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.

by Thomas Allen

This article presents two views, Poor’s and Rist’s, on Thomas Tooke. Thomas Tooke (1774-1858) was an English merchant, economist, and historian of prices. He wrote History of Prices and of the State of the Circulation during the Years 1793–1856 (1838-1857) in six volumes and Enquiry into the Currency Principle (1844). Unlike most of the people whom Poor reviews, Tooke is not an ardent supporter of the Quantity Theory of Money. He considers the quantity of money, i.e., circulating purchasing media, to be mostly irrelevant.

 

Poor on Tooke

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.

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

Tooke sought to prove “that a rise in prices always precedes, and causes an increase of money, in whatever form” (p. 313). Poor states that Tooke’s claim is like saying “that a rise of water in rivers always precedes and is the cause of rainfall.” [In other words, Poor asserts, to the extent that changes in the money supply relate to prices, that a rise in general prices follows an increase in money supply while Tooke asserts that it precedes an increase money supply. Both include all forms of credit money as part of the money supply.]

Tooke believes that no variation in the quantity of the circulating medium affects prices. He believes “that the amount of the circulating medium, is the effect, and not the cause, of variations in prices” (p. 314). Because people have more money to spend does not mean that they will spend it. He maintains that as long as paper money is convertible to gold on demand, increasing the quantity of paper money will not affect the prices of commodities. Thus, convertible paper money cannot affect prices under any condition (pp. 314-316). [Tooke appears not to distinguish between paper money issued to discount real bills and paper money issued to discount fictitious bills like accommodation bills or financial bills like government bills. The former has little or no affect on prices whereas the latter often cause prices to rise, i.e., causes the currency to depreciate.]

Following Adam Smith, Tooke believes that paper money is merely a substitute for gold coin. For each unit of paper money in circulation, a unit of gold coin is removed from circulation. Any excess paper money would be redeemed in gold coin. Thus, paper money is a substitute for coin and is not in addition to gold coin. [Under the real bills doctrine, paper money is not a substitute for gold coin, but is in addition to gold coin. However, if excessive paper money is issued, the excess is quickly redeemed for coin. As shown below, Rist disagrees with Poor on this interpretation of Tooke.]

According to Tooke’s argument, convertible paper money cannot affect prices. Moreover, “[n]either could a government inconvertible paper currency affect prices, so long as it was not in excess of the wants of those using it in their exchanges” (p. 216). Also, Tooke maintains that “[v]alue was no necessary attribute of [paper money or gold coin]” (p. 316).

Poor objects to Tooke’s claim that money, i.e., gold coin, has no value per se. Poor states, “Whatever is to serve as money, in the last resort, must always possess uniformity of value, not only for months and years, but for ages” (p. 316). [Whatever serves as money needs to be able to transport value not only through space but also through time. Before a material becomes money, it must be able to transport value through time and space or represent something that can transport value through time and space. To do that, it has to have value in itself.]

According to Tooke, prices “depend upon cost, and the ability, not the will, of the public to consume” (p. 317). Poor remarks, “The public are able to consume a thousand things they will not” (p. 317). [As value is subjective and price reflects value, a person must have the will to consume before he consumes. Also, once he decides to consume, he must have the ability to consume. Poor is much closer to the truth on this issue than Tooke.]

According to Poor, Tooke fails to understand “that it is possible for prices to fall enormously, even when it [money] is greatly inflated” (p. 317). Poor continues:

The effect of an inflation is to advance prices, from an increase of the instruments of expenditure, and from its tendency to excite speculation, which may be carried to such a pitch as to seize and attempt to hold all the food, for example, upon the market. In such case, it not unfrequently happens that the public can be supplied from other sources, or that, from the excessive rates charged by holders, consumption will be so much reduced that those who attempted to control prices find themselves unable to carry their purchases, and are forced to throw them upon the market; in consequence of which, prices may for a time be far below what they would have been under a metallic currency (p. 317).

[In the United States, the decades following Lincoln’s war to prevent Southern independence, general prices trended downward although the money supply was inflated. First, it was inflated with U.S. notes; then it was inflated with silver dollars. Although this inflation did not result in a rise in general prices, it did distort the economy and lead to the depression of the 1870s and the depression of the 1890s. Moreover, technological advances were driving prices down faster than the inflation could push them up.]

Tooke’s notion that prices are “wholly independent of the quantity of the circulating medium” (p. 317) comes from observations of events occurring when the Bank of England has suspended redemption of its notes. About Tooke’s notion, Poor writes in his concluding remarks on Tooke:

He might as well have attempted to prove that indulgence in liquor had no tendency to elevate one, from the exhaustion or syncope resulting from its excessive use. So, under an inflation of the currency, prices may fall in much greater ratio than the inflation, from the decreased cost of production, or from the falling off, from any cause, of the demand. None of these causes or influences were properly considered by him. He sought to erect a science from an observation of certain phenomena, without sufficient reference to their cause or law. It is as useless, however, to attempt to reason with him as it was with the philosopher in the tale of “Rasselas.” It was, probably, from an examination or an attempted examination of his works, that Mr. Gladstone declared the study of money to be a fruitful cause of insanity (p. 317).

[In recent decades, the money supply in the United States, Japan, Europe, and other countries have been highly inflated. Yet none of the developed countries have experienced a rise in general prices of the magnitude that one would expect if the Quantity Theory of Money were correct.

Whereas Poor is more focused on the real bills doctrine than on the Law of Reflux, Tooke focuses on the Law of Reflux and mostly ignores the real bills doctrine. {The Law of Reflux claims that banks cannot over issue bank credit money, bank notes and checkbook money, because any over issued currency quickly returns to the issuing bank for redemption. The Law of Reflux pertains to the liability side of a bank’s balance sheet while the real bills doctrine pertains to its asset side. Although the real bills doctrine depends on the Law of Reflux, the Law of Reflux does not depend on the real bills doctrine. That is, the Law of Reflux can operate when financial papers like government bills and commercial papers other than real bills of exchanges like accommodation bills are discounted. The Law of Reflux functions under the gold standard where excess credit money can be exchanged for gold, which extinguishes the credit money. However, it does not function under today’s fiat money standard where one form of credit money can only be exchanged for another form of credit money.} As shown below, Rist is more in agreement with Tooke than is Poor. However, Rist places more importance on the real bills doctrine than does Tooke.]

