<h2>CHAPTER 45</h2>
<h3>USE, COINAGE, AND VALUE OF MONEY</h3>
<h4>§ I. THE PRECIOUS METALS AS MONEY</h4>
<div class="sidenote">Money defined and reviewed</div>
<p>1. <i>Money we have defined as a material means of payment and medium of
exchange, generally accepted and passing from hand to hand.</i> The origin
and function of money were set forth in the study of capital. The
subject must now be approached from a different side and with the
two-fold purpose of seeing whether there is anything peculiar in the
relation of money to the general problem of value, and what is the
influence of the action of the state on the value of money. The
definition of money implies several ideas. First, the words "generally
accepted means of payment" imply that money, as something bearing the
stamp of social approval, has a peculiar social character, is not an
ordinary good. Second, the definition implies that money itself must be
a thing having value, otherwise it could not serve as a medium of
exchange. Exchange means the taking and giving of things of value. Money
is, therefore, not merely an order for goods, as a card or paper
requesting payment; it is itself a thing of value, though this value may
be due solely to its possessing the money function. This point is one of
the most difficult in the subject. Third, the definition implies that
money is a material thing. The telegram when transferring an order for
the payment of money, the spoken word, the promise to pay, etc., are not
money. Fourth, it implies that money passes from hand to hand, is a
thing that can be handled, and is or can be bodily transported.</p>
<p><span class="pagenum"><SPAN name="Page_432" id="Page_432">[Pg 432]</SPAN></span></p>
<div class="sidenote">Difficulty in applying the definition</div>
<p>The application of the definition is not always easy, for money shades
off into other things that serve the same purpose and are related in
nature. Even special students differ as to the border-line of the
concept, but as to the general nature of money there is essential
agreement. In many problems it appears to be at the same time like and
unlike other things of value, and just wherein lies the difference often
is difficult to determine. The use of money is of such social
importance, and it touches so many practical interests, that it raises
many questions of a political and ethical nature. There are perhaps more
popular errors on this than on any other one subject in economics. Yet
the general principles of money are as fully understood and as firmly
established as any parts of economics.</p>
<div class="sidenote">Standard, or primary, money</div>
<div class="sidenote">Gold-using countries</div>
<p>2. <i>The precious metals, gold and silver, are the standard, or primary,
moneys in the world to-day.</i> Primary, typical, standard money is the
unit in which the value of the money of a country is expressed, no
matter what its form is; the standard is a certain weight and fineness
of a particular metal. Coins of this standard are called full, or real,
money by some writers who deny the title of money to everything else. It
has been shown before that there has been an evolution in the use of
money. The more efficient forms, gold and silver, have competed with
copper, iron, tin, cattle, salt, tobacco. In this contest silver had
proved itself a few centuries ago to be the fittest medium of exchange,
but in the last century gold has, among the leading nations, been
displacing silver rapidly. In a higher degree than any other material,
gold has the qualities of a good standard money in rich and industrially
developed communities. The gold-using countries to-day are those of the
western world. England for perhaps two centuries practically has had
gold as its standard money; the United States since 1834 (except for the
period of paper money from 1862 to 1879); France since about the year
1855, at which time she shifted from silver under the working of the
bimetallic law; and Germany, then<span class="pagenum"><SPAN name="Page_433" id="Page_433">[Pg 433]</SPAN></span> more backward industrially, since
1873. Australia and Japan have reached that result only within the last
few years, and Italy, Russia, India, Mexico—even China and other
Oriental countries—are striving to attain it.</p>
<div class="sidenote">Subordinate kinds of money</div>
<p>In all these countries other kinds of money are used side by side with
gold and silver. The actual money consists of a wide and confusing
variety: silver, nickel, copper, paper in various forms and issued by
various authorities. But among all the kinds, either gold or silver is
found standing preëminent and in a peculiar position. The difficulties
of the money problem must be attacked at the point of standard money
where it is nearest to ordinary value problems and is less complicated
than when the various money substitutes are included. Most of the
fallacies regarding money have arisen not about standard money, but
about paper and light-weight silver.</p>
<div class="sidenote">Coinage defined</div>
<p>3. <i>Coinage is the act of shaping and marking a piece of metal to be
used as money so as to indicate its weight and fineness.</i> The precious
metals can and do circulate as money without coinage. Any other mark
equally plain and equally recognizable serves for many purposes just as
well as the government stamp on the standard metal. The use of metals in
antiquity was without coinage, by weight and test of fineness. In
backward countries to-day most payments are made by weight.
