This article marks the last in the series of reviews of the writings of Henry Varnum Poor by Thomas Allen. PB
In 1877, Henry Varnum Poor (1812-1905) wrote Money and Its Laws: Embracing a History of Monetary Theories, and a History of the Currency of the United States. He was a financial analyst and founder of a company that evolved into Standard & Poor’s. Poor was a proponent of the real bills doctrine and the classical gold-coin standard and, thus, the quality theory of money. He gave little credence to the quantity theory of money — especially if credit money, such as bank notes, were convertible on demand in species. Also, he contended that the value of money depends on and is derived from the value of the material of which it is made and with paper money, its representation of such value.
In the latter part of his book, he discusses leading monetary theorists from Aristotle (350 B.C.) to David A. Wells (1875). Most of the economists whom he discussed were proponents of the quantity theory of money. We will look at his discussion on William G. Sumner. My comments are in brackets. Referenced page numbers enclosed in parentheses are to Poor’s book.
William G. Sumner (1840-1910) was a classical liberal American social scientist. He was a professor of political economics at Yale where he taught social sciences and held the first professorship in sociology in the United States. He supported free trade, free markets, and the gold standard and opposed imperialism. Among his many works are A History of American Currency (1874) and Problems in Political Economy (1883). Poor reviews the part of A History of American Currency that discusses the report of the Bullion Committee. [The British Parliament established the Bullion Committee to study returning to the gold standard after the Napoleonic wars and to make recommendations about how to return Britain to the gold standard.]
Sumner claims that the report of the Bullion Committee “solved the whole subject of money” (p. 416). He declares that money does not flow from poorer agricultural regions to richer financial cities. To the contrary, it flows from the richer regions to the poorer regions (p. 416). As for the balance of trade, if it means “equilibrium,” then exports equal imports and trade regulates itself. If it means “remainder,” it is a myth (p. 417).
Summarizing the doctrines of the Bullion Committee, Sumner writes:
- The value of an inconvertible currency depends on its amount relatively to the needs of the country for circulating medium (only to a very subordinate degree on the security on which it is based or the credit of the issuer).
- If gold is at a premium in paper, the paper is redundant and depreciated. The premium measures the depreciation.
According to Sumner, for “a system of even nominal convertibility, the motives of speculation and of price fluctuations lie outside of the currency in industrial and commercial circumstances. Speculation . . . controls the amount of the currency” (p. 417). Whereas, “[o]n an inconvertible system, the amount of the currency controls speculation” (p. 417). Thus, if an inconvertible currency “is not redundant, its effect is slight; if it is very excessive, it ‘floats’ every thing, and becomes the controlling consideration” (p. 417). The quantity of inconvertible paper money determines its value and prices. [Uncertainty causes inconvertible legal-tender government notes to depreciate. The excessive issue of these notes, as Sumner and the quantity theory of money claim, is not the cause of their depreciation. However, an excess of issue can influence the value of these notes by affecting uncertainty. Uncertainties that affect the value of inconvertible government notes include (1) the uncertainty of when they will be paid or even if they will be a paid, (2) the ability of the government to pay, (3) the willingness of the government to pay, and (4) the kind of coin that will be used for payment. Inconvertible paper money is what the world has had ever since 1971. However, today, much of this uncertainty has been eliminated. Almost no one now believes that governments will ever pay their notes, i.e., redeem their notes in a commodity that has intrinsic value at that intrinsic value.] However, Sumner comments that the quantity of the U.S. notes is fixed. Therefore, the answer to its value lies in its adverse foreign exchange, i.e., outflows of gold. He asks, “Is it [the gold outflow] due to the balance of payments, or to some deterioration of the currency” (p. 418)? According to the Bullion Committee, with which Sumner agrees, “the balance of imports and exports never can move the exchanges, either above or below par, more than just enough to start a movement of bullion” (p. 418). Thus, “[o]n a specie system, any outflow of bullion would bring down prices, and immediately make a remittance of goods more profitable than one of bullion; and, if the exportation of bullion was artificially continued (as, for instance, to pay the expenses of a foreign war), it would reduce prices until a counter current would set in and restore the former relative distribution all the world over” (p. 418). Continuing, Sumner writes, “If, therefore, there is an outflow of gold, serious and long continued, accompanied by an unfavorable exchange, it is a sign that there is an inferior currency behind the gold, which is displacing it. The surplus of imports of goods above the exports of goods is nothing but the return payment for this export of gold, and is not a cause, but a consequence” (p. 418). To produce an influx of gold, the inferior currency, inconvertible notes, needs to be removed. If foreign exchanges are adverse, gold will be exported; this exportation of gold is an indication that the paper money is excessive. Thus, inconvertible paper money should be issued in such quantity to prevent the exportation of gold (pp. 418-419).
Poor disagrees with Sumner’s notions on the balance of trade. Particularly, Poor disagrees with Sumner’s notion that if a country exports gold that it necessarily receives an equal value of merchandise. Or, if it imports gold, it exports an equal value of merchandise (p. 419).
Poor illustrates his disagreement with an analogy:
Suppose an individual possessed of a thousand dollars in coin to expend it in the purchase of the necessaries of life even, his means are reduced in like ratio. If he would reinstate his former condition, he must forego future expenditures to an equal amount. So, if a person run into debt to his shopkeeper to the amount of a thousand dollars, if he would pay it, he must forego a like amount of his future earnings. His indebtedness until paid would very properly be termed a balance of trade against him. So with a nation (p. 419).