 

Rist on Tooke

In 1938, Charles Rist (1874-1955) wrote History of Monetary and Credit Theory from John Law to the Present Day (translated by Jane Degras, New York: Augustus M. Kelly Publishers: 1966) in which he reviews several economists including Tooke. Rist was a French economist, who was of the Banking School as opposed to the Currency School. [Under the gold standard, banking philosophies generally fell into either the banking school or the currency school. The banking school “holds that as long as a bank maintains the convertibility of its bank notes into specie (gold), for which it should keep ‘adequate’ reserves, it is impossible for it to over issue its bank notes against sound commercial paper with fixed short term (90 days or less) maturities.”[1] Its position is also called the “Banking Principle” or “Principle of Fullerton.” To the banking school, bank notes are merely circulating credit instruments. Although they can be exchanged for gold, they are not intended to be warehouse receipts for gold. The currency school “maintains that all . . . changes in the nation’s quantity of money should correspond precisely with changes in the nation’s holdings of monetary metal. . . .”[2] Its position is also called the “currency doctrine.” To the currency school, bank notes are merely warehouse receipts and, therefore, should be backed 100 percent by specie. To the banking school, bank notes are claims for new merchandise offered for sale in the markets. Under the currency school, bank notes are claims for gold. Under the currency school philosophy, an elastic currency does not exist; under the banking school, it does.] Rist’s opinion of Tooke differs somewhat from Poor’s. My comments are in brackets. Referenced page numbers enclosed in parentheses are to Rist’s book.

As an opponent of devaluation, Tooke supports making bank notes convertible to gold at the same rate that existed before suspension during the Napoleonic wars. Devaluation hurts the working class (pp. 184-185). [However, devaluation benefits debtors, most of whom are speculators, governments, and people living beyond their means, as it allows them to pay their debts with less gold.]

Tooke does not believe that the fall of prices and the concomitant economic sluggishness resulted from returning to the gold standard at prewar parity (p. 185). About the fall in prices, Rist notes:

In all probability, the output of the gold and silver mines being what it was, the increase in the volume of goods produced would in itself have been enough, once the war was over, to bring prices down. . . . [T]he very high level to which prices in England and on the continent had been raised by the war and by paper money could not be maintained once the increase in the quantity of paper issued, which had been continuous up till then, was interrupted by the return to gold. The normal lowering of prices which would in any case have followed from a greater output of goods while the volume of currency remained the same, was intensified in England by the rise in the gold value of the pound sterling. . . . [T]he scarcity of gold was made responsible for what was in fact the obvious result of war and inflation (pp. 185-186).

Tooke distinguishes between paper money and bank notes. Paper money is money in the proper sense of the word. Bank notes are instruments of bank credit. Moreover, bank notes should not be treated differently from checks and bills of exchange. All three are credit instruments and have the same character. Also, in the full meaning of the word, none are money (p. 187).

Whereas Ricardo considers only the supply of paper money to explain the rise in prices when bank notes are not convertible to gold, Tooke considers both the supply of and the demand for currency (p. 187). Demand depends on the conditions of the markets and fluctuates accordingly (pp. 188-189). Fluctuation in foreign demand for the British pound has an immediate effect on domestic prices. Thus, the rise in prices is affected by “expansion of the home demand for goods due to successive increases in the amount of paper money put into circulation, and a rise in the price of goods imported due to the depreciation of the paper money on the foreign exchange market” (p. 189).

Rist compares Tooke with Ricardo on the rise in prices under a paper money standard: “Tooke contends that the rise in English prices during the Napoleonic wars was to a large extent the effect of the depreciation of sterling on the exchange, whereas Ricardo regards that depreciation merely as a repercussion of the preceding rise in the prices of English goods” (p. 190).

Tooke contends “that in fact that part of the rise in English prices above the rise due to exchange depreciation was the result of an excessive issue of paper money” (p. 190). However, he also believes that exchange depreciation is closely connected with the increased quantity of paper money (p. 191).

Ricardo argues that “the only way to bring the pound back to par was to reduce the note circulation” (p. 193). However, the pound was brought back to parity with gold not by reducing the quantity of notes in circulation, but through improvements on foreign exchanges, which Tooke noted (pp. 193-194).

Whereas Ricardo treats convertible bank notes as equivalent to paper money, Tooke notices a great deal of difference between the two. Also, Ricardo distinguishes bank notes from other credit instruments (checkable deposits and bills of exchange) while Tooke considers them the same (p. 196).

To Tooke forced paper currency, such as the pound during the Napoleonic wars and the U.S. note until 1879, is money. Legal-tender paper money “is issued to meet the requirements and cover the expenditure of the State, it represents a final income (that is to say, not subject to repayment) for those individuals who come into possession of it, increasing their purchasing power, thus increasing their demand for goods and making prices rise. In brief, paper money acts on prices in the same way as metallic money does” (p. 197). [Examples are the U.S. note between 1862 and 1879 and the federal reserve note after 1933 domestically and after 1971 on foreign exchanges.]

On the other hand, convertible bank notes “are credit instruments. They are only issued as advances. Far from being incorporated in the currency, they are bound to return to the bank which has issued them when the advances are repaid” (p. 197).

