Chapter X. Exchange Its Machinery.

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Free communication.—From what has been said in the preceding chapter as to the nature of value and price, it will appear that the most fundamental condition for ready exchange is perfectly free communication between individuals as to wants and abilities to meet wants. There is implied, also, an absolute protection of property rights and of equity in dealing through the laws and customs of the community. No one acquires property for the purpose of exchange unless he can foresee the possibility of carrying out the exchange at any future time. He must also feel that he is protected by surrounding circumstances from misinformation as to values. In short, any community is ready for free exchange among its members only when it maintains the conditions for fair competition. To this fairness of competition many things contribute, aside from the governmental machinery. There can be little trade without a common language, and the full advantages of common speech are reached through every facility for ready communication between all the individuals of the community. An universal press, postal facilities, telegraph and telephone systems have all grown up in meeting this need.

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The same is true of established market places, boards of trade and produce exchanges. Not only does the multitude of exchanges in one place lessen the cost of such exchanges, but these make it possible for multitudes to reach a fair understanding of what is wanted and what is offered in any line of production. This need accounts for the tendency so frequently noticed to establish great centers of trade in particular commodities. The world wants a fair understanding of what the world contains, and these methods of bringing together buyers and sellers are the natural outgrowth of this need.

Full statistics.—The same end is served still more fully by frequent publication of price-lists, and a daily record of the transactions in any market gives information which every dealer can use to advantage. Public statistics, carefully and honestly prepared, serve both buyers and sellers of any article of commerce. The farmer needs as much as anybody the fullest information as to what his fellow farmers have to sell, whether they are immediate neighbors or in distant parts of the world. The price of wheat on any farm ought, if perfect understanding is reached, to conform to the general law of supply and demand throughout the world, and the yield of wheat in Russia, India and South America affects the value of every bushel raised in our country.

Every advance in the perfection of statistics and the rapidity of collection makes more certain the bargain of every producer and consumer. People have sometimes opposed the gathering of statistics for fear that large dealers and speculators may take unfair advantage from [pg 111] such information. But a careful consideration will show that managing of the market depends chiefly upon want of information on one side of the bargain. If farmers were as thoroughly informed as to the crops of the world as carefully collected statistics might make them, no false rumors could mislead them in selling their produce. The evident tendency toward more stable markets, as shown by the records of the last twenty years, is accounted for partially, at least, by the more perfect information available. If farmers themselves would take interest in furnishing accurate estimates of the extent and condition of every product held for sale, they would in the long run reap the highest advantages of clearly understanding the supply and demand in the markets of the world. This would do more to destroy the demoralizing force of mere speculation than any possible legal enactment.

Ready transportation.—An equally important part of the machinery of exchange is easy transportation. Every improvement in the transportation of persons or products not only lessens the cost of the article when delivered, but increases the actual stability of price and range of the market.

The pioneer farmers of northern Ohio found absolutely no market for their wheat until the opening of the Erie canal. Farmers upon western prairies found corn their cheapest fuel until railway transportation brought coal mines and corn fields into closer relations. The rural community which takes pains to have good roads not only lessens the cost of hauling grain to market by saving friction and toil, but actually [pg 112] enlarges its market at home. Hard roads enable them to do four times the work they can do on soft roads. In the same way any improvement of railroads, construction of pipe lines for gas and oil, or introduction of pneumatic tubes, for mails and light packages in cities, directly spreads the range of market for the products of every individual laborer and makes more sure the returns for any effort he may give in production. Perhaps this is even more easily seen by considering how the world's markets are opened by improvement in water transportation. Water freight on a bushel of wheat from Chicago to New York from 1865 to 1874 averaged over twenty-two cents; from 1885 to 1894 it was less than seven cents.

The universality of markets for all kinds of products is clearly shown by realizing what we have within reach of every country community today. Such easy transportation adds to the productive abilities of every person. Over ordinary roads the cost of transporting wheat two hundred miles is equal to its value at the end of the journey. Corn will usually pay its way not more than half that distance. So in countries where railroads do not exist the people consume only what they themselves produce, or devote themselves to very few products, and so occupy only a portion of their time. In the best developed regions of our country, every family can reach a steady supply of all kinds of goods, and can know that every article produced has its proper place in the market without waste. The cost of delivering bread in Boston is greater than the cost of carrying the flour in it two thousand miles. This ready transportation [pg 113] leads to more complete and more definite occupation and so to larger returns in the way of satisfaction from all efforts. The extended market gives added value to all permanent or fixed capital. It makes both farms and homes more useful, if full advantage of such improvements is taken. At the same time, values of land tend toward an equality throughout the world.

