On the other hand, substances may be very valuable which have cost little or no labour. When a shepherd in Australia happens to pick up a nugget of gold on the mountain side, it takes no labour worth mentioning to pick it up, yet the gold is just as valuable in proportion to its weight as any other gold. Some gold mines produce a great quant.i.ty of gold: others which have cost quite as much to sink, produce little; nevertheless the gold out of the one mine is sold at the same price in proportion to its weight and fineness as that out of the other mine.

#Thus it is quite certain that labour is not the cause of value.# Gold is valuable because a great many people want more gold than they have already got, and whenever a thing is valuable it is because somebody wants it.

But we may look at this matter in another way. If it were possible to get a valuable thing like gold with little labour, many people would become gold miners. Much gold would then be produced; if this were wanted as much as what was already in use, it would be as valuable. But no one wants an unlimited quant.i.ty of any substance. Wealth, as we saw, must be limited in supply; if gold became as plentiful as lead or iron, it could not possibly remain as valuable as it is now. People would have far more than they could employ for ornaments, watches, gilding and so forth; there would be a large surplus to be used in making pots and pans, for which it is less needed. Now we can see through the whole subject of value. When much of a substance can usually be produced with little labour, the substance becomes so plentiful that people are satisfied with the supplies of it which they have; they do not want more, or at least do not want it so urgently. It follows that they are unwilling to give much wealth for it. Thus the labour spent upon producing a commodity does not affect the value of that commodity, unless it alters the quant.i.ty of it which people can get, and thus makes a further supply of the commodity more or less useful than before.

#75. Why Pearls are valuable#. To make this still more plain, let us endeavour to answer this difficult question, "Do men dive for pearls because pearls fetch a high price, or do pearls fetch a high price because men must dive in order to get them?" Pearl-diving is a very dangerous and laborious kind of work. The divers have to jump into the deep sea with heavy weights to carry them down, and they must hold their breath a long time while they are engaged in collecting the oyster sh.e.l.ls at the bottom. The number of good pearls which they generally get is small compared with the great toil of getting them. It follows that, on the average, they must receive a high price for what they do find, otherwise they would not have adequate wages for such work. But this alone is not a sufficient reason for the pearls being so valuable, otherwise the mother of pearl sh.e.l.ls, in which the pearls are found, and brought up, would be as valuable as the pearls. But mother of pearl is a very cheap substance. Again, if it were merely a question of labour, a diver might go down anywhere, and, bringing up the first stone or sh.e.l.l he found, insist on selling it for a high price, because he had dived for it. The truth is, that pearls are valuable because there are many ladies who have not got pearl necklaces, and who would like to have them; and those who have some pearls would like to get more and finer ones. In short, then, pearls are valuable because they are useful to ladies who want more pearl ornaments: they are thus useful because the ladies have not hitherto been able to get as many as they would like; and they have not been able to get many, because it is so difficult to fish them up from the bottom of the sea. Here we have the whole theory of value and labour. #The labour which is required to get more of a commodity governs the supply of it; the supply determines whether people do or do not want more of it eagerly; and this eagerness of want or demand governs value.#

CHAPTER XII.

MONEY.

#76. Barter.# When exchanges are made by giving one ordinary commodity for another, as a sack of corn for a side of bacon, or a book for a telescope, we are said to #barter# them. The operation is also called #truck# (French, _troc_, barter). Among uncivilised races trade is still carried on in this way; a traveller going into the interior of South Africa takes a stock of beads, knives, pieces of iron, looking-gla.s.ses, &c., in order that he may always have something which the natives will like to receive in exchange for food or services. People still occasionally barter things in England, or the United States, but this is seldom done, owing to the trouble which it gives.

If, for instance, I want a telescope, in exchange for a book, I shall probably have to make many inquiries, and to wait a long time before I meet with a person who has a telescope to spare, and who is also willing to take my book in exchange. It is very unlikely that he who has a telescope will just happen to want that particular book. A second difficulty is, that the book will probably not be worth just as much as the telescope, and neither more nor less. He who owns a valuable telescope cannot cut it up, and sell a part to one and a part to another; this would destroy its value.

