the word "except" would have been left out of the contract and gold, silver and greenbacks would have been equivalent in paying powers as money, but no doubt the two metals would have gone abroad, on account of the rise of prices incident to large production and consumption during the war. I do not believe the ills of society can be cured by an increase of the currency. The amount of currency adjusts itself to the requirements of exchange and when there is a surplus it resides in the banks vaults until called into requisition by an increase of the smaller exchanges of trade.