<h2>CHAPTER 47</h2>
<h3>THE STANDARD OF DEFERRED PAYMENTS</h3>
<h4>§ I. FUNCTION OF THE STANDARD</h4>
<div class="sidenote">Definition of the standard</div>
<p>1. <i>The standard of deferred payments is the thing of value in which, by
the law or by contract, the amount of a debt is expressed.</i> A credit
transaction is a lengthened exchange; one party fulfils his part of the
contract, the other party promises to give an equivalent at a later
date. The equivalent may be in any kind of goods; for example, in barter
one may part with a horse on the promise of a cow to be received later;
or a small horse on the promise of a large one; or a flock of sheep on
the promise of its return at the end of the year with a part of the
increase of the flock. A simple standard in which to express the debt is
the thing borrowed, as horse, sheep, wheat, house, etc. This involves
the use of the renting contract. Again, the thing to which the value of
debts is referred may be a thing quite different from the goods
borrowed, and with the growth of the money economy and the use of the
interest contract, money comes more and more to be used as the standard.
The parties express the debt in terms of the standard unit established
by law.</p>
<div class="sidenote">Increasing use of the interest contract</div>
<p>2. <i>The importance of the standard of deferred payments increases with
the use of money and with the amount of outstanding debts.</i> Until the
use of money develops, the use of credit is difficult and limited; it
becomes easy when the value of all things is expressed in terms of a
common circulating medium. If all business were done for cash there
would be no great interests affected when a change in the value of<span class="pagenum"><SPAN name="Page_454" id="Page_454">[Pg 454]</SPAN></span>
money occurred. Every dollar would change in value in the hands of the
holder, but there the effect would cease. But the volume of outstanding
debts expressed in terms of money now exceeds many fold the total value
of the circulating medium. The value of all these debts changes in the
same proportion as does that of the standard unit of money; when this is
cheapened either by law or as a result of increasing supplies, a
creditor to whom a thousand dollars are due loses the same as if he had
a thousand metal dollars locked up in a strong chest.</p>
<div class="sidenote">Great effects of money changes</div>
<p>Outstanding contract debts may be roughly divided into three classes:
short-time loans, running less than a year; medium-time, running from
one to five years; long-time, running over five years. Fluctuations are
rarely rapid and great enough to affect appreciably the debtors and
creditors in the case of short-time loans. The results are greater in
the case of long-time loans, such as national, state, and city debts,
bonds of corporations, mortgages given by farmers on their land or by
owners of city real estate. A multitude of interests are affected by a
change in the value of money. When, as in the years 1873-96, money gains
in purchasing power (prices fall) receivers of fixed incomes are
gainers. When, as in the years 1896-1903, the value of money falls, the
revenues from educational and charitable endowments, the salaries of
public officials, and all fixed incomes, lose purchasing power. In a
capitalistic age, therefore, almost every individual is affected in some
way by a change in the value of money. In most cases the change escapes
recognition; people do not trace out the relation that an industrial
change bears to their own interests. In a few notable cases, however,
the change has been revolutionary as in the period following the
discovery of America, when the feudal dues had come to be expressed in
terms of money instead of labor services. In modern times, the mass of
debts being greater than ever before, such changes as those following
the discovery of gold in California or the decrease in gold<span class="pagenum"><SPAN name="Page_455" id="Page_455">[Pg 455]</SPAN></span> production
between 1873 and 1890 have the gravest economic results.</p>
<div class="sidenote">Merits of gold and of silver as standards</div>
<p>3. <i>The best standards of deferred payments available—the precious
metals, gold and silver—are still imperfect.</i> The good that is most
convenient as a standard of deferred payments is the one used as money.
Gold to-day is constantly expressing the value of all other things.
Borrowers prefer to make loans in the form of the general medium of
exchange. From the usage of speaking of all things in terms of money,
the false idea arises that the value of other things changes, but that
the value of gold is always the same. Money is no such a fixed objective
standard as a foot-rule or a pound weight. The value of gold rests on
the estimates made by men, and is constantly changing according to
conditions. A fixed objective standard of value is not possible of
attainment. The value of the precious metals is stable as compared with
most things. The current new supply is comparatively regular. For
generations at a time there may be no radical changes in the output of
gold and silver. For centuries there was no change in the methods of
extraction. Recent inventions, however, have considerably altered these
conditions. The nature of the use of gold and silver, likewise, is such
as to make the demand for them, under ordinary conditions, most stable.