#77. Convenience of Money.# With the aid of money all the difficulties of barter disappear; for #money consists of some commodity which all people in the country are willing to receive in exchange, and which can be divided into quant.i.ties of any amount#. Almost any commodity might be used as money in the absence of a better material. In agricultural countries corn was so used in former times. Every farmer had a stock of corn in his own granary, and if he wanted to buy a horse or cart, he took so many sacks of corn to his neighbour's granary in exchange. Now suppose that, with corn as money, a farmer wanted to part with a cart and get a plough instead; he need not inquire until he finds a person willing to receive a cart, and give a plough in exchange. It is sufficient if he find one farmer who will receive a cart and give corn, and any other farmer who will give a plough and receive corn. No difficulty arises, too, if the cart or plough are not of equal value; for if the cart be the more valuable, then the farmer finally gets for it the plough together with enough corn to make up the difference. Money thus acts as a #medium of exchange#; it is a go-between, or third term, and it facilitates exchange by dividing the act of barter into two acts, in this way--

#Sale.# #Purchase.# _____/______ ____/____ / / #Cart.# #Money.# #Plough.#

No doubt it turns one act of exchange into two; but the two are far more easy to manage than one, because they need not be made with the same person.

#78. Money as a Measure of Value.# When money is used in exchange, he who receives money is said #to sell goods#, and he who pays money is said #to buy or to purchase#. In each case there is an act of exchange, and sales and purchases are not really different in nature from acts of barter, except that one of the commodities given or received is employed for the purpose of arranging the exchange. Thus money may be called #current commodity#, because it is merchandise chosen #to run# about as a medium of exchange. Now, in every purchase or sale there must be some proportion between the quant.i.ty of the money, and the quant.i.ty of the other commodity. This proportion expresses the value of the one commodity as compared with the other. Value in exchange means nothing but this proportion, as was before explained (section 72). Now when money is used, the quant.i.ty of money given or received for a certain quant.i.ty of goods is called #the price of that goods#, so that the price is the value of goods stated in money. But as money when once introduced is used in almost every act of exchange, a further great advantage arises. We are able to compare the value of any commodity with that of any other commodity. If we know how much copper may be had for so much lead; how much iron for so much steel; and so on with zinc and bra.s.s, bricks and timber, and so forth, it would not be possible to compare the value of copper with zinc, or iron with timber. But if we know that for one ounce of gold we can get 950 ounces of tin, 1,700 ounces of copper, 6,400 ounces of lead, and 16,000 ounces of wrought iron, then we learn without any trouble that for 1,700 ounces of copper we can get 16,000 ounces of iron, and so on. Thus gold or any other substance used as money serves as a #common measure of value#; it measures the value of every other commodity, and thus enables us to compare the value of each commodity with that of every other.

This is an immense convenience. It leads every one to think and speak of the values of things in terms of a money known to everybody. All lists of values of goods are given as lists of prices and everybody understands these prices and can compare the prices in one list with those in another. Money may then be said to have two chief functions. It serves as

(1) #A medium of exchange.# (2) #A common measure of value.#

But it is important to remember that, though money thus acts in a very useful and peculiar way, it never ceases to be a commodity. Its value is subject to the laws of supply and demand already stated (section 73); if the quant.i.ty of money increases, its value is likely to decrease, so that more money is given for the same commodity, and #vice versa#.

#79. What Money is made of.# As already remarked almost any commodity may be used as money, and in different ages all kinds of things such as wine, eggs, olive oil, rice, skins, tobacco, sh.e.l.ls, nails, have actually been employed in buying and selling. But metals are found to serve much the best for several reasons, and gold and silver are better for the purpose than any of the other metals. The advantages of having gold and silver money are evident. Such metals are #portable#, because they are so valuable that a small weight of metal equals in value a great weight of corn or timber or other goods. Then they are #indestructible#, that is, they do not rot like timber, nor go bad like eggs, nor sour like wine; thus they can be kept for any length of time without losing their value. Another convenience is, that there is no difference in quality in the metal itself; pure gold is always the same as pure gold, and though it may be mixed with more or less base metal, yet we can a.s.say or a.n.a.lyse the mixture, and ascertain how much pure metal it contains. The metals are also #divisible#; they may be cut or coined into pieces, and yet the pieces taken together will be as valuable as before they were cut up. It is a further advantage of gold and silver that they are such beautiful, brilliant substances, and gold is also so heavy that it is difficult to make any counterfeit gold or silver; with a little experience and care, every one can tell whether he is getting real money or not--when the money is made of gold or silver.