Bank notes can “affect prices only provisionally, for in order to repay the advances a sum exactly equal to those advances has to be taken from the final income. An advance from the bank enables the borrower to spend to-day an income which he will in fact receive only later, but he will not spend that income since it will be used to repay the advance” (p. 198). Thus, “[b]ank-notes are claims on a defined quantity of gold. Paper money is a means of payment whose purchasing power over goods (or gold) is fixed on the market according to variations in supply and demand. It is a legal claim, and it is only the law which gives it the power to settle debts” (p. 199). [Legal-tender paper money settles a debt by passing that debt to another. However, being an obligation of the issuer, it can never extinguish debt. On the other hand, gold coin is no one’s obligation and can, therefore, extinguish debt.]

Not only does convertibility limit the quantity of notes issued [and checkbook money], it also “gives notes legal and economic qualities which paper money does not possess, and which are independent of quantity” (p. 200).

Unlike Ricardo, Tooke does not consider bank notes identical to metallic money, gold or silver coin. To Tooke, money is more than a medium of exchange or a common denomination of value; “it is the ‘subject of contracts for future payment,’ and ‘it is in this latter capacity that the fixity of a standard is most essential’” (pp. 200-201). “[T]the value of the convertible bank-note is derived precisely from its connexion with the metallic standard” (p. 201). Although a paper money standard is a standard, it is, however, a poor standard because it has nothing to guarantee stability (p. 201).

Rist summarizes Tooke’s conclusion on the identity of bank notes and checkable deposits:

1. Since all credit instruments are essentially the same, it is absurd to put bank-notes in a class apart. If credit has been granted in excessive quantities, the situation cannot be remedied merely by limiting the number of bank-notes issued, as the Currency School argued, it is necessary to deal with credit as a whole.
2. The banks’ creation of credit, in all its forms, and particularly in the form of bank-notes, takes place only because the public demand credit. Banks cannot create notes at will, any more than they can create deposits. They are only created if the public demand them. That is why it is impossible to get out of a crisis by creating paper. Whereas paper money is created by the government at will in order to meet expenditure which cannot be covered by its ordinary revenue, credit instruments are created only in response to public demand. The State creates paper money at will but cannot withdraw it from circulation, the banks do not create credit instruments at will, but can withdraw them by ceasing to renew credits (p 213.).

According to Tooke, financial crises result from the abuse of credit (p. 214). Preventing the abuse of credit is necessary to prevent financial crises. “[T]he abuse of credit is the result of the ‘spirit of speculation’” (p. 214). Moreover, “[c]redit does not give rise to speculation, but follows it; credit is always the response to a demand, and this demand is itself the result of a given economic situation” (p. 214). [The beginning of the twenty-first century bears witness to speculation abusing credit — the housing bubble for example.]

Tooke identifies two primary price movements: (1) speculative price movements and (2) permanent or fundamental price movements (p. 215). Speculative price movements “originate not in an expansion of credit, but in a favourable price situation in certain commodity markets” (p. 215). As a result, credit expands in response to the demand for speculation. Thus, the boom begins.

According to Tooke, “1, . . . speculation originates in the situation of the commercial or industrial market, and not in an increase in the note circulation; 2, that the steady expansion of credit is an effect, and not a cause of this speculation, for there is no expansion of credit without the demand for it; 3, that the contraction in the currency which follows a crisis is the consequence and not the cause of the slump” (p. 215).

An economic slump (panic, depression, or recession) occurs when the income (wages, interest, dividends, profits, etc.) of consumers fails to keep up with rising prices of commodities. As a result, commodity prices must drop, which leads to an economic crisis. Prices decline to the level of the income of consumers, i.e., consumers can again afford to buy (pp. 216-217). [The world has been witnessing such an event with the collapse of the prices of real estate and commodities beginning in 2008.] Thus, according to Tooke, the aggregate of money income devoted to consumption limits the aggregate of money prices. [The Social Credits advocates hold a similar view. They believe that economic slumps result from the people lacking the money to buy the goods that have been produced. Their solution is to have the government or its central bank to print enough money, either physically or electronically, for the people to buy the excess goods and give it directly to the people.]

Tooke does not deny that the influx of gold or the creation of paper money affects prices. However, other things also affect prices (pp. 219-220). For example, speculation can lead to an increase in the velocity of money, which can affect prices (p. 220). Also, affecting prices are the balance of trade, the capital markets, and the state of credit (p. 222).

Rist summaries Tooke’s observation on interest:

1. A low discount rate cannot by itself stimulate the price level;
2. A low discount rate can affect prices on the stock exchange without having any effect on commodity markets.

[Tooke’s observation is seen in lowering of interest rate following the 2008 crisis. Stock markets have trended upward while commodity prices have trended downward.]

For a fall in interest to stimulate the economy, it has to “‘coincide with a tendency from other causes, to a speculative rise of prices, and with the opening of new fields for enterprise’” (p. 223). Otherwise, any action undertaking by the central bank to stimulate the circulation of money will not affect prices (p. 223). Nevertheless, “a low rate of interest may foster and support a rise which began from other causes. ‘If there exist grounds for speculation in goods, a coincident facility of credit may, but will not necessarily, extend the range of it.’ . . .[A] low rate of interest is at the bottom of all cases of ‘overtrading’ and ‘overbanking’” (p. 223). (“Overbanking” means “advances, either on insufficient or inconvertible securities, or in too large a proportion to the liabilities” [p. 214, fn].)

“Tooke maintained that the raising of the discount rate, coupled with a strong cash position, would enable the Bank of England to mitigate the effects of a crisis and to prevent it from developing. Mere limitation of notes will only make the crisis more acute, for it is the function of notes to provide additional temporary currency in times of crisis, which will make it possible to avoid bankruptcies and collapses” (p. 228).

[Poor is a proponent of elasticity in the credit system. There seems to be less difference between Poor and Tooke than Poor claims. Tooke’s explanations are closer to the truth than Poor credits him.

As shown above, Poor’s view of Tooke’s works differs significantly from Rist’s. Poor’s views Tooke unfavorably while Rist views him favorably.]