The precious metals are but slowly worn out; only a portion of the
annual output is used in the arts; there is, therefore, a large
reservoir into which flows steadily a small stream; the existing stock
is twenty or thirty times the annual output. Yet the value of the
standard metals is never quite stable, and sometimes several influences
combine, as in the last century, to affect their value greatly and
suddenly.</p>
<p><span class="pagenum"><SPAN name="Page_456" id="Page_456">[Pg 456]</SPAN></span></p>
<div class="sidenote">Various standards suggested</div>
<div class="sidenote">Enjoyment</div>
<div class="sidenote">Sacrifice</div>
<div class="sidenote">Labor</div>
<div class="sidenote">Tabular standard</div>
<p>4. <i>Various ideals for a standard of deferred payments have been
suggested—as return of equal enjoyment, of equal sacrifice, social
expediency; and various standards—as labor, commodities, and the
tabular standard.</i> The ideal standard of deferred payments is one that
will insure justice between borrower and lender. Different views have
been taken as to what constitutes justice in this matter. The suggestion
is attractive that the sum when returned should represent the same
amount of enjoyment as it did when it was borrowed. Such a standard is
impossible of realization in any general way, for men's circumstances
are constantly changing. To insure even to the average man the same
amount of enjoyment is only roughly possible. The same goods do not
afford the same enjoyment when conditions have changed. Another
suggestion is that the goods returned should represent the same
sacrifice as those loaned. Here again the difficulty is in the lack of
an objective standard. Whose sacrifice? That of the lender, who may be
rich, or that of the borrower, who may be poor? Some have supposed the
conditions of equal sacrifice were met by the labor standard, according
to which the sum returned should purchase the same number of days of
labor as when borrowed. But what kind of labor is to be taken, that of
the lender or that of the borrower, or that of some one else? Labor is
of many different qualities, which can be exactly compared only through
their objective value in terms of some one good. The ideal of equal
enjoyment has been supposed to be realized by the tabular standard,
which consists of a number of leading commodities in fixed proportions.
The money returned is to be enough to purchase the same goods at the
expiration as at the making of the loan, and thus may be a larger or
smaller sum than was borrowed. While this does not, as is sometimes
claimed, insure equality of enjoyment, it averages the fluctuations of
many goods, and thus prevents great extremes. This standard has been
favored by notable monetary authorities, but the difficulties of its
practical application are prohibitive.</p>
<p>It must be recognized that any possible concrete standard of deferred
payments will sometimes work hardship to individuals. The best average
results for justice and social welfare will be secured by measuring
debts in goods that<span class="pagenum"><SPAN name="Page_457" id="Page_457">[Pg 457]</SPAN></span> change least often, least rapidly, and in the least
unpredictable manner. Gold thus far has proved itself worthy to serve as
the standard.</p>
<h4>§ II. INTERNATIONAL BIMETALLISM</h4>
<div class="sidenote">Examples of price fluctuations</div>
<p>1. <i>The fall of prices in 1873 and the following years meant a great
change in the standard of deferred payments.</i> The monetary changes
following the discovery of America were due to the inflow to Europe of
great quantities of silver taken by force from the native American
rulers, and from the rich mines. Silver, at that time throughout Europe
the main standard of deferred payments, was thus greatly lowered in
value. This change lightened all outstanding obligations, lowered the
money rents of the peasants, and the customary dues of labor wherever
they had come to be expressed in money form. By the third quarter of the
nineteenth century gold had become in Europe and America the main
standard, though silver still served as such in some countries. The
output of gold in 1849-57 caused the greatest money inflation that has
occurred since the sixteenth century, favoring in a similar manner the
debtor classes. The substitution of gold for silver by some countries at
that time, by making a great additional market for gold, helped in some
degree to check the fall in its value.</p>
<div class="sidenote">The recent great fall of prices</div>
<p>The decline in the output of gold was a change of the opposite
character, causing a fall of prices and increasing the burden of debts.
