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

James W. Gilbart (1794–1863) was an English banker and author. Among his works is Practical Treatise on Banking (1827), The History and Principles of Banking (1834), and Principles and Practice of Banking (1873), which is an abridged and combined edition of 1827 and 1834 books. Poor reviews Principles and Practices of Banking.

About Gilbart, Poor writes, “Gilbart was a striking instance of a voluminous writer upon money, without any proper comprehension of its nature and laws. . . . As a Political Economist, he belonged to the school of Tooke and Mill, in holding that the convertible notes of no other Bank than that of the Bank of England could influence prices or the rates of exchange” (p. 368).

Gilbart writes, “The bankers in issuing their notes do not make any reference to the quantity of gold in the country; but they make reference to their ability to discharge these notes when retained to them for payment” (p. 368). He argues that banks cannot issue bank notes in excess. However, if a bank has a monopoly on issuing bank notes and issues notes for gold, then an inflow of gold could lead to a large issue of notes, which could lead to speculation. When many banks are issuing notes, these notes are quickly returned to the issuing bank by other banks for redemption. When only one bank issues notes, those notes are only returned for gold when gold is needed for foreign exchange (pp. 368-369). [Thus, it is easier for a central bank with a monopoly on issuing bank notes to overissue notes than it is for competing banks to overissue notes.] According to Gilbart, paying interest on deposits also prevents the excessive issuance of notes by encouraging notes to be deposited. The criteria used by the Bank of England to issue notes causes prices to rise and reduce interest. (The criteria are issuing notes against gold bullion and to purchase Exchequer bills and government stock.) However, “if notes are issued merely to pay for transactions that have previously taken place, and are drawn out by the operations of trade, those notes will have no such effect” (p. 369).

Poor summaries Gilbart’s explanation for the inability of private banks and bankers to overissue their notes: “1st, from their constant retirement ‘by the interchange by the Banks with each other of their different notes and checks, once or twice a week;’ and, 2d, for the reason that, by allowing interest on deposits, ‘all the surplus circulation is called in, and lodged with the Banks’” (p. 370). Poor does not believe that retiring notes by exchanges among banks reduces excess notes. [Poor errs somewhat. If bank notes increase in response to increased production as represented by buying real bills of exchange, then bank exchanges will remove currency and prevent excess. However, he has a point if bank notes are issued to buy financial bills like government treasury bills or to finance a speculative venture. These notes are more than what is needed to clear consumer goods from the markets. Therefore, they are inflationary as Poor describes. A major disagreement that Poor has with Gilbart is that Gilbart believes that the Law of Reflux is sufficient to regulate bank credit money and prevent its excessive quantity. {The Law of Reflux claims that banks cannot overissue bank credit money, bank notes and checkbook money, because any overissued currency quickly returns to the issuing bank for redemption.} Poor does not believe that it is sufficient. He believes that more is needed, such as adherence to the real bills doctrine.]

Poor refutes Gilbart by noting, “An inflation may take place to a very large extent where exchanges are daily made, and where the Banks are on a specie basis, provided the issuers are all actuated by similar sentiments and move in a similar direction” (p. 370). [Most bankers prefer a centralized banking system, as countries now have, because it ensures that all bankers move in a similar direction. With a decentralized banking system, bankers usually vary greatly in their sentiment and move in various direction.]

Poor argues that bank notes or checkable deposits used by a country bank for speculation, to buy government securities, or to finance businesses affect prices and interest as bank notes issued by the Bank of England to buy Exchequer bills (p. 371). “Once in the market, they perform precisely the same functions, and are subject to precisely the same laws. They are equally promises to pay coin on demand; and must be equally discharged within similar periods, by the payment of coin or its equivalent” (p. 371). [If the country bank’s loan of bank notes or checkable deposits comes from the bank’s capital or from savings deposits, then these notes and deposits should not have the same effect as the central bank issuing notes to buy government bills. The country bank has not added any additional currency, but it has merely transferred currency from one person to another. The central bank has added additional currency.]

Poor remarks that since bank notes and checkable deposits issued by private banks far exceed those issued by the Bank of England, their effect must likewise be much greater. He writes, “It is certain that the former [private banks] do exert a much greater influence over prices and the rates of exchange, in ratio to their amount, than the latter [the Bank of England]; for the reason that they have a much more intimate connection than those of the Bank [of England] with the foreign commerce of the country, and are usually made upon securities, as a class, inferior to those which the rules of the Bank allow it to take” (p. 372).

