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

Bonamy Price (1807-1888) was an English political economist and a professor of political economy at the University of Oxford. Among his works are The Principles of Currency (1869), Currency and Banking (1876), Chapters on Practical Political Economy (1878). Poor reviews Principles of Currency.

Price provides this profound observation:

It [political economy] never seems to make a final and permanent lodgment of any of its truths in the public mind. They float on a tide which often carries the vessel backward as fast as it progresses forward. The tendency to backslide seems to be incessant and irresistible, — not often from any fault of its own, or from want of ability and demonstrating power in its teachers, but from the strength of the adverse forces which every one of its conclusions is ceaselessly obliged to encounter. A centrifugal force is ever acting on some large section of society, — sometimes, even, on a whole population, — which makes it forget all that it has learned, and draws it back into the darkness of ignorance (p. 401).

[Ever since the abandonment of the gold standard accompanied by the real bills doctrine with World War I, mankind has been charging ever more swiftly into the “darkness of ignorance.”] In other sciences, once a truth is established, people do not return to the errors, fables, and falsehoods that it has corrected and replaced. For some reason, the political economist has difficulty in confirming his observations; about this issue, Price writes:

The reason of this difference of fortune does not consist in the certainty attached to the subject-matter of the one, and the inherent uncertainty of the other. Some of the positions reached by Political Economy attain the quality of demonstration; and yet they are denied or ignored as readily as if they were the hypothesis of an empiric. They are not argued against and refuted; no second trial is summoned to retest their value: they are simply passed over; and then the error which they were supposed to have dispelled resumes its possession of the public mind, just as if it were the infallible suggestion of instinct (p. 401).

According to Price, the explanation for people continually returning to false economic principles “is to be found in the ceaseless action of selfishness, in the never-dying force of class and personal interests, in the steady and constant effort to promote private gains at the cost of the whole community” (p. 401). To Price, promoting private gain at the cost of the whole community is just a manifestation of the mercantile theory. Price follows his explanation with a discussion on mercantilism (pp. 402-403).

Poor strongly objects to Price attitude about merchants: “A reader of the Economists cannot fail to be struck with the hostility, not to say hatred, which all of them display toward merchants” (p. 404). Then Poor asks, “What is the reason of this hatred, with a sharper tooth even than that of the odium theologicum? — the practice of treating gold as wealth, and the highest form of wealth” (p. 407). Also, Poor expresses his low opinion of Adam Smith’s treatment of merchants. He writes, “Smith did his best to sustain his theory by sneers and flings at those who grew rich by its violation. He declared them to be a mean and selfish race, the abettors of the worst forms of monopoly, and the disturbers of the peace of the world” (p. 407). Then, Poor adds that “Price, in his grotesque way, attempts to paint them in still blacker colors” (p. 407). Moreover, Poor states that Price “admits that if the merchant, if the universal instinct of the race, is to be trusted, the teachings of Adam Smith, so far as they relate to money, are shams” (p. 407). Continuing, Poor writes:

The only refuge of the Economists is in crying that the science has been overborne by the selfishness of men of affairs. They cannot deny that these grow rich by pursuing methods precisely the opposite to those which they lay down. . .  The Economists fiercely reply that truth is sacrificed to mammon; but if it be the office of Political Economy to teach the method of wealth, why has not the man of millions the true method; and what need of going beyond his rules? As for the selfishness of the race, we fear that Political Economists have no prescription for its cure (pp. 407-408).

[If the merchant looks to the government to gain an advantage over others, he is a villain of society — and even more so are those in government who conspire with him to give him an advantage. {Governmental officials who seek to penalize merchants because they are merchants are also scoundrels.} However, if a merchant concentrates on providing the customer with goods and services of the highest quality at the lowest price instead of seeking governmentally protected advantage, then he is a great asset to the community.]

Price rejects the notion that bills of exchange and checks represent money. Moreover, he declares that they are not money. They are “[o]rders to pay money, which can be legally enforced; title-deeds to money which lead directly to the obtaining of money. They are all warrants or evidences of debt” (p. 404). [Bills of exchange, checks, and even bank notes are forms of credit {credit money} and are not real money themselves. Price is correct in that they do not represent money, i.e., gold coin. However, they do represent the equivalent value of gold coin. That is a $10 bank note, or a check written for $10, represents the value of a $10 gold coin; it does not represent the $10 gold coin. Credit money is merely the promise to pay the value, i.e., the amount of gold, stated on the note, check, or bill. {Today, notes and checks are promises to pay some unknown nebulous abstraction. Moreover, it is a promise that the issuer has no intention of keeping.}]

According to Price only a small amount of buying and selling is done with coin or bank notes. Most buying and selling and borrowing and lending are done with checks and bills, that is, it is done by exchanging debt (p. 405). [In today’s monetary system, all exchanges are made with debt. All “money” is credit. Therefore, the only way to extinguish debt is bankruptcy and reputation.]

