[Sidenote: Theoretical possibility of a good paper money]

3. _A sound theory of paper money makes it a special case of monopoly value._ It has been seen that the power of almost every monopoly over price is relative, not absolute. As the power of a great private corporation over the price of its product is limited, so is that of the government over the value of political money. The money use is the source of value to the paper notes. Business conditions remaining unchanged, the limit of possible issue without depreciation is the number of units in circulation before the paper money was issued, the saturation point of full-weight and full-value coins. Because governments generally have not stopped at that point, paper money has depreciated. Popular error and selfish interests force legislation beyond the reasonable limit. In a few cases only have there been public integrity and courage enough to retrace the steps before great harm resulted. It is princ.i.p.ally this lack of control that prevents paper money from being a good circulating medium.

[Sidenote: Influence of law on value]

It is sometimes said that government cannot affect value in any way, but it can do so in many ways. Certainly one of the most remarkable is by the use of its monopoly power over the medium of exchange, whereby it can, under certain conditions, cause a piece of paper to have the value of a piece of gold. Thereby at the same time it affects the interests of nearly every member of society, raising or lowering the value of many kinds of property, and of many incomes.

CHAPTER 47

THE STANDARD OF DEFERRED PAYMENTS

-- I. FUNCTION OF THE STANDARD

[Sidenote: Definition of the standard]

1. _The standard of deferred payments is the thing of value in which, by the law or by contract, the amount of a debt is expressed._ A credit transaction is a lengthened exchange; one party fulfils his part of the contract, the other party promises to give an equivalent at a later date. The equivalent may be in any kind of goods; for example, in barter one may part with a horse on the promise of a cow to be received later; or a small horse on the promise of a large one; or a flock of sheep on the promise of its return at the end of the year with a part of the increase of the flock. A simple standard in which to express the debt is the thing borrowed, as horse, sheep, wheat, house, etc. This involves the use of the renting contract. Again, the thing to which the value of debts is referred may be a thing quite different from the goods borrowed, and with the growth of the money economy and the use of the interest contract, money comes more and more to be used as the standard.

The parties express the debt in terms of the standard unit established by law.

[Sidenote: Increasing use of the interest contract]

2. _The importance of the standard of deferred payments increases with the use of money and with the amount of outstanding debts._ Until the use of money develops, the use of credit is difficult and limited; it becomes easy when the value of all things is expressed in terms of a common circulating medium. If all business were done for cash there would be no great interests affected when a change in the value of money occurred. Every dollar would change in value in the hands of the holder, but there the effect would cease. But the volume of outstanding debts expressed in terms of money now exceeds many fold the total value of the circulating medium. The value of all these debts changes in the same proportion as does that of the standard unit of money; when this is cheapened either by law or as a result of increasing supplies, a creditor to whom a thousand dollars are due loses the same as if he had a thousand metal dollars locked up in a strong chest.

[Sidenote: Great effects of money changes]

Outstanding contract debts may be roughly divided into three cla.s.ses: short-time loans, running less than a year; medium-time, running from one to five years; long-time, running over five years. Fluctuations are rarely rapid and great enough to affect appreciably the debtors and creditors in the case of short-time loans. The results are greater in the case of long-time loans, such as national, state, and city debts, bonds of corporations, mortgages given by farmers on their land or by owners of city real estate. A mult.i.tude of interests are affected by a change in the value of money. When, as in the years 1873-96, money gains in purchasing power (prices fall) receivers of fixed incomes are gainers. When, as in the years 1896-1903, the value of money falls, the revenues from educational and charitable endowments, the salaries of public officials, and all fixed incomes, lose purchasing power. In a capitalistic age, therefore, almost every individual is affected in some way by a change in the value of money. In most cases the change escapes recognition; people do not trace out the relation that an industrial change bears to their own interests. In a few notable cases, however, the change has been revolutionary as in the period following the discovery of America, when the feudal dues had come to be expressed in terms of money instead of labor services. In modern times, the ma.s.s of debts being greater than ever before, such changes as those following the discovery of gold in California or the decrease in gold production between 1873 and 1890 have the gravest economic results.

[Sidenote: Merits of gold and of silver as standards]

3. _The best standards of deferred payments available--the precious metals, gold and silver--are still imperfect._ The good that is most convenient as a standard of deferred payments is the one used as money.

Gold to-day is constantly expressing the value of all other things.

Borrowers prefer to make loans in the form of the general medium of exchange. From the usage of speaking of all things in terms of money, the false idea arises that the value of other things changes, but that the value of gold is always the same. Money is no such a fixed objective standard as a foot-rule or a pound weight. The value of gold rests on the estimates made by men, and is constantly changing according to conditions. A fixed objective standard of value is not possible of attainment. The value of the precious metals is stable as compared with most things. The current new supply is comparatively regular. For generations at a time there may be no radical changes in the output of gold and silver. For centuries there was no change in the methods of extraction. Recent inventions, however, have considerably altered these conditions. The nature of the use of gold and silver, likewise, is such as to make the demand for them, under ordinary conditions, most stable.

