Since money has to be exchanged for valuable goods, it should itself possess value and it must therefore have utility as the basis of value. Money, when once in full currency, is only received in order to be passed on, so that if all people could be induced to take worthless bits of material at a fixed rate of valuation, it might seem that money does not really require to have substantial value. Something like this does frequently happen in the history of currencies, and apparently valueless shells, bits of leather, or scraps of paper are actually received in exchange for costly commodities. This strange phenomenon is, however, in most cases capable of easy explanation, and if we were acquainted with the history of every kind of money the like explanation would no doubt be possible in other cases. The essential point is that people should be induced to receive money, and pass it on freely at steady ratios of exchange for other objects; but there must always be some sufficient reason first inducing people to accept the money. The force of habit, convention, or legal enactment may do much to maintain money in circulation when once it is afloat, but it is doubtful whether the most powerful government could oblige its subjects to accept and circulate as money a worthless substance which they had no other motive for receiving.
Certainly, in the early stages of society, the use of money was not based on legal regulations, so that the utility of the substance for other purposes must have been the prior condition of its employment as money. Thus the singular peag currency, or wampumpeag, which was found in circulation among the North American Indians by the early explorers, was esteemed for the purpose of adornment, as already mentioned…. The cowry shells, so widely used as a small[Pg 20] currency in the East, are valued for ornamental purposes on the West Coast of Africa, and were in all probability employed as ornaments before they were employed as money. All the other articles [previously] mentioned … such as oxen, corn, skins, tobacco, salt, cacao nuts, tea, olive oil, etc., which have performed the functions of money in one place or another, possessed independent utility and value. If there are any apparent exceptions at all to this rule, they would doubtless admit of explanation by fuller knowledge. We may, therefore, agree with Storch when he says: “It is impossible that a substance which has no direct value should be introduced as money, however suitable it may be in other respects for this use.”
When once a substance is widely employed as money, it is conceivable that its utility will come to depend mainly upon the services which it thus confers upon the community. Gold, for instance, is far more important as the material of money than in the production of plate, jewellery, watches, gold-leaf, etc. A substance originally used for many purposes may eventually serve only as money, and yet, by the demand for currency and the force of habit, may maintain its value. The cowry circulation of the Indian coasts is probably a case in point. The importance of habit, personal or hereditary, is at least as great in monetary science as it is, according to Mr. Herbert Spencer, in morals and sociological phenomena generally.
There is, however, no reason to suppose that the value of gold and silver is at present due solely to their conventional use as money. These metals are endowed with such singularly useful properties that, if we could only get them in sufficient abundance, they would supplant all the other metals in the manufacture of household utensils, ornaments, fittings of all kinds, and an infinite multitude of small articles, which are now made of brass, copper, bronze, pewter, German silver, or other inferior metals and alloys.
In order that money may perform some of its functions efficiently, especially those of a medium of exchange and a store of value, to be carried about, it is important that it should be made of a substance valued highly in all parts of[Pg 21] the world, and, if possible, almost equally esteemed by all peoples. There is reason to think that gold and silver have been admired and valued by all tribes which have been lucky enough to procure them. The beautiful lustre of these metals must have drawn attention and excited admiration as much in the earliest as in the present times.
2. Portability
The material of money must not only be valuable, but the value must be so related to the weight and bulk of the material, that the money shall not be inconveniently heavy on the one hand, nor inconveniently minute on the other. There was a tradition in Greece that Lycurgus obliged the Lacedæmonians to use iron money, in order that its weight might deter them from overmuch trading. However this may be, it is certain that iron money could not be used in cash payments at the present day, since a penny would weigh about a pound, and instead of a five-pound note, we should have to deliver a ton of iron. During the last century copper was actually used as the chief medium of exchange in Sweden; and merchants had to take a wheelbarrow with them when they went to receive payments in copper dalers. Many of the substances used as currency in former times must have been sadly wanting in portability. Oxen and sheep, indeed, would transport themselves on their own legs; but corn, skins, oil, nuts, almonds, etc., though in several respects forming fair currency, would be intolerably bulky and troublesome to transfer.
