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:

1. 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).
2. 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.

by Thomas Allen

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 Francis Bowen. My comments are in brackets. Referenced page numbers enclosed in parentheses are to Poor’s book.

Francis Bowen (1811-1890) was an American philosopher, writer, and educationalist and a professor of political economy at Harvard University. Among his works are Lectures on Political Economy (1850), The Principles of Political Economy applied to the Condition, Resources and Institutions of the American People (1856), and American Political Economy (1870), which Poor reviews.

Poor describes American Political Economy as “a feeble and garrulous restatement of Adam Smith, Stewart, Ricardo, Tooke, McCulloch, and Mill, to whose absurdities and errors an emphasis is given by no means to be found in the originals” (p. 409).

Bowen writes “that money is merely a contrivance for diminishing the friction of exchange; and, though safe and convenient, it is also a very costly contrivance for this end” (p. 409). Money is part of a country’s wealth, but it is not capital. It does not yield profit or interest. Only the goods transferred by the means of money yield profit. Because money is not consumed, “it is not productive” (p. 409). Therefore, “[t]he specie which a merchant or a banker holds in store, to provide against daily calls or sudden emergencies, is the only unproductive portion of his capital: he is subject to a loss of interest on the whole amount thus retained” (p. 409). “The coin which a man keeps in his pocket does not, like his shoes or his hat, contribute to his comfort: it is a convenience to him only as it supplies immediate means for making small purchases or satisfying small demands” (p. 409).

Poor replies

[Coin has a great many functions beside “diminishing the friction of exchange.” It cannot be called unproductive so long as it can be loaned at interest, and is absolutely indispensable in the process of distribution, without which there can be no capital worthy the name. It would be just as proper to say that a wagon or railroad car was unproductive, for the reason that it did not produce the merchandise transported by it (pp. 409-410).

[Expressing the same sentiment, Hutt states, “The essences of all these services [of money] is availability. . . . [M]oney assets are not unemployed or resting when they are in our pockets, or in our tills, or in our banking accounts, but in pseudo-idleness, like a piano when it is not being played, or a fireman or a fire engine when there are no fires.”[1] In essence, Bowen is presenting the sterility-gold-coin argument against the gold standard.]

About exchanges, Bowen writes, “Every exchange is a barter of a quantity of merchandise for a certain sum of money which is its equivalent” (p. 410). Because money is not consumed when it is exchanged, a community does not need as much money as there is merchandise; therefore, money is immediately ready for another purchase. Bowen declares:

The circulation of money and of merchandise bears some relation to the momentum spoken of in physical science, which is composed of the velocity multiplied by the mass; the momenta are equal, though the velocity should be increased tenfold, provided that the mass is but one tenth part as great. So, also, the momentum of wealth is its value multiplied by the rapidity of its circulation. As money circulates far more rapidly than merchandise, it is evident that (the number of exchanges on both sides being equal) there must necessarily be less value in the money than in the merchandise, and as much less as the circulation of the money is more rapid than that of the merchandise (p. 410).

Next Bowen presents an algebraic equation to describe his concept: gs=mr,

where g = quantity of goods on sale; s = number of times the goods are resold; m = quantity of money in circulation; r = number of purchases effected by each piece of money. [This equation is similar to Irvin Fisher’s equation: MV=PT, where M = the amount of money; V = the velocity of money; P = prices; T = the number of transactions. In The Value of Money, Benjamin Anderson explains in great detail the flaws of Fisher’s equation and the quantity theory of money.]

With this equation, Bowen shows “that the value of money will be inversely as its quantity” (p. 411). [That is, as the quantity of money increases, its value decreases if everything else remains constant. By value, he seems to mean purchasing power.]

Poor remarks that Bowen errs because “[m]omentum and effective value are identical terms. All kinds of merchandise, wealth being a generic term, obey the same law. Whatever value can be predicated of one kind, due to the rapidity of its circulation, can be of all other kinds” (p. 411).

Continuing, if Bowen is correct, then according to Poor, “the great problem for society is to determine the degree of momentum that can be secured for its merchandise, as its wealth will be increased in like ratio” (p. 411). Then, using Bowen’s equation, Poor defines “g” to stand for the “goose” instead of “goods.” Next, he states:

Now, “the value of the goose is inversely as its quantity multiplied by the rapidity of its circulation.” Assuming the formula given to express the ordinary rapidity of circulation, or, what is equivalent, the momentum, and consequently, value of the goose; then, if its momentum, or value, be doubled, the formula has only to be altered; thus: — gs=2mr, or mr=gs/2. The goose has now a value twice greater than it had before (pp. 411-412).

According to Bowen’s equation, the value of the goose is inverse to its quantity. Therefore, using Bowen’s equation, if the quantity of the goose is reduced by half, the quantity of money doubles — assuming that demand remains the same. Thus, Poor notes:

If the crop of geese should be short, and it should be desirable to increase their momentum, or effective value, say tenfold, all that would have to be done would be to increase their rapidity of circulation to be expressed by the following change in Mr. Bowen’s formula; thus: — gs/10=mr, or 10mr=gs. When the last degree of momentum was secured, a wing or a leg of the goose would have a value equal to that of the whole bird. Society will be the gainer in an equal degree, by being able to devote to other purposes the land formerly dedicated to goose-culture.

Continuing, Poor writes:

Admitting the conclusiveness of his demonstration, it must be applicable to all kinds of merchandise; for, as has already been shown, money, after it has been spent, is as functus officio to its late owner as is the goose to its owner after it is eaten. If it be objected that the money is still in existence, and the goose is not, it may be replied: that the goose has indeed been eaten, but productively, to appear in new geese, or, in other kinds of merchandise; so that whoever uses the money the second time is still confronted by a new goose or its equivalent. If the goose or its equivalent do not reappear, then the money does not. Each responds, and with equal alacrity, to the call of the other (pp. 412-413).