Poor summaries Gilbart’s comments before the Committee of 1840-41 about the actions that he would recommend for the Bank of England to follow in the event of war: “Mr. Gilbart, in the event of a war, would suspend specie payments, — would demonetize gold and silver, as a means of retaining them in the country” (p. 373). About Gilbart’s recommendation, Poor remarks, “He would cut off the handle of your axe, and render it useless, so as to prevent an enemy from striking off your head. But how was the enemy to get hold of the handle? By paying the price both for that and the axe. If he paid the price, he might thereby put in the hands of the owner that wherewith to defend himself far better than with the axe” (p. 373). He continues, “But if the gold of a country at war be demonetized, the enemy or some other nation will be sure to get it, not in exchange for powder and ball, but for wines and silks, — for that which, instead of arming and furnishing it for the fight, would inevitably tend to its emasculation, to the destruction of all patriotism and manhood” (p. 373). Moreover, Poor writes, “The effect of a war is always to turn the exchanges of a country engaged in it in its favor, for the reason that every one orders home the proceeds of his exports in coin, in order to have in hand that upon which he can certainly rely, should the event prove unfavorable, should domestic order be disturbed, or the wonted industries of the country fail” (p. 373). [This is not exactly true — especially if the prospect for one’s country winning the war is slim. If a person has the means, he may want to leave some of his wealth in a neutral country if he has to flee.] Poor notes that when Lincoln’s war to suppress Southern independence broke out gold and goods flowed into the United States. At the end of 1861, specie payments were suspended, and U.S. notes, greenbacks, were first issued in February 1862. After the suspension, exports far exceeded imports for the remainder of the war. [Some, perhaps most, of this difference is accounted for by the high tariff that the Republican Congress imposed. This tariff was the primary reason for the secession of the States of the Deep South.] Poor concludes his remarks about Lincoln’s war:

If legal-tender notes had not been issued, the United States would have laid all the world under tribute. The fast impulse of a people when they find themselves about to be plunged into a war is to forego every article that does not rank among the necessities of life. Their silver and gold are the first things they place beyond the reach of harm. Foreigners cannot get them, unless they pay more than they are worth. This they will not do, for the reason that they can get them of nations at peace, for their worth. The position of the United States, so far as its currency was concerned, was impregnable, but for its voluntary demonetization (p. 374).

The United States “lost their gold as soon as it could be taken away from them by lavish and wasteful expenditure” (p. 374). Poor is convinced that “[t]he civil war in the United States would have been ended in half the time, and at half the cost, but for demonetizing their coin” (p. 374).

Gilbart states that banking capital is employed in discounting bills. According to him, when a bank of circulation [a bank that issues bank notes against bills] buys a bill, it increases the amount of money by the amount purchased. [This statement not exactly true as the bill of exchange can itself function as money in discharging debt and other financial obligations. However, other bills, such as treasury bills and bills of accommodations, seldom function as currency.] Gilbart claims that if a bank of deposit buys a bill, it does not increase “at all the amount of money in the country; but it will have put into motion . . . [money] that would otherwise have been idle” (p. 375). [This statement may or may not be true. If a bank buys the bill with money from its capital or from savings, then it is true. If it buys the bill by creating checkable deposits, it is not true. Checkable deposits are functionally the same as bank notes.] In both cases, Gilbart argues, the effects of bank notes issued by the bank of issue and the effects of checkable deposits created by private banks are the same. If notes issued by the bank of issue can cause high prices, overtrading, and speculation, so can checkable deposits created by private banks.

Poor responds that the two differ in that one bank’s capital is in a form proper for loans [this comment applies to deposit banks] and in the other “no capital whatever is created or provided” (p. 375) [this comment applies to the central bank of issue]. He writes, “To say that notes, without the least provision for their redemption, are the equivalent of deposits, which may be wholly in the form of coin or of notes representing coin, is to say that fiction equals reality, and shadow substance” (p. 375). Issuing bank notes without anything to support them may well result in problems for the bank while lending “the capital made up of deposits might prove most advantageous to all parties to the loan” (p. 375).

Poor concludes, “Mr. Gilbart, undoubtedly, possessed a capacity of intuitively measuring the person who wanted to borrow his money; but he was wholly out of his sphere when he undertook to write upon its laws” (p. 375).

Commentary 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 Henry D. Macleod. My comments are in brackets. Referenced page numbers enclosed in parentheses are to Poor’s book.