The portability of money is an important quality not merely because it enables the owner to carry small sums in the pocket without trouble, but because large sums can be transferred from place to place, or from continent to continent, at little cost. The result is to secure an approximate uniformity in the value of money in all parts of the world. A substance which is very heavy and bulky in proportion to value, like corn or coal, may be very scarce in one place and over-abundant in another; yet the supply and demand cannot be equalised without great expense in carriage. The cost of conveying gold or silver from London to Paris, including insurance, is only about four-tenths of one per cent.; and[Pg 22] between the most distant parts of the world it does not exceed from 2 to 3 per cent.
Substances may be too valuable as well as too cheap, so that for ordinary transactions it would be necessary to call in the aid of the microscope and the chemical balance. Diamonds, apart from other objections, would be far too valuable for small transactions. The value of such stones is said to vary as the square of the weight, so that we cannot institute any exact comparison with metals of which the value is simply proportional to the weight. But taking a one-carat diamond (four grains) as worth £15, we find it is, weight for weight, 460 times as valuable as gold. There are several rare metals, such as iridium and osmium, which would likewise be far too valuable to circulate. Even gold and silver are too costly for small currency. A silver penny now weighs 7-1/4 grains, and a gold penny would weigh only half a grain. The pretty octagonal quarter-dollar tokens circulated in California are the smallest gold coins I have seen, weighing less than four grains each, and are so thin that they can almost be blown away.
3. Indestructibility
If it is to be passed about in trade, and kept in reserve, money must not be subject to easy deterioration or loss. It must not evaporate like alcohol, nor putrefy like animal substances, nor decay like wood, nor rust like iron. Destructible articles, such as eggs, dried codfish, cattle, or oil, have certainly been used as currency; but what is treated as money one day must soon afterwards be eaten up. Thus a large stock of such perishable commodities cannot be kept on hand, and their value must be very variable. The several kinds of corn are less subject to this objection, since, when well dried at first, they suffer no appreciable deterioration for several years.
4. Homogeneity
All portions of specimens of the substance used as money should be homogeneous, that is, of the same quality, so that equal weights will have exactly the same value. In order that we may correctly count in terms of any unit, the units must[Pg 23] be equal and similar, so that twice two will always make four. If we were to count in precious stones, it would seldom happen that four stones would be just twice as valuable as two stones. Even the precious metals, as found in the native state, are not perfectly homogeneous, being mixed together in almost all proportions; but this produces little inconvenience, because the assayer readily determines the quantity of each pure metal present in any ingot. In the processes of refining and coining, the metals are afterwards reduced to almost exactly uniform degrees of fineness, so that equal weights are then of exactly equal value.
5. Divisibility
Closely connected with the last property is that of divisibility. Every material is, indeed, mechanically divisible, almost without limit. The hardest gems can be broken, and steel can be cut by harder steel. But the material of money should be not merely capable of division, but the aggregate value of the mass after division should be almost exactly the same as before division. If we cut up a skin or fur the pieces will, as a general rule, be far less valuable than the whole skin or fur, except for a special intended purpose; and the same is the case with timber, stone, and most other materials in which reunion is impossible. But portions of metal can be melted together again whenever it is desirable, and the cost of doing this, including the metal lost, is in the case of precious metals very inconsiderable, varying from 1/4d. to 1/2d. per ounce. Thus, approximately speaking, the value of any piece of gold or silver is simply proportional to the weight of fine metal which it contains.
6. Stability of Value
It is evidently desirable that the currency should not be subject to fluctuations of value. The ratios in which money exchanges for other commodities should be maintained as nearly as possible invariable on the average. This would be a matter of comparatively minor importance were money used only as a measure of values at any one moment, and as a medium of exchange. If all prices were altered in like proportion[Pg 24] as soon as money varied in value, no one would lose or gain, except as regards the coin which he happened to have in his pocket, safe, or bank balance. But, practically speaking, as we have seen, people do employ money as a standard of value for long contracts, and they often maintain payments at the same variable rate, by custom or law, even when the real value of the payment is much altered. Hence every change in the value of money does some injury to society.