Diminishing cost of transportation.—That the cost of transportation keeps diminishing in spite of combinations of capital to prevent it, and in spite of local legislation restricting it, proves that the increasing perfection of machinery and the accession of capital in railroads and waterways are stronger than the purposes of men. That freights are regulated by “what the traffic will bear” is merely another way of saying that transportation comes under the universal law of values—what the service is worth in the market, or what people are willing to give for it. According to good authority, the net profit of carrying one ton of freight one mile has fallen in twenty-five years from one cent to less than one-ninth of a cent. The same principle fixes a classification of freight according to service. We can afford to pay more for carrying valuable produce than for carrying cheaper products. It also leads to special rates for developing traffic, as illustrated in rates on baled alfalfa hay from western plains to Chicago.

Wise managers, if not misled by speculation in stocks, care more for enlarging traffic than for immediate returns upon a smaller bulk, because the bulk of profit is greater. A good illustration of development [pg 114] of a special traffic is found in the milk trains running two hundred or three hundred miles to supply the city of New York. The railroads are compelled by the needs of the traffic to carry the milk cheaply enough to prevent its being made into butter and cheese. Laws regulating this charge are effective, because such a necessity exists in the nature of the case.

Weights and measures.—Another important growth in the machinery of trade is found in standards of quantity,—weights and measures of every kind. It is scarcely possible to realize the uncertainty of exchange without exact weights and measures. The story of the Indian trader who bought furs by weight, putting his hand upon the scales for one weight and his foot for its double, illustrates how uncertain such judgments of quantity may be without system. The present names of weights and measures indicate their origin in similar ways.

Measures have usually been connected with some part of the body: as “finger,” used one way in measuring the load of a gun and another on a stocking; “hand,” still used in measuring the height of horses; “span,” once considered sufficiently definite for any measurement; “foot,” now made to conform to an accurate system; and “pace,” still used in many communities. Connected with the arm, are “cubit” and “yard.” Many ladies still measure their dress goods by arm's lengths. For small measures, “grain” and “barley-corn,” still used as names, indicate dependence upon average quantity in articles of general growth.

Today all civilized governments settle upon a definite [pg 115] system of measures and weights, all accurately connected with each other and with some precise dimension in nature supposed to be invariable. Our common yard is distinctly associated with a pendulum vibrating seconds; and in the great decimal system, adopted by most countries in Europe, and likely to be reached in all countries, the whole is connected with a measured meridian upon the earth's surface. Care is then taken to have standard measures and weights prepared in such a way as to be free from all effects of any change of temperature, and legal enactments distinctly define each measure and weight, actually punishing one for the crime of using false weights or measures. Units of quantity thus enter into all our calculations and form an essential basis of all exchange. Cheating in measure and weight grows less and less possible with this clear understanding of exact units. The New York Legislature has defined the size of fruit packages, and the Massachusetts poultry raisers ask a law requiring eggs to be sold by weight.

Metrical system.—If the whole world should unite on a single decimal system of measures and weights, like that now used in most of Europe, all would be gainers from the reduction of misunderstandings and miscalculations increasing the cost of exchange. The difficulty of adopting a new system arises chiefly from the absolute importance of any system and the unconscious use of that to which people are already accustomed, together with its application in a thousand unthought of ways to every tool and every rule. That the advantage of a uniform decimal system would more [pg 116] than balance the difficulty of change, no student of the subject now doubts. Some have estimated the saving at nearly one-half of the present clerk hire. Our government has already taken steps for such a change, though years may be required to accomplish it.

Standards of quality.—The machinery of exchange also involves standard units of quality, but these must vary with every different kind of commodity. Custom has given rise to all sorts of devices for expressing degrees of fineness, strength and hardness, as well as more delicate qualities of flavor and odor. Boards of Trade often establish offices of inspection with brands upon grains, flour, butter, pork, etc., and these become definite parts of a contract which the government rightly enforces. Private trade-marks and brands, if honestly used, become a prominent element in exchange. These are protected rightly by being filed with the government, which secures to the originator his sole use of such a proof of quality.

In some articles of trade, when a whole community is interested, the government goes further and undertakes inspection and branding by an official. This in most states applies to kerosene oil, first for public safety, but afterwards for protection of exchange. Laws regulating the quality of fertilizers are based upon the necessity of knowledge, that bargains may be fair; and in many parts of our country now the branding of ground feeds, with an analysis of their qualities, is deemed an essential of safe bargaining. The extent to which this effort to establish the certainty of qualities may need to be carried can be estimated by the recent [pg 117] agitation over adulterations of food products. All believe that, as buyers, they have a right to know the quality of what they buy. It is conceivable that markets may some time establish a system of terms, descriptive of qualities, almost as definite as weights and measures. All this contributes to fair competition in exchange.