Henry D. Macleod (1821-1902) was a Scottish economist. Among his works are Theory and Practice of Banking (1856), Elements of Political Economy (1858), A Dictionary of Political Economy (1859), Principles of Economist Philosophy (1873), and The Theory of Credit (1889). He is credited with coining the term “Gresham’s Law.” Poor reviews Macleod monetary theory presented in Theory and Practice of Banking.

About Macleod, Poor comments that he “has erected a vast system, measured by the number of pages devoted to it, The fundamental principle of which is that gold and silver serve as money by reason of being representative of debt; that paper serves as such by reason of being the representative of transferable debt; and that whatever represents transferable debt is currency, — paper money” (p. 383). [Today, debt is money with no involvement of gold and silver. In today’s monetary system, money would cease to exist without debt. Under the gold standard, money would continue to exist as gold coin if all debt disappeared. {Some fiat money reformers would argue that government notes are not debt instruments. But they are albeit noninterest-bearing and nonpayable debt. They cannot extinguish debt; they can only transfer debt from one person to another, and eventually the government ends up with the country’s debt as government notes are its obligations.}]

Macleod claims that the notion “that money represents commodities, and that paper currency may be based upon commodities” (p. 363) is a “stupendous fallacy” and a delusion. “Money does not represent commodities at all, but only debt; or services due, which have not yet received their equivalent in commodities” (p. 364). [This is a strange notion. In its origin, money did not represent a commodity, because it was a commodity, much less debt. In the ancient world, money was never thought of as representing debt. Credit and debt were not common and even abhorred. To discourage debt, much of the ancient world outlawed charging interest on loans.] Moreover, he claims that the quantity of money that a person has “is just the quantity of debt services due to him” (p. 364). Also, “the quantity of money a nation possesses is simply the quantity of accumulated industry it possesses over and above all commodities; but they have no relation to each other” (p. 364). Money “represents that portion of a man’s industry which is reserved for future use” (p. 364). He states that “the value of money depends upon its relations to what it represents, namely, debt, and not to commodities” (p. 364). Furthermore, he declares, “If money or currency increases faster than debt or services due, it immediately causes a diminution of its value. If debt increases faster than money or currency, then the value of money is raised” (p. 364). [Macleod errs with this statement. Raising prices nearly always results in a monetary regime of government notes and legal-tender bank notes, which are functionally the same as government notes. As such notes themselves are debt, debts are always increasing faster than money or currency. According to Macleod, the value of money, by which Macleod seems to mean the purchasing power of money, should rise, i.e., general prices should fall.] According to Macleod, John Law erred in basing his paper money on a commodity, land, instead of debt. Macleod writes, “Where there is no debt, there can be no currency” (p. 364). [As mentioned above, in the ancient world and even when Macleod wrote, many people used a currency that did not involve or represent debt. When people bought by shaving silver from a silver bar to buy goods priced in the weight of silver, as some people did in the nineteenth century, they were using a currency that neither involved nor represented debt. This seems to conflict with Macleod’s concept of money.] He also disagrees with the concept of bankers issuing bank notes on good bills, real bills of exchange (p. 365). Continuing, Macleod writes:

[T]hat the only true foundation of a paper currency is that substance which is the legal or the universally accepted representative of DEBT. . . . [A]mong all civilized nations, gold or silver bullion is the acknowledged representative of debt. Consequently, gold or silver bullion is the only true basis of a paper currency. Among all civilized nations, the weight of bullion is the acknowledged measure of value; and, consequently, bullion is the only true basis of the “promises to pay” (p. 365).

He continues:

[I]t is not as a commodity that bullion is the basis of a paper currency, but as the substance which is the accepted representative of debt. . . . Bullion, then, as the symbol of debt, is not only the sole proper basis of a paper currency, but is the only true regulator of its amount. As all paper currency is a “promise to pay” gold or silver bullion at some definite time, it is quite evident that the “promises to pay” floating in a nation must bear some proportion in quantity to the actual quantity of the bullion (pp. 365-366).

Macleod claims that a yard of broadcloth or a Dutch cheese could represent debt and be the measure of value as well as gold (p. 365). Poor response to this notion as:

flippant and incoherent nonsense, swollen into two spacious volumes, when Dr. Schliemann shall have dug up at Troas or Mycenae Dutch cheeses perfectly fresh and sweet, and bearing upon their surfaces the dimples in the exact form and shape in which they were impressed by the tiny fingers of the pretty Dutch milkmaids three thousand years ago. Till then the habit or prejudice of mankind in assuming gold, as money, to be capital instead of debt, will be considered as resulting not from accident, but from law (p. 366).