Copyright © 2017 by Thomas Coley Allen.

by Thomas Allen

Usury as used in this article means interest or fees charged on loans, or loans on which interest or fees are charged and not just exorbitant interest or fees. Loans may be of money or other goods. Anti-usurers are opponents of usury.

During the Middle Ages, moralists, the scholastics, claimed that charging interest on loans, usury, was immoral and, therefore, unlawful, although people devised convoluted ways to circumvent this prohibition against charging interest. Even today, some moralists maintain that charging interest on loans is immoral and should be prohibited. They based their argument against usury in part on the teachings of Aristotle and in part on the laws of Moses.

Since the Reformation, primarily since Calvin, most moralists have ceased believing that charging interest on loans is immoral. (Some have accused Calvin of being a crypto-Jew or an agent of the Jews for justifying usury.)

Moralists of the Middle Ages claim that if a lender charges interest on a loan, exacting hire for money lent, he is guilty of the sin of extortion. Modern moralists, as Dabney calls them, disagree. They hold that reasonable interest is as just as a reasonable hire for any work or instrument of work.

Aristotle argued that usury was against nature, unnatural, and beneath the dignity of citizenship. To Aristotle, even the use of money, though necessary, was tainted and not worthy of study. Money, gold and silver, was sterile. (If money is sterile, why are people willing to pay to use it?) If one planted seed in a chest of gold or silver coins, nothing would grow. (Planting seeds in a box of nebulous electronic money, which is what most of today’s money is, would prove even less fruitful. Nevertheless, if properly watered, seeds planted in a chest of coins will sprout, and these sprouts are eatable.) Moreover, a bag of coins stored for years does not increase by a single coin — thus, proving the barrenness of money. (Food stored for years will not increase in amount either, but unlike gold coins, the stored food will deteriorate and become worthless. Does this mean that food is barren?) Because the use of money was unnatural, usury was unnatural since it is an increase based on money. Only an increase from herds, farming, hunting, and war were natural. Thus, even trade and mechanical arts were unnatural. Money was something used by those involved in trade, and, therefore, its use was base and beneath the dignity of a citizen. Since trade for money was contrary to nature, so was usury on its use. To Aristotle, money was a mere medium of exchange and did not increase by passing from one person to another, so he saw no justification for interest. He never sought to discover why people paid interest and never developed a theory of interest.

In Exodus 22:25, Moses declares, “If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.” In Deuteronomy 23:19, he declares, “Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury.” Most who condemn usury today overlook Deuteronomy 23:20, which reads, “Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the Lord thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.” Thus, the laws of Moses allowed charging interest on loans to strangers. The scholastics interpreted “stranger” to be anyone who was not a Christian. Consequently, a Christian could not charge interest on loans to another Christian.

As the Church forbade Christians lending Christians money at interest, it drove borrowers to the Jews for loans. As a result, the Church gave the Jews a virtual monopoly on lending money, which largely explains why today Jews dominate banking. (Hypocrite that it was [is], while condemning usury as a venal sin, the Papacy lent and borrowed at interest, although it called the interest “fees,” “gratuities,” etc. — anything but “interest” or “usury.” By the Reformation, the Papacy was allowing charitable loans, called contracts, to pay interest while it continued its prohibition against interest-bearing business loans. Businesses often used “insurance contracts,” which guaranteed the lender a fixed rate of return, otherwise known as interest, instead of a percentage of the profit.) When Christian lending to Christians at interest became acceptable, Christians no longer had to borrow from Jews.

As Dabney explains, the modern moralists and the Middle Age moralists, the scholastics, do not disagree on morals, but they do disagree on a merely economic question. They disagree on money being an effective force or influence in the production or creation of new value. Whereas, the modern moralists argue that money is an effective force in the production or creation of new value, the scholastics argue that it is not. To the modernist, money is an exchangeable form of capital, and capital is the agent that creates new value. Thus, charging interest is not a moral issue; it is an economic issue.

