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

David Hume (1711-1776) was a Scottish historian and philosopher. He influenced two schools of philosophy: skepticism and empiricism. His writings include A Treatise of Human Nature (1739-1740), Essay Moral and Political (1741-1742), An Enquiry Concerning Human Understanding (1748), Political Discourses (1749-1752), and History of England (1754-1762).

According to Poor, Hume was a disciple of Aristotle. However, Aristotle was more truthful and had an earnestness that attracted sympathy. On the other hand, to Hume, “truth was a matter of secondary importance” (p. 89), and Hume’s lack of earnestness repelled sympathy. Also, like Aristotle, Hume “assumed all his premises without consideration or reflection, and disposed, by a single stroke of his pen, of questions, to solve which by any proper method a lifetime might hardly suffice” (p. 89).

Hume believes that the value of money (gold and silver) is mostly fictitious and that this value is of no consequence. Money is not a subject of commerce; it is only an instrument agreed upon to facilitate trade. Moreover, the quantity of money that a country possesses is immaterial. Only governments receive any advantage from a large supply of money, and then only in regards to wars and negotiations with foreign countries. Hume states, “dearness of every thing, from plenty of money, is a disadvantage which attends an established commerce, and sets bounds to it in every country by enabling the poorer States to undersell the richer in all foreign markets” (p. 90). An increase in money leads to an increase in trade, which results in a shortage of labor. Moreover, Hume doubts the benefit of banks and paper credit. He states:

But there appears to be no reason for increasing that inconvenience by a counterfeit money which foreigners will not accept of in any payment, and which any great disorder in the State will reduce to nothing. . . . And in this view it must be allowed that no Bank could be more advantageous than such a one as locked up all the money it received (as was the case with the Bank of Amsterdam), and never augmented the circulating coin, as is usual, by returning a part of its treasure into commerce. A public Bank by this expedient might cut off much of the dealings of private bankers and money-jobbers; and though the State bore the charge of their salaries to directors and tellers of this Bank (for according to the preceding supposition it would have no profit from its dealings), the national advantage resulting from the lower price of labor and the destruction of paper credit would be a sufficient compensation (p. 90).

Hume remarks, “money is nothing but the representation of labor and commodities, and serves only as a method of rating or estimating them” (p. 90). Furthermore, he contends that greater quantity of money is an inconvenience because the greater quantity requires more trouble to keep and transport it. Greater quantities of money lead to higher prices and wages (p. 91).

According to Poor, “Hume followed Law where the latter was wrong, and rejected him wherever he was right” (p. 91). About the value of money, Poor summarizes Hume’s notion: “The value of money . . . is fictitious; its greater or less quantity, therefore, is of no consequence; nothing is to be gained by increasing the dimensions of a fiction; it is not valuable to a country in its commerce, for it is not the subject of commerce, only the oil which lubricates its wheels” (p. 91).

Poor refutes Hume’s idea that money is a fiction with a question: “Is not that a subject of commerce, the possession of which is the great object of commerce, and in which all the profits or balances arising in commerce are payable” (p. 91)? People who pay and receive money do not act as though it is a fiction. Moreover, if money is a fiction in one country, why would it not be a fiction in another country or even all countries? Why would a large quantity of this fiction give one country an advantage over another country with which it wars? How can a thing considered pure fiction in one country be a solid reality in another? Then Poor asks, “Is not that valuable which every people seek to obtain by exchanging therefor whatever they possess; and which will always, at its cost, command all other kinds of property” (p. 91)? [This notion that money is a fiction shows up in the arguments of many proponents of fiat paper money and its electronic equivalent. The government can decree whatever it wants to be money as money. Moreover, it can decree the value of the monetary unit and can maintain this value by following some magic formula or scheme.]

According to Hume, “In all respects, except in wars and negotiations, the abundance of money . . . may be, and often is, a disadvantage, as prices are raised thereby in ratio to its abundance. In this way, poor countries having no money are enabled to undersell the rich having a great deal of money, and drive them out of their accustomed markets” (p. 91). [Wars often lead to an overabundance of credit money, that is, inflation. This inflation often leads to a rise in general prices during and after the war.] Poor declares, “The exact reverse of all this is the truth” (p. 91). He continues, “Prices are either low in ratio to the abundance of money, or, what is the same thing, the amount which a people are able to consume is in ratio to such abundance” (pp. 91-92). He illustrates his assertion with examples of poor countries lacking money to import goods because they lack money to transport what they do have to trade. Thus, the price of imported goods is inverse to the amount of money available (p. 92).

