Chapter V. Money

CHAPTER V MONEY § I. Selling and Buying. ISOLATED Man's activity would he governed directly by his wants: he would endeavour to produce just those things which he thought would best satisfy those wants. The same may be said of any society when it proceeds by way of authoritative direction to its members: when it says, for example, It Thou shalt repair the highway, giving three days' labour each year," it is endeavouring to satisfy its desire for good roads. Of course a vast quantity of the labour of mankind is still called forth and regulated directly by the wants of those who perfonn it. Taking the world as a whole, and not thinking merely of the north-western comer of the Eastern Hemi sphere, and the thinly peopled continents of America and Australia which have been colonized in recent centuries, we see that individual families still very largely provide their own individual food-supply by their own labour devoted directly to the pur pose and even in Western Europe and its colDnies quite. a considerable proportion of the whole of the labour expended is that of women and girls engaged in household and nursing service which 88 SELLING AND BUYING 89 satisfies directly the wants of themselves and those to whom they are bound by affection or conven tionalfamily ties. A certain, though much smaller, amount. of labour is compulsory labour ordered by territorial societies with a view of satisfying societary wants directly, and another, probably larger, portion is expended voluntarily by well disposed persons with the view of benefiting societip.~ directly.

The same observations. may be made about the use of the. material instruments of production and enjoyment. Isolated Man, of course, would use them to satisfy his wants directly, and as things are, many of them are used directly to satisfy the wants of their owners, whether their owners are individuals or societies: a man may use his· own spade to dig in his own ground, and may live in his own freehold house, and a society may enjoy its own club-house or its park. But under existing institutions in the parts of the world where this book is likely to be read, people work and allow their property to be used chiefly, not to satisfy their own wants directly, or .because society orders them, but in order to get the results of other persons' work or the use of their property. They attain their object not by direct exchange or barter of goods, services, and the use of property for other goods and services and the use of other property, but by selling one set of these things for money and buying the oth~r set with th~ money so obtained.

90 MONEY § 2 . Metallic money: Coins. Almost any movable thing might conceivably be used as money-as something to be acquired in order to be subsequently exchanged for something actually wanted, but in historical times the most widely used form of money has been amounts of certain metals. When recognizable units of bulk and weight had once been arrived at, it was inevitable that metals should come into use as money. Quan tities could then be compared, and any required quantity could be handed from one person to another without much difficulty by cutting up or melting down big pieces when small quantities were required and by putting together a number of pieces when large quantities were required. The fineness of the metal could be discovered with the rather small approximation to accuracy then regarded as sufficient. But soon the reckoning of quantities of the metal was much facilitated by the practice of reputable merchants and powerful kings who stamped pieces of metal with marks which certified their weight and fineness, so that people became willing to accept them It by tale," that is, by mere counting instead of by actually weighing and assaying them.

These stamped pi€ces of money, called It coins," and the practice of accepting them by tale became so familiar that people lost all recollection of the unit of weight and the degree of fineness which they originally represented and simply thought of the unit in which they counted money-I( the unit of COINS account," such as £1 or II-as a coin or a particular number of coins. Thus in England, where the silver penny was originally nothing but a coin certified by its stamp to he the two-hundred-and-fortieth part of a pound weight of silver, and was indeed the II pennyweight" of the Troy table of weights, people came to regard £1_ 1t one pound" of money-as not a pound weight of silver but as 240 pence or 20 shillings. ' This identification of the unit of account with certain coins made it possible, and for the moment, though not permanently, profitable for the kings who stamped and issued the coins to reduce the quantity of precious metal in the unit of account. N a one would have thought of reducing the pound weight to something less than what had before been regarded as a pound weight, but it was easy for the king to put less silver into each coin which he paid out; and now that £1 was only a certain number of these coins, that of course reduced the weight of silver in £ I.

So by successive II debasements," as they were called, the English pound sterling came to contain by the time of Elizabeth only about one-third of its original quantity of silver. The Scotch pound was debased to one-thirty-sixth, and the French to one sixty-sixth of its original amount. The debased coins could have retained the old value or purchasing power if their number had been kept down to the old figure, but no such restriction was imposed; their number was increased as the silver in them was diminished, and their value or purchasing power, carrying with it the value. of the MONEY unit of account, fell in proportion to the debasement. This is, of course, the same thing as prices rising. § 3. Bimetallism, or the Double Standard. A coinage in which all the coins were made of the same metal was simple but not very convenient. If the metal was very precious, there was a difficulty in making small payments, since coins of the value required were too small to be easily minted and handled. If, on the other hand, the metal was not very precious, there was inconvenience in making large payments, because the weight and bulk of the requisite quantity of coins was so great. We find a silver threepenny piece bad enough; a gold one would be intolerable if it could be coined. On the other hand, £5 in silver is an unpleasant load in the pocket.