The modern moralists and the scholastics agree on the major premise, but they disagree on the minor premise. Both agree that if a person takes something from another for nothing, he is guilty of extortion — the major premise. For the scholastics, the minor premise is that money lent yields nothing in the creation of new value. Therefore, the inference is that charging interest is extortion. For the modern moralists, the minor premise is that money lent is the capital that the borrower uses to create new values. Therefore, the inference is that when the lender receives interest on the money lent, he does not extort. As shown, the disagreement between the Middle Age moralists and the modern moralists is with the minor premise, which is an economic issue and not a moral issue. Much of the opposition to usury, then and now, comes from confusing interest with physical production and associating interest with money. Interest does not have to be in money; it can be in other goods.

Today, nearly all monetary loans are exchanges of credit. The borrower exchanges his credit for the lender’s credit, which is usually more readily acceptable by the public than is the borrower’s credit. The borrower gives the lender a note, usually written, but occasionally oral, promising to repay the lender the money or credit borrowed. In exchange for this promise, the lender gives the borrower the lender’s credit, although occasionally the lender will give his cash, which today is another form of credit, to the borrower. Today, the credit is lent as checkable deposits where the lender promises to pay all valid checks present against these deposits. (In the past, bank notes were commonly used. The lender promised to pay his notes, which were his credit instruments, when presented for payment.) For the use of the lender’s credit or cash, the lender charged a fee called interest.

Meyer defines interest “as the price paid for the use of loanable funds. Loanable funds may be used either for purchase of consumer goods or as capital in the process of production.” Mund defines interest as “the price paid for the use of loanable funds (money or credit) which are to be repaid at a later date.”

According to Menger, interest is the payment for “the exchange of one economic good (the use of capital) for another (money, for instance).” By opposing the charging of interest, anti-usurers hold that money either is not an economic good or, if it is, not worthy of payment. As interest is the payment for the use of capital, the opponents of usury must assume that the use of capital has no value. If it does have value, then why is paying for this value immoral? If it does have value, then the anti-usurers believe that the user of capital is entitled to steal that value. Why is not such theft immoral?

According to Ely, “[i]nterest represents the difference in value between present and future goods.”  In effect, people who oppose usury are claiming that the future value of a good is the same as its present value. However, by charging interest, the claim is that a good today is worth more than the same good in the future. That is, an ounce of gold or a loaf of bread is worth more to its holder today than it will be ten years later. Interest represents that difference in value. According to the anti-usurers, an ounce of gold or a loaf of bread ten years from now is worth the same to the holder as it is today. Usury assumes risk over time; zero interest assumes no risk over time. Usury assumes that present enjoyment and satisfaction is greater than future enjoyment and satisfaction; zero interest assumes that future enjoyment and satisfaction is greater in the future than they are in the present. That is, usury assumes that most people prefer to have an automobile today than ten years later. However, anti-usurers believe that people have no time preference and have no more desire for an automobile today than ten years later. If they do and are willing to pay a premium, interest, for an automobile today rather than waiting ten years, they are sinning — just as viewers of pornography are as guilty, as the producers and dealers are, of sin. Likewise, anti-usurers believe that given a choice between receiving a $100 today and a $100 a year later, people will be indifferent to when they receive the $100. (Most people would probably prefer the $100 today to a $101 a year later. However, a majority probably would prefer $200 a year later than $100 today. The $1 and $100 are interest paid for delayed satisfaction.) To the anti-usurers, present value and future value are equal, and, therefore, interest is not only immoral, it is not even needed.

According, Alchian and Allen, “Interest is the price of earlier availability, rather than later availability, of rights to use goods.” Whenever people evaluate and exchange present goods or money for future goods or money, interest is involved whether they realize it or not. Moreover, contrary to the implied, if not expressly stated, claim of the anti-usurers, present goods or money are more valuable than the same goods or money in the future. Interest represents that difference in the present and future value.

Interest is merely a result of people preferring something sooner rather than later. Why is paying for the expression and consideration of this preference a sin? It must be a sin because the moralist anti-usurers want to prohibit usury in the name of morality.

Rothbard states that “present money is worth more than present expectation of the same amount of future money” — the law of time preference. That is, the future always exchanges at a discount to present. This discount is the interest that bridges the time preference. Anti-usurers reject the law of time preference, and if it does exist, it is a sin.

North gives a similar definition: Interest “is the discount we apply to future goods as against present goods.” Moreover, “[i]t is not a uniquely monetary phenomenon.”

Anti-usurers argue that the future and future goods do not need to be discounted. Thus, they imply that the future is known; people do not live in an uncertain world. Furthermore, they assume that all people will live long enough to enjoy the future; therefore, people do not have to discount the future, i.e., charge interest.