International payments are made by means of gold ingots that bear the
mark of some well-known banking-house, and for that purpose gold bullion
is money without the coiner's stamp. But for most uses government
coinage has marked advantages. It is far more convenient for the average
citizen to handle coins uniform in size and design than the diverse
coins that would be put out by private enterprisers.</p>
<div class="sidenote">Technical features of coinage</div>
<p>An established rate of fineness insuring uniform quality is a great
convenience. In the United States all gold and silver coins are nine
tenths fine; in Great Britain, eleven twelfths. The established weight
of the gold dollar in the<span class="pagenum"><SPAN name="Page_434" id="Page_434">[Pg 434]</SPAN></span> United States is twenty-three and twenty-two
hundredths grains of fine gold or twenty-five and eight tenths grains of
standard gold. The limit of tolerance is the variation either above or
below the standard weight or fineness that a coin is allowed to have
when it leaves the mint. The par of exchange between standard coins of
different countries is the expression of the ratio of fine gold in them.
Thus the par of exchange between the American dollar and the English
sovereign (the "pound") is four and eighty-six and two third hundredths,
that is, four and eighty-six and two third hundredths dollars contain
the same amount of gold as an English gold sovereign. The embossed
design, milled or lettered edges, and other similar devices are merely
to make the coins easily recognizable and difficult to counterfeit.</p>
<div class="sidenote">Seigniorage defined</div>
<p>4. <i>Seigniorage is the right the ruler or state has to charge for
coinage, or it is the charge made for coinage.</i> Coinage as a function of
great importance politically as well as economically was early exercised
by governments or rulers. The prince, king, or emperor stamped his own
device or portrait upon the coin; hence the term seigniorage from
seignior (meaning lord or ruler). The right to issue money came to be
one of the most essential prerogatives of sovereignty. Coinage is rarely
without charge, and often has been a source of revenue to the ruler. In
the Middle Ages this right was frequently exercised by princes for their
selfish advantage to the injury and unsettling of trade.</p>
<div class="sidenote">Free or gratuitous coinage</div>
<p>When no charge is made for coinage, the coinage is said to be
gratuitous. Coinage is said to be free if the subject or citizen can
take bullion to the mint whenever he pleases, paying the usual
seigniorage. Coinage is limited if the government or ruler determines
when coinage is to take place. Thus, coinage may be both free and
gratuitous, when citizens are allowed to bring bullion whenever they
please and have it converted into coins without charge or deduction. But
coinage is free without being gratuitous when any citizen<span class="pagenum"><SPAN name="Page_435" id="Page_435">[Pg 435]</SPAN></span> may bring
metal to the mint, whenever he chooses, to be coined subject to the
seigniorage charge.</p>
<div class="sidenote">Money value under free coinage</div>
<p>5. <i>Where coinage is free and gratuitous the coin is worth the same as
the bullion that is in it.</i> This evidently and necessarily must be near
the truth if the citizens exercise their right. They will not long keep
metal uncoined in their possession when it is worth more in the form of
money, nor will they long keep money from the melting-pot when it is
worth more as bullion. Yet there may be a slight disparity between the
bullion and the money values before the metal is converted into coin or
the coin melted down into metal. A motive for action must exist before
either change will be made; but a thing cannot have considerably
different values in two different uses at the same moment.</p>
<div class="sidenote">Adjustment of supply to value</div>
<p>There is here no special problem of value. The value of gold as bullion
and money is fixed by marginal demand. The several uses of gold are
constantly competing for it: its uses for rings, pens, ornaments,
championship cups, photography, dentistry, delicate instruments, and as
a circulating medium. If the metal becomes worth more in one use, its
amount there is increased and correspondingly diminished in the others.