About paper money, Poor writes, “So with a symbolic currency, — with paper money. This is the representative of capital. If one be abundant the other must be; and, if abundant, prices must be low, for prices are high or low in ratio to the abundance or want of the articles to which they relate. Whatever the form of money or currency, therefore, the greater the abundance the lower are prices” (p. 92). [Poor is correct if the money comes into existence via production. However, if the money comes into existence by governmental fiat, spoils of war, or thief, the results is usually higher prices. These higher prices may show up in financial assets like bonds and stocks or they may appear in commodities and consumer goods.]

He continues, “Paper credits — that is currencies — issued by Banks are one of the most important conditions of low prices, as they serve as the cheapest possible means of distribution” (p. 91). [Here, Poor is referring to the real bills doctrine. Bills of exchange are a form of credit money, commercial money, created by the manufacturer or wholesaler and the retailer. When a bank discounts a bill, it converts it to bank credit money, bank notes or checkable deposits. The bank has not really added to the money supply. It has merely converted one form of credit money, commercial money, to another and more usable form of credit money, bank credit money. This is the type of credit money to which Poor refers. However, when a bank buys a financial bill, like a treasury bill, with bank credit money it expands the money supply because financial bills do not come into being as a result of production. Poor opposes creating bank credit money to buy financial bills.]

Poor comments on Hume’s claim that a compensation “for the inconvenience of too great an abundance of coin [is] that it can be used in foreign wars, but Bank paper can never be used out of the country in which it is issued” (p. 92). Poor notes that the costs of articles used in a war far exceed the coin available. [At the time Hume and Poor wrote, most countries used gold or silver coin for money.] Poor asks, “If they [articles of war] can be had by means of paper money, equally with coin, does not the former possess for the government the same value as coin” (p. 92)? He continues: “Hume would have all Banks . . . collect every thing into their vaults, and let nothing out! But how, in such case, are exchanges to be effected? There must be either coin or symbols, or all commerce must speedily come to a dead stand. In such event, a people, in the course of a few months, would be reduced to the very brink of ruin” (p. 92).

Continuing on Hume’s opinion about gold and silver as money, Poor writes, “With Hume, gold and silver derive their importance to a nation solely from their use in its wars and negotiations. Considered by itself, their abundance is of no consequence whatever” (p. 93).

Poor identifies an inconsistency or contradiction in Hume’s assertion about money: “Hume asserts the value of money to be imaginary, and at the same time that a great abundance of it is injurious by raising the price of commodities” (p. 93). [If the value of money is imaginary, then its quantity should be irrelevant. If its abundance raises price, then it must have some value so that it can raise prices — at least until hyperinflation destroys all its value.]

About value, Poor notes:

But what constitutes the value of any article? The amount of demand that exists for it. There can be no other test or measure. We can form no idea of the value of any article but by comparing it with that of some other. If it have no exchangeable value, it has no value. It may have uses, without having values.  . . . An imaginary value, therefore, is no value; so that the very foundation upon which Hume erected his argument has no existence whatever. Only that which possesses value can affect the value of other things. If money had no value, its greater or less abundance could exert no influence whatever on the value or price of other articles (p. 93).

[Poor does acknowledge that things, such as air, are important and even necessary for life, but they have no value in the proper economic sense of the term.]

About Hume’s pontification on money, Poor remarks that “a little thought and reflection would have shown” (p. 93) him that he was wrong. “[B]ut this way was not Home’s way. Reflection and analysis are laborious and painful processes, to which he was by no means inclined. To truth he was wholly indifferent. His object was effect, provided that could be produced by very little labor and pains” (p. 93).

Hume was also a proponent of coin debasement. He believed that if all silver coins were recoined to contain less silver but maintain the same denomination, prices would not increase. Moreover, foreign trade would be invigorated. Because of more coins circulating, domestic industry would also increase (p. 94). [Many advocates of fiat paper money believe that debasement of money enlivens the economy and is, therefore, good.]