As interest gives time economic value, the anti-usurers must maintain that time has, or should have, no economic value. An item will have the same value a year or a century from now as it has today. In spite of the assertions of the anti-usurers, time is a scarce economic resource that needs to be economized. (People are not God, who exists outside time; they are prisoners of time.)

As North notes, “Time is mankind’s only absolutely irreplaceable environmental resource.” Time is the foundation of all economic planning, and interest is the expression of this foundation. Anti-usurers must maintain that either time is irrelevant to economic planning or, if it is relevant, it has no value.

In the name of morality, anti-usurers would deny compensation, interest, to anyone who saves his money, a present good, and makes it available to entrepreneurs to produce future goods. According to the anti-usurers, this service of capital, saving, to provide an advance in time, as Rothbard calls it, should be without charge; it should be free. To charge for this service is extortion.

Usury rewards the farsighted and prudent — people who anticipate their future wants and needs and saves for it. Anti-usurers want to reward the spendthrift — the impulsive who must have immediate gasification. The anti-usurers would have the prudent to lend to the spendthrift at no charge.

Interest is payment for the use of capital. Anti-usurers have no problem with paying wages to managers and workers for their labor. Few would even deprive the entrepreneur or owner his profit for organizing and superintending, either directly or indirectly through managers, the operation of his business. However, they would deprive the capitalist, who may even be a lowly worker via his meager savings or retirement account, any return on the use of his capital. Thus, the entrepreneur deserves a return on his entrepreneurship; the manager deserves a return on his management; the worker deserves a return on his labor; yet the capitalist does not deserve a return on his capital.

Besides covering the cost of time-preference, part of the interest covers the cost of administrative expenses of transferring money from one person to another. Opponents of usury assume that this cost is either negligible or at least not worthy of compensation. Another part of the interest covers the cost of risk. Most anti-usurers assume that all loans are risk free. The few who realize that loans do involve risk to the lender believe that such risk should not be compensated. Why would anyone want to risk his money at no cost, zero interest, and give up the present enjoyment and satisfaction that it can bring so that another can satisfy his desires, either in consumption or production, today?

As Mises notes, when the natural or ordinary interest is zero, no consumption occurs even into eternity. High interest rates show that people want to consume in the present and near term. Low interest rates show that people are willing to wait longer to enjoy consumption. At zero interest, which is what the anti-usurers demand, present consumption ceases, and everyone’s labor and resources go toward future consumption. Thus, people would starve as they invest all their labor and resources in capital goods. Do anti-usurers expect lenders to be so future oriented that they will choose death over usury?

Hunger prevents the natural rate of interest from becoming zero. If food is available, people will eventually eat it before they starve. Thus, the present value of food will eventually exceed its future value, which means people start applying an interest rate to saving their food for future use, and consuming it in the present.

Therefore, anti-usurers have to resort to the coercive power of government to suppress interest to zero. As contradictory as it seems, if the government forces interest to zero, as the anti-usurers want it to do, people will consume their capital. As a result, future goods will become more scarce and eventually cease to exist. Again, people will starve because they have consumed their “seed corn.” The few who survive would return to the hunter-gatherer stage of humanity. Thus, when the government outlaws usury, it forces people to become extremely present  oriented.

Is starvation what the anti-usurers want? If they succeed in outlawing all interest, starvation is what they will get.

High interest rates occur when people are present oriented; they have a high time preference. Low interest rates occur when people are future oriented; they have a low time preference. Future oriented people value future income and satisfaction more than present oriented people value them. Generally, future oriented people and societies are much wealthier and more advance than are present oriented people and societies. The burden of time is much higher for present oriented people and societies than it is for future oriented people and societies.

Anti-usurers seem to prefer present orientation to future orientation. They seem to prefer people consuming everything as quickly as possible to prevent delaying satisfaction, for that implies interest. However, as they demand zero interest, they seem to want to convert everyone to an extremely future-oriented person, who consume nothing in the present.

Everything, and every action, carries an interest rate whether noticed or not. Interest guides people in their consumption. Even the farmer uses interest when he decides how much of his crop to consume now and how much to save for planting next season.

Likewise, when a shipwrecked sailor rations his water consumption, he is employing time preference, interest. By weighing immediately quenching his thirst against quenching his thirst in the future, he is employing time preference, which interest represents.