The supply likewise is influenced by changes in price. Gold-mining is
one among various industries to which men may apply their labor and
capital. Some mines are superior, others average, others marginal which
it barely pays to work. There is, therefore, a rise and fall of the
margin of production with change in price and change in cost of
production. If at a given moment, when it barely pays to work a mine,
gold becomes worth less, that mine will go out of use. As gold rises,
some mines that did not pay before, come into use. A similar variation
has been noted in the case of marginal land, marginal factories,
marginal forges, and marginal agents of every kind.</p>
<div class="sidenote">"What is a dollar?"</div>
<p>The question was once asked in Parliament, "What is a pound?" and a good
question to ask in beginning the study of money is, "What is a dollar?"
The answer, so far as it<span class="pagenum"><SPAN name="Page_436" id="Page_436">[Pg 436]</SPAN></span> refers to the standard money, is: a dollar is
a convenient name applied to twenty-three and twenty-two hundredths
grains of fine gold or twenty-five and eight tenths grains of standard
fineness. The exchange value of gold varies in different places and
conditions, but the name remains the same. A dollar exchanges for more
wheat in Dakota than in New York or for more iron in Pittsburg than in
Oregon, yet it is sometimes asserted that the value is always the same
because the name is always the same. The fallacy of this may be seen in
the equivalent expression that twenty-three and twenty-two hundredths
grains of gold have the same value always and under all circumstances.</p>
<p>The problem of the bullion value of money metal, under gratuitous
coinage, presents no special difficulties. The ordinary theory of value
applies to it. The difficulties of the money question begin at the point
where the money value is seen to diverge from, and depend on, something
else than the value of the bullion. Yet in the principles just discussed
are found a firm foundation for any further study of the question.</p>
<h4>§ II. THE QUANTITY THEORY OF MONEY</h4>
<div class="sidenote">The money use</div>
<p>1. <i>The fundamental use that money serves is to apportion incomes of
goods so as to make them yield the maximum gratification.</i> Money first
increases utility by increasing the ease with which exchange takes
place. Like any tool or agent, it is valued for what it does or helps to
do. But further, it enhances the sum of enjoyments by the division of
goods into proper quantities, making them available at the best time. It
follows from the principle of diminishing utility that the particular
time at which goods are available for wants has an essential bearing on
their value. A hundred loaves of bread in the hands of a single
individual would mold long before they could be consumed. Money enables
men in society to acquire these hundred loaves in a series so that they<span class="pagenum"><SPAN name="Page_437" id="Page_437">[Pg 437]</SPAN></span>
can be used when most needed. Money is the most successful device man
has ever discovered for distributing the supplies of a journey along its
course, and the goods of daily need over a period of time. The use of
money as a storehouse of value is merely an extreme case of keeping
things for the future when they will have a greater gratifying power.</p>
<div class="sidenote">Concept of the money demand</div>
<div class="sidenote">Variation in the average</div>
<p>The fact that money is essentially a valuable good kept on hand as the
best possible provision against emergencies points to the essential
nature of the money demand. Money is sought, in order to form a cash
reserve, up to a point where the loss from keeping it balances the
probable gain. The money use is subject to the law of diminishing
utility; beyond a certain point its added convenience is purchased at
too great cost. Every man may be thought of as having an average, or
usual, money demand, which is that proportion of his income that gives
him more utility retained in money form than if at once expended. A man
with an income and expenditure of fifty dollars a month paid monthly has
use ordinarily for no more than fifty dollars as his cash reserve. While
under ordinary circumstances this is his maximum demand, various
circumstances may diminish it. If his expenses are distributed in two
equal parts (the one on pay-day, the other thirty days later) his
average money demand is twenty-five dollars, not fifty dollars. If most
of his purchasing is done at the beginning of the month, his average
money demand may be perhaps ten dollars. Many a workman purchases on
credit, spends his fifty dollars within an hour after he receives it,
and goes without money for the rest of the month. The average demand of
a community for money required as a reserve is affected by the methods
of doing business. With a given method of use a reduction in the supply
of money results in loss of time and waste of effort; an increase in the
supply results in a lowering of its value relative to other things. In
either case the equilibrium of the marginal utilities of income must be
restored. The<span class="pagenum"><SPAN name="Page_438" id="Page_438">[Pg 438]</SPAN></span> thought of an average, rational, money demand relative to