Standards of value.—More important still in the machinery of exchange is a standard unit of value. We have seen that value in any article of commerce can be fixed in terms of any other article, but prices remain indefinite so long as there is want of universal appreciation or appraisal in essentially the same terms and ideas. The tendency toward definite prices in well understood units of value is as clearly perceptible in the progress of commerce as is the tendency toward definiteness in weights and measures.

In early ages almost any article of common use, so that its qualities might be generally understood, has served as a standard of value, in terms of which all wealth has been estimated. Communities engaged in grazing counted all their wealth by cattle. Homer's heroes wore armor valued in cattle, and early Roman coins bore the images of cattle, while the very name of Roman coins, pecunia, is supposed to have been derived from the name of the flock. Communities of fishermen for a long period have estimated wealth in dried fish. More mechanical peoples have used some article of manufacture, like nails in some Scottish villages and the country cloth of western Africa. Sometimes a single prime article of export has served the purpose, [pg 118] like tobacco in the colony of Virginia and dried hides on the plains of South America. In most of pioneer America the hunters' pelts have served the same purpose, the average “coonskin” having a value which all could understand. As communities became more wealthy the display of wealth in ornaments made of precious metals and in precious stones has led to the use of these as standards of value. American Indians used their wampum, and African tribes employed peculiar shells. But as commerce increased, embracing wider regions, gold and silver became the staple article of value everywhere, since these, so easily tested for purity, could have their value estimated definitely by weight. Thus the standard unit of value has been definitely connected with standard weights.

Coinage.—Gradually these weights, for greater ease of transfer and for clearer understanding of values, became the basis of coinage. The stamp of the coiner became a certificate of quality and quantity, and finally, as in the case of weights and measures, governments assumed the whole responsibility for fixing the weight and fineness of coins, and reduced all coinage to system, that every citizen might know the value of the unit in which he estimates any article of commerce.

The early coins were definite weights of gold, silver or copper, and in many countries coins still bear the names that indicate their original weight. Yet arbitrary rulers have often sought to cheat their subjects by issuing coins of lighter weight and baser metal. The French livre, now the franc, is one seventy-second of its original value. English coins were debased ten [pg 119] times between the years 1299 and 1601 to exactly one-third of their original value. The loss from such debasement falls almost wholly upon the poor, whose wages fail to buy the usual food and clothing. Henry VIII reduced the coins of his realm again and again, until it would have taken five years' revenue of Elizabeth's reign to restore the currency. Elizabeth chose to take the standards as she found them, but to establish an absolute degree of purity and fix by law the weight of each coin in the system. The standard of purity since maintained in England is 22 carats, or eleven-twelfths fine, and weights have been maintained in spite of several efforts to reduce them. Other nations have taken similar steps with varying standards of purity: .835 in the Latin union, .9 in the United States, and over .96 in most coinage of western Asia. In this way the standard of value for every citizen of a country is as clearly defined as the standard of weight, and every transaction in trade, with every account of such transaction, involves that unit.

United States coinage.—A brief statement of the system of coinage now established in the United States may illustrate the definiteness of the standards of value. The United States mint at Philadelphia and its branches at New Orleans, Denver, San Francisco and Carson have the sole authority for making coins. Any effort at coinage by outside parties is criminal. The mint receives the gold and silver by weight and assay of purity, melts and refines and mixes with alloy, to bring the mass to required fineness, nine-tenths pure, and casts the metal into bars called bullion. These bars are [pg 120] then most carefully assayed, and, if found of exact standard purity, are rolled and drawn into plates the thickness of the coins desired. From these plates disks are punched by machinery, each disk being weighed, and if found too light thrown aside, if too heavy reduced by filing, until every disk represents exactly the required weight of the coin desired. The disks then pass through a milling machine which raises the edges, and when cleaned by dilute acid and carefully dried, are stamped by a steel die with some device covering both surfaces completely. This effectually gives the seal of the nation to the purity and weight of the coin, and, since it covers the whole surface, prevents the possibility of reducing that weight without marring the coin.

United States standards.—The system of coinage in the United States since 1873 embraces standard coins of gold, silver, nickel and copper, but gold alone actually furnishes the standards of value, all other coins being at present subsidiary. Gold is coined for individuals free; that is, a certain weight of metal presented at the mint is assayed, to determine the exact weight of pure gold, and an equal weight of pure gold is returned to the owner in coin. Sometimes a slight charge for the expense of coinage is made and called seigniorage. At present no such charge is made, for the reason that when a nation bears the cost of coinage, foreign coins are kept from circulation, and its own coins are current everywhere.