Finally, it is a great convenience that #these metals do not change in value rapidly#. A bad harvest makes corn twice as dear as before, and destructible things, like eggs, skins, &c., are always rising or falling in value. But gold and silver change slowly in value, because they last so long, and thus the new supply got in any one year is very little compared with the whole supply or stock of the metal. Nevertheless, #gold and silver, like all other commodities, are always changing in value more or less quickly#.

#80. Metallic Money.# Almost all the common metals--copper, iron, tin, lead, &c.--have been used to make money at one time or other, besides various mixtures, such as bra.s.s, pewter, and bronze. But copper, silver, and gold have been found far more suitable than any of the other metals.

Copper, indeed, being comparatively low in value, is wanting in portability. It was formerly the only money of Sweden, and I have seen a piece of old Swedish money consisting of a plate of copper about two feet long and one foot broad. A merchant making payments in such money had to carry his money about in a wheel-barrow. Now we use copper only for coins of small value, and to make the copper harder, it is melted up with tin and converted into bronze.

In the Saxon times English money was made of silver only, but this was inconvenient both for very large and for very small payments. The best way is to use gold, silver, and bronze money according as each is convenient. #In the English system of money, gold is the standard money and the legal tender#, because no one can be obliged to receive a large sum of money in any other metal. If a person owes a hundred pounds, he cannot get rid of the debt without tendering or offering a hundred pieces of coined gold to his creditor. Silver coin is a legal tender only to the amount of forty shillings--that is, no creditor can be obliged to receive more than forty shillings in a single payment.

Similarly, bronze coin is a legal tender only up to the amount of one shilling in all.

#81. What is a Pound Sterling?# In England people are continually paying and receiving money in pounds, but few could say exactly what a pound sterling means. No doubt it is represented by a coin called a sovereign, but what is a sovereign? Strictly speaking, #a sovereign is a piece of gold coined, in accordance with an Act of Parliament, at a British mint, still bearing the proper stamp of that mint, and weighing not less than 122-1/2 grains#. On the average the sovereigns issued from the mint ought to weigh 123.274 grains, but it is impossible to make each coin of that exact weight, and if this were done, the coins would soon be lessened in weight by wear. A sovereign is legal tender for a pound as long as it weighs 122-1/2 grains or more, and is not defaced; but, in reality, people are in the habit of paying and receiving sovereigns which are several grains less in weight than the law requires.

Twenty silver shillings are by law to be received as equal in value to a pound. This is necessary, in order that we may be able to pay a fraction of a pound, for a coin made of gold equal to the twentieth part of a pound would easily be lost, worn, or even blown away. But the silver in twenty shillings is not equal in value to the gold in a pound; its value varies with the gold price of silver, and, at present, twenty shillings are only worth about sixteen gold shillings and eightpence, that is, 5/6 of a pound. It is necessary to make the silver coin thus of less value than it is taken for, in order to render it unprofitable to melt the coin. In the same way, the metal in a bronze penny is worth only about the sixth part of a penny, so that people would lose a great deal by melting up or destroying pence.

#82. Paper Currency.# Instead of using actual coins of gold, silver, or bronze, it is common to make use of paper notes containing promises to pay money. When the sum of money to be paid is large, a bank note is much more convenient, being of far less weight than the coins, and less likely to be stolen. A five-pound bank note is a promise to pay five pounds to any person who has the note in his possession, and who asks for five pounds in exchange for the note at the office of the bank issuing the note. A #convertible bank note# is one which actually can be thus changed into the coins whenever it is desired, and so long as this is really the case, it is evident that the note is just as valuable as the coins, and is more convenient. The only fear is that, if a banker be allowed to issue these bank notes, he will not always have coins enough to pay them when presented. Very frequently banks have been obliged to stop payment; that is, to refuse to perform their promises.