money income is the fundamental requisite for clear thinking on the
question of money, but to grasp this thought there is needed a certain
power of scientific imagination lacking in some minds.</p>
<div class="sidenote">The quantity theory of money</div>
<p>2. <i>The quantity theory of money is that, other things being equal, the
value of money falls as its quantity increases, and vice versa.</i> This is
an abstract statement of a concrete and difficult problem. The phrase
"other things being equal" betokens the statement of a tendency where
there are several unknown factors. In recent discussion the quantity
theory of money has been questioned by some critics; yet it is held by
most economists to be merely the general law of value as applied to
money. There are three sets of facts to be brought into relationship
with each other in the quantity theory: (1) amount of business or
exchanges to be effected; (2) the methods by which this is done; (3) the
amount of money available to do it. According to the quantity theory we
must expect that when conditions (1) and (2) remain fixed, the value of
money will vary inversely as its quantity. This conclusion follows from
the conception of the money demand as the value of circulating medium
that bears an average proportion to the value of goods exchanged.</p>
<div class="sidenote">Example of its application</div>
<p>Let us consider various conditions. When a number of men, by reason of
increasing gold supplies, get larger stocks of money than they have had,
the former proportion between their money incomes and their money is
altered. In reducing their stock of money by buying goods they bid up
the prices of goods until the total value of goods exchanged again bears
the same ratio as before to the total value of money. Taking an extreme
case: if twice as many dollars get into circulation in a community,
either some few men must have several times as many dollars as before,
while others have the same; or every man will have his due proportion,
just twice as much as before. The latter, "other<span class="pagenum"><SPAN name="Page_439" id="Page_439">[Pg 439]</SPAN></span> things being equal,"
must be the logical result after equilibrium has been restored. Is any
other result thinkable? Now if prices of goods remained the same as
before, there would be twice as great a value of money available to
effect exchanges. There is no reason why each should tie up twice as
large a proportion of his income in a supply of the medium of exchange.
If, however, there is a concerted movement to spend the surplus money,
there results a general bidding down of the exchange value of money, a
general bidding up of prices of goods. At what point will this movement
stop? The rational conclusion must be that "other things being equal"
equilibrium will be reëstablished only when the ratio between the value
of money and the price of goods becomes the same as before. The money
being doubled, prices must be double, and likewise for any other change
in quantity.</p>
<div class="sidenote">Objections made to the quantity theory</div>
<p>3. <i>The quantity theory is misunderstood, and is criticized on the
ground that the facts oppose it.</i> If but one kind of metal were used as
money, and this were coined of uniform weight and fineness, the problem
would be comparatively simple. But in fact gold and silver, full-weight
and light-weight coins, circulate side by side. More mysterious still,
the money in circulation is partly coin and partly paper. How can the
quantity theory hold in these conditions? Several objections to the
quantity theory are presented. It is said, first, that prices do not
vary exactly with the per capita circulation of different countries at a
given moment. The per capita circulation in Mexico may be five dollars
and in the United States twenty-five dollars, while prices are much less
than five times as great here as in Mexico. Secondly, it is said that
prices do not vary directly with changes in the amount of money in a
given country. There is now perhaps five times as much money per capita
in the United States as fifty years ago and yet prices are not five
times as high. Thirdly, it is said that credit methods change, and
therefore that money does not fix prices. Fourthly, it is said that even
if true of primary money the theory fails to apply to actual<span class="pagenum"><SPAN name="Page_440" id="Page_440">[Pg 440]</SPAN></span> conditions
with many forms of money in circulation side by side. Fifthly, it is
said that there are too many unknown quantities to permit the rule to be
used.</p>
<div class="sidenote">The objections examined</div>
<p>4. <i>A reasonable interpretation of the quantity theory makes it a
statement of the effect of a change in a single factor.</i> The objections
to the quantity theory assume that it is a statement of what occurs
under all conditions, instead of what it is, an index to the working of
one condition at a time. The foregoing objections need but to be further
analyzed to show that in each of them it is not merely the quantity of
money, but a number of other factors that differ in each of the
propositions. We may note briefly in turn the defects in the arguments
of the preceding paragraph.</p>
