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Conclusions Respecting the Volume of the Currency

( Originally Published Early 1900's )



A. QUESTION of fundamental importance which now arises is, What should we regard as the sum total of the currency of the country? We must begin by discussing a disputed question respecting the definition of the word "money" which arises from the want of an exact nomenclature. If we so far accept mercantile usage as to call by the general name of currency everything which men pass from one to the other in payment, we see that it comprises the following classes of things :

I. Coined gold or silver. We have seen that, on the monetary system which has always prevailed, coined gold or silver must be the ultimate basis of everything that is used as money. Whatever form credit-money may take, it must, to be valid, consist in a right to receive or claim from some party a definite quantity of coin. A right to receive merely ideal money, or a representative of coin, amounts commercially to little more than the right of a hungry man to an ideal loaf of bread. This right may, however, as already shown, be more or less remote in time or place without destroying its value.

II. Legal-tender notes. In the United States gold and silver are to a certain extent replaced by promissory notes issued by the government, familiarly known as "greenbacks." At present these notes give the bearer the right to claim from the United States the amount of gold or silver coin named on their face. They have therefore the qualities of banknotes, but differ from them in being a legal tender. This is the same thing as saying that every person paying them out may throw upon his creditor the expense and onus of having them paid. From 1862, the time when these notes were first issued, to 1879, they were not payable in coin. In consequence their value was sometimes greatly below their nominal equivalent in coin. Since the resumption of specie payment by the govern-ment in 1879 they have been at par with coin.

III. Bank-notes. The third kind of currency consists of bank-notes. These notes are now issued by all the national banks of the United States under certain limitations and restrictions prescribed by law. They differ from greenbacks in that they are not a legal tender between individuals. The only parties responsible for their payment are the banks which issue them, though the government has taken very efficient measures to secure their payment.

IV. Bank credits; that is, the right to receive money from a bank, expressed by figures being written to the credit of the individual depositor in the books of the bank.

Now, it is a disputed question whether anything but coin should be called money. This is a question of definition which does not admit of being absolutely settled, because anything may be called by any name which all agree upon. It is, how ever, certain that the coined money which is the necessary basis of all currency should have a distinctive name. But instead of laying down a rule on this subject which might not be accepted by others, we shall simply try so to use words that in each case it shall be clear what is meant. We shall speak of "coin" or " coined money" whenever reference is made to this kind of money alone.

Currency is something quite different, and may include all credits and money actually used in payments. At the same time, its actual meaning in commerce is very vague. Commonly it means only material money, coin and notes in actual circulation. Sometimes it means paper money, in contradistinction to coin. We shall use it in a sense wider than either of these to designate everything, material or immaterial, which passes from hand to hand as money.

The question now is, How shall we determine the total volume of the currency in dollars ? We have shown that the volume of coined money in circulation is a definite quantity. We now want to know what this quantity becomes in the case of credits. First consider what the phrase " volume of the currency" means. The amount of currency possessed by any one man at any moment comprises the disposable funds which he has received in payment for services rendered, and which he can immediately pay out at his pleasure. It is that which he thinks of as "cash on hand" or "cash on hand and in bank." He may have it in three places—in his pocket, in his safe, or in his bank. In his pocket or his safe it is simply so many dollars in coin and bank-notes. In bank it is simply so much credit; he does indeed think of it as so much money in bank, but, as just shown, this is not so: it is not money, but credit. But this fact does not prevent its being counted by him and by every one else as so many dollars, nor abridge its power of performing all the functions of money.

In the case of merchants who do business abroad on a large scale we may add that yet another form of currency is that of money or credit in the hands of correspondents. When a shipper sends a cargo of goods abroad and sells them, he may have the right to draw upon the consignee for payment. In this case he conceives himself to have so much money or credit in the hands of the consignee; but since he cannot pay this credit out to others with the saine freedom that he can transfer a bank credit or a bank-note, it is not considered as a part of the currency.

We have now to consider whether the sum total of the coin and bank-notes actually existing in the country should be considered as in circulation. The principles on which this question is to be settled belong to a more advanced stage of our subject, but the result can be stated here. Currency is to be considered in circulation only when it can be paid out by the owner at his own pleasure, and when lie is keeping it for the purpose of payment. If he is gaining interest on it, and is keeping it with that object alone, it is not in circulation. What we assume as a condition of being in circulation is that, since the owner is gaining no interest, lie will invest or expend it as soon as he can find an opportunity. This is the case with the great volume of money which every one has on hand or in bank.

