Before proceeding with the main line of this argument, we will digress to notice some of the arguments put forth in support of the stability of the value of gold by those who cannot but recognize the great fall in general prices.

While such writers do not deny the truth of the fundamental principles we have already considered, they either forget or ignore them.

Notable among such writers is Mr. David A. Wells, and as his views may be taken as representative of many others, some statements from his article in The Forum for October, 1893, previously mentioned, are here selected for criticism. In the beginning of that article, as well as in his work, "Recent Economic Changes," he clearly recognizes and states that there has been a great and universal decline in the prices of a variety of commodities within the last thirty years. He claims, however, that such a general fall of prices does not prove that the value of gold has increased, for the reason that, as he endeavours to show, such fall in prices was caused by lowered labour cost of production, due to improved machinery, better methods, greater division of labour, etc. All these facts may be freely admitted; the error lies in supposing that it makes any difference what the cause is. Since value is a relation, it will be altered by a change in either of the terms between which that relation exists, and it is immaterial whether a day's labour produces more commodities in general, and the same amount of gold, or a less amount of gold, and the same amount of commodities in general, as compared with some former period. The value of gold, other things being the same, is greater in both cases. The fact remains that if gold exchanges for more commodities in general than formerly, its value has risen. It is not clear what Mr. Wells' conception of value is, on which his arguments are based. He, however, seems to regard the labour that a commodity will purchase as the measure of its value, since he says, in the magazine article: "And then, in respect to the one thing that is everywhere purchased and sold for money to a greater extent than any other, namely labour, there can be no question that its price measured in gold has increased in a marked degree everywhere in the civilized world during the last quarter of a century."

"Measured by the price of labour, therefore, gold has unquestionably depreciated; and can anybody suggest a better measure for testing the issue?"

The fallacy of using labour in any form as a test of value was pointed out in the chapter on value. That the labour a commodity will purchase is not in any way a standard of value, as between two different periods, has been shown by almost every economist from Ricardo down to the present time.

The above quotations, in connection with the following from the same article, bring to light an important phase of the subject, which it may be well to make clear. Mr. Wells remarks:—

"A decline in prices, by reason of an impairment of the ability of the people of any country to purchase and consume, through poverty or pestilence or by reason of the misapplication of labour and capital, i.e. waste, ... is certainly an evil. But a decline in prices caused by greater economy and effectiveness in manufacture and greater skill and economy in distribution, in place of being a calamity, is a blessing and a benefit to all mankind."

With growing knowledge, and the advancement of the arts and sciences, there is a continual improvement in methods of production and distribution, enabling the same amount of labour to produce and distribute to consumers a far greater amount of commodities in general than it formerly could. This has been conclusively shown in detail by a mass of statistics in Mr. Wells' book. The question arises, to whom should this increased product properly belong?

For the purpose of this inquiry the community may be considered as divided into three separate classes, according to the source from which their principal income is derived; viz.—

(1) Labourers,—including all whose income is principally derived from their work, of hand or brain, whether as wages, salaries, or products directly created.

(2) Employers of labour,—including all whose income is mainly derived from investments of capital directly in productive enterprises in the widest sense of the term,—those who take the risks of business incident to the doing of the work of the community. (3) Money lenders,—those whose income is derived from interest on loans; who, not wishing to take the risks and cares of active business, prefer to loan their capital to others who will do so, accepting as their share of the profits a definite amount as interest.

The incomes of many people are derived, of course, from all three of these sources, but they may be considered as belonging to the class determined by their greatest revenue.

It is evident that labourers should have a share of the increased product that greater skill, improved methods, machinery, etc., create; since labour is the direct cause of such increase, and not only the greater skill but the improved methods are due to labour.

Equally evident is it that the capitalist who has taken the risks of business and whose wealth and enterprise have contributed to the results, should also share in the increased product.

But all considerations of justice and equity forbid that those who, declining to take any risk themselves, prefer to loan their capital to others at a fixed compensation, should receive any share of the increased product which labourers and employers may succeed in creating, beyond such fixed compensation. Justice is satisfied when to them is returned the value they loaned with the interest agreed upon for its use.

It must not be forgotten that what is really loaned is capital,—commodities in general,—not money; the money is only a medium for effecting the transfer, and a measure of the capital transferred. What should be returned, therefore, in repayment of a loan is the same amount of commodities in general that was borrowed,—the same value.

