( Originally Published 1909 )
THE most obvious of the forms of cash is the coined currency that we carry in our pockets, consisting of gold, silver, and bronze discs, stamped with the image and superscription of the king, and milled round the edges to prevent enterprising bullionists from shaving metal off their rims. This precaution, it will be observed, is not considered ' necessary in the case of the penny.
The most potent of these, in extracting goods and services from mankind, is gold. Since the purpose of this volume is an endeavour to make money matters, as they are, clear and comprehensible, there is no need to enter into a historical dissertation on the steps which have raised gold into its position as the most important medium of exchange, legal tender to any amount, and consequently, as we shall see later, the basis of credit, or of the lender's side of credit. (On the borrower's side there must be some sort of security as a basis.) But the more obvious reasons which produced this result may be enumerated. We have already seen that buying is distinguished from barter by being an exchange of goods for money instead of an exchange of goods for goods. The inconvenience of a state of barter is evident on a moment's reflection, and it need not be said that as long as it prevailed commercial progress was almost impossible. The sad state of the hungry hatter, unable, in the days of barter, to get meat because the butcher wants not hats but boots, is a commonplace of the economic text-books, and it is clear at once that a long step forward has been taken when a community agrees to recognize one commodity as always acceptable in payment for others, so that any capitalist who is possessed of a store of it may always rely on being able to convert it into whatever he needs that is produced by his fellows. It is also evident that the commodity selected had to be endowed with certain qualities, chief among which were that it should be lasting, easy to pass from hand to hand, and fairly uniform, that is, with not too great a difference in size and desirability between its various examples.) The Old Testament story shows that in the primitive society depicted by it a man's wealth was gauged by the size of his flocks and herds and the number of his changes of raiment, and in the Homeric poems fine suits of armour are valued by the number of kine that they would fetch. Other instances of the use of articles of common consumption as currency include tobacco, hides, shells, bullets and nails. But the prevalence of beasts was sufficient to lead etymologists to consider at one time that the Latin word for a beast, pecus, had been enshrined in the name for money, pecaunia, which has come down in English in its negative form, impecunious. This derivation is now abandoned, comparative philology having decided that pecunia is the same word as the English " fee," and is chiefly memorable for having prompted a passage, full of vivid fancy and inspiration, in Carlyle's " Sartor Resartus." " A simple invention it was," says Herr Teufelsdrockh, " in the old-world Grazier sick of lugging his slow Ox about the country till he got it bartered for corn or oil to take a piece of Leather, and thereon scratch or stamp the mere Figure of an Ox (or Pecus); put it in his pocket, and call it Pecunia, Money. Yet hereby did Barter grow Sale, the Leather Money is now Golden and Paper, and all miracles have been out-miracled : for there are Rothschilds and English National Debts ; and whoso has sixpence is sovereign (to the length of sixpence) over all men; commands Cooks to feed him, Philosophers i to teach him, Kings to mount guard over him to the length of sixpence."
The ox was certainly at one time a standard of value, though it may be doubted whether it passed generally as currency, even stamped on leather, for Carlyle's hypothesis really requires a rather advanced stage of credit organization, with token money issued by graziers, and apparently accepted by a trusting and economically civilized publie.
But in any case the ox must have been singularly ill-adapted for currency purposes ; not only was it not lasting, but it was certain to deteriorate after a certain age, and finally to perish ; it was very far from portable, as Carlyle's Grazier found ; and the difference between one ox and another in size, value, and other respects is so great that the kine circulation must have been singularly liable to the action of the great economic principle known as Gresham's Law, under which, as we shall see later, bad currency drives out good.
All this has been somewhat laboriously set forth, because in these respects the ox is the very antithesis of the gold-piece, and having seen wherein the ox failed, we have already grasped the advantages of the sovereign. The sovereign is permanents portable, and of universal acceptability, either in its own shape or melted back into its original bullion. As it emerges from the Mint, there is no appreciable difference between it and its fellows, and its long use as the standard money of the leading commercial nation has given it a position which is unrivalled in the present and unparallelled in the past. The different experiences to which one sovereign and another may be subjected make a difference to the length of time during which they preserve their full weight, but weight rarely becomes a question of practical importance to holders of the sovereign considered as cash, though it occasionally does so to bullion dealers, who regard the sovereign merely as a piece of gold that may be melted into bars. The coinage is now so well cared for that for purposes of inland and retail exchange one may be taken to be as good as another, as long as we are certain that it is a real sovereign, duly stamped and milled. We are apt to take this inestimable convenience as a matter of course, but it is only secured by constant vigilance on the part of the responsible authorities, and throughout the Middle Ages untold loss, inconvenience and uncertainty was caused by the chronically chaotic state of the currency in this and other countries.