The standard unit of value for the United States is 25.8 grains of gold nine-tenths fine, and this is called a [pg 121] dollar, although no coin of this weight is at present struck. In actual practice, the standard is shown in the ten-dollar piece, or eagle, weighing 258 grains. The half eagle (five dollars) and the quarter eagle (two dollars and fifty cents) indicate upon their face their relation to the principal coin. The double eagle, or twenty-dollar piece, is coined for greater convenience. These coins connect all the currency of the country directly with the market value of commodities in the world, through gaining their value directly from the market value of gold, where gold is bought and sold. Thus gold furnishes the standard of value with which all other values are compared.

Silver coins of the United States are made from silver purchased by the government. The dollar, adopted from the Spanish rix-dollar, itself derived from the German thaler, is by law a coin of 412-½ grains of silver nine-tenths fine. This silver dollar has a story of its own, which will be given later, and does not form a part of the system of 1873. The half dollar, the quarter dollar, and the dime, for fractional currency, are proportional parts of 385.8 grains of silver nine-tenths fine. These are about five per cent less in weight than the proportional parts of the silver dollar. The original purpose of this reduced weight was to prevent the consumption of these coins in ordinary uses by making them worth on the face a little more than their bullion value. These fractional coins are legal tender in the courts to the amount of five dollars. In nickel and copper coins no effort has been made for many years to maintain a standard of value, the amount of metal in any of them being [pg 122] far less in value than their face. They are legal tender only to the amount of twenty-five cents.

Fluctuation of standards.—In the study of the precious metals as the standard of prices, it is necessary to remember that the value of these metals, like that of all products of labor, is subject to considerable fluctuations. The very fact that gold and silver are durable metals, not easily consumed or readily worn away, tends to make the increased product in a series of years less and less valuable. While the ordinary increase in product may be provided for by increased demand through extended exchange, the very improvements in the machinery of exchange, especially the extension of general credit, operate in the opposite direction.

It is certain that the value of gold and silver within one hundred years after the discovery of America, when European nations took possession of accumulations among the inhabitants of Central and South America, diminished to a little more than one-fourth of the value previous to that discovery. It is estimated that the value of gold since the discovery of 1849, in California, followed by the opening of mines in Australia and South Africa, has been reduced to little more than three-fifths of its value in 1850. This estimate is based upon careful comparisons between what an ounce of gold in 1850 would buy of some hundred staple products, and what the same ounce of gold will buy today of the same hundred products. The test is a somewhat uncertain one, from the fact that many products are much more affected by improved methods of production than others, and changes of habits and customs among the [pg 123] people greatly affect the prices by changing demands. The combination of a large number of products being less likely to be affected than any one, the comparison is worthy of some confidence. Nevertheless, it is possible for two different persons, making different selections for comparison, to arrive at very diverse results. If the selected articles are those of ready manufacture where improved methods have most largely entered, the value of gold will seem to have increased; if, on the other hand, the selected articles are raw materials, in which the law of diminishing returns gives greater cost of production, the value of gold will seem to have diminished.

A test easily applied, though not absolutely correct, is in the amount of labor of the most common sort which an ounce of gold would pay for at the different periods compared. Careful comparisons show that an ounce of gold today buys more of all sorts of manufactured articles and more of most articles of food, though less of the better class of meats and less of labor, than ever before. This fluctuation in the value of gold has its chief importance in connection with long extended credits, though its influence is felt in other directions through a common system of accounts, in which the standard unit of some system of coinage is the sole basis of comparisons. If the standard unit is growing less valuable, in a series of years the book-keeper will show a constantly increasing total of wealth; if, on the other hand, it is growing more valuable, the books will show an apparent loss. Were a perfectly uniform standard possible, all interests would be best provided for.

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Ratio of silver to gold.—More directly important in its effect upon exchanges is the unequal fluctuation of gold and silver when both are made the standard of value. That silver and gold are from independent sources, subject to variations of their own in product and processes of extraction, makes it impossible that they should sustain always the same ratio to each other in value.