Nevertheless, when there is no other currency to be had, the bank notes often go on circulating like money. They are then called #inconvertible notes#, and there is said to be a #paper money#. A person is willing to receive paper currency in exchange for goods, if he believes that other people will take it from him again. But such paper currency is very bad, because its value will rise or fall according to the quant.i.ty issued, and people who owe money will often be able to pay their debts with less value than they received. The subject of bank notes and paper money, however, is too difficult for us to pursue in this Primer.

CHAPTER XIII.

CREDIT AND BANKING.

#83. What Credit means.# It is very important for those who would learn political economy to understand exactly what is meant by #credit#. John is said to give credit to Thomas when John leaves some of his property in the use of Thomas, expecting to have it returned at a future time. In short, any one who lends a thing #gives credit#, and he who borrows it #receives credit#. The word #credit# means #belief#, and John believes that he will get back his property from Thomas, though this, unfortunately, does not always prove to be the case. John is called the #creditor#, and Thomas the #debtor#.

It is not common, indeed, to speak of credit in the case of most articles: when a man borrows a horse, a book, a house, an engine, or other common article, and pays for its use, he is said to #hire# it, and what he pays for the use is called the hire, fare, or rent. In some countries, where coins are not yet used, people lend and borrow corn, oil, wine, rice, or any common commodity which all like to possess. In the parts of Africa where palm oil is produced in great quant.i.ties, people give and take credit in oil. But in all civilised countries it has become the practice to borrow and lend money. If a man needs an engine, and has nothing to buy it with, he goes and borrows money enough from the person who will lend it on the lowest terms, and then he buys the engine where he can get it most cheaply. Frequently, indeed, the man who sells the engine will give credit for its price, that is, will lend the sum of money to the buyer, just sufficient to enable him to buy it.

Credit is a very important thing, because, when properly employed, #it enables property to be put into the hands of those who will make# the #best use of it#. Many people have property but are unable to go into business, as is the case with women, children, old men, invalids, &c.

Rich people perhaps have so much property that they do not care to trouble themselves with business, if they can get others to take the trouble for them. Even those who are engaged in business often have sums of money which they do not immediately want to use, and which they are willing to lend for a short time. On the other hand, there are many clever active men, who could do a great deal of work in establishing manufactories, sinking mines, or trading in goods, if they only had enough money to enable them to buy the requisite materials, tools, buildings, land, &c. A man must have some property of his own before he can expect to get credit; but with some property to fall back upon in case of need, and with a good character for honesty and ability, a trader can by credit obtain other people's capital to deal with.

#84. Loans on Mortgage.# Credit is given in many different ways; sometimes a man is a.s.sisted by a permanent loan from a relative or friend who has confidence in him. Enormous sums of money are lent, as it is called, upon #mortgage#. A man, for instance, who has built a cotton mill with his own money, pledges the mill as security for a loan, that is, he gives his creditor a right to sell the mill unless the debt is paid when required. #The mill is called a mortgage or dead pledge#, because it becomes dead to the former owner, if he breaks the conditions of the loan. There are many inst.i.tutions, such as insurance companies, building societies, &c., which have a great deal of capital to lend on mortgage, and many rich people invest their money in the same way. Thus a very large part of the houses, land, factories, shops, &c., are not really owned by the people who seem to own them, but by #mortgagees#, who have lent money on them.

Generally speaking, the interest paid for such loans is 4-1/2 or 5 per cent. per annum, when the security is quite good, that is, when the property mortgaged is sure to sell for more than is lent upon it. A considerable margin is always left to cover mistakes or alterations as regards the value of the property; thus, if a house be said to be worth 1000, it will usually be security only for a debt of 700 or 800. When the security is not so good, because the ownership or the value of the property mortgaged is doubtful, the rate of interest charged will be higher, and may be six, seven, or more per cent. The surplus covers the risk, that is, compensates the lender, for the chance of losing what he lends. Mortgage loans are generally made upon fixed capital like houses, mills, ships, &c., which last a long time; but sometimes stocks of goods, such as cotton, wine, corn, &c., are mortgaged as security for temporary loans.