In those good old days, monarchs who did not actually debase their own currencies by decreasing the amount of true metal in them, and then passing them to their unsuspecting subjects, were regarded as enlightened and disinterested reformers ; and the imperfect methods of coinage employed even by the best-intentioned made it easy to sweat and clip the coins, that is to say, to shave bits off them and then pass them on. Here carne in the opportunity of the bullion dealer, and the process arose which went on undetected for centuries until it was enounced and denounced by Sir Thomas Gresham, Queen Elizabeth's great monetary adviser, who stated his famous economic law on the subject.
The gist of which is, that if two coins are in circulation, one better than the other, the good one will be held back by any one who is wise enough to recognize its merits, and the bad one will be passed on; so that after a time only the clipped and sweated coins will be circulating in the hands of the public, and the full-weighted ones will be either in the vaults of the bullion dealers or melted into bars.
To protect themselves against the working of this law, our forefathers used sometimes to carry a small pair of scales, with weights representing a guinea and a half-guinea, fitted into a neat case to be tucked into the pocket.
It has been claimed for gold, that one of its great advantages, which helped to raise it to its position of predominance as circulating medium and basis of credit, is its steadiness in value. It is, in fact, a ' common delusion that the value of gold is fixed and never varies. The value of gold appears to be fixed by the law which compels the Mint to take any gold that is brought to it and coin it into sovereigns at the rate of L3 17s. 10 1/2 per oz., but that is only another way of expressing the fact that a coined sovereign is equivalent to so much gold ; but because we are accustomed to value everything in sovereigns many of us have been led into the assumption that gold which can always be made into so many sovereigns per oz. must therefore be unchangeable in value. But if we keep fast hold of the fact that the value of a thing is what it will fetch, it will be seen at once that the sovereign, or the gold from which it is coined, has no such charmed prerogative.
When wheat is 35s a quarter the buying power of the sovereign, in the pocket of the miller who wants to buy wheat, is different from its value when wheat is 25s. But though the value of gold can be no more fixed than that of anything else, at the same time its comparative indestructibility, and the enormous amount of it in existence in one shape or another, make its value depend much less than that of most other things on the amount of the output at the moment. Wheat, which is grown to be consumed straightway, depends for its price on the prospects of the present crop and the amount left over of the last; gold, which is mined in order to be kept in the form of plate, ornaments, coins and ingots, and is only consumed by dentists, is obviously much less dependent on the chances which may be tending to increase its amount more or less rapidly than usual. For whatever its form, it may always be brought out and melted, and so come into the market in the shape of cash, as was recognized by the prudent Athenians * when in the days of their prosperity they overlaid the statue of Athene with gold, giving it a gorgeous appearance for the time being and leaving a reserve which could at any time be stripped off and turned into the sinews of war.
Gold thus may be regarded as less likely to fluctuate in value than most other commodities owing to the huge accumulated supply, which renders the new output for the time being a matter of comparatively little importance ; and this fact, which has sometimes been exaggerated into a statement that its value is fixed, has certainly contributed, with its beauty as decoration and its commanding merits as currency, to the universal acceptability of gold, in economically civilized countries, in payment for goods and services.
It is doubtless a mere convention that gives gold its commanding position, and it may be con- tended that it would be much simpler, cheaper and more civilized to conduct exchanges by means of pieces of paper secured on national property, as the French Revolutionists tried to do with their assignats, or to abolish all need for mediums of exchange and help ourselves to whatever we want, rendering honest service in exchange by the mere impulse of our own consciences. But we are not concerned at present with any theoretical questions of an ideal currency or absence of currency. The only currency that is of practical and everyday importance is that which is endowed with the virtue of universal acceptability. If the trading community will take a certain piece of metal everywhere in payment for its goods and services, that piece of metal is good currency; and no most scientifically evolved substitute will take its place until it has won its way to the possession of the same virtue. And the fact cannot be gainsaid that gold is the one commodity which is universally and at all times acceptable in all civilized communities, and that all forms of promise to pay, or paper money, are acceptable in proportion to the readiness with which they can be turned into gold. And consequently we shall find, when we come to deal with the more interesting problems of the manufacture of credit, that the convertibility of credit into gold is a matter that its manufacturers always have to consider and allow for carefully, and that consequently the amount of gold that they may possess in order to meet credit instruments that come in for conversion, is necessarily a very important factor among those which regulate the amount of credit that they can, or ought to, create.
But even when the importance of gold as the universally acceptable medium of exchange is admitted, it is often denied, by economic theorists and other critically-minded observers, that the amount of available gold is a question of any moment.