Hence peoples have constantly desired to have coins made of two or more metals circulating to gether and interchangeable with each other at fixed ratios, as, for example, our silver shilling and 12 bronze pence are interchangeable. But throughout the world down to quite recent times great difficulty constantly arose owing to the fact that the relative value of the metals of which the coins were made refused to keep close to the ratio adopted in the national coinages. ~or example, a coin containing 119 grains of pure gold would be coined in England and declared by proclamation to be equal to twenty silver shillings, that being at the moment the market value of 119 grains of gold. This would work well for a few years, but then the market value of 119 SUBSIDIARY COINS 93 grains of gold would perhaps rise to 23s. Thenno more of these gold coins could be coined, for the king would not give 23S. for gold which he could only make into a coin worth 205.; and, which was worse, all the fullweight gold coins would disappear from circulation because some persons would :find a way, in spite of all prohibitions, ,to melt them down or export them in order to get 23S. instead of the 20S.

which was all they would pass for if used as money within the country. If, on the other hand, gold fell in value so that the 20S. offered by the Mint for 1::£9 grains of gold became a better price than could be got anywhere else, such large quantities of gold coins would be minted that the value of £1, whether in gold or silver coin, would sink below that of the silver bullion contained in the silver coins which passed as £I. The result of this would be that no more silver would be offered for coinage, and existing fullweight silver coins would in their turn be exported ·or melted down. Consequently during the period of attempted U bimetallism" or U double standard " there was perpetual complaint of either the gold or the silver coins U disappearing from circulation." Frequent ~orrection of the legal ratio between the two sets of coins was inconvenient, and could not possibly keep exact pace with the gradual market changes.

§ 4. Standard and Subsidiary Coins. Eventually' the difficulty was surmounted "by the adoption of coins made of only one metal as the standard, while at the same time coins made of one 94 MONEY or two other metals were used as mediums of exchange. These non-standard coins were made It subsidiary" to the standard coins or, as it was usually expressed in England, were (I token coins," because a certain number of them represented the standard coins without professing to contain metal worth as much as the standard coins. This system was first introduced, in England at any rate, by tradesmen. The king was apparently too proud to coin any II base metal " coins, and the smallest silver coin was too high in value for small purchases at shops. It therefore became the habit of large tradesmen to issue base metal tokens for farthings, halfpence and pence to their customers in change, promising to redeem them in silver or goods on demand. Their customers found it con venient to hold little stocks of these tokens and to use them in transactions with each other as well as with the shop which issued them.

The practice was obviously open to abuse, and at length the State condescended to supply base metal coins of small denomination itself, and put a stop to the private issues of tokens. Copper pence, half pence and farthings were then coined for the govern ment without any pretence of the metal contents of the coins being worth ~t-~" 411)" and "9"tlf of £1. But they circulate easily at those values because they are wanted and are not issued in excess of the amounts which will just maintain their values at those rates. By accident rather than design, the same principle was applied to the English silver coins in 1816.

BANK-NOTES 95 During the greater part of the eighteenth century the price which the Mint offered for silver was below the market value of the metal, so that none was coined. Fullweight silver' coins disappeared from circulation but a considerable stock of worn coins . remained, because the metal left in them was not enough to be worth more than the sum which the coins l'assed for as coins. The public became accus tomed to think of II pounds" as amounts in gold coin rather than as amounts in silver coin, and when the coinage was reorganized after the Napoleonic War, the State took the hint and reduced the silver in the fullweight coins to an amount appreciably below what could be bought with the coins as coins. Since that time the value of twenty shillings in silver coin has been kept equal to that of £1 simply by the fact that the State exercises a strict monopoly of the production of such coins and limits the supply to an amount which will circulate at that rate. It buys silver for coinage at the market price, just as it buys baser metal for the manufacture of pence and halfpence.