#85. Banking.# A large part of the credit given, in a civilised country, is given by bankers, who may be said #to deal in credit#, or which comes to the same thing, #in debt#. A banker usually carries on three or four different kinds of work, but his proper work is that of borrowing from persons who have ready money to lend, and lending it to those who want to buy goods. As a shopkeeper sells his stock of goods, he receives money for it. And, until he buys a new stock, he has no immediate need of this money. Those, again, who receive salaries, dividends, rents, or other payments once a quarter, do not usually want to spend the whole at once. Instead of keeping such money in a house, where it pays no interest and is liable to be stolen, lost, or burnt, it is much better to deposit it with a banker, that is, to lend it to a banker who will undertake to pay it back when it is wanted. Generally speaking a merchant, manufacturer, or tradesman sends to his banker every day the money which he has received, and only keeps a few pounds to give change or make petty payments. The advantages of thus depositing money with the banker are chiefly as follows:--

(1.) The money is safe, as the banker provides strong rooms, locked and guarded at night.

(2.) It is easy to pay the money away by means of cheques or written orders ent.i.tling the persons named therein to demand a specified sum of money from the banker.

(3.) The banker usually allows some interest for the money in his care.

Bankers receive deposits on various terms; sometimes the depositor engages to give seven days' notice before withdrawing his deposit; in other cases the money is lent to the banker for one, three, or six months certain, and the longer the time for which it is lent the better the rate of interest the banker can usually give. But a great deal of money is deposited #on current account#, that is, the customer puts his money into the bank, and draws it out just when he likes, without notice. In this case the banker gives very little interest, or none at all, because he has to keep much of the money ready for his customers, not knowing when it will be wanted.

Nevertheless, while some depositors are drawing their money out, others will be putting more in, and it is exceedingly unlikely that all the thousands of customers of a large bank will want their deposits at the same time. Thus it happens that the banker, in addition to his own capital, has a large stock of money always on hand, and he makes profit by lending out this money to other customers, who need credit.

There are various ways in which a banker arranges his loans; sometimes he lends upon the mortgage of goods, houses, and other property, or of shares in railways and government funds, in the way described; but this is not a proper way for a banker to employ much of his funds, because he may not be able to get back such loans rapidly enough when he needs them. One of the simplest ways of lending money is to allow customers to overdraw their accounts, that is, to draw more money out of the bank than they have put in. But a banker naturally takes care not to allow overdrafts unless he has great confidence in his customer, or has received a guarantee of repayment from him or his friends.

#86. Discount of Bills.# The most common and proper way in which a banker gives credit and employs his funds is in the discount of bills, that is, in advancing money in exchange for a definite promise to pay it back at a stated time. Suppose that John Smith has sold a thousand pounds worth of cotton goods to Thomas Jones, a shopkeeper; several months will pa.s.s perhaps before Jones can sell the goods over the counter, and if he has not much capital, he agrees that John Smith shall give credit for the thousand pounds but in the mean time draw a bill upon Jones. This bill would very likely be somewhat in this form--

LONDON, 1st February, 1878.

1000, 0s. 0d.

Three months after date pay to me or my order the sum of one thousand pounds, value received.

JOHN SMITH.

To Mr. Thomas Jones.

John Smith is said to be the #drawer# of the bill; Thomas Jones is the #drawee#, and the bill amounts to a claim on the part of John Smith that Thomas Jones owes him the sum named. If the drawee acknowledges that this is the case, he signifies it when the bill is presented to him, by writing on the back the word "accepted," together with his name.

Now if the drawer and drawee of a bill are persons of good credit, a banker will readily discount such a bill, that is, buy it up for the sum due, after subtracting interest at the rate of say five per cent. per annum for the length of time the bill has to run. The bill forms good security, because, when accepted, John Smith is bound to pay the thousand pounds when due, and if he fails, the drawee is liable. Such bills are often bought by one person after another, being #endorsed# by each to the next, that is, impressed with an order that the money shall be paid to the next person named. When due the last owner must claim the money from John Smith, and if he refuses to pay, each owner has a claim upon the previous owners.