In theory it is easy to argue that, if the amount of gold were suddenly doubled, the world at large would not be a penny the richer, because the buying power of the gold would be halved, the price of everything would be doubled, we should have twice as many sovereigns in our pockets, and should have to pay twice as much for everything that we wanted. But I venture to think that it is easy even in theory to push this contention too far; because any such great addition to currency and credit would have a great effect in stimulating production, and so would lead to a great addition to the number of real goods which humanity desires and consumes when it can get them. In so far as this was so, the condition of humanity as a whole would be materially improved. Trade would be more active, and the many borrowers who are almost always in search of credit for the promotion of various productive enterprises would be more easily provided. In fact, the extent to which trade and economic progress have in the past been quickened by additions to the supply of the precious metals has produced a theory, with respectable authority behind it, which connects the development of civilization with mining activity. Perhaps the most stalwart and "uncompromising exposition of this theory is given by Sir Archibald Alison in his "History of Europe." "The two greatest events," he says, "which have occurred in the history of mankind have been directly brought about by a successive contraction and expansion of the circulating medium of society." These events were the fall of the Roman Empire, which, according to Sir Archibald, " was in reality brought about by a decline in the gold and silver mines of Spain and Greece," and the Renaissance, which he ascribes to the discovery of the mines of Mexico and Peru.
Between these two theoretical extremes one maintaining that the available volume of the precious metals is a matter of no importance, the other regarding it as the cause of the most momentous events in human development it is probably safe to steer a midway course, marked by the buoys of C actual fact. Experience shows that an era of active gold production may be accompanied by a fall in the prices of commodities, either because the multiplication of commodities may be progressing more rapidly than the output of gold, or because inactivity of trade, perhaps due to some shock to credit, may be checking the demand for commodities. i But when the more normal effect of increased gold supplies is at work, and the prices of goods are rising, the producers of the goods are thereby benefited, and set to work harder than ever to produce them. The mechanism of transport is extended and improved, the waste places of the earth are ploughed and watered, and the material heritage of mankind is increased and multiplied. So much so that the demand for credit and capital for the furtherance of these extensions is apt to become so keen, that, as we saw in the recent period of great commercial expansion, an era of active gold product in may coincide with high rates for money It is thus evident that innumerable and incalculable considerations have to be enumerated and calculated before we can say with certainty either that variations in the amount of gold are of no importance, or that they will have results which can be definitely counted on. But for the purposes of our present inquiry there is no need to wonder what might happen if the available gold supply were doubled ; it may be asserted that, rightly or wrongly, and up to a certain point, if any reasonably possible addition was made to the Bank of England's store of gold, the event would, in normal times, be welcomed by the commercial community. The position of the Bank would be regarded as stronger, the City would be cheerful and optimistic, and there would be so much more credit available for any borrower who had an enterprise to finance and could give good security. If there were no enterprising borrowers with good security to offer, the new gold would certainly be useless. But, except in times of extreme slackness in trade, this is an improbable contingency; and it also is improbable that extreme slackness in trade would last long, if it were treated with sufficient doses of this medicine.
We are thus wandering far afield from our consideration of sovereigns in the pocket to gold as the basis of credit. But these monetary questions are all so inextricably entangled that it is almost impossible to Mark them off logically and deal with them one by one. It is the universal acceptability of gold in civilized communities that gives it both ' its popularity in the shape of sovereigns, and its importance as a wheel in the machinery of credit.
And this importance is so great that it had to be referred to on our first meeting with the metal in the course of this inquiry.
The small change that we carry in our purses need not detain us long. It must be noted that silver coins are not " legal tender " to the extent of more than £2 ; that is to say, if you owe your tailor £5, you cannot legally satisfy the debt by handing him one hundred shillings or any other arrangement in silver. Probably it would not occur to you to do so, and if you did he would probably accept it, and the restriction is not apparently of much practical importance. Actually it is most important, for the dreary record of currency history is a long tale of the uncertainty and inconvenience which arose in the days when people tried to keep gold and silver circulating on equal terms at a fixed ratio, with the result that the one which happened for the moment to be less valuable as bullion continually drove out of circulation the one which was more valuable, thanks to the operation of Gresham's Law and the quick and cunning bullion merchants.
Bimetallists maintain that the confusion and difficulty of the two-metal system only arose because it was not scientifically and universally applied, and Bimetallism has been endorsed by eminent theoretical authority. The simplicity of the single standard, however, has obvious practical advantages, and it may at least be claimed that England, by making silver legal tender only up to sums of £2, and adopting what is called a gold standard, solved a problem which had puzzled the civilized world for centuries.
It may also be observed that our silver coins are mere tokens ; that is to say, they do not pretend to contain as much of the metal as would, if melted down, fetch as much as the value at which they circulate. At the present moment there is roughly about fourpennyworth of silver in a shilling, which thus has a purely conventional and artificial value as currency.
Bronze coins are legal tender only to the extent of one shilling.