§ 5. Notes: Convertible and Inconvertible. In the seventeenth· century it became customary for goldsmiths and " bankers"· to accept quantities of coin for sa.fe-custody, and to give the depositors " notes" or receipts which .soon developed into written or printed promises to pay round sums to anyone presenting the (I note" and demanding the money promised. These became II current," that /l MONEY is, they ran from hand to hand like coin. For large payments they were more convenient than coin, especially at a time when the coins were often very badly clipped, sweated, and mixed with foreign and spurious pieces so that an amount in coin could not be tendered with assurance that the receiver would raise no question about it. The bankers soon discovered that they could pay out in these notes and coin taken together more money than had been deposited with them in coin. A banker for instance whose customers had deposited £10,000 in coin for him to take care of, might be able not only to give them his notes for the £10,000, but to lend out £7,000 of the coin, and in addition to lend out £5,000 more in notes. This would of course mean that if his notes were brought in and payment in coin demanded for them all at once, he would be unable to pay at once except in the unlikely and almost impossible event of his being able to collect simultaneously all that his debtors owed to him. But in practice no such sudden It run " upon him would be made. He would owe in all £15,000 on his notes, but his debtors would owe him £7,000 in consequence of his advances in coin and £5,000 in consequence of his advances in notes, and he would still have the £3,000 in coin deposited and not paid out, which three items together balance his liability of .£15,000. And his business would be profitable, since he would pay nothing or very little on the £10,000 deposited, while charging substantial interest on the £12,000 lent. His profit would not be counterbalanced by a loss to his fellow-citizens, but INCONVERTIBLE NOTES 97 would be the result of his providing them with an inexpensive medium of exchange.

Of course if the bankers had been able to issue unlimited amounts of this inexpensive medium, the value of the monetary unit of account would have fallen indefinitely, and all sorts of inconveniences and injustices would have resulted. But the fact that the notes were promises to pay coin on demand, or, as it is said, were H convertible" into·coin, made it impossible for enough notes to be in circulation to make them worth less than the coin they promised to pay. If people found that a note promising to pay £5 was becoming/less good than £5 in coin, they naturally asked for the £s in coin. The coin itself could not be dragged down in value by the competi tion of the notes, since it in tum-was convertible into bullion either lawfully or in defiance of the law. Any effect therefore of the issue of the notes upon the value of money was confined to its influence on the world-value of bullion, and was only harmful when bullion tended otherwise to remain stable or fall in value. Moreover, when it was harmful in this respect, the harm was probably small compared with the incidental advantages of the system.

But when the habit of accepting notes became well established, the check upon issue provided by convertibility was sometimes removed by govern ments which found themselves in financial diffi culties. Being desirous of spending more than they could r~ by taxes or by borrowing in the ordinary way, they would insist on their bank lend ing them more notes than it could safely issue so MONEY long as they were convertible. The bank would protest, and then the government would quiet it by absolving it from its promises to pay, and making the notes (( inconvertible." Or, in later times, a government would itself issue notes like bank notes in general appearance but bearing no promise whatever, and would declare these bits of paper to be U legal tender," which means that anyone to whom money was due was obliged to accept them as full payment of the sum of money stated on their faces. Inconvertible notes can be issued without any limit, and when the issuers have a free hand their value depends solely on the moderation of the issue.

Under the influence of an unbridled issue the value of the German mark fell between August 1914 and December 1923 from about 51 grains of gold to 1,OOO,~.OOO,ooo (one billionth in the English, not ~ the American, reckoning) of that amount. In face of "depreciation" of the notes compared with bullion, the standard coin disappears from circulation altogether, or almost entirely, because it becomes worth more as bullion than as coin: if a small quantity is kept in circulation by rigorously enforced prohibitions of melting and exportation, this depre ciates along with the notes. Of course inconvertible notes may be and often have been limited to an amount which can circulate without any depreciation, but in that case there' can be no more of them than there wduld have been if they had been convertible, and no object is served by their being inconvertible.

BANK ACCOUNTS 99 §6. Bank Accounts. Since the beginning of the nineteenth century the use of both coin and notes as a medium of exchange has been made unnecessary in all large transactions by the introduction of the practice of giving and accepting orders to bankers instead of using coin or notes. Well-to-do persons no longer collect large amounts of coin or even of bank-notes in their houses to meet their larger payments. Ea<6of them has a bank account, which means that most of them have It put money into the bank," so that the bank owes them something; while the rest have arranged that the bank will be ready to lend them some convenient amount when required. Then when one of these persons wishes to pay a substantial sum to another who has an account at the same Bank, he could (and sometimes does) do it by a verbal order to the bank to transfer the sum from his account to that of the other person. But if he writes an order to his bank " Pay So-and-so or bearer seventeen pounds, eleven shillings and fivepence" and gives it to So-and-so, it will not matter whether So-and-so banks at the same bank or not. In either case So-and-so will hand in this order or cheque (spelt II check" more intelligibly by the Americans) to his own bank, and if this is a different one from that of the writer of the cheque, it will II collect" the £17 lIS. Sd. for him. And it will be able to collect it without any notes or coin being used, because either it will have an account with the first bank or both it and the first bank will have accounts at a third bank.