Bowen notes that a large portion of specie currency can be replaced with paper currency or other substitutes. However, “the total amount of the currency will remain just as before; the value of the paper and the precious metals, taken together, will be just what the specie alone would be if paper were not used” (p. 413). Wealth and commodities are estimated in the monetary unit, such as the dollar, “and it is by the aid of such estimates that all exchanges are made” (p. 413). “Thus, the idea of money aids us, when the reality is seldom employed” (p. 413). He asserts, “Money is even now only a hypothetical or abstract medium of exchange in all the larger transactions of commerce” (p. 413). Bowen anticipates “the time, in the progress of invention and the discovery of new expedients and facilities in commerce, when it will become so universally; when, at any rate, so costly and useless a realization of the idea as gold and silver coin will be entirely done away” (p. 413). [If Bowen had lived another 85 years, he would have witnessed his dream as gold and silver were no longer part of the monetary system. Also, he could have witnessed the economic disaster that the abandonment of gold and silver coin has brought.]

Poor responds that Bowen is greatly mistaken:

Money is still, as many find to their cost, far more than a mere scale of valuation. The holders of property, when they sell it, still persist in demanding something more than “hypothetical or abstract media of exchange.” They may be very uncivilized and selfish to demand a quid pro quo in all transactions, and the laws which uphold them very barbarous; but these laws, nevertheless, have maintained their force since laws existed (pp. 413-414).

[Today, what passes for money is little more than an abstract counter, an abstract medium of exchange. It cannot extinguish debt as it is debt. At least mankind is no longer “uncivilized and selfish” as they no longer demand “quid pro quo.” They exchange goods and services for that which has no value in itself and does not represent value.]

Bowen explains the difference between convertible bank currency and inconvertible paper money. Convertible currency cannot be overissued. If inconvertible paper money “could be kept precisely equal to what the amount of metallic currency would be in case there were no paper in circulation, then there would be no depreciation of the paper; nay, the paper might even command a premium over the coin, if the aggregate value of it were made less than what the coin would amount to, and if it were also possible to prevent the importation of specie.” (p. 414). [Bowen errs. Uncertainty causes inconvertible legal-tender government notes to depreciate. The excessive issue of these notes, as Bowen and the quantity theory of money claims, 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. S. McLean Hardy’s statistical study of the U.S. note between 1862 and 1873 shows that uncertainty, and not the quantity of notes, was the driving force behind the depreciation of U.S. notes.] Bowen adds, “Money acquires the power of exercising its functions, not from any intrinsic quality that it possesses, but solely from convention” (p. 414). [The economists whom Poor reviews needed to study the origins of money. They would have found that money acquired “the power of exercising its functions” not from convention, but solely from its intrinsic quality that it possesses. A good place to start is the works of Karl Menger and William W. Carlile.] Continuing, Bowen writes, “The value of paper money, not depending at all upon its cost of production, is regulated solely by its quantity” (p. 414). [Thus, the quantity theory of money explains the value of money. However, the quantity theory of money seems to have failed to explain the downward trend in prices during the last three decades of the nineteenth century in the United States. Money supply more than doubled, yet general prices declined.] Then he remarks:

A certain determinable sum of money is needed in every nation to effect its current exchanges, and to maintain prices at an equilibrium with the average prices of commodities throughout the commercial world. Coin being banished, if the issue of paper money is less than this sum, the paper will be at a premium; if greater, it will be at a discount (pp. 414-415).

[For decades, every country has operated with a monetary system of inconvertible paper money completely divorced from gold. If Bowen is correct in that the managers of the inconvertible currency can maintain price stability, then the monetary system of every country is operated by either incompetents who lack the knowledge and ability to manage properly their monetary systems or criminals who are deliberately destroying the currencies of their countries. Fiat monetary reformers would argue that they are both. They are criminals transporting the country’s wealth to the rich and powerful by destroying the currency. They are ignorant incompetents for failing to follow the fiat money reformer’s scheme for issuing the currency. However, the fiat money reformers do not agree on the correct scheme to follow except that the government, which is controlled by the rich and powerful, should issue the currency. The fiat money reformers are probably correct in that the money managers are both incompetent and criminals. For that reason, the issuance and regulation of money should be taken from governments and their central banks and left to the markets. In monetary matters, the only action required by the government is to define the monetary unit as a specific weight of precious metal and to punish violations of contracts and acts of fraud.]

In his concluding remarks about Bowen, Poor writes:

Were Mr. Bowen the only one to be affected by his opinions, they would be of very little consequence; but they become of the greatest importance when taught to young men about to enter the world of affairs, especially when they relate to a subject which concerns, more deeply almost than any other, the welfare of society. What would be thought of a professorship in a university that should still seek to establish the wonderful properties of the philosopher’s stone? The attempt would not be a whit more absurd than his teachings upon the subject of money. The thing chiefly to be regretted is, that there does not seem to be any way in which to rid the universities and the world of such nonsense. So far as money is concerned, all are Alchemists, all are believers in the philosopher’s stone, all are intent upon its realization. The first step in the way of reform should be to abolish the “professorship of Political Economy,” not only in this, but in all institutions in which it is now pretended to be taught; and either abandon instruction in it altogether, or put its duties in commission. In the latter case, whatever was taught would at least have the merit of being as broad as the course of instruction would allow (p. 415).

Copyright © 2017 by Thomas Coley Allen.

Endnote

^[1].  William Harold Hutt, Individual Freedom: Selected Works of William H. Hutt, editors Svetozar Pejovich and David Klingaman (Westport, Connecticut: Greenwood Press, 1975), pp.207-209.