It might be plausibly said, indeed, that the debtor gains as much as the creditor loses, or vice versa, so that on the whole the community is as rich as before; but this is not really true. A mathematical analysis of the subject shows that to take any sum of money from one and give it to another will, on the average of cases, injure the loser more than it benefits the receiver. A person with an income of one hundred pounds a year would suffer more by losing ten pounds than he would gain by an addition of ten pounds, because the degree of utility of money to him is considerably higher at ninety pounds than it is at one hundred and ten. On the same principle, all gaming, betting, pure speculation, or other accidental modes of transferring property involve, on the average, a dead loss of utility. The whole incitement to industry and commerce and the accumulation of capital depends upon the expectation of enjoyment thence arising, and every variation of the currency tends in some degree to frustrate such expectation and to lessen the motives for exertion.
7. Cognisability
By this name we may denote the capability of a substance for being easily recognised and distinguished from all other substances. As a medium of exchange, money has to be continually handed about, and it will occasion great trouble if every person receiving currency has to scrutinize, weigh, and test it. If it requires any skill to discriminate good money from bad, poor ignorant people are sure to be imposed upon. Hence the medium of exchange should have certain distinct marks which nobody can mistake. Precious stones, even if in other respects good as money, could not be so used, because[Pg 25] only a skilled lapidary can surely distinguish between true and imitation gems.
Under cognisability we may properly include what has been aptly called impressibility, namely, the capability of a substance to receive such an impression, seal, or design, as shall establish its character as current money of certain value. We might more simply say, that the material of money should be coinable, so that a portion, being once issued according to proper regulations with the impress of the state, may be known to all as good and legal currency, equal in weight, size, and value to all similarly marked currency….
FOOTNOTES:
[4]W. Stanley Jevons, Money and the Mechanism of Exchange, pp. 29-39. D. Appleton & Company, New York, 1902.
CHAPTER IV
LEGAL TENDER[5]
The essential idea of “legal tender” is that quality given to money by law which obliges the creditor to receive it in full satisfaction of a past debt when expressed in general terms of the money of a country. A debt is a sum of money due by contract, express or implied. When our laws, for instance, declare that United States notes are legal tender—and this is the only complete designation of a legal-tender money—for “all debts public and private,” it must be understood that this provision does not cover any operations not arising from contract. Current buying and selling do not make a situation calling for legal tender; a purchaser cannot compel the delivery of goods over a counter by offering legal-tender money for them, because, as yet, no debt has been created.[6]
Contracts made in general terms of the money units of the country must necessarily often be interpreted by the courts. The existence of contracts calling for a given sum of dollars and the necessity of adjudicating and enforcing such contracts, require that there should be an accurate legal interpretation of what a dollar is. As every one knows, the name, or unit of account, is affixed to a given number of grains of a specified fineness of a certain metal. This being the standard, and this having been chosen by the concurring habits of the business world, it is fit that the law should designate that, when only[Pg 27] dollars are mentioned in a contract, it should be satisfied only by the payment of that which is the standard money of the community.
Since prices and contracts are expressed in terms of the standard article, it is clear that the legal-tender quality should not be equally affixed to different articles having different values, but called by the same name. This method would be sure to bring confusion, uncertainty, and injustice into trade and industry. No one who had made a contract would know in what he was to be paid. The legal-tender quality, then, should be confined to that which is the sole standard. And it is also obvious that when a standard is satisfactorily determined upon, and when various effective media of exchange, like bank notes, checks, or bills of exchange, have sprung up, the legal-tender quality should not be given to these instruments of convenience. They are themselves expressed in, and are resolvable into, the standard metal; so the power to satisfy debts should be given not to the shadow, but to the substance, not to the devices drawn in terms of the standard, but only to the standard itself, even though, as a matter of fact, nine-tenths of the debts and contracts are actually settled by means of these devices. So long as these instruments are convertible into, and thus made fully equal to, the standard in terms of which they are drawn, they will be used by the business community for the settlement of debts without being made a legal tender. And whenever they are worth less than the standard they certainly should not be made a legal tender, because of the injustice which in such a case they would work.