<div class="sidenote">Not a per capita rule</div>
<p>First, the quantity theory does not remotely imply that prices in
different countries differ at a given moment according to the per capita
money. In the case of the United States and Mexico not only the amount
of exchange per capita but the method of exchange, and the rapidity of
the circulation of money differ quite as much, doubtless, as does the
per capita circulation. The quantity theory would lead any fairly
careful student to a conclusion the exact opposite of that which its
critics have twisted from it.</p>
<div class="sidenote">Recognizes the growth of trade</div>
<p>Second, the quantity theory does not imply that during a period of years
when a country is changing in a multitude of ways, as in population,
methods of industry, modes of exchange and transportation, and in wealth
and income, the prices will vary directly either as the absolute or per
capita amount of money does. In the light of the quantity theory the
inquirer must be led to just the opposite of the ridiculous conclusion
imputed to it.</p>
<div class="sidenote">Recognizes use of credit</div>
<p>Third, the theory does not overlook the effect of an increased use of
credit, for it fully implies that any such a change, by economizing the
use of money, would enable the same amount of money to support a higher
scale of prices.</p>
<div class="sidenote">Not confined to primary money</div>
<p>Fourth, the theory does not overlook the variety of forms, and is not
true merely of primary money. However great<span class="pagenum"><SPAN name="Page_441" id="Page_441">[Pg 441]</SPAN></span> this variety, the money
demand of individuals and of communities still represents a pretty
definite ratio of the value of exchanges effected. If the primary money
alone were doubled in quantity, while the various forms of substitute
money (smaller coins, bank-notes, government notes, etc.) remained
unchanged, the quantity of money as a whole would not be doubled, and
according to the theory, prices would not be expected to double. Indeed,
in such a case, the method of exchange would be very greatly altered,
and the case is fully covered by the statement of the theory.</p>
<div class="sidenote">Is a practical rule</div>
<p>Fifth, despite the number of changing factors affecting the methods of
exchange, the method of business, etc., the quantity theory is a rule
usable at any moment. These various factors change slowly, and the
quantity theory answers the question, What change occurs in prices as a
result of an increase or decrease of the money in a given community at a
given moment? Like the law of gravitation, the law of projectiles, and
the statement of the chemical reaction to be expected when adding some
substance to a given compound, the theory must be interpreted with
practical limitations. When the quantity theory is thus stated and
understood, its negation is unthinkable, as is evidenced by the
involuntary use made of it constantly by every one of its few critics in
explaining the simplest monetary phenomena.</p>
<div class="sidenote">Practical application of the quantity theory</div>
<div class="sidenote">Recent price changes</div>
<p>5. <i>The quantity theory makes intelligible the great and rapid changes
in price that have followed sudden changes in the money supply.</i>
Inductive demonstration of broadly stated economic principles is
difficult, but in no other economic problem is laboratory experiment so
nearly possible as in that of money. Many inflations and contractions of
the circulating medium have occurred, now in a single country, again in
the entire world, and the local or general results have served to
exemplify richly the working of the quantity principle. With the scanty
yield of silver- and gold-mines in the Middle Ages, prices were low.
After the discovery of America, especially in the sixteenth century,
quantities of<span class="pagenum"><SPAN name="Page_442" id="Page_442">[Pg 442]</SPAN></span> silver flowed into Europe. The great rise of prices that
occurred was explained by the keenest thinkers of that day along the
essential lines of the quantity theory, though there were many monetary
fallacies current at the time. The experience in England during the
Napoleonic wars, when the money of England was inflated and prices rose
above those of the Continent, led to the modern formulation of the
theory by Ricardo and others. The discovery of gold in California and
Australia, in 1848-50, increased the gold supply marvelously, and gold
prices rose throughout the world. Between 1870 and 1890 the production
of gold fell off greatly while its use as money increased and prices
fell. A great increase of gold production has occurred in the period
since 1890. In part the rising prices from 1897 to 1902 are explicable
as the periodic upswing of confidence and credit, but in part doubtless
they are due to the stimulus of increasing gold supplies. These are but
a few of many instances in monetary history which, taken together, make
an argument of probability in favor of the quantity theory so strong as
to constitute practically its inductive proof.</p>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_443" id="Page_443">[Pg 443]</SPAN></span></p>
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