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Home -> Orville Marcellus Powers -> Commerce and Finance -> Chapter XV

Commerce and Finance - Chapter XV

1. Chapter I

2. Chapter II

3. Chapter III

4. Chapter IV

5. Chapter V

6. Chapter VI

7. Chapter VII

8. Chapter VIII

9. Chapter IX

10. Chapter X

11. Chapter XI

12. Chapter XII

13. Chapter XIII

14. Chapter XIV

15. Chapter XV

16. Chapter XVI

17. Chapter XVII

18. Chapter XVIII

19. Chapter XIX

20. Chapter XX

21. Chapter XXI

22. Chapter XXII

23. Chapter XXIII

24. Chapter XXIV

25. Chapter XXV

26. Chapter XXVI

27. Chapter XXVII

28. Chapter XXVIII

29. Chapter XXIX

30. Chapter XXX

31. Chapter XXXI

32. Chapter XXXII

33. Chapter XXXIII

34. Chapter XXXIV

35. Chapter XXXV

36. Chapter XXXVI

37. Chapter XXXVII

38. Chapter XXXVIII

39. Chapter XXXIX

40. Chapter XL

41. Chapter XLI

42. Chapter XLII

43. Chapter XLIII

44. Chapter XLIV

45. Chapter XLV

46. Chapter XLVI

47. Chapter XLVII

48. Chapter XLVIII

49. Chapter XLVIX

50. Chapter L

51. Chapter LI

52. Chapter LII



Money has four functions, viz.: 1. A medium of exchange.
2. A measure of value. 3. A standard of value for future pay-
ments. 4. A store of value.

Money is as essential to the interchange of commodities as
language is to the interchange of ideas. Without some com-
mon medium of exchange it would be absolutely
ExchangT impossible to carry on the manufactures and com-
merce of the country. The rude system of barter-
ing one product for another as the parties may each need, is
only adapted to a low civilization where wants are few and sim-
ple. The history of civilization and progress is concurrent with
the history of money. The breaking up of feudalism in the
middle ages, and the growth of commerce, was due largely to the
introduction and use of money, by which the vassals were able
to pay their rent in money instead of services.

In order to effect exchanges of commodities there must be
an equality of values, and in order to establish this equality of
values a measure of value is necessary. A meas-
Value ure of value in the exchange of commodities is

as necessary as the yard stick or pound weight in
measuring quantities. It is useless to convert all things into
terms of money as a medium of exchange unless this is done at
certain rates, for without fixing the rate or measure of value
between commodities no exchange is possible. In this country
the standard unit of value is the gold dollar consisting of a
certain amount of gold and alloy fixed by act of Congress, and
all values are measured in dollars or parts of a dollar. Al-
though the gold dollar is the standard, it is not necessary that
all payments be made in gold dollars. We use silver, nickel,
copper and paper as actual mediums of exchange, but of course
they are all founded upon the gold dollar as the standard. A
farmer agrees to pay a fixed proportion of his produce as rent,
say one-third of his corn, but when the time arrives for payment
he may, by agreement with the landlord, pay in gold, silver,
paper, wheat, cattle or any other commodity, the quantity
being measured, of course, by the value in gold dollars. In
other words, the medium of exchange or payment may be
different from the measure of value. We may measure in one
thing, and pay in another. The medium of exchange would be
useless unless measured in terms of the standard, and the meas-
ure would be useless without some medium of exchange by which
the transaction could be carried out. A person having an article
for sale desires to know what its value is, compared with other
articles; that is, to have it measured by a common, recognized
standard of value, but he also desires that, when he is ready
to sell the article, there shall be a medium of exchange by which,
he can dispose of all, or as much of it as he desires, without
having to resort to the primitive system of barter.

Since many contracts involve the payment of money at some
distant future time it is essential that money should possess
A standard of stability or uniformity of value. Suppose that in
value for Put- the case of a lease for many years the tenant
agrees to pay a fixed rental in gold, and during the
term of the lease the production of gold at the mines should
be greatly increased doubled, say. The result would be that
the value of gold would diminish and its purchasing power
would be reduced. Prices of other commodities would rise.
A gold dollar would not buy as much of anything as it did
before. Now the tenant would be able to sell his goods at higher
prices but his rent would remain the same in dollars. In this
case the landlord would suffer a disadvantage. Suppose, on
the contrary, that the mines failed to yield the customary amount
of gold for a series of years and gold became scarce. Its scarcity
would increase its value. Then a dollar of gold would have
greater purchasing power and prices of other commodities would
fall. The rent under this long term lease would remain the
same,, however, and the tenant must now pay his rent in dearer
money. The landlord in this case would reap an advantage,
as he would be getting a higher rent the same rent nominally,
but of greater purchasing power.