Having shown that the legal-tender quality is only a necessary legal complement of the choice of a standard, it will not be difficult to see that the state properly chooses an article fit to have the legal-tender attribute for exactly the reasons that governed the selection of the same article as a standard. The whole history of money shows that the standard article was the one which had utility to the community using it. As the evolution of the money commodity went on from cattle to silver and gold, so the legal-tender provisions naturally followed this course.
A state may select a valueless commodity as a standard,[Pg 28] but that will not make it of value to those who would already give nothing for it; and so, it may give the legal-tender quality to a thing which has become valueless, but that will not of itself insure the maintenance of its former value. This proposition may, at first, appear to be opposed to a widely-spread belief; but its soundness can be fully supported. It should be learned that a commodity, or a standard, holds its value for reasons quite independent of the fact that it is given legal recognition. It has happened that legal recognition has been given to it because it possessed qualities that gave it value to the commercial world, and not that it came to have these qualities and this value because it was made a legal tender.
A good illustration of this truth is to be found in international trade. Money which is not dependent on artificial influences for its value, and which is not redeemable in something else, is good the world over at its actual commercial value, not at its value as fixed by any legal-tender laws. It is not the legal-tender stamp that gives a coin its value in international payments. A sovereign, an eagle, a napoleon, is constantly given and received in international trade not because of the stamp it bears, but because of the number of grains of a given fineness of gold which it contains—the value of which is determined in the markets of the world. And an enormous trade among the great commercial countries goes on easily and effectively without regard to the legal-tender laws of the particular country whose coins are used.
By imposing the attribute of legal tender, however, upon a given metal or money, it may be believed that thereby a new demand is created for that metal, and that its value is thus controlled. And in theory there is some basis for this belief. It is, of course, true that, in so far as giving to money a legal-tender power creates a new demand for it (which without that power would not have existed) an effect upon its value can be produced. But this effect is undoubtedly much less than is usually supposed. It must be remembered that the value of gold, for instance, is affected by world influences; that its value is determined by the demand of the whole world as compared with the whole existing supply in the world. In order to affect the value of gold in any one country, a demand created[Pg 29] by a legal-tender enactment must be sufficient to affect the world-value of gold. Evidently the effect will be only in the proportion that the new demand bears to the whole stock in the world. It is like the addition of a barrel of water to a pond; theoretically the surface level is raised, but not to any appreciable extent.
It may now be permissible to examine into the extent to which a demand is created by legal-tender laws. If the article endowed with a legal-tender power is already used as the standard and as a medium of exchange, it is given no value which it did not have before. The customs and business habits of a country alone determine how much of the standard coin will be carried about and used in hand-to-hand purchases, and how much of the business will be performed by other media of exchange, such as checks or drafts. The decision of a country to adopt gold—when it had only paper before, as was the case in Italy—would create a demand for gold to an extent determined by the monetary habits of that country; and this demand has an effect, as was said, only in the proportion of this amount to the total supply in the world. This operation arises from choosing gold as the standard of prices and as the medium of exchange. To give this standard a legal-tender power in addition does not increase the demand for it, because the stamp on the coin does not in any way alter the existing habits of the community as to the quantity of money it will use.
But in case an equal power to pay debts is given to fixed quantities of two metals, while each quantity so fixed has a different metallic value but the same denomination in the coinage, Gresham’s law is set in operation with the result that the cheaper metal becomes the standard. After this change has been accomplished, the legal tender has no value-giving force. When the cheaper metal has become the standard, its legal-tender quality does not raise the value of the coin beyond the value of its content. This cheaper standard, in international trade, would be worth no more in the purchase of goods because it bore the stamp of any one country. Prices must necessarily be adjusted between the relative values of goods and the standard with which they are compared. If the[Pg 30] standard is cheaper, prices will be higher, irrespective of legal-tender acts. Where two metals are concerned, then, the only effect of a legal-tender clause is an injurious one, in that the metal which is overvalued drives out that which is under-valued.