From 1873 to 1896 there was almost constant decline of the prosperity of
the agricultural classes, due in part to this money influence, but in
part to influences which cannot be dwelt upon here, as they had nothing
to do with the money question. There was complaint, agitation, and
demand for relief on the part of many interests in France, Germany,
England, and the United States.</p>
<div class="sidenote">Bitmetallism defined</div>
<p>2. <i>Bimetallism, the use of two metals as standard moneys, was the
remedy proposed.</i> Bimetallism is legally complete<span class="pagenum"><SPAN name="Page_458" id="Page_458">[Pg 458]</SPAN></span> when both metals are
admitted to the mints for free coinage at an established ratio of
weight; it is halting or limping when one of the metals is not freely
coined. Bimetallism may be legally authorized, but not actually working.
As soon as the legal ratio varies appreciably from the market value,
only one of the metals will in fact be brought to the mint. National
bimetallism is confined to a single country, as that in the United
States before the Civil War, or in France before 1867. International
bimetallism is an agreement among several nations to use two metals on
the same terms, the only case in history being that of the Latin Union,
which included France, Italy, Switzerland, and other countries. The
discussion of international bimetallism in recent years has been on the
proposal to make a much larger league of states than the Latin Union,
embracing all the leading countries.</p>
<div class="sidenote">Object of international bimetallism</div>
<p>3. <i>The main object of international bimetallism is to prevent the
fluctuations of the standard of deferred payments.</i> Commercial dealings
between gold-using and silver-using countries are of great magnitude,
and the use of different standards leads to many difficulties.
Fluctuations in the ratio of the two metals occasion much uncertainty
and loss to individual traders. The rise in the value of gold meant an
increase in the burden of the public debts of silver-using countries
which collect their revenues in silver, but which must pay their debts,
principal and interest, in gold.</p>
<div class="sidenote">Its theory</div>
<p>The theory of bimetallism is that the government can act on the value of
the two metals through the principle of substitution. The metal tending
to become dearer will not be coined, the other will be coined in greater
quantities. The degree of influence that can thus be exerted on the
value of the two metals depends on the size of the reservoir of the
metal that is rising in price. When it all leaves circulation, the law
on the statute book permitting it to be coined becomes a mere sounding
phrase. In such a case there is bimetallism <i>de jure</i>, but monometallism
<i>de facto</i>. The greater the league<span class="pagenum"><SPAN name="Page_459" id="Page_459">[Pg 459]</SPAN></span> of states, the greater is the
likelihood that the scheme will work. The economic theory of bimetallism
was recognized by a majority of economists to be abstractly sound, but
the political difficulties in the way of international agreements are
great, and have proved to be insurmountable.</p>
<h4>§ III. THE FREE-SILVER MOVEMENT IN AMERICA</h4>
<div class="sidenote">Conditions leading to the demand for free-silver</div>
<p>1. <i>International bimetallism, despite many efforts, failed of
adoption.</i> This brief proposition sums up the history of the movement,
from 1878 to 1892, to form a league of states and an agreement for
international bimetallism. International conferences were held, and
taken part in by the leading financiers of the world. France at first
favored the policy, and the United States was always foremost in
advocating it, while England in the main was opposed. Some of the
advocates of bimetallism argued that the fall of prices was due not
alone to economic forces, but also to a money conspiracy which had
influenced legislation to introduce and continue the gold standard.
This, of course, was strenuously denied. It is true that the commercial
classes found gold the form of money most suitable to large business,
and no doubt class interests entered into the question in some measure.