The whole fabric of the business world is made up of an
endless series of contracts, many of them extending into years
of futurity for their fulfillment, such as contracts
extracts ^ or future delivery of goods, leases of houses and

lands, hiring of services for a term of years, the
settlement of estates of inheritance to be made upon the ma-
turity of minors, or the payment of pensions, annuities or life in-
|'surance, and it is important in all such undertakings that the
money which is our standard of value now, and the basis on
which the contract is made, shall continue uniform and finally
possess the same value or purchasing power at the end of the
period of time for which the contract runs.

Were our standard of value such a commodity as wheat, an
abundant crop would dimmish its purchasing power and cor-
respondingly raise prices of other commodities and vice versa to
the serious injury of one class and the benefit of another. For-
tunately for the commodity gold, which all of the most advanced
nations have chosen as their standard of value, its production
is remarkably uniform. The earth yields a constant and never-
failing supply of the precious metal, not of such abundance as
to affect its value or relieve man of the necessity of giving back
value in labor for value in gold received, yet in sufficient meas-
ure to repay the effort in seeking and mining it. It costs sub-
stantially a dollar in labor generally to get a dollar's worth of
gold out of the earth and coin it into money. Thus gold is
especially adapted to perform this function of the money stand-
ard of value for future payments.

Money may be said to perform a fourth function that of a
convenient means of storing value. When acting as a medium

of exchange it circulates back and forth in the
Value same locality, and may sometimes return to the

same person, but at times a person desires to con-
dense his wealth into small space and perhaps transport it to a
distant country, or hoard it away for a time. Money in the
form of the precious metals affords a convenient means of doing
this. It is true that other commodities of small bulk, imperish-
able quality, and great value, such as diamonds or other precious
stones, might be used for hoarding, and sometimes are, but
their value is not affixed or stamped thereon, and their future
value may not be uniform or stable. gold coins are an exception-
ally convenient means of hoarding or transporting money, and
the facility with which it can be hoarded has a manifest tendency
to beget economy and encourage accumulation, especially among
the industrial classes. The large number of savings banks
throughout the United States, with their enormous total of de-
posits and millions of depositors, is largely the effect of frugality
and saving caused by the facility which the precious metals
afford for hoarding or storing value.

Subsidiary coin or "token money" may be defined as coin,
the nominal value of which as money is greater than its value
as metal, even making allowance for the cost of coinage. When
the government in 1834 changed the legal rate of
making sixteen grains of pure silver equal to one
of pure gold, the silver dollar then became of greater value than
the gold dollar by 2| cents. Naturally people preferred to
pay their debts in the cheaper metal, gold, and silver ceased to
circulate. People who had silver on hand either converted it
to other uses or sold it to brokers who melted it into bullion


and exported it to other countries where its full value could be
realized. We were then without silver for fractional currency,
except worn halves, quarters and dimes which had lost 2J per
cent, of their value by abrasion, and hence were equal in value
to so many cents in gold. Then the increased supply of gold
from California in 1850 caused a still further advance of If
per cent, in the price of silver, driving still more of the white
coin out of the country, and causing the remaining coins to be
still lighter and smoother. To remedy this difficulty and supply
the country with silver for fractions of a dollar, Congress in
1853 passed a law providing for the coinage of
Law of 1853 new silver half dollars, quarters, dimes and half
dimes about seven per cent lighter than the former
ones. There being no inducement to melt these coins into
bullion or export them, they circulated at par with gold (except
during the suspension of specie payments), although their
metallic value was considerably less than their nominal value
as silver. This was the beginning of silver as subsidiary coin
in the United States.