A careful study of the subject by Professor Rogers shows that early in the thirteenth century one pound of gold was worth ten pounds of silver, at the close of that century would buy twelve and one-half pounds of silver, and in the middle of the fourteenth century bought thirteen and three-fourths pounds; but in the fifteenth and sixteenth centuries, after the new world was pillaged, one pound of gold bought from ten and one-half to twelve pounds of silver. In the seventeenth century fifteen pounds of silver went for one pound of gold, and in the eighteenth, fifteen and one-half pounds. Early in the nineteenth century the ratio was fixed in this country at sixteen of silver to one of gold, and that estimate was assumed to be essentially correct as late as 1877, when a pound of gold would exchange in the market for three and one-half pounds of platinum, seven pounds of aluminum, sixteen pounds of silver, seventy-one pounds of nickel, 942 pounds of tin, 1,696 pounds of copper. Twenty years have produced great changes in both the total annual products and the relative cost of mining. The estimate of 1877 would now be incorrect for any of the metals named. A pound of gold now buys 1,540 pounds of aluminum, the [pg 125] change being due to an invention for reducing aluminum ore. It now takes about thirty-seven pounds of silver to pay for one pound of gold, a change in part due to new systems of coinage in which silver plays a subordinate part, but chiefly due to the greatly increased product of rich mines and greatly improved methods of reducing ores.

The cheaper money drives out the good money.—In any system of coinage, employing both silver and gold as standards, it is found by actual experience, repeated hundreds of times, that a change in the ratio between the two metals in open market always leads to hoarding for speculative purposes of the most costly metal of the two.

Thus, in our country previous to 1873, when silver was worth more than one-sixteenth of its weight in gold, uncoined silver was necessarily worth more than coined silver for some purposes, and the coins already struck were worth more in the manufacture of spoons and plate than to circulate as coins. Prior to 1853, when the half dollars, quarter dollars and dimes were coined at the ratio of sixteen to one, such coins could not be kept in circulation, for the reason that they were worth more than their face value. The law of 1853 reduced the weight of these coins so that their market value as silver was sure to remain a trifle less than their face value. The result was no further melting up of these small coins for use in the arts or for bullion. This fact is only one illustration of what is called Gresham's law, formulated in the time of England's base coinage during the sixteenth century, but noticed centuries [pg 126] earlier, that cheap money always drives out a more costly money. The principle is as constant as human nature, that nobody will give a greater value when a less value will serve the same purpose. For this reason, no country in recent times has been able to keep both gold and silver as the actual standards of value at the same time. Either the ratio must be changed with every fluctuation of either metal, or one of the metals must be undervalued in the system of coinage, as has been done in England for the greater part of this century; or else the total coins of the cheaper metal must be limited in amount, as has been done by the Latin Union in Europe during the last twenty-five years. In either case the tendency is toward a single standard. The commercial world prefers a stable, well understood unit to a changeable one. And while the fluctuations of gold alone affect somewhat the stability of prices, these are thought of less importance than the necessary legal adjustments for new systems of coinage.

Monometalism and bimetalism.—The discussion has led to two opposing views, distinguished as monometalism and bimetalism. The monometalist holds that since one metal only can, under ordinary circumstances, set the standard of price, it is wise to choose the one subject to the least fluctuation for the universal standard. The bimetalist holds that a nation, or at any rate a group of nations, can fix by agreement the price of gold and silver in terms of each other, when used as money. Since the use of these metals as money makes the chief demand for them, it is thought possible to make this legal ratio hold upon the total product of [pg 127] both gold and silver. If, then, in any country the supply of gold should be out of due proportion with silver, its overvaluation will at once attract gold from other countries until it becomes no more profitable there than elsewhere. The result is assumed to be a somewhat ready equalization of values for the territory establishing the standard, so that the actual fluctuations of the standard unit will follow the line of lowest prices for either of the metals. The monometalist feels certain that the actual withdrawal from circulation, and so from use as money, of the higher priced metal causes greater hardship and probably greater fluctuations in values of other commodities than any fluctuation of a single standard can produce.

It is very certain that the commercial world recognizes the tendency toward a single standard, and that the coinage systems of all civilized countries are practically, if not in definite form, based upon a single standard. The countries of wide commerce and extensive credit are using the gold standard. The less developed countries adhere to the silver standard. Many which nominally sustain both have, by some legal restriction in the coinage of silver, become practical supporters of the gold standard. Few, if any, thorough students of the subject believe it possible by statute in the present conditions of mining and commerce to bring the commercial world anywhere back to the ratio of sixteen to one, established in the United States in 1834. Statute law might declare a sheep to be equal to a horse, but no power on earth could make it pull as much. So even agreement among nations, by [pg 128] legal enactments, cannot enforce an unnatural relation between two products.

NATIONAL STANDARDS OF VALUE, 1899

Gold Gold, with silver limited Gold or silver Silver
Great Britain, Germany, Sweden, Norway, Denmark, Austro-Hungary, Roumania, Turkey, Portugal, Brazil, Canada, Newfoundland, Egypt, Russia, Chile. United States, France, Belgium, Italy, Switzerland, Greece, India. Haiti, Uruguay, Argentine Republic, Venezuela, Spain, Servia, Bulgaria, Netherlands, Algeria, Tunis, Japan, Java, etc., Philippine Islands, Hawaii. Mexico, Central America, Columbia, Bolivia, Peru, Equador, China, Hong Kong and Straits, Cochin China.