One circumstance now comes in to make the question at this point a little indefinite. Banks and bankers, especially in Europe, often pay a small interest on their deposits, which our national banks are not allowed to do. When the depositor is receiving interest, this may induce him to leave his money in the bank instead of paying it out. But as the interest received is below the current rate at which money can be borrowed, we may consider this inducement as not sufficient to keep a large sum of money permanently out of circulation.

We may now see that the coin held by a bank in reserve to make good its outstanding credits is not in circulation. It does indeed add to the circulation three or four times its volume by enabling the bank to give credit, but this credit we have already counted. Now, since the bank cannot and does not pay the coin reserve out at its own pleasure, this reserve does not belong to the class described.

Nearly the same considerations apply to the funds accumulated in the public treasury. A volume amounting to several hundred millions of dollars is commonly kept in reserve in the vaults of the treasury. It can be paid out only in pursuance of law, and until so paid is not in circulation.

The saine rule might apply to the treasuries of the several States of our Union. The amounts held by them are not, however, so great as to specially require their consideration.

We therefore conclude that the total volume of the currency may be obtained in this way : Add up all the coin in the hands of persons, all the legal-tender and bank notes in circulation, and all the bank deposits. The sum is the total volume of the currency. We do not include the coin held by the banks or the treasury as a reserve, because this is not in circulation. If we know the total amount of coin in the country, we may find the amount in the hands of individuals by subtracting the bank and treasury reserves from the sum total. We may therefore find the volume by adding up the total amount of coin, bank-notes, and deposits, and subtracting the reserves held by the banks.

Including bank credits as a part of the volume of the currency is a precaution which is, unfortunately, seldom taken. Financiers generally include only coin and bank-notes in their official publications. But bankers know very well that the total volume of the deposits is the most important factor of all, and the correctness of the student's ideas on the subject may be gauged by the clearness with which he sees that bank credits should be included as well as bank-notes.

An illustration of this is afforded by a well-known feature of business in France. Statistics show that the amount of coin and bank-notes circulating in that country is larger in proportion to its population than in most others. The explanation of this is that the habit of keeping bank accounts and making transfers by cheque is less practised in France than elsewhere. Where an American business man would keep all his money in bank, and draw cheques for all payments, the Frenchman keeps bank-notes in his safe and pays them out to his customers.

At the same time it should not be lost sight of that bank credits and bank-notes perform for the most part quite distinct functions. The former are used principally in large transactions and in the great wholesale operations of commerce. The latter are used in retail trade.

The question has sometimes been raised whether bank cheques should not be considered as a part of the volume of the currency, since they pass from hand to hand in payment. The answer to this is that if we include them we must leave out the bank deposits which they represent. We must be careful always to count every credit once, but never to count it twice. Let us look at the matter more closely. John Smith has a credit of $1000 on the books of the bank. lie hands his neighbor a cheque for $500 of this amount. This does not in the slightest degree increase the bank credit ; it merely divides the ownership of it: one half now belongs to Smith, and one half to the drawee of the cheque. When the latter transfers the cheque to a third party, this third party is the owner of the half of the credit, and so on indefinitely until the cheque is paid.

But suppose an owner to deposit the cheque in some other bank. Then there is an apparent increase of $500 in the total credit, because the $1000 appears undiminished on the books of the original bank. So far as this original bank is informed, John Smith is still the owner of the whole $1000, while the other bank has $500 to the credit of an entirely different party, thus making a sum total of $1500. In reality, however, there is still no greater sum total of credit. Smith knows that he has only $500 and, being an honest man (else the bank would have nothing to do with him), acts accordingly. The remaining $500 is to the credit of another party in another bank. When the cheques are exchanged in the clearing-house the state of the case will be patent, and Smith's credit will be reduced to $500. Since the sum total of credit remains unchanged by the drawing and transfer of the cheque, it would be a mistake to consider the cheque as an addition to the currency. It is neither credit nor currency in itself, being only the instrument for transferring a portion of existing credit unchanged to another party.



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