The precious metals are but slowly worn out; only a portion of the annual output is used in the arts; there is, therefore, a large reservoir into which flows steadily a small stream; the existing stock is twenty or thirty times the annual output. Yet the value of the standard metals is never quite stable, and sometimes several influences combine, as in the last century, to affect their value greatly and suddenly.

[Sidenote: Various standards suggested]

[Sidenote: Enjoyment]

[Sidenote: Sacrifice]

[Sidenote: Labor]

[Sidenote: Tabular standard]

4. _Various ideals for a standard of deferred payments have been suggested--as return of equal enjoyment, of equal sacrifice, social expediency; and various standards--as labor, commodities, and the tabular standard._ The ideal standard of deferred payments is one that will insure justice between borrower and lender. Different views have been taken as to what const.i.tutes justice in this matter. The suggestion is attractive that the sum when returned should represent the same amount of enjoyment as it did when it was borrowed. Such a standard is impossible of realization in any general way, for men's circ.u.mstances are constantly changing. To insure even to the average man the same amount of enjoyment is only roughly possible. The same goods do not afford the same enjoyment when conditions have changed. Another suggestion is that the goods returned should represent the same sacrifice as those loaned. Here again the difficulty is in the lack of an objective standard. Whose sacrifice? That of the lender, who may be rich, or that of the borrower, who may be poor? Some have supposed the conditions of equal sacrifice were met by the labor standard, according to which the sum returned should purchase the same number of days of labor as when borrowed. But what kind of labor is to be taken, that of the lender or that of the borrower, or that of some one else? Labor is of many different qualities, which can be exactly compared only through their objective value in terms of some one good. The ideal of equal enjoyment has been supposed to be realized by the tabular standard, which consists of a number of leading commodities in fixed proportions.

The money returned is to be enough to purchase the same goods at the expiration as at the making of the loan, and thus may be a larger or smaller sum than was borrowed. While this does not, as is sometimes claimed, insure equality of enjoyment, it averages the fluctuations of many goods, and thus prevents great extremes. This standard has been favored by notable monetary authorities, but the difficulties of its practical application are prohibitive.

It must be recognized that any possible concrete standard of deferred payments will sometimes work hardship to individuals. The best average results for justice and social welfare will be secured by measuring debts in goods that change least often, least rapidly, and in the least unpredictable manner. Gold thus far has proved itself worthy to serve as the standard.

-- II. INTERNATIONAL BIMETALLISM

[Sidenote: Examples of price fluctuations]

1. _The fall of prices in 1873 and the following years meant a great change in the standard of deferred payments._ The monetary changes following the discovery of America were due to the inflow to Europe of great quant.i.ties of silver taken by force from the native American rulers, and from the rich mines. Silver, at that time throughout Europe the main standard of deferred payments, was thus greatly lowered in value. This change lightened all outstanding obligations, lowered the money rents of the peasants, and the customary dues of labor wherever they had come to be expressed in money form. By the third quarter of the nineteenth century gold had become in Europe and America the main standard, though silver still served as such in some countries. The output of gold in 1849-57 caused the greatest money inflation that has occurred since the sixteenth century, favoring in a similar manner the debtor cla.s.ses. The subst.i.tution of gold for silver by some countries at that time, by making a great additional market for gold, helped in some degree to check the fall in its value.

[Sidenote: The recent great fall of prices]

The decline in the output of gold was a change of the opposite character, causing a fall of prices and increasing the burden of debts.

From 1873 to 1896 there was almost constant decline of the prosperity of the agricultural cla.s.ses, due in part to this money influence, but in part to influences which cannot be dwelt upon here, as they had nothing to do with the money question. There was complaint, agitation, and demand for relief on the part of many interests in France, Germany, England, and the United States.

[Sidenote: Bitmetallism defined]

2. _Bimetallism, the use of two metals as standard moneys, was the remedy proposed._ Bimetallism is legally complete when both metals are admitted to the mints for free coinage at an established ratio of weight; it is halting or limping when one of the metals is not freely coined. Bimetallism may be legally authorized, but not actually working.

As soon as the legal ratio varies appreciably from the market value, only one of the metals will in fact be brought to the mint. National bimetallism is confined to a single country, as that in the United States before the Civil War, or in France before 1867. International bimetallism is an agreement among several nations to use two metals on the same terms, the only case in history being that of the Latin Union, which included France, Italy, Switzerland, and other countries. The discussion of international bimetallism in recent years has been on the proposal to make a much larger league of states than the Latin Union, embracing all the leading countries.

[Sidenote: Object of international bimetallism]

3. _The main object of international bimetallism is to prevent the fluctuations of the standard of deferred payments._ Commercial dealings between gold-using and silver-using countries are of great magnitude, and the use of different standards leads to many difficulties.

Fluctuations in the ratio of the two metals occasion much uncertainty and loss to individual traders. The rise in the value of gold meant an increase in the burden of the public debts of silver-using countries which collect their revenues in silver, but which must pay their debts, princ.i.p.al and interest, in gold.