Actual bimetalism.—It is necessary to caution against supposing that the use of both gold and silver as currency in any country implies true bimetalism, nor is it at all certain that the making of either gold or silver legal tender at option touches the question of bimetalism. Only the issue by free coinage at the will of the owner of both metals shows a distinct attempt to maintain bimetalism. The actual maintenance of both standards has always been, and always will be, by alternation, when the ratio of the two metals as to value is established at very nearly the market value of the two metals in bullion.

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Popular demand for a return to the old ratio in the United States is founded in part upon misconception of commercial principles and largely upon a misunderstanding of current events during a financial crisis. The supposed dangers from a single standard of value are largely exaggerated from confusion of standards with currency in exchange. It is quite conceivable that gold may still serve as a standard unit of value, while 90 per cent of exchanges have no other use for gold beyond its furnishing terms of comparison. We must measure value by value, and the unit of value must be true to its name, just as we measure length by something long. But the number of yardsticks in actual use in a store may have no constant ratio to the number of yards of cloth sold by that measure. The folding of calico in yard folds relieves the yardstick, but does not change the nature of the yard. So gold, or silver, is relieved of many functions in exchange through banking systems without materially affecting its use as a standard unit.

The multiple standard.—It is proper to mention in connection with units of value a theoretical device for overcoming the necessary fluctuation in all articles of value. This is sometimes called the multiple standard. The plan, in brief, is to appoint a committee of experts, whose record of current prices, in some general market, for a hundred or more staple articles of commerce, shall be compared from week to week, or day to day, in such a way as to indicate how far above or below the average the price of any article may be. If, then, gold is made a legal tender, a comparison of its price with the average [pg 130] of all prices will show how much weight of gold must be given on any day to actually return a value exactly equivalent to what was borrowed sixty days or a year previous, when the ratio of gold to average prices was different. In this way it is supposed that natural fluctuations in gold, silver or any other commodity made legal tender for debt can be fully provided for without loss to either debtor or creditor.

The objections to this ideal standard are the practical difficulty of settling, first, the wide range of commodities to serve as the basis; second, the importance to be given each in adjusting the standard; and third, the nature of the commission under which the work should be done. In the history of the world, custom has preceded law in devising for welfare; in this, law without experience will have to precede custom. The difficulty which most men would experience in understanding and trusting such a system puts off indefinitely the possibility of a general adoption.

The currency.—The last essential in perfect freedom of exchange is a satisfactory means of transferring completely and quickly all property right in any article of trade. Exchange of commodity for commodity or service for service is possible to a very limited extent, since the man who wants my horse may have nothing which I want in return, or if he has, the values may be unequal, and one or the other must remain in debt, which means that one of the articles belongs in part to both. In some new countries exchanges are confined to this slow and uncertain method of barter, where nobody can buy until he finds a neighbor wanting just what he himself [pg 131] has to sell. Traders in such countries contrive to accumulate a variety of things needed by all sorts of people, that they may be ready with some kind of exchange to meet particular wants. No community, however, begins to reap the clear advantages of exchange until some universally acceptable medium of exchange is discovered and accepted. The process of developing this medium is essentially the same as that described in establishing a standard of value; and so the word money naturally represents both the standard of value and the common currency of trade. It is easy, however, to see by further examination that the two functions of money are quite easily separable, and that, while it is difficult to substitute for the standard of value, a variety of substitutes can serve as currency.

In speaking of coinage hitherto, the standard of value has been assumed to be the most important, but in fact a large proportion of our coin serves simply as currency without materially affecting the standard of value. This is true of all the fractional coins, which are purposely over-valued, and equally true of the silver dollar under existing circumstances. In fact, the primary use of coin was simply for the purpose of transferring property. In the words of Aristotle, 350 B. C., “Men invented among themselves, by way of exchange, something which they should mutually give and take, and which, being really valuable in itself, might easily be passed from hand to hand for purposes of daily life.” This coined money supplies the needed means of exchange most readily because it carries its value with it. In all civilized communities, and in many only partially [pg 132] civilized, it is readily exchangeable for any article of commerce. It is also valued in proportion to its weight, so that any bulk in gold or in silver may be easily divided by exchange for smaller coins. With a little painstaking the coins are made identical in value, so that every trader knows what he gives and receives. They are exceedingly durable, resisting almost all the forces of nature with little loss. For this reason they are likely to have an almost universal value, that is to be wanted by everybody, in any place, at any time, and under any circumstances. These facts are proved by the tendency to hoard such coins whenever individuals have a surplus of wealth beyond present wants, or whenever there is risk in using wealth as capital because of distrust of government, of individuals or of future enterprise. A buried treasure is almost sure to be in the form of coins.

