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.
RESPONSE FROM: W.B.S.
(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,
FROM: W.B.S.
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?
FROM: W.B.S.
(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.
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