 

 

 

End Notes

[1]. Percy L. Greaves, Jr., Understanding the Dollar Crisis (Belmont, Massachusetts: Western Islands, 1973), p. 8.

[2]. Ibid., p. 28.

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

William Huskisson (1770-1830) was a British statesman, financier, and member of Parliament. He wrote “Question Concerning the Depreciation of Our Currency” (1810), which Poor reviews. Huskisson wrote his pamphlet during the Napoleonic wars when the English pound was not convertible into gold or silver. His and Poor’s comments reflect this condition.

Huskisson states that in the popular sense, money is often considered to have only purely arbitrary and conventional value. Sometimes, it is defined as “the representation of all other commodities, and sometimes as the common measure of them” (p. 216). He concludes that these definitions are incomplete “because they are equally applicable to every description of currency, whether consisting of the precious metal, of paper, or of any other article” (p. 216). Huskisson continues, “It is of the essence of money to possess intrinsic value” (p. 216). Moreover, “The quality of representing commodities does not necessarily imply intrinsic value; because that quality may be given either by confidence or by authority. The quality of being a common measure does not necessarily imply intrinsic value” (p. 216). He adds, “Money, or a given quantity of gold or silver, is not only the common measure and common representative of all other commodities, but also the common and universal equivalent” (p. 216). Although paper currency has no intrinsic value, promissory notes in whatever form and from whatever source can represent value. “It does so, in as much as it is an undertaking to pay, in money, the sum for which it is issued” (p. 216) “The money, or coin of a country, is so much of its capital. Paper currency is no part of the capital of a country: it is so much circulating credit” (p. 216). Huskisson adds, “Whoever buys, gives, whoever sells, receives, such a quantity of pure gold or silver as is equivalent to the article bought or sold; or, if he gives or receives paper instead of money, he gives or receives that which is valuable only as it stipulates the payment of a given quantity of gold or silver” (pp. 216-217). Paper money remains at par with gold if it is convertible to gold coin. Both money (gold coin) and paper promissory money (bank notes) “are common measures and representatives of the value of all commodities. But money alone is the universal equivalent; paper currency is the representative of that money” (p. 217). He identifies two types of paper currency: “the one resting upon confidence, the other upon authority” (p. 217). Paper currency resting upon confidence is circulating credit. Bank notes are of this type of currency. Paper currency resting upon authority is paper money [government notes and bank notes made legal tender by the government] are of this type of currency (p. 217). [Huskisson was a Bullionist. That is, he believed that paper money ought to be a warehouse receipt for gold. For each dollar, pound, or franc of paper money in circulation, there ought to be a dollar, pound, or franc of gold stored in a vault to back that paper money.]

Poor objects to Huskisson’s notion that confidence or authority can give quality to representing commodities. Poor remarks, “That a person believes that a note which he takes represents commodities does not make it the representative of them, any more than the belief of the Alchemists made the baser metals in combination the representatives of gold, into which they so long sought to convert them. If confidence would create values, the silliest dunce would be the Croesus of the race” (p. 217).

Some people believe that if the government can declare the length of the foot or meter for measuring distance, it can declare that a bank note [or a government note] can measure value: “Intrinsic value is no more necessary in one case than in the other” (p. 217). To this belief, Poor replies that owners of land would not accept for their sales the instruments by which their acres are measured. To them, a surveyor’s chain is only worth its value as scrap metal. “When men buy and sell, they exchange, or intend to exchange, articles possessing equal values” (p. 217). [Actually, exchanges only take place when both parties perceive that they are receiving something of greater value to themselves than what they are giving up.]

Poor continues citing Huskisson. According to Huskisson, if a country’s circulating currency consists exclusively of gold and if the quantity of gold in that country doubles while the quantity of gold and the demand for it remained the same in all other countries, then the value of gold in such country would fall. This loss of value would appear as a rise in the prices of all commodities. However, since gold is much cheaper in the country in which its quantity has increased, it would be bought and exported to other countries until its value is again equal in all parts of the world (p. 218). If a country’s circulating currency consists of both gold and paper and if a paper currency were doubled while the quantity gold remains the same, prices will rise. The value of gold as a commodity will rise in price and in the same proportion as other commodities; that is, its value compared with other commodities will remain the same. Such an increase in paper currency causes the exportation of gold coin because gold’s value as currency remains the same while its price in that currency has increased, i.e., the gold content of the coin is worth more than the denomination stamped on the coin. This exportation decreases the currency in circulation and thus supports the value of the currency remaining. Thus, “[a]n excess of paper has, in the first instance, the same effect upon prices as an excess of the precious metals, to the same amount, would have, in any particular country. But it does not admit of the same relief: it cannot right itself by exportation” (p. 218).

Huskisson identifies two ways that the currency of a country can be depreciated:

1. If its standard coin contain less of gold or silver than it is certified to contain. In that case, the paper, as representing the coin, is also depreciated, and precisely in the same degree as the coin.
2. If the standard coin being of full weight, and the paper which represents that standard coin, and is, or purports to be, exchangeable for it, is not exchangeable, at the same time, for so large a quantity of gold or silver as is contained in the coin which it represents. In that case, the coin, though undiminished in value, must, as part of the currency, partake of the depreciation of the whole (p. 218).

Poor remarks that if the currency of a country consists of gold coin and paper and if the two were equal in value, then the paper must be symbolic. Contrary to Huskisson assumption, a doubling of the currency would not be inflationary.  Poor writes:

Prices would, in reference to money, remain unchanged. So long as gold and paper possessed the same value, an increase, or, rather, an inflation, of the currency, would not inflate or increase the price of gold bullion, — gold as merchandise, — while it might increase the value of all other kinds of merchandise, for the very good reason that gold cannot rise in value in reference to itself; that is, a sovereign after the inflation would purchase the same amount of bullion as before” (p. 219).

Moreover, Poor remarks, “So long as coin would purchase no more than an equal nominal amount of paper, gold would have no more tendency to go abroad than before such increase. Indeed, its tendency would be inward to provide adequate reserves for the increase of paper” (p. 219).