The price of silver continued to fall, as compared with gold,
until 1874, but during all of this time no silver dollars were in
circulation, silver being worth more than gold. In 1873 Con-
gress passed an act demonetizing silver. The
metal in the silver dollar at the time of the pas-
sage of the demonetization act was worth two
cents more than a gold dollar, but the price of silver has since
continued to decline until it has become worth less than half
its nominal value*. It now circulates freely as subsidiary 'coin,
since the amount of silver coined and in circulation is limited
and it is receivable for all. public dues. Receiving it for public
dues is one way of redeeming the coin. Besides silver we

Congress passed an act in February, 1878, remonetizing silver, but not-
withstanding this its value has continued to fall, and it only circulates at
Its nominal value because the Government receives it at the equivalent of
gold at the custom house and tax office.
have subsidiary coin in the form of fractional currency, consist-
ing of copper and nickel. These are redeemable by the govern-
ment in gold when presented in sums of twenty dollars or more.
Paper money consists of printed promises to pay a given
sum of money to the holder on demand. It is the government's

promise to pay. It is not money, in reality, but
paper Money represents money, and circulates instead of the

actual coin. We call it money because it circulates
from hand to hand and performs some of the functions of
money, and because it will purchase our wants the same as
money. It is redeemable or convertible into actual money on
demand, and is issued either directly by the government or by
banks under the authority of the government. There are
several important advantages in favor of the use of paper money.
It is lighter than coin and hence more convenient to carry in
the pocket. Coin loses by abrasion, but paper can be readily
replaced with new. Paper money can be sent through the mails
or transported by express much more easily than coin.

Paper money may be divided into two kinds, distinguished
on account of the origin of each, viz., Fiat Money and Representa-
tive money. These may be further subdivided as follows:
Fiat -4 Treasury Notes
Paper Money
National Bank Bills
Gold Certificates
Silver Certificates

Fiat money consists of promises to pay by the government
direct, or by banks under authority and control of the govern-
ment, founded upon the faith of the people in the
Fiat Money stability and credit of the government. Such
bills are issued under a special law which limits
the quantity, pledges the government to redeem them in gold
on demand, and provides for a sufficient reserve fund of gold coins, to be kept on hand to redeem the bills in circulation.
The advantages of fiat money are that it enables a nation
to increase its circulating medium rapidly, or temporarily, with-
out increasing its stock of precious metals. The increase in the
volume of coin must necessarily be made slowly, as the metal is
mined and coined, but the demands of trade or the exigencies of
war may require an increase in the volume of the money of the
country to be made quickly. ,,Now it has been found by experi-
ence that where public confidence in the government remains
unshaken, a reserve of one dollar in coin is a sufficient deposit
to maintain a circulation of three dollars in paper, on the prin-
ciple that all the bills will not be presented for redemption at
one time.

From the foregoing it must not be inferred that the govern-
ment can create value or make as much money as it chooses.
Government ^he government can no more create value than it
Cannot Create can create gold or coin. It may say how many
grains of gold shall constitute a dollar or how
many pounds shall constitute a bushel of corn. It may decree
that a quantity of gold coins or gold bullion shall be deposited in the
national treasury and it can, within certain limits, issue its paper
promises to pay, representing this real money, but this is the
extent of its power. If it exceeds this limit, and at times there
have been strong temptations to do so, the result is inflation.
The money begins to depreciate and falls below par. It circu-
lates only at a discount, and cannot be exchanged for real money
except at a loss. The people lose faith in it. Gold is driven out
of circulation by it, because, according to the law of values
announced by Sir Thomas Gresham three centuries ago, called
"Gresham's Law," the cheaper money always drives out the
dearer, people preferring to pay their debts with the cheapest
money which their creditors can be induced, or by law compelled,
to accept.

As seen from the foregoing, fiat money may be redeemable
in coin, that is, it may be "convertible" into gold at the will of

160 MONEY.

the holder, or it may be founded only on the faith of the people
in the stability of their government, or "inconvertible." The
Convertible former is a convenience and aid to commerce, be-
and inconvert- cause it increases the circulating medium without
impairing its stability. The latter is inflation
and brings in its train serious financial and industrial dangers.
Representative money consists of certificates of deposit issued
by the government for gold or silver deposited in the treasury.
These certificates circulate as money instead of the
coin wnicn they represent. The coin can be had
by the holder of the certificate upon demand. The
representative money of the United States consists of Gold Certificates and Silver Certificates. The theoretical difference be-
tween these and greenbacks or treasury notes is that the latter is
issued in excess of the redemption fund on which they are based,
while Gold Certificates and Silver Certificates can never exceed in amount
the coin on deposit.

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