[Sidenote: Its theory]

The theory of bimetallism is that the government can act on the value of the two metals through the principle of subst.i.tution. The metal tending to become dearer will not be coined, the other will be coined in greater quant.i.ties. The degree of influence that can thus be exerted on the value of the two metals depends on the size of the reservoir of the metal that is rising in price. When it all leaves circulation, the law on the statute book permitting it to be coined becomes a mere sounding phrase. In such a case there is bimetallism _de jure_, but monometallism _de facto_. The greater the league of states, the greater is the likelihood that the scheme will work. The economic theory of bimetallism was recognized by a majority of economists to be abstractly sound, but the political difficulties in the way of international agreements are great, and have proved to be insurmountable.

-- III. THE FREE-SILVER MOVEMENT IN AMERICA

[Sidenote: Conditions leading to the demand for free-silver]

1. _International bimetallism, despite many efforts, failed of adoption._ This brief proposition sums up the history of the movement, from 1878 to 1892, to form a league of states and an agreement for international bimetallism. International conferences were held, and taken part in by the leading financiers of the world. France at first favored the policy, and the United States was always foremost in advocating it, while England in the main was opposed. Some of the advocates of bimetallism argued that the fall of prices was due not alone to economic forces, but also to a money conspiracy which had influenced legislation to introduce and continue the gold standard.

This, of course, was strenuously denied. It is true that the commercial cla.s.ses found gold the form of money most suitable to large business, and no doubt cla.s.s interests entered into the question in some measure.

The difficulties of the debtor cla.s.s in America were peculiarly great, owing to the inflated paper currency, from 1862 to 1879, which had made our conditions quite abnormal. In the period of speculation following the Civil War an enormous ma.s.s of debts had been acc.u.mulated. The hopes of thousands of tillers of the soil suffering from a fall in prices, and of the great debtor cla.s.s, clamoring for relief, were centered upon the success of this movement. Banking and other large business interests in general opposed it.

[Sidenote: Purpose of the free-silver movement]

2. _The plan of the free-silver advocates was to legalize national bimetallism in the United States at a ratio between gold and silver very different from the market ratio._ Gold had become, long before 1860, the real standard of our money system, and after 1873 it was the only metal admitted to free coinage. Silver, little by little, was losing purchasing power in terms of gold, until from being worth, in 1873, one sixteenth as much, ounce for ounce, it became, in 1896, worth but one thirtieth as much as gold. It must be recognized that the power of silver to purchase general commodities fell much less than the change in its ratio to gold would indicate, gold having risen in terms of most other goods as well as of silver. Nevertheless, the proposal to open the mints to free silver at sixteen to one in the year 1896 meant a sudden and marked cheapening of money. The prime purpose was to lighten the burden of debts by making the standard of deferred payments cheaper. It was at first a debtors' movement, but to succeed it had to enlist the support of other large cla.s.ses of voters. And thus, by force of political necessity, but doubtless in large part navely, it developed into the more sweeping theory that wages, welfare, and prosperity called for a larger supply of money independently of the effect on debts.

[Sidenote: The free-silver theory]

In its extreme form the free-silver plan was a fiat scheme, for some of its supporters believed that by the mere pa.s.sage of the law the two metals could be made to bear to each other any ratio desired. But its most intelligent and high-minded advocates (who were moved to its support by a sincere sympathy and concern for the distressed agriculturalists) recognized fully that the force of the law was limited by economic conditions. The extreme opponents of the plan, ignoring the evident fact that the adoption of a metal as a standard money is one of the most essential of the market conditions, denied that government action could in any way affect the value. Most of the arguments presented on either side in the political campaigns showed little evidence of a sound theory of money. The victory of the gold standard in 1896 and 1900, it would seem, was due more to the well-founded fear that a sudden change of the money standard would cause a panic, than to a thorough understanding of the question.

[Sidenote: Increase of gold production]

3. _The increase of the gold output has for the present checked the fall of prices._ Before 1890, for a number of years, the average output of gold was shrinking till it reached a scant hundred million per year. At the same time, nations which recently had gone over to the gold standard were striving to secure large stocks for their banks and general circulation, and those great reservoirs, as a result, became better filled than they ever were before. After the opening of new gold-yielding territory in South Africa and in the Klondike, the annual output of gold became greater than it had ever been, being at the opening of the South African War in 1898 nearly three times that of ten years earlier. The present methods of extracting gold resemble those of fifty years ago as civilized industry resembles that of savages.

Intricate machinery has taken the place of crude tools, chemical processes have been introduced, and the princ.i.p.al product results from the regular and certain working of deep mines rather than from chance surface discoveries. Great ma.s.ses of debris can now be reworked profitably. In many parts of the world are enormous deposits of low-grade ores, before useless, that can be worked economically by present methods. For a generation at least the world's supply of gold is likely to continue larger than ever before in history, and prices in terms of gold probably will rise.