In effect, Hume claims that money can be debased, yet “at the same time maintain its value” (p. 94). Moreover, he claimed that while maintaining its value, it would “derive an advantage from its debasement in diminishing prices” (p. 94). Thus, “[i]n the same sentence, the value of money was to be both maintained and reduced” (p. 94). Poor continues,

From diminished prices at home, foreign trade was to be enlivened, and domestic trade receive some increase and encouragement from the greater number of pounds and shillings in circulation. But how could more pounds and shillings be in circulation, if the debased coins would purchase as much as those of full weight and value? (p. 94)

[Historically, the purchasing power of debased coin fell to equal the purchasing power of its metal content — thus causing prices to rise in nominal terms, but not in metallic terms. Even draconian laws could not prevent the fall in value of the debased coin.]

Commenting on Hume, Poor writes:

With Hume, from the perversity or credulity of human nature, a falsehood plausibly told, and well stuck to, would have all the potency of truth. . . . He contrived by artful fabrications to falsify the whole course of English history, and to make the world believe, almost for a century, that slavery, not freedom, was the birthright of Englishmen (p. 94).

Hume maintains that if the quantity of money remains unchanged, then, over time, everything becomes cheaper. “[T]he proportion between the circulating money and the commodities in the market . . . determines the prices” (p. 95). Poor replies, “The degree of wealth of a people depends upon their means of distribution. The one must always be in ratio to the other. Their money must increase as their industries increase, by a law as inexorable as that of gravity” (p. 95).

About Hume’s “plan for benefitting the public by reducing prices, by reducing the amount of money” (p. 95), Poor retorts that his plan “is equivalent to taking off one-half of the cars from a railroad, where the whole had only sufficed for its operations” (p. 95). Poor continues:

Such a process would reduce greatly the price or value of merchandise to the producer. It would, at the same time, add very largely to the price paid by the consumer. Both would be equally injured by the restricted capacity of the instrument of distribution. The former would receive much less; the latter would pay much more. So with money. With its decrease, production would decrease in far greater ratio. With such decrease, cost of production would increase (p. 95).

[Poor is thinking of the real bills doctrine where money supply matches production. The quantity of money grows as production grows and contracts and production contracts.]

Hume claims, “These institutions of Banks and Paper Credits render paper the equivalent of money” (p. 95). To which, Poor responds:

It is the capital such paper represents that makes it the equivalent of money. By representing capital, and serving in the place of coin as the means of its distribution, it reduces instead of “raising proportionably the price of labor and commodities.” His assumption consequently is exactly opposed to the fact (pp. 96-97).

Poor notes, “With Hume, money was not capital at home while it was capital abroad” (p. 97). To the contrary, “[i]t is the highest form of capital at home, for that reason it is the highest form of capital abroad” (p. 97).

Poor writes:

With Hume, the evil of paper money is, that it displaces a corresponding amount of coin, — sinks it below its level, compared with other countries. . . . Its paper currency, by assisting in the exchanges, may have secured to it a larger amount of coin than it would have had without such currency. His assumption, therefore, that the notes in circulation replaced a corresponding amount of coin is wholly gratuitous (p. 97).

Poor adds,

It is from this assumption, however, that Economists have drawn their celebrated dogma or axiom that the proper measure of issue of paper money is the amount of gold that would have been in circulation but for such issue; overlooking the fact that paper money is not based upon coin so much as upon merchandise; and that the amount of the coin of a nation is to be measured not by that which it possesses, but by that which it can command (p. 97).

[Here, Poor is referring to the real bills doctrine. Bank notes come into circulation by converting bills of exchange, commercial money, into bank credit money, bank notes and checkable deposits. Bills of exchange arise out of production. Therefore, the quantity of bank notes in circulation depends on production and not on the quantity of gold. The greater a country’s production, the more gold it can command.]

In his concluding remarks on Hume, Poor writes:

Hume was one of the earliest writers to refer to the subject of currency to be issued by Banks. An opportunity was thus opened to him, had he chosen, by unfolding its nature and laws, of performing a substantial service for mankind. He preferred to talk rather than to investigate, — to appear wise and learned rather than to be so. . . . As the reputation enjoyed by Aristotle forbade all investigation of the truth of his dogmas, and secured for them immunity through the ages, so Hume impressed himself so strongly upon the opinions of mankind as to be received, for nearly a century, as authority upon most of the subjects upon which he wrote, although his works were full of errors and falsifications. He is still constantly quoted, with approbation, upon the knotty points of monetary science; although, as far as any knowledge of the subject was concerned, a Kaffir might as well be quoted for an authoritative opinion upon the Code of Menu (p. 98).

Copyright © 2016 by Thomas Coley Allen