He continues, “If adequate provision, either in merchandise or coin, were not made for its [paper currency’s] redemption, it [paper currency] would become depreciated: it would not be exchangeable for an equal quantity of gold, nor would it command an equal amount of merchandise with gold, no matter whether it rested upon confidence or authority” (p. 219). Moreover, he adds, “The value of gold would not be influenced in any degree by the amount or value of the paper outstanding” (p. 219).

According to Poor, if paper currency rests on authority and was issued in large amounts, “it would, in great measure, drive the coin previously in circulation out of the country. But this fact would not tend, in any degree, to raise the value of the currency ‘resting on authority’” (p. 220). Furthermore, contrary to Huskisson’s assertion, “[t]he exportation of coin would tend to reduce the value of such currency, instead of raising it, by rendering it all the more difficult to resume, from the impoverishment of the people, which would be measured by the amount of gold — capital — that had been drawn from them” (p. 220). [Also, the government has no power to create value on which the currency must rest except to declare the monetary unit to be a specific weight of a commodity, such as gold or silver, to which paper currency is convertible on demand. Many proponents of fiat paper money do believe that government fiat can actually give value to that which has no value.]

According to Poor, Huskisson believes that paper currency resisting on confidence or authority is equal to gold as a measure of value. A decline in the value of paper currency brings down equally the value of gold, “for the reason that one competent measure of value must be equal in potency or effect to any other competent measure” (p. 220). However, the opposite is true. Poor writes “that the paper money of the country, though declared to have a value equal to that of an equal nominal amount of gold, did not possess such value; that the values of the two, though equally supported by authority, had no necessary relation the one to the other; and that their wide divergence was well calculated to excite the most profound alarm” (p. 220).

Poor concludes,

He [Huskisson] could not go into the market to make any purchase, without having thrust into his hand two scales of prices, — one in paper, the other in gold; yet, in the face of all this, he was so tied to tradition as to assert that money resting upon authority — the assignats of France and the Revolutionary Currency of the United States — was as competent a measure of values as gold and silver (pp. 220-221).

[Many fiat money reformers believe that the Continental and assignat failed because the government did not follow the right scheme in issuing them. Also, the flaws of today’s paper monetary system, including its electronic equivalent, result from following the doctrines of Keynes and Friedman instead of the scheme that the fiat money reformers promote, who disagree with each other on the proper scheme. Examples of these schemes are:

– the Social Credit scheme, which requires the government to give the people enough money to  fill the gap between national income and gross domestic product (GDP);

– the American Monetary Institute’s scheme, which has the government creating and issuing government notes directly without banks;

– Richard Cook’s scheme, which is a combination of the Social Credit scheme and the American Monetary Institute’s scheme;

– the Money Reform Act scheme, which promotes the government issuing government notes and an end to banks converting loans to money;

– Arnold Leese’s scheme, which is a fascist monetary scheme;

– Byron Dale’s scheme, which has the government printing and spending government notes to finance the construction and maintenance of roads;

– Charles Norburn’s scheme, which has the government creating and spending government notes into circulation and an end to issuing interest-bearing government securities;

– the Foundation to Restore and Educated Electorate scheme, which is similar to Norburn’s scheme;

– Gertrude Coogan’s scheme, which has a trusteeship answerable to Congress issuing government notes to match productiveness and to maintain stable general prices;

– Silas Adams’ scheme, which has the government owning most of the country by buying all bonds, promissory notes, and other debt securities and corporate stock and other securities with government notes;

– K.S. Kenan’s scheme, which reduces the Federal Reserve mostly to a clearing house for banks and makes the Department of the Treasury responsible for issuing the country’s currency and replacing all interest-bearing U.S. securities with non-interest-bearing government notes.

For fiat money reformers, the problem is not fiat money itself; the problem is how the fiat money system is administrated.

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

Dugald Stewart (1753-1828) was a Scottish philosopher and mathematician, who popularizing the Scottish Enlightenment. He was a professor of moral philosophy at the University of Edinburgh. Among his writings are Elements of the Philosophy of the Human Mind (in three volumes, 1792, 1814, and 1827), Outlines of Moral Philosophy (1793), and The Philosophy of the Active and Moral Powers (1828). Poor reviews Stewart’s monetary philosophy as presented in his Lectures on Political Economy.

Poor writes, “Stewart was an ardent admirer of [Adam] Smith, and assumed to reduce to precise and logical terms what his great master only more generally outlined” (p. 171). Nevertheless, Stewart objected to Smith’s belief that the value of gold and silver depended largely on “their beauty, utility in the arts, and scarcity; that such qualities, among others still more important, fitted them to serve as money” (p. 171). For Stewart, the intrinsic value of gold and silver in a coin is “merely accidental circumstances.” Stewart asserts, “When gold is converted into coin, its possessor never thinks of any thing but its exchangeable value” (p. 171). If the intrinsic value of gold and silver are annihilated, i.e., their conversion to flatware, jewelry, etc., they could still function as money as they did when they had intrinsic value. Money is merely a ticket or counter. “It is general consent alone which distinguishes them [gold and silver], when employed as money, from any thing else which circulates in a country; from the paper money, for instance, which circulates in Scotland and England.” (p. 172). If a country were isolated from the rest of the world, gold or silver coin as a medium of exchange would have no advantage over paper currency. Also, whether the circulation medium consists of gold or paper would make no difference on the national wealth. Moreover, according to Stewart, whether gold or silver was abundant or scant would not matter. “The only utility which is essential to gold and silver as media of exchange is their peculiar adaptation (divisibility, durability, &c.) to this purpose” (p. 172). [For the most part, fiat money proponents agree with Stewart’s monetary theory.]