The example of an inconvertible paper, such as our United States notes (greenbacks) in 1862-1879, is still more conclusive. Although a full legal tender for all debts public and private, their value steadily sank until they were at one time worth only 35 cents in gold. In California, moreover, these notes, although legal-tender, were even kept out of circulation by public opinion. In short, the value of inconvertible paper can be but little affected by legal-tender powers. Its value is more directly governed, as in the case of token coins, by the probabilities of redemption.[7] As bearing on the point that the value of the paper was more influenced by the chances of redemption than by legal-tender laws, we may cite the sudden fluctuations in the value of our United States notes during the Civil War. With no change in the legal-tender quality and no change in the indebtedness which might be paid with such notes, their value frequently rose or fell many per cent. in a single day owing to reports of Federal successes or defeats in battle, which had a tendency to affect one way or the other the public estimate of the probabilities of an early resumption of specie payments. The fact that they were legal tender evidently had no effect whatever in maintaining their value.
In view of the evident fact that legal-tender acts do not preserve the value of money, it is clear that the demand created by such legislation must be insignificant. And this must be so in principle as well as in fact.
There is but one thing which the legal-tender quality enables money to do which it could not equally well do without being a legal tender; that is, to pay past debts. An examination, however, shows that this use of money is very small compared with its other uses. The amount of past debts coming due and which might be paid in any year, month or day is insignificant when compared with the total transactions of that[Pg 31] year, month or day—so very small as to lose all measurable value-giving power. In other words, the one thing which legal-tender money can surely do in spite of the habits, wishes or prejudices of the business community in which it exists, namely, cancel past debt, is infinitesimally small when compared with those other things which man wishes money to do for him. It is for this reason that it ceases to give value, and this is why history has shown so many instances where money endowed with legal-tender power has become utterly valueless. The legal-tender money is no longer money if it will not secure for man the things which are most important for his welfare, if it will not buy food, clothes and shelter; for it performs none of the functions of money except the subsidiary one of cancelling past debts.
Moreover, the obligatory uses of legal-tender money are in fact very inconsiderable. A law requiring a past debt to be satisfied with money of a certain kind has for its essence only the payment of something of a definite value, or its equivalent; in practice, it does not even bring about the actual use of a legal money, since the monetary habits of the community will not necessarily require the debt to be paid in such money. Take the extreme case of a judgment by a court against a defendant for fulfilment of a contract; in such an example, of all others, it would be supposed that legal money would be exacted. But even here, the judgment would most probably be satisfied by the attorney’s check, or at most by a certified check. If such media of exchange are of common usage in the community they will be resorted to in practice even for legal-tender payments.
The necessity of paying that which would be mutually satisfactory to payer and payee also makes clear why the existence of a legal-tender money does not necessarily cause its actual use in payments. The business habits of the community are stronger than legislative powers. Business men will not as a rule take advantage of a legal-tender act to pay debts in a cheaper money, if they look forward to remaining in business. For, if, by taking advantage of legal devices they defraud the creditor, they cannot expect credit again from the same source; and since loans are a necessity of legitimate[Pg 32] modern trade, such action would ruin their credit and cut them off from business activity in the future. Gold was not driven out of circulation by paper money during the years 1862-1879 in California, because the sentiment of the business public was against the use of our depreciated greenback currency; and a discrimination was made against merchants who resorted to the use of paper.
Explanation has been given of the principles according to which legal-tender laws should be applied, if at all. It is not wholly clear that there is any reason for their existence. It may now be well to indicate briefly the origin of legal-tender provisions. It can scarcely be doubted that their use arose from the desire of defaulting monarchs to ease their indebtedness by forcing upon creditors a debased coinage. Having possession of the mints, the right of coinage vesting in the lord, the rulers of previous centuries have covered the pages of history with the records of successive debasements of the money of account. The legal-tender enactment was the instrument by which the full payment of debts was evaded. There would have been no reason for debasing coins, if they could not be forced upon unwilling creditors. It is, therefore, strange indeed that, in imitation of monarchical morals of a past day, republican countries should have thought it a wise policy to clothe depreciated money with a nominal value for paying debts. Although the people are now sovereign, they should not embrace the vices of mediæval sovereignty for their own dishonest gain in scaling debts.