Next Macleod discusses inconvertible paper currency. If paper money ceases to be convertible into gold or silver, the paper money will establish a new standard that replaces the gold or silver standard (p. 367). [This occurred with the U.S. note when it was not convertible into gold.] The only way for an inconvertible paper currency to remain at par with gold is to limit its quantity. [Even reducing the quantity of U.S. notes could not keep it at par with gold. Only making U.S. notes convertible into gold on demand kept them at par with gold.] By limiting its quantity, he means, “devising some means whereby a greater quantity of it shall not be issued than if it were convertible into gold” (p. 367). If more than this is issued, the paper currency will trade at a discount to gold (p. 367). [Even with a fixed quantity several years before U.S. note became convertible into gold, they always traded at a discount to gold. Basically, what Macleod is proposing is using the price of gold as an index for regulating the quantity of paper currency.]

About Macleod’s concept on inconvertible paper currency, Poor writes:

This is only the old story over again, that value is not necessary to the circulation of a government or inconvertible currency; that, no matter how worthless it may be, it will circulate at the value of coin, if it do not exceed the amount of convertible paper which would have circulated in its place, or if its quantity do not exceed the wants of the community in its exchanges (p. 368).

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 John R. McCulloch. My comments are in brackets. Referenced page numbers enclosed in parentheses are to Poor’s book.

John R. McCulloch (1789-1864) was a Scottish economist, author, and editor. He was a professor of political economy at the University of London. Among his works are Principles of Political Economy (1825), Principles, Practice and History of Commerce (1831), and A Description Statistical Accounts of the British Empire (1837). Poor reviews McCulloch’s notes to his edited work of Adam Smith’s Wealth of Nation (1828).

Poor introduces his review of McCulloch with:

Fully accepting the doctrines of [Adam] Smith, and the wide distinction which he made between the qualities of the precious metals which fit them for money and those which determine their value in exchange, he proceeds to consider the laws by which their value is determined when their movement is perfectly free; and those by which they are affected when artificial restraint is imposed upon it (p. 318).

McCulloch states that under free competition, the value of gold and silver depend on the cost of their production. The prices of commodities, i.e., their value measured in money, vary with their cost of production, supply and demand, and the cost of gold and silver to which they are compared (p. 318). When the supply of gold and silver is restricted, the supply of money is limited. He writes, “Whenever the supply of money is limited, its value varies in inverse ratio to its quantity as compared with the quantity of commodities brought to market, or with the business it has to perform” (p. 318). For that reason, if the supply of commodities doubles while the amount of currency remains the same, their price would be reduced by half. On the other hand, if the supply of commodities were reduced by half and the amount of currency remains constants, their price would double (pp. 318-319). Thus, money is merely a ticket or counter used to compute the value of property, and in transforming it from one to another. [McCulloch seems to confuse value with price. The two are different. Price measures value, but it is not value. Furthermore, some items, e.g., air, patriotism, religious beliefs, have great value, but are not priced.] He claims “that a debased currency may, by first reducing, and then limiting its quantity, be made to circulate at the value it would bear were the power to supply it unrestricted, and were it of the legal weight and fineness; and, by still further limiting its quantity, it may be made to pass at any higher value” (p. 319). [History shows that when governments debase their currency, prices rise even if the supply is limited, which it seldom is.] He believes that nonconvertible paper money can be given a higher value than an equivalently denominated gold coin if its supply is sufficiently limited. A half-sovereign coin can be made to do the work (number of exchanges) as a one-sovereign coin if all one-sovereign coins were replaced by half-sovereign coins and no new coins were minted. [He means replacing each one-sovereign coin with a one-half-sovereign coin. He does not mean replacing each sovereign coin with two half-sovereign coins.] The same quantity of commodities would now be exchanged for the same number of coins. [This conclusion is highly unlikely. When exchanges were made under the gold standard, they were based on the gold content of the coin and not the number of coins. People compared the value of the product to the value of the gold content of the coin and not to the coin itself. Most likely, what would happen if half-sovereigns replaced all one-sovereigns, dealers who sold their products for one sovereign would now sell them for two half-sovereigns. Cutting the money supply in half as in McCulloch’s example would significantly hamper commerce and, by that, production.] He offers no example where what he suggests would happen has ever happened. McCulloch maintains that the value of inconvertible paper currency “depend[s] on the proportion which its amount bears to the commodities brought to market, or to the demand; and wherever a currency of this kind, or a limited gold currency, is in circulation, the common opinion that the price of commodities depends wholly on the proportion between them and the supply of money is quite correct” (pp. 319-320). However, “with a freely supplied currency consisting of gold and silver, . . . fluctuations in the supply and demand of such currency have no permanent influence over its value. This is determined by the cost of its production” (p. 320). [In The Value of Money, Anderson argues that the cost of production determining gold’s value is incorrect. He asserts that the “value of money is a quality of money, that quality which money shares with other forms of wealth, which lies behind, and causally explains, the exchange relations into which money enters.”[1] “Value {of money} is prior to exchange. Value is not to be denned as ‘power in exchange.’”[2] According to Anderson, the social value theory best explains the value of money: “the social value theory is the only way of giving a psychological explanation to the demand-curve, and a marginal value explanation of marginal demand-price.”[3] Thus, the value of money derives from the value of the commodity of which it is made and from its services as money. The value of the commodity as money is combined with the value of the commodity in its non-monetary use. Like all other commodities, and everything else, the value of the monetary metal and of its use as money is psychological. Anderson concludes, “The physical weight in gold, which itself is an object of social value, is commonly the immediate basis of the value of the dollar to-day, but money may get its primary value from other sources than valuable bullion. Given this primary value, the dollar may get an enhancement in that value from the services which it performs in the social technology of adjustment.”[4]]