Poor replies that like Smith, Stewart errs in his assumption “that money was an invention, — an arrangement entered into from a sense of its necessity” (p. 172). Stewart also errs in his conclusion “that value is not a necessary attribute of money” (p. 173). [Poor is correct: Money was not an invention. It evolved over time from spontaneous market operations. Only after money came into being did governments get involved.]

However, Stewart’s idea of money is a logical derivation from Smith’s idea. From the premises laid down by Smith, Stewart concluded that “value is no attribute of money.” Poor remarks, “the real value of money must equal its nominal value, or, in case of symbols, the values of what they represent must equal their nominal value in coin, or value is no attribute of money whatever” (p. 173). [Today’s fiat paper money is based on Stewart’s premise that value is no attribute of money. That is, the quality of money is irrelevant. Force is the only thing behind, or backing, today’s fiat paper money.]

Stewart states, “We never think when we receive the precious metals as money, of their value in the arts” (p. 173). To which Poor replies, “But were they not first taken, and chiefly, for their value in the arts? and if we do not now consciously go through the same mental process that was gone through when they were first taken, is it not that such consciousness is concealed from us by habit, not that it does not exist” (p. 173)? People practice many things without conscious thought about how such practice came into being. Acting this way “is no proof that the mind is not engaged in one case as in the other” (p. 173). Poor notes:

Stewart, however, wholly misstated the fact that gold and silver are taken without any consciousness of their value in the arts. As a rule, we do not raise the inquiry; we assume from experience that coins are what they purport to be: but let it be noised abroad that debased coins of a particular denomination are in circulation, then every one of the kind, good or bad, will be subjected to the closest scrutiny, and, if taken at all, will only be taken at its value in the arts, measured by the amount of pure metal it contains (pp. 173-174).

Stewart claims that if all gold and silver mines were exhausted, all the gold and silver in existence would be converted to money. Poor disagrees. First, he doubts the possibility of exhausting of all mines. If gold and silver were to disappear, civilization would disappear with them. However, if all mines were exhausted, Poor doubts that all gold and silver would be converted to money. Poor writes:

As it [gold] gradually disappeared from loss and attrition, commerce and trade, and with these, civilization and wealth, would gradually die out. As these disappeared, gold and silver would gradually flow back into the arts, and almost wholly in time; for, as there would be no trade, money would not be wanted. It is a fact of universal observation, that gold and silver possessed by the savage races are not used as money, but almost wholly in the arts (p. 174).

To Stewart’s belief that “gold and silver, as a medium of exchange, would possess no value over the most worthless of substances” (p. 175), Poor replies:

This absurdity is repeated by every subsequent writer upon the subject of money. Suppose England to be the world, what then? Would all sense of beauty, of utility or value be lost to its people? Suppose, as Stewart assumes, England isolated, a Yorkshire grazier should take with him to London a lot of beeves; and upon their sale should be offered a leather medal, with curious hieroglyphics stamped upon it, in payment. The seller at first might consider the offer as a good joke; but, on finding the purchaser in earnest, he would believe himself to be dealing with a madman, and would take good care to get his beeves into his possession again, and to rid himself of such a dangerous customer. To be logical, Stewart must assume that, were England isolated from all the world, its people would have a sense of neither use nor beauty; in other words, that they would be lower in the scale than any race or tribe ever yet discovered. If the precious metals have no intrinsic value, then the Scythian was correct in assuming money to be useful only for the purpose of assisting in numeration and arithmetic. It is for this reason that Stewart held their value to be disadvantageous, in complicating thereby the theory of money. If value be not an attribute of money, he was quite right in eliminating from it all idea of such quality (p. 175).

[The fiat paper monetary system that has now taken over the world supports Stewart’s notion of money better than it does Poor’s. However, Poor’s notion is much closer to the truth than Stewart’s. Because of believing Stewart, the world is now on the edge of a monetary crisis the likes of which the world has never before witnessed. Civilization is on the verge of collapsing into an economic abyss from which it may never recover, such as that which happened when the dying Roman civilization collapsed into the Dark Age — only this time the collapse may be worse. Only a return to a monetary standard, such as the gold standard, where money has real value in non-monetary uses and can extinguish debt because it is no one else’s obligation, can save it.]

Poor asks if Stewart is correct in that money as such has no value, then what harm can come from debasing coins? When a coin is debased, the denomination remains the same. However, the precious metal content of the coin is reduced. [Historically, when precious-metal coins were debased, prices quickly rose to adjust to the precious metal content of the debased coin. Even the death penalty could not deter this price adjustment.] Poor remarks, “If the sole use of money, as asserted by Stewart, be to assist in numeration and arithmetic, then the different denominations of coin have only the force of numerals; and a piece of leather upon which is imprinted the word ‘dollar’ is in its proper essence the same thing as a piece of gold upon which the same word is impressed” (p. 176). He continues,

Hume was more logical and consistent. Agreeing with Stewart that the only value of money, as such, was to assist in numeration and arithmetic, he took the ground that the currency should be debased, as the means of eliminating value from it; naively remarking, that such debasement should be effected in such a sly way that the people should not discover the swindle. Of the two, Hume is to be preferred. The admission that the debasement was a swindle had the merit, at least, of putting the people on their guard (p. 176).

Stewart writes that money provides a “scale of value” instead of a “standard of value,” which is the term that Smith uses. Thus, Stewart is more accurate than Smith about his concept of money. Poor notes, “It would be a contradiction in terms to call that a standard of value which had no value. A thing may be a scale, without being a standard. A yardstick is a scale for measuring distance or extension, but not the standard of distance or extension” (p. 177).

Poor asks, “If all value is to be abstracted from money, then of what advantage are the qualities of divisibility and fusibility, in the materials composing it” (p. 177)? These are two of the qualities that Stewart claims make gold useful as money (p. 176). Moreover, Poor continues, “Why not have the denominations which are fitted to express ‘every conceivable variation, of value’ all of the same size and fineness? A bank-note for a thousand dollars has precisely the same size and quality of material as a note for one dollar. The only difference is in their inscriptions” (p. 177).