Under a system of coinage, inequalities in exchange are easily adjusted, like “the boot” in a horse trade, or the balance between produce carried to the store and the articles carried away. Most of all, coin is used where for any reason there is distrust of the future. Coin, or its equivalent in bullion, is needed in all transactions where credit is wanting. This appears prominent in all lawless communities with a fluctuating population, and may be found in ignorant communities where methods of credit are not established. It is often essential in the settlement of claims between hostile countries, and is the final means of adjusting balances in all foreign trade. Occasionally this need appears in a universal panic, where each man takes his fellow by the throat, saying, “Pay me that thou owest.”

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Coin a part of a country's capital.—The coined money of a country thus becomes wealth in store for constant use as a machine of exchange. Its operation is effective when it keeps in constant motion, being itself consumed very slowly in the wear and tear of motion. It is sometimes compared to an endless screw, transmitting motion to everything else with which it comes in contact. Like other machines, it may be either too abundant or too scarce for the best advantage of the country. In either case there is waste. When the coin is idle it is unproductive, but suffers less waste from deterioration than almost any other kind of machine. In case of scarcity the cost of its use is increased under the general law of supply and demand, exactly as the cost of other machinery in use is advanced when many desire to use it. This machine is a prominent part of the capital of a country, greater in some countries than in others. In France the value of coin is estimated to be 3 per cent of the value of all real estate, including buildings. The use of such a machine makes a material part of the annual cost of exchanges. The coin of England, where interest is comparatively low, costs for its use in interest, wear and tear, and re-coinage more than $20,000,000 annually.

An additional cost to individuals is in the extra risk of carrying such wealth, as shown in express charges and special insurance, and still greater expense for safe keeping, and a considerable use of time in counting. These facts have led to many devices for lessening the need of keeping wealth in this form.

Credit by accounts.—The most obvious method of [pg 134] avoiding the use of coin in exchanges is a current account between individuals having many transactions in trade. A farmer carries his butter, eggs, fruits, grains and live stock, perhaps, to a single dealer in all these articles, and takes in return articles of household use or for any necessity as he requires them, from a spool of thread to a harvester. If both keep accurate accounts, a settlement once in six months satisfies most conveniently all the requirements of perfect trade. Indeed the settlement is needed only that the accounts may be verified. Except for the dangers of waste in unlimited credit and carelessness in expenditure where future wealth is drawn upon, this method of exchange is simple and inexpensive. In the nature of the case, however, it must be limited, for safety, to trade between people having confidence in each other's honesty of purpose and ability to keep correct accounts. It also requires a mutual expectation of ability on the part of either to meet indebtedness at any future time of settlement.

Credit by due-bills.—An extension of this credit in well established countries, so as to take in other persons than the two involved in book account, is found in due-bills, notes of hand payable on demand, or more formal securities, any of which may require a final decision in court. These pass from hand to hand, often in connection with coin, and under ordinary circumstances serve their purpose cheaply. In some countries a note of hand, with endorsement of each user, may make exchanges until it is covered with endorsements. The danger of waste is considerable from the impossibility of [pg 135] knowing the financial standing and honesty of the various endorsers, and the system is limited, of course, to the range of confidence in such trustworthiness. So easy is it to extend this credit of individuals beyond the range of safety that most governments have found it necessary to protect their citizens against its dangers by limiting or prohibiting its use as currency.

Credit currency.—So convenient, however, and so economical is the use of credit, that all well established nations have developed systems for the issue of a credit currency founded upon the stability of strong corporations or upon the national credit. Nations themselves have often issued bills of credit in the form of notes, or promises to pay at the national treasury. If these are payable on demand in the coin of the realm, they are said to be redeemable. If the time of payment is uncertain, or indefinitely postponed, they are said to be irredeemable. Thus we have the many forms of paper money so familiar to everybody and the various practices and speculative theories regarding it, which make a large part of the discussion of financial questions throughout the world.