Poor retorts:

Mr. McCulloch might as well have assumed a particular county of England to be fenced off by a wall so high that only a small amount of vital air could get into it; and that, in such case, the right to breathe would sell at an enormous price; and have inferred, therefrom, that, should the amount of money be limited, its price would rise in like ratio. One illustration is as pertinent, or rather as impertinent, as the other (p. 320).

Poor continues, “Whoever gets gold, gets it to spend. There may be quarrels between those who dig and those who rule as to who shall enjoy the product; but, whatever the result, it would immediately go into circulation” (p. 320). [Today, the rulers have resolved the quarrel by driving gold from the monetary system. They have given themselves absolute control of the monetary system. Contrary to the claims of most orthodox fiat money proponents and probably all fiat money reformers, the Federal Reserve is not an independent agency independent of the government and does as it pleases. It is just the junior partner in the scam to pillage the American people. The government is the senior partner. It created the Federal Reserve; the Federal Reserve did not create the government. It exists at the pleasure of the government, which may abolish the Federal Reserve anytime. Working together, the government and the Federal Reserve can confuse the people by blaming the other for the country’s economic problems although both are guilty.]

Poor notes that in another work of McCulloch, McCulloch claims that controlling the movement of precious metals is impossible for governments (p. 320). Poor writes:

His illustrations, however, are in keeping with those of the school to which he belonged, which is always assuming impossible instances as a means of setting forth its conclusions and beliefs. It is the way of children, not the method of men of full stature. Neither the production nor possession of the precious metals can be monopolized. Their value everywhere, under all conditions (allowing for the influence of accidental circumstances), is measured by their cost (pp. 320-321).

[Governments may not be able to prevent the movement of gold, but they can greatly hamper its movement. For example, with few exceptions, the U.S. government prohibited Americans owning gold between 1933 and 1974.]

Commenting on McCulloch’s belief that if the currency’s quantity is strictly limited, a debased currency can function as well as full-weight coin, Poor remarks that Locke had proven more than a century earlier, that a debased coin will not function as well as a full-weight coin. About the period of recoinage of English money in 1696 when Locke made his argument, Poor writes:

For a time, the amount of coin in circulation, or currency of all kinds, equaled hardly a tithe of that required for the exchanges of the country. These, for a considerable period, had to be made by means of credit or barter. Yet the necessity which then existed for a “circulating medium” did not exert the slightest influence in raising the value of the debased coins. The value of each was measured by the cost of the metal that each contained. Had their value risen greatly above their cost, supplies would immediately have flowed in from other countries. If tickets or counters were all that were wanted, these could easily have been provided, as McCulloch suggests, by cutting the pieces in circulation into a sufficient number of parts. It was capital, not counters, that was wanted, and relief came only when that was supplied (p. 320).

Poor continues:

But even admitting that, by reducing the amount of metal in coins, their value might be maintained from the necessity of their use, there was still an important link wanting to connect his premise with his conclusion. Gold gets into circulation by means of its value. It circulates at its value. If its amount were permanently decreased, its value would increase. This is palpable enough; but how is that which is valueless in itself to get into the category of values (p. 322)?