Continuing his comment on Stewart’s claim that divisibility and fusibility were qualities that fitted gold and silver for money, Poor writes, “According to Stewart’s theory, the qualities which fit gold and silver for money — divisibility and fusibility — are of the least importance; for pieces of similar size may be made by their inscriptions to express ‘every conceivable variation of value’” (p. 177).

Stewart claims that a scale of value renders “the ideas of value much more precise and definite than they otherwise would have been” (p. 177). Poor asks, “But how can ideas of relative value be made more precise by comparing them with a scale from which all value is abstracted? How can nothing be made to be the measure of the value of something” (p. 177)? [A great question. As far as I know, no one has satisfactorily explained how something of no value and does not represent something of value can measure value.] Continuing with an example, Poor writes, “A definite idea is conveyed in the statement that a gold dollar measures the value of a bushel of corn; but what idea can be formed of the value of the corn from a statement that its value is that expressed upon a worthless piece of leather or paper” (p. 177)? [With today’s fiat paper money, value is “measured” with worthless pieces of paper. Perhaps trying to measure something with nothing explains, at least in part, the devastating economic crisis looming before the world.]

Stewart also suggests that “the quantity of money required by a community was in ratio to the rapidity of its circulation” [i.e., the velocity of money or the velocity of circulation] (p. 178). [The concept of the velocity of money is an important component of the quantity theory of money.] To which Poor replies, “This suggestion, which naturally resulted from the assumption that money is not capital, but a scale of valuation, or an aid in enumeration and arithmetic, has become an axiom among all modern Economists” (p. 178). [Today, nearly all economists continue to agree with Stewart on this issue.] Commenting on the event that Stewart used to deduce his conclusion on the rapidity of circulation, Poor writes:

The result of these transactions was, that in the course of seven weeks the garrison had been paid 49,000 florins, the sutlers had sold supplies to the amount of 49,000 florins, and the commandant or government owed them 49,000 florins: so that in the end the latter had converted their supplies into money, and had in hand 7,000 florins, and a debt against the government or commandant for 49,000 florins. From all this Stewart deduces a law, — that the amount of currency required is in ratio to its activity. Suppose the garrison had required a certain amount of forage lying twenty miles off; and that, having but one horse, ten days were required for its transportation. With ten horses, the same work might have been done in a single day. Would Stewart from this fact have attempted to prove that one horse could do the work of ten? We wonder he did not fortify his argument by the following syllogism: ‘ten horses can do so much work in one day; one horse can do the same work in ten days; therefore one horse can do the work of ten horses (p. 179).

Stewart states “that the quantity of money and notes in circulation must bear but a small proportion to the value of the goods to be bought and sold, and that this proportion must vary according to the quickness with which the money circulates or shifts from one hand to another” (p. 179). To this claim, Poor replies, “If the proportion of money to the goods to be bought and sold be small, then the amount of goods bought and sold will be small. Stewart has only shown that, with a small amount of money, seven weeks were required to effect exchanges which might, with an adequate amount, have been made in one” (p. 179).

Continuing his comments on the rapidity of the circulation of money, Poor writes:

If money be capital, or the representative of capital, and if when it is exchanged it is exchanged for other kinds of capital, then there can be no greater activity in money than in other kinds of capital; and there can be no relation whatever between its activity and quantity. There would be just as much sense in saying that the quantity of wheat necessary for the consumption of a community was in ratio to the rapidity of its movement: that is, if the rapidity of its motion be made twice as great, one-half the ordinary quantity will suffice. . . . [Stewart] overlooked the fact, that, when money was used as the measure of value or the scale of valuation, the thing, the scale itself, passed from the party using it to the party whose goods had been purchased and measured by it. . . . With Stewart . . . money is an entity, possessed of volition and will, flying about the country eager to do some good deed; an active and lively piece doing twice the work of a dull, phlegmatic one. But money cannot move unless something else moves, no matter how eager it may be for work. Its eagerness must find its complement in some other kind of property; so that if volition, will, and activity be predicated of one, volition, will, and activity must be predicated of the other. Money has no attribute of activity different from that possessed by all other kinds of merchandise. The use of one involves the use of the other; the employment of one involves the employment of the other (pp. 180-181).

Poor concludes his review of Stewart with this comment:

One of the great evils resulting from the reputation of such a man as Dugald Stewart is, that every word that he uttered, which was recorded by himself or by others, is carefully gathered up and put into his ‘works.’ In the case of Stewart, these are swelled to eleven ponderous volumes, full of propositions of the correctness of not one of which the reader can have the least assurance. Had his ‘literary executor,’ instead of carefully raking up, burned three quarters of all he left, he would have rid the world of a vast mass of rubbish, and the painstaking student of a great deal of the most irksome toil. It may be set down as a maxim, that a person who assumes to write authoritatively upon every subject will write well upon none. Life is not long enough for one man to know every thing, or to construct an universal science (p. 182).

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

John Law (1671-1729) was a Scottish financier and gambler. He attempted to revive France by opening a bank to issue paper money. In 1716, he opened his bank, which became the Royal Bank with Law as its director. Reckless lending by his bank led to the financial panic of 1720. Poor reviews Law’s Money and Trade Considered (1705).

Law argues “that articles of property, other than silver . . . might be made into money, or might be made the basis for the issue of paper money in place of one of silver” (pp. 81-82). [At the time that Law wrote, silver was the primary species in circulation.] According to Law, using items other than silver as money or as the basis for paper money should greatly benefit the public.

Law declares, “The value of silver as money is its value in barter” (p. 82). He continues:

The additional value silver received from being used as money was because of its qualities which fitted it for that use, and that value was according to the additional demand its use as money occasioned. . . . Money is not a pledge, as some call it; it is a value paid, or contracted to be paid, with which it is supposed the receiver may, as his occasions require, buy an equal quantity of the same goods he has sold, or other goods equal in value to them; and that money is the most secure value either to receive, to contract for, or to value goods by, which is least liable to change in its value. . . . Thus silver having a value and qualities fitting it for money, which other goods had not, was made money, and, for the greater use of the people, was coined (pp. 82-83).