Today, many opponents of usury oppose charging interest on loans for immoral reasons rather than moral reasons. They merely want to use other people’s capital, money, to satisfy immediately their consumptive desires without any cost to themselves. With a forced zero-interest loan, the borrower is taking something, the use of another’s capital to save time, from another, the lender, for nothing, which the moralists consider extortion.

Morally, one may be obliged to lend to a destitute Christian in dire need of the necessities of life at no interest (Exodus 22:25) and perhaps without the thought of repayment. (Actually, today with governments stealing the wealth of the productive and giving it to the poor to provide not only the necessities of life, but also many luxuries, no need really exists to lend to the poor and needy.) However, he should ensure that money lent goes for necessities and not for frivolous consumption or pleasure. (Perhaps a better solution is to give the person in need the necessities needed and allow the recipient to pay for them later when he can. [One should never lend any more money to any friend, relative, or acquaintance than he is willing to give them as a gift because he is not likely to be repaid.]) Nevertheless, no one is morally obliged to lend money interest free to invest in a business, to speculate, or to satisfy consumptive desires.

Likewise, loans to Christian churches, Christian schools, and Christian charities should be interest free. But, then, why not just donate the funds?

In a highly Christianized society, interest rates will be low, but not zero. They are low because Christians are, or should be, future oriented. As noted above, future orientation causes interest rates to be low.

Anti-usurers need to decide if they want a future oriented society in which the wealth of mankind will continue to climb, or a present oriented society in which wealth declines toward the hunter-gatherer level. If they want a future oriented society with increasing wealth, they need to cease insisting on zero interest, outlawing usury. If they insist on zero interest, outlawing usury, they will create a present oriented society with declining wealth for all. As Christianity is future oriented and outlawing usury is present oriented, the anti-usurers are promoting an unchristian society.

As the above discussion shows, usury, the payment for time, is essential to life. Without usury, civilization would not and could not exist. Without usury, mankind would only exist in a hunter-gatherer society. Moreover, anti-usurers promote a highly contradictory and impossible society: They want people to be extremely present oriented, have a high time preference, and extremely future oriented, have a low time preference, simultaneously. Anti-usurers are nothing more than promoters of “something for nothing.” In short, anti-usurers prefer lower-class living, present orientation, to higher-class living, future orientation.

 

References

Alchian, Armen A. and William R. Allen. University Economics: Elements of Inquiry. 3^rd edition. Belmont, California: Wadsworth Publishing Co., Inc., 1972.

Allen, Thomas. “Questions for the Anti-Usurers.” Franklinton, North Carolina: TC Allen Company, 2010.

Dabney, R.L. The Practical Philosophy. Harrisonburg, Virginia: Sprinkle Publications, 1897.

Elliott, Calvin. Usury: A Scriptural, Ethnical and Economic View. Frankston, Texas: TGS Publishers, 1902, 2008.

Ely, Richard T. An Introduction to Political Economy. New and revised edition. New York, New York: Eaton & Mains, 1901.

Jordan, James B. The Law of the Covenant: An Exposition of Exodus 21-23. Tyler, Texas: Institute for Christian Economics, 1984.

Laughlin, J. Laurence. The Elements of Political Economy. New York, New York: American Book Co., 1882.

Menger, Carl. Principles of Economics. Translators James Dingwall and Bert F. Hoselitz. New York, New York: New York University Press, 1976.

Meyers, Albert L. Elements of Modern Economics. 4^th edition. Englewood Ciffs, New Jersey: Prentice-Hall, Inc., 1956.

Mises, Ludwig von. Human Action: A Treatise on Economics. 3^rd revised edition. Chicago, Illinois: Henry Regnery Co., 1963.

Mund, Earl E. “Interest.” In Economic Principles and Problems. Editor Walter E. Spahr. Fourth edition. Vol. II. New York, New York: Rinehart & Co., Inc.: 1940.

Nicholson, J. Shield. “Usury.” Encyclopedia Britannica. 9^th edition. The R. S. Peale Reprint. Chicago, Illinois: R.S. Peale & Co. XXIV, 17-19.

North, Gary. The Dominion Covenant: Genesis. An Economic Commentary on the Bible. Volume 1. Tyler, Texas: Institute for Christian Economics, 1982.

North, Gary. Moses and Pharaoh: Dominion Religion Versus Power Religion. Tyler, Texas: Institute for Christian Economics, 1985.

North, Gary. Tools of Dominion: The Case Laws of Exodus. Tyler, Texas: Institute for Christian Economics, 1990.