[This is the question that others also ask: How can that which has no value itself and is not the representation of value measure value?]

Poor asks how can something that has little or no value get into circulation in the first place? He answers that McCulloch would claim that some medium of exchange is needed and people agree that this worthless thing would be their medium of exchange. To this answer, Poor replies, “[I]t is useless to reply to such assumptions as these. They are the dreams or vagaries of persons bereft of all sense in reference to the subjects to which they relate, and who, unfortunately, are wholly impervious to reason” (p. 322).

Commenting on bank notes, McCulloch writes:

Notes not legal tender, and payable on demand, or at some stipulated period, are not paper money, though they serve the same purposes during the time they continue to circulate. The value of such notes is wholly derived from the confidence placed in the ability of the issuers to retire them when presented for payment, or when they become due. Whenever, therefore, this confidence ceases, their circulation necessarily ceases also (p. 322).

About paper money, i.e., government notes, McCulloch states that “confidence in the solvency of the issuers exercises the smallest influence over the value of paper money” (p. 322). Paper money is legal tender and not legally convertible into gold or anything else. “It circulates because it is made legal tender, and because the use of a circulating medium is indispensable; and its value, supposing the demand to be constant, is, in all cases, precisely as the quantity in circulation” (p. 322). He believes that the issuer of inconvertible paper money can maintain par with gold or silver without difficulty (pp. 322-321). To maintain a constant price of gold, all that the issuer needs to do is to decrease or increase the quantity of paper money. [This is the recommendation of some supply-side economist in recent years.]

Poor questions McCulloch’s assumption that “an inconvertible government note of the nominal value of an ounce of gold, to be of equal value, and exchangeable therefor” (p. 323). Moreover, Poor comments that according to McCulloch, inconvertible government notes circulate “not from any value it possessed, but from the necessity for its use as a ticket or counter of exchange” (p. 324). Furthermore, according to McCulloch, such money need not be made legal tender (p. 324). Poor wonders how such money would ever get into circulation and who would accept it (p. 324). Also, how would the excess be retired? [The government can get its notes into circulation by printing them and paying them to its employees, welfare recipients, and suppliers. It can further encourage the circulation of its notes by requiring them in payment of taxes and making them legal tender at the debtor’s option for payment of debts. In theory, the excess could be removed by having tax receipts to exceed expenditures enough to retire the excess — when was the last time that happened?]

McCulloch proposes eliminating precious metal, either as bullion or coin, as money because of the excessive cost. Paper should be substituted for metal. Thus, paper would replace gold as the reserves held by banks (pp. 324-325). [In the United States between 1862 and 1879, U.S. government notes replaced gold largely as reserves for banks. Today, all bank reserves are in paper and its electronic equivalent, which is even cheaper than paper.]

If McCulloch’s proposals were implemented, Poor sarcastically remarks, “The monetary millennium would then dawn on the world” (p. 325). [If McCulloch had lived another hundred years, he could see the results of his monetary millennium. His monetary millennium arrived in 1971 when the world divorced itself completely from gold and substituted entirely a paper and electronic monetary system in its place.]

In response to McCulloch’s proposal, Poor writes:

But what does every one seek in exchanging that which he possesses? To better his condition; to get something which will be more valuable to him than that with which he parts; in order to have that which, when he wishes to use it, will bring to him the greatest possible amount of values in other forms. Gold and silver, therefore, are always demanded in exchange, for the reason that they are values in their highest forms. The whole effort of mankind is to convert its industries and products into such values, or into that which shall produce them; and which, till its possession be demanded, is drawing interest in kind for the benefit of the party entitled to it. The whole effort of nature is in the same direction, — to convert lesser into greater values (p. 325).

Then Poor remarks that McCulloch “would invert all this order, by converting whatever a person has to sell, not into the most valuable, but into the least valuable form” (p. 325).

In his concluding remarks on McCulloch, Poor writes, “Nothing can be more disgraceful in a man like him, — Professor of Political Economy in the university of a city which, commercially, is the very eye of the world, and standing at the very apex of his school, — than the ignorance and assurance he displayed” (p. 327).

 

Endnotes

[1].. B.M. Anderson, The Value of Money (New York: The Macmillian Co., 1917), pp. 8-9).

[2].. Ibid., p. 9.

[3].. Ibid., p. 42.

[4].. Ibid., p. 591.