It is not meant that bond-holders and money-lenders should be entitled to no share in the generally bettered condition of mankind due to lowered labour cost of producing commodities. They should, and in the long run would, receive their full share, through the higher rate of interest that increased general profits would bring if money value were constant, and by this means would obtain a just share, determined by open competition and not an unjust share, determined by the insidious device of a varying measure. It is meant, however, that the money-lender is entitled to no share in any increased productiveness of labour during the lifetime of his loan, beyond the interest stated. He gets his share of such increased productiveness through the higher interest he will subsequently receive in re-loaning his capital.

If prices of commodities have declined while wages have increased, as Mr. Wells claims, it shows that the labourer, on the whole, has received some share of the increased production, since his wages will buy more of commodities in general than formerly. Whether the employer of labour has also received a share is more difficult to determine; but it is absolutely certain, if prices have fallen, that the money-lender, who is entitled to no share at all, aside from interest, has also received a share, and a very large one in many cases; since the money returned to him in discharge of a debt will purchase a much larger amount of commodities in general than it would when it was loaned; and this share has evidently been drawn from what should have gone to one or both of the other classes, and they are wronged to that extent.

While the labourer may, or may not, have received the share to which he was entitled during the last twenty years, it seems highly probable, from Mr. Wells' statistics and arguments, that it is the employer of labour—who as a rule is the borrower—who has been injured most by the fall of prices.

One of the great aims and endeavours of mankind is to produce the largest amount of commodities possible, with the least labour,—or to lower the labour cost of commodities. It is this lowered labour cost, which is "a blessing and benefit to all mankind," not lowered prices. The two are not the same, nor have they any real connection. Lowered labour cost depends solely on the improvement in skill, methods, machinery, etc., which will go on as well with prices constant on the average, as with falling prices,—in fact, even better,—and the product will then be distributed honestly; while with falling prices the distribution is dishonest.

It is important to keep clearly in mind the distinction between capital and money. That Mr. Wells has not always done so, the following quotation will show:—

"Nobody, furthermore, has ever yet risen to explain the motive which has impelled the sellers of merchandise all over the world, during the last thirty years, to take lower prices for their goods in the face of an unexampled abundance of capital and low rate of interest, except upon the issue of the struggle between supply and demand."

Capital is accumulated wealth devoted to the production of more wealth; money is merely a medium for the exchange and transfer of wealth: they are not synonymous terms. An abundance of capital may exist with a small amount of money (relative to the demand) and consequent low prices, or with a large amount of money and high prices: they have no connection.

The rate of interest, also, has nothing to do with the question. Interest is determined by the amount of capital seeking investment in loans, relative to the demand, and in a time of relative contraction of the volume of money, and consequent falling prices, will, as a rule, be low, since there is less inducement for men to borrow capital to engage in business, and more men wishing to lend. The risks of business are much increased at such a time, and the profits much lessened, and as the rate of interest is determined by the profits of business in general, it will be low also. Mr. Wells, indeed, has recognized this fact elsewhere in his writings, but has evidently forgotten it in the above quotation. The accumulation of money in banks in times of depression indicates not too much money, but a general belief that its value is rising, or a fear that it will rise; testifying, if to anything, to too little money, in fact. Men do not hold a thing that brings no income unless they expect to profit by its rise.

As to the main point of the above quotation, certainly men accept lower prices for merchandise because of the issue between supply and demand, but the supply of money is as much involved in the calculation as the supply of merchandise. Men accept lower prices—that is less gold—for commodities in general, because gold has increased in value. Mr. Wells further says:—

"No one has ever named a single commodity that has notably declined in price within the last thirty years, and satisfactorily proved, or even attempted to prove, that its decline was due to the appreciation of gold."

No one, of course, could prove by the decline in price of a single commodity that money or gold had appreciated; but when a writer admits, as Mr. Wells has done so clearly, that prices in general have fallen, no proof is needed; the statements are but different ways of saying the same thing.

That in order to establish the appreciation of money it is necessary to show that all commodities have fallen in price, or that the price experiences of different commodities had harmonized in their decline, as Mr. Wells implies, is manifestly absurd. Even if average prices were constant, there would be continual fluctuations of individual prices, some rising, others falling, and these continue the same with an increasing money value, so that some prices might not alter at all, or might rise even with a rising money value, but others again would decline in a greater degree than if the money value were constant. If the average purchasing power of money is greater, then its value is greater, whatever be the cause.

So much space has been devoted to a criticism of this article because the opinions expressed in it seem to be fundamental and dangerous errors. Moreover, they are given added weight by the reputation and prominence of the author, while they are more or less representative of the arguments of other defenders of the gold standard.

Either Mr. Wells is mistaken in his conception of value, and of the standard by which it is measured, or Ricardo, John Stuart Mill, and all other authorities on Political Economy are mistaken in supposing that the value of a commodity is its general purchasing power.