Polleit, Thorsten. “The ‘Natural Interest Rate’ Is Always Positive and Cannot Be Negative.” March 21, 2015. https://mises.org/library/natural-interest-rate-always-positive-and-cannot-be-negative. May 14, 2017,

Poor, Henry Varnum. Money and Its Laws: Embracing a History of Monetary Theories, and a History of the Currencies of the United States. Reprint. New York, New York: H.V. and H.W. Poor, 1877.

Rothbard, Murray N. Man, Economy and State: A Treatise on Economic Principles, 2 volumes. Los Angeles, California: Nash Publishing, 1970.

Tenebrarum, Pater. “The Consequences of Imposing Negative Interest Rates.” November 21, 2014. http://www.acting-man.com/?p=34365.  May 14, 2017.

Copyright © 2017 by Thomas Coley Allen.

Another excellent review by Thomas Allen of the acerbic writings of Henry Varnum Poor…

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

Henry Fawcett (1833-1884) was a British academic, statesman and economist. He was a professor of political science at the University of Cambridge, England. Among his works are Manual of Political Economy (1865), which Poor reviews, Democracy in America (1875), and Free Trade and Protectionism (1878).

Fawcett writes, that “a bank-note, whether issued by a State establishment or by a private firm, is simply a convenient form for bringing into practical use the credit which may be possessed by the Bank. . . . A banker, therefore, whose credit is good can circulate a great number of his notes in his own neighborhood; his notes being willingly accepted by those to whom he is known. . . . It is manifestly to his advantage to issue notes” (p. 376). Using an example, he illustrates his statement. If £60,000 of bank notes are kept in circulation and if the banker keeps legal-tender reserves equal to £20,000, he has £40,000 at his disposal to invest. In England, the circulation of bank notes is placed under various restrictions. Fawcett investigates the effect on prices that the removal of these restrictions would have. “[T]he effect which would be produced entirely depends upon circumstances” (p. 376). If “there is no change in the population, or in the commercial condition of the country[,] . . . [and if] an increased issue of notes were added to the money circulation of the country, prices would manifestly rise; because there would be now more money in circulation to carry on the same amount of buying and selling which was previously conducted by a smaller amount of money” (p. 376). However, if “the additional notes which are issued simply cause a corresponding amount of bullion to be withdrawn from circulation, it is manifest that no effect is produced on prices” (p. 376). Continuing, Fawcett states:

[G]eneral prices depend upon the quantity of money in circulation compared with the wealth which is bought and sold with money, and also upon the frequency with which this wealth is bought and sold before it is consumed. If more wealth is produced, and an increased quantity of wealth is also bought and sold for money, general prices must decline, unless a large quantity of money is brought into circulation. . . . In fact, if there should be an increased production of wealth, if there should be more buying and selling, or if any other circumstance should occur the effect of which is to require the circulation of a larger amount of money, the value of money must rise; or, in other words, general prices must decline, unless an increased supply of money is forthcoming, so that a larger amount may be brought into circulation (p. 377).

Next Fawcett discusses bills of exchange. If bills of exchange ceased to be used, then the money supply would have to be increased to replace the bills of exchange. Thus, “bills of exchange, in many classes of transactions, are a convenient and complete substitute for money” (p. 377). “Consequently, if it were not for bills of exchange, one of two things must happen: either the money in circulation must be increased, or the money already in circulation must become more valuable, since a greater amount of money will be required to carry on the trade and commerce of the country” (p. 377). Therefore, whether an increased issue of bills of exchange affects prices cannot be answered affirmatively or negatively. “All that can be said is this: if the buying and selling now carried on by bills of exchange were effected by money, then one of two things must occur, — either more money must be brought into circulation, or general price most decline” (pp. 377-378). Fawcett concludes, “The influence, however, which is exerted upon prices by bills of exchange is not due to any thing peculiar in the nature or form of a bill of exchange: it is not the bill which produces the influence, but the influence is produced by the credit which is given. The bill is not this credit; but is simply a testimony or record of its existence” (p. 378).

Poor responds that Fawcett errs in his example. All £60,000 of notes would be returned for redemption within 60 to 90 days of the issue for gold coin or the equivalent to coin. Explaining how this would happen, Poor writes:

If the banker discounted bills representing merchandise, his notes would be returned to him by their makers in their payment. If he discounted those that would not be paid, then the notes issued would have to be presently taken in by him, by paying out a corresponding amount of his reserve. The debts created by their issue are to be discharged by their use, or by that of coin. Every note issued, therefore, must have a provision of an equal amount of capital for its discharge, and must be discharged by such provision. Its value depends upon its capacity of being discharged, of being retired from circulation. If it could never be discharged, it could have no value. Such is the law of all convertible currencies. Notes get into circulation upon the credit of the issuer; but it is always upon the assumption that means, their equivalent in value, are first provided for their redemption. Without such confidence, no one would take them. The basis of their circulation is not credit, but capital. Credit is but another word for confidence that such capital exists, and can always be had when wanted (p. 378).