Poor agrees that “Law was entirely right in assuming that the value of silver was its value in barter” (p. 83). However, Law “was mistaken . . . in asserting that it derives a value from its use as money, unless by its use as money he meant its use as reserves” (p. 83). [Most people who believe that money has value because of the material of which it is made believe that its use as money adds to that material’s value, whether such money is used as reserves or as a circulating purchasing medium.] Poor adds, “It is not their [gold and silver] use as a medium of exchange that constitutes their value: it is their value in the arts and their capacity to serve as reserves that give them their value in exchange” (p. 83). [In Dawn of Gold: The Real Story of Money, Philip Barton argues that gold originally received much of its value as money from its use in religion.]

Law argues:

Silver money is more uncertain in its value than other goods, so less qualified to serve as money. . . . Silver in bullion or money changes its value from any change in its quantity, or in the demand for it. . . . [S]ilver or money is dearer or cheaper, being more or less valuable, and equal to a greater or lesser quantity of goods. . . . More durable goods, as metals, materials for shipping, &c., increase in quantity beyond the demand for them, so are less valuable (p. 83).

Poor comments that Law’s assumption “are exactly opposed to the fact. The value of silver is uniform from the uniformity of its production and of the demand for it. Should there be some excess in production for one or more years, such excess would be taken up at previous prices to be held as reserves (so long as silver is legalized as money)” (p. 84). Poor continues, “Unlike other merchandise, the market for silver is the world. Until the markets of the world are glutted, it cannot fall materially in value from increase of production.” (p. 84). [As long as a country is on the silver standard, the “price” of silver will not change because the monetary unit is defined as a specific weight of silver. When the United States were on a de facto silver standard under its bimetallic system, one dollar would always buy 371.25 grains of silver because the dollar was defined as 371.25 grains of silver. That is, the “price” of 371.25 grains of silver was always one dollar, which was 371.25 grains of silver. {The price of 371.25 grains of silver was not fixed at one dollar, the dependent variable. The dollar was fixed at 371.25 grains of silver, the independent variable.} Moreover, Benjamin Anderson argues in The Value of Money that the supply of money and the demand for money does not determine its value. He argues 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. The value of the commodity as money combines with the value of the commodity in its nonmonetary use. Like all other commodities, and everything else, the value of the monetary metal is psychological.]

Poor remarks:

Although at the outset some of Law’s propositions in reference to money were eminently sound, he was compelled to sacrifice them so soon as he began to unfold his scheme. Those who came after him were incapable of appreciating him where he was right, but were certain to follow him wherever he was wrong. . . . Economists have borrowed greatly from Law, from whom, from the disgrace attached to his name, they could copy without reference and with impunity. They constructed, in great measure, from the ruins he left behind, their grotesque and absurd edifices (pp. 84-85).

Law proposes to substitute paper money based on land instead of silver. Unlike silver, Law believes that his land-based paper money would not fall in value. Land is more likely to maintain its value than any other goods because it does not increase in quantity. [Law’s notion that land maintains its value is wrong. The value of land can vary greatly, even over a few years. In 1991, the aggregate value of all the land in Japan was almost four times that of the United States. By 2005, land in Japan had lost half its value while land in the United States had more than tripled in value.]

Poor remarks that no one would borrow or accept Law’s land notes unless they could use them “to obtain coin, or merchandise, the equivalent of coin, — capital that could be used in their industries” (p. 86). Holders of these land notes could not convert them to the land backing them. Whether well secured or not, Law’s land notes “could never get into circulation” (p. 86). To avoid this difficulty, Law declared, “Money is not the value for which goods are exchanged, but the value by which they are exchanged. The use of money is to buy goods; and silver, while money, is of no other use” (p. 86).

Poor is convinced that Law doubts that people would willingly receive his land money for other articles. Poor remarks, “As he [Law] could not give up his scheme, his principles had to give way to his necessities, and he was forced to assert the exact opposite to that which he had affirmed, and the truth of which he had conclusively demonstrated” (p. 86). Thus, Law declares that money “was not the value for which goods were exchanged, but the value by which they were exchanged” (p. 86). Poor continues, to Law money “was the yardstick by which goods were measured off, — a contrivance to assist in numeration, — a tally or counter to register the delivery of certain quantities or values of merchandise; in other words, value was not a necessary attribute of money” (p. 86). [This notion that money is merely a counter and that value is not a necessary attribute of money is held by most of the writers whom Poor reviews and by today’s fiat money proponents.]

Law identifies several criteria that make land superior to silver as money. One is that land produces everything, including silver. Thus, silver is just a product. Another is that, unlike silver, land does not increase or decrease in quantity and is, therefore, more certain in its value. Also, unlike silver, land can be improved and, by that, increase the demand for it. Land cannot lose any of its uses whereas silver can. When land is used as money, it does not lose any of its other uses; however, silver used as money cannot simultaneously be used for other purposes. [See “Land-Backed Currency” by Thomas Allen, which explains the inferiority of land as the basis for money.] Poor replies, “A mortgage on real property may possess a high value, and yet bare no other attributes fitting it to serve as money” (p. 87).

Law also knew that his land money would not be accepted abroad. Therefore, he asserts “that it was not necessary that it ever should pass abroad; that the domestic trade of a nation was alone to be considered” (p. 88).

About Law, Poor writes:

He took the short cut of throwing his principles overboard without the least compunction, whenever they came into conflict with his purposes. He was a man of action, who never stopped to explain, but pushed right forward to the object he had in view. For him to doubt and inquire would be to give up the contest altogether. His life was a mission to promote, in the first place, the welfare of his own country, by supplying it with money — capital; and every consideration was subordinate to this grand idea (p. 88).

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.