The difficulties of the debtor class in America were peculiarly great,
owing to the inflated paper currency, from 1862 to 1879, which had made
our conditions quite abnormal. In the period of speculation following
the Civil War an enormous mass of debts had been accumulated. The hopes
of thousands of tillers of the soil suffering from a fall in prices, and
of the great debtor class, clamoring for relief, were centered upon the
success of this movement. Banking and other large business interests in
general opposed it.</p>
<div class="sidenote">Purpose of the free-silver movement</div>
<p>2. <i>The plan of the free-silver advocates was to legalize national
bimetallism in the United States at a ratio between gold and silver very
different from the market ratio.</i> Gold had become, long before 1860, the
real standard of our<span class="pagenum"><SPAN name="Page_460" id="Page_460">[Pg 460]</SPAN></span> money system, and after 1873 it was the only metal
admitted to free coinage. Silver, little by little, was losing
purchasing power in terms of gold, until from being worth, in 1873, one
sixteenth as much, ounce for ounce, it became, in 1896, worth but one
thirtieth as much as gold. It must be recognized that the power of
silver to purchase general commodities fell much less than the change in
its ratio to gold would indicate, gold having risen in terms of most
other goods as well as of silver. Nevertheless, the proposal to open the
mints to free silver at sixteen to one in the year 1896 meant a sudden
and marked cheapening of money. The prime purpose was to lighten the
burden of debts by making the standard of deferred payments cheaper. It
was at first a debtors' movement, but to succeed it had to enlist the
support of other large classes of voters. And thus, by force of
political necessity, but doubtless in large part naïvely, it developed
into the more sweeping theory that wages, welfare, and prosperity called
for a larger supply of money independently of the effect on debts.</p>
<div class="sidenote">The free-silver theory</div>
<p>In its extreme form the free-silver plan was a fiat scheme, for some of
its supporters believed that by the mere passage of the law the two
metals could be made to bear to each other any ratio desired. But its
most intelligent and high-minded advocates (who were moved to its
support by a sincere sympathy and concern for the distressed
agriculturalists) recognized fully that the force of the law was limited
by economic conditions. The extreme opponents of the plan, ignoring the
evident fact that the adoption of a metal as a standard money is one of
the most essential of the market conditions, denied that government
action could in any way affect the value. Most of the arguments
presented on either side in the political campaigns showed little
evidence of a sound theory of money. The victory of the gold standard in
1896 and 1900, it would seem, was due more to the well-founded fear that
a sudden change of the money standard would cause a panic, than to a
thorough understanding of the question.</p>
<p><span class="pagenum"><SPAN name="Page_461" id="Page_461">[Pg 461]</SPAN></span></p>
<div class="sidenote">Increase of gold production</div>
<p>3. <i>The increase of the gold output has for the present checked the fall
of prices.</i> Before 1890, for a number of years, the average output of
gold was shrinking till it reached a scant hundred million per year. At
the same time, nations which recently had gone over to the gold standard
were striving to secure large stocks for their banks and general
circulation, and those great reservoirs, as a result, became better
filled than they ever were before. After the opening of new
gold-yielding territory in South Africa and in the Klondike, the annual
output of gold became greater than it had ever been, being at the
opening of the South African War in 1898 nearly three times that of ten
years earlier. The present methods of extracting gold resemble those of
fifty years ago as civilized industry resembles that of savages.
Intricate machinery has taken the place of crude tools, chemical
processes have been introduced, and the principal product results from
the regular and certain working of deep mines rather than from chance
surface discoveries. Great masses of debris can now be reworked
profitably. In many parts of the world are enormous deposits of
low-grade ores, before useless, that can be worked economically by
present methods. For a generation at least the world's supply of gold is
likely to continue larger than ever before in history, and prices in
terms of gold probably will rise.</p>
<div class="sidenote">Rising prices the temporary solution</div>
<p>Though no change seems likely or possible at the present time, the
free-silver advocate has been justified by events against those gold
advocates who said that the amount of money has nothing to do with
prices. Prices have gone up as gold has increased. The free-silver
advocates have gotten what they wanted through a change for which
neither party can claim the credit. Yet the present situation is
unsatisfactory and undeveloped. A standard better than a single metal,
more stable than a single commodity, is desirable if it can be found.
The money question must arise again and in a new form before many years.
The difficulty has not been finally settled; it is but postponed.</p>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_462" id="Page_462">[Pg 462]</SPAN></span></p>
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