Poor continues, “The reserve is not held to meet such notes as occasionally return, such as are assumed to be issued in excess; for the reason that all will return within their appointed periods” (p. 379). Thus, “Mr. Fawcett wholly misconceived the law or nature of paper money” (p. 379). [Poor gives an excellent explanation of the operation of the real bills doctrine. If the principle of the real bills doctrine is adhered to, currency cannot be overissued. It ensures that the currency available to clear, buy, new goods entering the markets is sufficient to clear the market with little or no effect on prices. Here is where the advocates of Social Credit err. Under the real bills doctrine, new goods entering the markets produce the money needed to buy them, i.e., the bill of exchange. Without resorting to borrowing, it also provides the money to pay employees and suppliers before the goods are sold. Thus, the real bills doctrine is far superior to the Social Credit scheme, which requires the government to print and give government notes to the people to close the gap between national income and the gross domestic product. The real bills doctrine closes the perceived gap between the national income and gross domestic product more quickly, accurately, and precisely than does the Social Credit scheme. Moreover, unlike the Social Credit scheme, the real bills doctrine closes the gap without resorting to governmental force or making the people dependent on the government or leading them to believe that they are getting something for nothing. Unlike the Social Credit scheme, which requires about two years to deliver the money to the people necessary to close the gap that occurred two years earlier, the real bills doctrine does so within a few months at most. Furthermore, the real bills doctrine is far superior to the Social Credit scheme at getting the right amount of money at the right place and at the right time.]

Moreover, according to Poor, Fawcett errs with “his statement that notes can be substituted, as currency, for a corresponding amount of gold; the saving to the country being in the amount of the substitution, ‘because notes, which are simply pieces of paper of no intrinsic value, perform with equal efficiency all the purposes which were previously fulfilled by the gold which is now supposed to be dispensed with’” (p. 379). Poor remarks:

Notes which are constantly being retired from circulation cannot take the place of gold which remains, as currency, unchanged and permanently in circulation. Whether convertible or not, they cannot perform, with equal efficiency, all the purposes which are fulfilled by gold. Their value is representative, not intrinsic; that of gold is intrinsic, not representative. Notes become valueless if their constituent become valueless; the value of gold depends upon nothing but itself (p. 379).

[With today’s paper fiat money, notes have replaced gold. That paper notes and their electronic equivalent “cannot perform, with equal efficiency, all the purposes which are fulfilled by gold” explains much of the monetary and economic problems that the world now faces.]

In comparing gold with bank notes, Poor writes:

Gold can be used in the arts; notes cannot. Gold can discharge indebtedness to foreign countries; notes cannot. Gold can discharge balances arising in the domestic trade of a country; notes cannot. Gold can be held as reserves by the issuers of paper money, and by society, and for all time; notes cannot in either case, as they are necessarily speedily retired by the use, or disappearance from any cause, of their constituent. Notes are accepted within the country in which they are issued, by reason of their representative character. They can perform only one function of gold, — that of effecting domestic exchanges (p. 379).

[Poor fails to mention that gold, which is no one else’s obligation, can extinguish debt; notes cannot. Notes can only discharge debts by transferring them to another. Moreover, gold can transport value over millennia; notes cannot.]

Also, according to Poor, Fawcett fails to see “that the less cannot include the greater. Paper discharges gold from use in one particular; but can no more be substituted for it in all the functions which the latter has to perform in the economy of society than a mere promise can be substituted for the performance, or sugar for iron” (p. 379). Poor adds, “Great advantages result from the use of paper money, and in ratio to its use, in the same way that great advantages result from the use of ships and railroad” (p. 380). [Trying to substitute completely paper for gold is the major flaw of modern-day economics and today’s monetary system that will cause their downfall. It is also the major and fatal flaw of all schemes of the fiat monetary reformers. Even worse, is the movement to reduce all money to electronic bytes, as they are even more nebulous and abstract than paper notes.]