[Sumner is closer to the truth than Poor. An exchange is only made when both parties of the exchange believe that he is receiving greater value than he is giving up. Poor has a point if the long-run consequences are considered. However, the long run is considered when an exchange is made. Unfortunately, many people do an extremely poor job of considering long-run consequences, and some give it no weight.]
Continuing, Poor writes:
If it [a country] import more in value of ordinary merchandise than it exports, its specie will have to go to make up the deficit. Now, no nation not producing gold can part with any considerable amount of it without causing embarrassment to its industries and trade; for the reason that that which it possessed and exported was a part of the machinery by which these were carried on. The tendency of the precious metals the world over is to distribute themselves according to the means and needs of those using them. If there be no movement in any direction, it is assumed that they are in proper equilibrium (p. 419).
Furthermore, Poor remarks, “The export of a large amount of coin is usually due to a vicious paper currency, and such a currency is always attended with wasteful expenditure” (p. 420). [Perhaps, politicians ought to heed Poor’s wisdom here. Could trade imbalances be caused more by “a vicious paper currency” and “wasteful expenditures” than the shenanigans of foreign countries to give their domestic industries advantages in foreign and even domestic trade at the expense of their own citizens?] When a country exports gold, it becomes weaker, “for she has parted with that which is essential to her welfare, and must be reclaimed by future accumulations” (p. 420). [The development in the use of bills of exchange reduced the need to export gold. Moreover, the elimination of gold from the monetary systems of the world today makes the exportation of gold irrelevant — at least in theory. Now a country only exports the inconvertible paper money of another country or its own inconvertible paper money, which it can replace without having to import it. Furthermore, most countries would prefer never having to import any of their currency that has been exported, except to tax it.]
Admitting that Sumner may be correct about inferior currency causing the outflow of gold, Poor asks, “may not the loss as well be described as an ‘unfavorable balance of trade’ as by any other term” (p. 420)? Then Poor remarks:
A nation that has parted with its coin, which has to be brought back again, would have been much better off had it never parted with it. That which has been received will never suffice to bring it back; and, if it would, the charges of transportation and interest would involve a large loss; so that, after all, “balance of trade” is a veritable fact, and always exists to a greater or less extent in commerce between nations, and must always exist until human affairs reach the accuracy and certainty of natural laws (p. 420).
Next, Poor asks, “[W]hat is an ‘inferior currency’” (p. 420)? He answers, “One kind is the inconvertible notes of government, issued not for the purpose of loaning capital, but to supply the lack of it” (p. 420). About inconvertible governments notes, he writes, “The demand for merchandise must increase in ratio to its amount; for it is always superadded to the existing currencies. As such notes are always made legal tender, they not only drive coin out of the country, but keep it out till they are retired. Such a currency admits of no corrective by the laws of trade” (p. 420).
“Another ‘inferior’ currency,” Poor writes, “is that issued by Banks, without a constituent” (p. 420). Initially, it acts like government notes in driving gold out of the country. However, since these bank notes are convertible to gold coin, banks must supply the gold to meet their redemption. As a result, “[t]hey must pay for the excess of imports over exports from their reserves” (p. 421). Poor writes:
It is impossible, however, for them [bankers] to tell whether all the bills discounted by them have their proper constituent: they can only determine the fact by the result. If they see gold beginning to move, they understand at once that improper bills have been discounted; that the currency has been issued in excess, and must so far be taken in by a reduction of their line of discounts. The movement of gold, therefore, is an indication of the state of the currency, as infallible as is that of the mercury of meteoric conditions (p. 421).
[Poor is describing the operation of the real bills doctrine correcting the overissue of bank notes and checkable deposits resulting from discounted faulty bills.]
Sumner’s test of an ‘inferior currency’ differs greatly from what Poor has described. Sumner’s test is that of quantity; Poor’s is that of quality. To Sumner, a currency is not “inferior” if “its amount does not exceed that required by a country in its exchanges, even if it be not backed by a single dollar of coin” (p. 421). Thus, according to Sumner, “the value of money depends upon its quantity, not upon the provision made for its convertibility, [and] ‘are not matters of opinion, but of demonstration’” (p. 421). To this, Poor replies, “If so, then it is a matter of demonstration that one and one make four” (p. 421). Poor adds “that the real or estimated value of articles, whether they be merchandise or money, is their exchangeable value. To assume otherwise, would be to say that the exchangeable value of a piece of silver having the weight and insignia of a sovereign equals the value of a sovereign. Humanity is not yet brought to so low a pitch as this” (p. 421). [The sovereign is a gold coin that contains 0.23542 troy ounces, i.e., 113 grains of gold, which was the British pound from 1816 until Great Britain left the gold standard. A century after Poor wrote, humanity, or at least mainstream economists, had reached such a low level that they fell for the pitch that a piece of paper with the government’s seal on it was the same as gold.]
Poor concludes his review of Sumner:
Even the Economists are by no means the simple race their theories would make them. In spite of the conclusions of the Bullion Committee, which, with Mr. Sumner, are the very acme of financial wisdom, he would be the last man to take a bank or government note without especial reference to the provision made for its discharge. If their creed were their law, a few days would suffice for the Economists to fool away whatever they possessed (pp. 421-422).
Copyright © 2017 by Thomas Coley Allen.