No one doubts the worthlessness of currency in any form of note, from individual or firm, which cannot be paid when presented. The notes of the government, so long as that government is considered stable, may circulate readily, and even after doubts exist as to the final ability of the government to redeem, they still circulate, perhaps with greater readiness, in the feeling that hoarding is utter loss and the stopping of trade in the ordinary perishable products of industry will be an enormous [pg 136] disaster. This feeling often leads to the use of a currency without value, like the token money used for change in the absence of legal coins. Though nobody is bound to redeem these tokens, everybody takes the risk of loss as less disastrous than no exchange. Paper money issued by corporations is universally considered dangerous to the interests of communities, unless very carefully restricted within distinct and clearly understood limits. The discussion of such issues will be given in another chapter devoted to banking. The issue of paper money by governments has been a frequent device for enforcing contributions of citizens to extraordinary expenses in war or other disaster. A history of such issues cannot be given within the limits of this book, but is well worth the study of those who seek an understanding of the powers and limitations of government under natural laws, in making a satisfactory currency. A government's stamp upon the piece of paper is so far good, and only so far, as it secures to the receiver of the paper an equivalent value to what he gave for it. If the government itself is unable to give that value, it can never insure the ability or the willingness on the part of any individual to give such value. While millions of dollars in such form may serve as currency without any deterioration, as at the present time, when government promises in all the various forms amount to nearly $1,000,000,000, should any of these, on any day, be refused payment for want of means in government possession, every individual in the land would feel that the value of his possessions in the shape of such notes was made just so far doubtful as the [pg 137] chances of redemption are postponed. All issues of such notes at once become certificates of debt rather than credit, and lose, to greater or less extent, their exchangeable value.

In the extraordinary issue of “greenbacks” during the civil war, the purchasing power of a paper dollar was reduced to less than half, and gradually appreciated in value as the expectation of early redemption increased. The effect of such issues upon government revenues will be treated in its proper connection. As currency, it certainly robs each creditor and holder while depreciating, and as surely robs each debtor while appreciating. As wage earners are universally creditors, according to prevailing customs, they suffer most in a depreciation of money values: i. e., they work for dollars at one value and a week or a month later receive them to expend at a less value. Speculative debtors, on the other hand, always thrive on depreciating currency, paying their debts in what costs less exertion. Under appreciating currency, the creditors gain, be they bankers or workmen.

Banking.—The peculiar convenience for saving found by experience in the use of each of these methods of settlement in exchange leads to a natural commingling of all. Coins serve some purposes best, and accounts have a limited range; notes of hand are often desirable, and paper money, if safe, is universally convenient. This natural combination has led to a more systematic arrangement for handling various kinds of currency, called banking. The most obvious addition to the machinery of exchange in the system of banking is the possibility of immediate transfer of property right [pg 138] in a bank deposit by check and account, or by a draft in account between banks, or by bills of exchange in more distant transactions. The bank deposit is made up of individual wealth, or titles to wealth, supposed to be immediately available for use in exchange. It may consist of all the kinds of currency described or conceivable. Checks are orders upon these individual accounts or deposits, and by their means exchanges are made with great ease and little risk between individuals in the same neighborhood or even in distant cities or distant countries. The cost of storing, handling or transferring any form of currency is reduced to a minimum. So far-reaching is this comparatively modern machine of exchange that it is properly assumed to be the means of settling 90 per cent of all exchanges, domestic and foreign, with almost no use of money in any of its numerous forms. Its importance as a machine of commerce entitles banking to a more distinct consideration, and chapter XI will be devoted to the subject.

Deferred settlement.—In certain stages of civilization exchanges involve, not simply present wealth, but prospective accumulation. A farmer may purchase his farm upon the assurance of crops and stock to be raised in a series of years. In this exchange final settlement is deferred by notes payable at definite future dates, the promise to pay being secured by a deed in trust, a mortgage deed or individual endorsement. If many individuals are united, a purchase may be made by means of issuing more formal notes called bonds, the property of the company being pledged for the payment of the bonds when due. Sometimes such purchases are [pg 139] made by the issue of stock, establishing the right of the seller to a certain undivided share in the wealth controlled by the company. In this case the time of final settlement is indefinitely postponed, to be fixed by limits of the charter or by a vote of the stock-holders. All these certificates of indebtedness serve to a limited extent in exchange of property. So far as they enter into commerce, after the first transaction, they are simply articles of purchase and sale, having a more or less established market value. Since they usually represent an accumulating interest or a provisional dividend, the market value is constantly fluctuating, and they can therefore serve almost no purpose of currency.

The ease with which such notes, bonds and stock can be made the basis of a single purchase in establishing some enterprise gives to them an indefinite influence in trade, sometimes immensely extending the apparent purchasing power of a community. The advantages and disadvantages of such deferred settlement are so varied and important as to make it worth while to treat the subject more extensively than is proper in this analysis, and such treatment will be found in Chapter XII.

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