Next Poor comments on “Mr. Fawcett’s theory of the effect upon prices of credit in the form of paper money is singularly unphilosophic and inadequate. With him, the whole thing is a mere piece of mechanism: so much money, so much price; and the reverse. His conclusions are based upon assumptions wholly impossible in themselves” (p. 380). Contrary to Fawcett’s belief that doubling production and purchases while the amount of money remains the same will cause price to fall one-half, “production and consumption cannot be doubled, the amount of money remaining the same; both must, as a rule, proceed in ratio to the amount of money in circulation” (p. 380). Moreover, Poor adds, “Paper money is the symbol of merchandise: the one must be in ratio to the other, as the necessary condition of production and consumption” (p. 380).

About Fawcett’s belief, Poor remarks:

He [Fawcett] might as well have assumed the commerce of a country to be doubled for the reason that the ships employed carried twice as much as they have the ability to carry. His statements and illustrations are nothing less than contradictions in terms. Credit in the form of money has an effect entirely different from that due to its quantity. ‘If,’ says Fawcett, in effect, ‘one would lift two pounds of merchandise with a one pound weight, he must double, or reduce one-half, the length of one arm of the scale.’ The true object of paper money is to raise the two pounds of merchandise without the employment of any weight whatever. So far as this can be done, can the cost of the operations of weighing be saved, and prices reduced in like ratio; and so far can the coin of a country be employed in the discharge of functions peculiar to itself, and which neither symbols nor paper money of any kind can discharge (p. 380).

According to Poor, depending on Fawcett’s definition of currency, Fawcett may have erred in assuming that an increase in currency is followed by an increase in prices (pp. 380-381). If currency is capital or the representation of capital, then Fawcett is wrong because “prices must be in ratio to the amount of merchandise fitted for consumption, or in ratio to the perfection of the instruments for its distribution” (p. 381). However, if currency “be neither capital nor the representative of capital (merchandise); if it be that kind of currency which can be substituted for gold, like legal tender [notes],” (p. 381) then Fawcett is right because “an increase of such currency always tends to advance prices in being in excess of the means of consumption” (p. 381). [Although general prices fluctuated under the gold standard, they were much more stable than general prices have been under today’s paper fiat monetary system. {An ostensible goal of today’s monetary system used to be to maintain stable prices.} Under the gold standard, general prices trended upward for years and then downward for years; however, over a few decades, they remained fairly stable with perhaps a downward bias because of improved technology. Under today’s fiat paper monetary system, general prices have trended upward as the monetary unit loses purchasing power year after year.]

About inconvertible currency [e.g., today’s currency], Poor writes, “People accept an inconvertible currency of government notes, as it will discharge their own debts existing at the time, by virtue of its being legal tender, and from a belief that it will speedily be redeemed by an equivalent in some form. If government be competent to issue it, it would have a high value for a time, even if it were believed that it would not be paid” (p. 384). [No one really believes that today’s currency will be paid, i.e., redeemed in gold or in anything else with intrinsic value.]

According to Fawcett, a country can increase the issue of its currency without disturbing the finances of the country “if its issue were confined within reasonable limits” (p. 384). “If, for example, the United States, in the late civil war, had issued notes only in ratio to their increased necessity for money, the issue could have exerted no influence over prices” (p. 384). About U.S. notes issued during the war, Poor comments, “The demand for money, measured by the price of the notes issued, exceeded sixteen-fold the amount of previous expenditure” (p. 384). Then he asks, “how could the expenditures of a government be increased sixteen-fold, or even eightfold, without any increase of capital, or fund to draw upon, and prices remain at their old figures? It is the same as to say that a demand multiplied by one per cent equals a demand multiplied by eight or sixteen per cent” (p. 384). Continuing, Poor remarks, “If gold could have been supplied wherewith to meet all expenditures growing out of the war, prices would still have increased enormously, from the excess of demand over supply” (p. 384). About the rise of prices during the war, Poor writes, “Prices rose, therefore, in ratio to the demand; in other words, in ratio to the inflation of the currency” (pp. 384-385).

In his concluding remarks about Fawcett, Poor writes:

If Mr. Fawcett had paused long enough to ask himself weather [sic] or not a sovereign to be received six months hence had the same value to the person who was to receive it as a sovereign in hand; or whether a government note having one year to run, without interest, equalled in value its note having the same time to run, bearing interest, — the answer, properly made, would have unlocked to him all the mysteries of money. Instead of this, he contented himself with a mild restatement of all the old dogmas, every one of which he accepted without reservation, and every one of which is exactly opposed to the principles upon which money is based. It must, however, be said in his favor, that his style is in agreeable contrast to the incoherent extravagance of Macleod and the fantastic nonsense of Bonamy Price (p. 385).

by Thomas 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 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