Sect. II.—: Circumstances which Regulate the Exchangeable Value of Money.

This branch of our subject naturally divides itself into two parts: 1st, An inquiry into the principles which regulate the exchangeable value of money when the power to supply it is free or unfettered; and, 2d, An inquiry how far these principles are affected by the operation of monopoly.

I. There does not seem to be much room for difference of opinion respecting the circumstances which regulate the value of the precious metals, and their distribution throughout the various countries of the globe. Bullion is a commodity, on the production of which competition operates without restraint. It is not subjected to any species of monopoly, and its value in exchange must, therefore, depend on the cost of its production, that is, on the quantity of labour required to produce it and bring it to market.

If the same quantity of labour always produced the same quantity of bullion, its value would be invariable, and it would constitute a standard by which the variations in the exchangeable value of other commodities might be correctly ascertained. But this is not the case with bullion or anything else. Its value fluctuates like that of other articles, not only according to the greater or less productiveness of the mines from which it is extracted, but also according to the varying skill of the miners, the improvement of machinery, and other circumstances.

In his treatise on Political Economy, Say has a chapter entitled “De la valeur que la qualité d’être monnoie ajoute à une marchandise.” But a little reflection will convince us that this is a mistake, and that the circumstance of the precious metals being used as money adds nothing to their value. Say reasons on the hypothesis, which is equally at variance with principle and fact, that an increase of demand is always productive of an increase of value. The latter, however, depends upon the cost of production; and it is obvious that the cost of a thing may be diminished while the demand for it is increased, and conversely. This is so plain a proposition, as hardly to require to be substantiated by argument. And the instance of cotton goods, the price of which, notwithstanding the vast increase of demand, has been constantly on the decline during nearly a century past, is enough to convince the most sceptical of the extreme erroneousness of Say’s conclusion. But, with regard to the precious metals, it is clear that under ordinary circumstances, or when mining is prosecuted under nearly the same conditions as other businesses, the capital employed in their production must yield the common and ordinary rate of profit; for, if it yielded more than that rate, there would be an influx of capital to the mining business; and, if it yielded less, it would be withdrawn, and vested in some more lucrative employment. And hence, though the demand for gold and silver should, from the adoption of some other commodity as an instrument of exchange, gradually become less, the value of the precious metals would not on that account be reduced. A smaller supply would, indeed, be annually brought to market, and a portion of the capital formerly engaged in the mining, refining, and preparing of metals, would be disengaged. But as the whole stock thus employed yielded only the average rate of profit, the portion which is not withdrawn must continue to do so; or, which is the same thing, gold and silver must continue to sell for the same price. It is true that where mines are, as they almost always are, of different degrees of productiveness, any great falling off in the demand for bullion might, by rendering it unnecessary to work inferior mines, enable the proprietors of the richer mines to continue their work, and to obtain the ordinary rate of profit on their capitals, by selling bullion at a reduced price. In this case the value of bullion would be really diminished; but this diminution would not be occasioned by a falling off in the demand, but by a greater facility of production. On the other hand, an increased demand for bullion, whether it arose from the suppression of paper money, or from a greater consumption of gold and silver in the arts, or from any other cause, would not be accompanied by any rise of price, unless, in order to procure the increased supply, it were necessary to have recourse to less productive mines. If the mines from which the additional supplies were drawn were poorer than those already wrought, more labour would be necessary to procure the same quantity of bullion, and, of course, its price would rise. But if no such increase of labour were needed, its price would remain stationary, though ten times the quantity formerly required should be demanded.

But though true under the circumstances supposed, these conclusions are often much modified in practice. Frequently, indeed, the production of the precious metals partakes very largely of the nature of a gambling speculation. When gold or silver is found in any particular locality, its abundance, and the chances which it affords to adventurers of enriching themselves, are uniformly exaggerated, and an excess of hands is attracted to the pursuit of the metal. In such cases, it commonly happens that, while a few individuals engaged in the business make fortunes, the great mass make little or nothing. But most people being sanguine enough to think that they will be found in the fortunate class, the supply of bullion may be largely increased, and its value reduced, even though the majority of those engaged in its production should be really carrying on a losing employment.

When the gold and silver mines of America first began to be wrought, the most extravagant ideas were entertained of their productiveness; so much so, that they were supposed to be able to bear a duty of half the produce. But it was soon found that the exaction of such a duty would occasion their total abandonment. It was consequently lowered, by successive reductions, to a tenth; and even this was felt to be oppressive, so that, in the end, the duty was fixed at a twentieth part, or five per cent. And, despite this reduction, the trade of mining was generally unprofitable. Ulloa says, that in Peru an individual who embarked in a mining speculation used to be considered as a ruined man, or as having adventured in a lottery, in which, though there were many great prizes, the blanks had a decided preponderance; and, according to Humboldt, nearly the same thing was experienced in Mexico; the search after mines, and the working of them, being there looked upon as a sort of gambling adventure, in which many were ruined, while a few only attained to great wealth.

It remains to be seen whether the result of the extraordinary discoveries in California and Australia will be different. We suspect, however, that it will not; and that in the lottery of these countries, as in that of Mexico and Peru, the blanks will greatly exceed the prizes. It is understood that last year (1856), there were in California above 100,000 persons engaged in the raising of gold, or in the employments subordinate to and immediately connected therewith. And if we estimate the value of the labour of these parties at £100 a-year each, at an average, we shall not probably be beyond, but within the mark; and, on this hypothesis, it would require a sum of £10,000,000 to defray their mere wages. Now, it would appear from the accounts most worthy of credit, that the produce of the gold diggings, &c. of California in 1856, amounted to from £13,000,000 to £14,000,000; and, taking it at the latter amount, which is perhaps exaggerated, still it would only yield £4,000,000 of surplus, which, were it equally divided among the parties employed in raising it, would give £40 to each. But instead of being equally, it is most unequally divided; and, while a few have perhaps realised from £1000 to £2000, or upwards, it is plain that very many can have made little or nothing, not even ordinary wages. And this has also been the case in Australia. But the brilliant prizes, and the stories of cobblers and ditchers whom a fortunate chance has suddenly raised to opulence, have not failed to attract crowds of competitors. And the probability is, that the business of gold-raising will be zealously prosecuted, even though it should make a most inadequate return to the aggregate hands engaged in it. Under such circumstances, the supply of bullion may become, to a considerable extent, independent of the cost of its production; and the value of gold in the market may, for lengthened periods, depend chiefly on its quantity compared with the demand.

Although, therefore, it be true that, under ordinary circumstances, commodities are but seldom brought to market unless they sell at a price sufficient to repay the cost of their production, including therein a reasonable profit to the producers, yet many things occur to disturb the equilibrium between cost and price. And though, in the great majority of instances, such disturbances, when they do occur, are rarely of any very considerable permanency, such may not be the case with gold and silver. The circumstances connected with their production are so very peculiar, that they may be furnished for indefinite periods, and in large quantities, even when they do not really indemnify the great body of their producers.

After gold and silver have been brought to market, their conversion into coin, or manufactured articles, depends on a comparison of the profits which may be derived from each operation. Bullion would not be taken to the mint were it more profitable to send it to a silver-smith; and the latter would not work up bullion into plate, if he could turn it to better account by converting it into coin. Hence the values of bullion and coin in countries where the mint is open to all, and the expenses of coinage are defrayed by the state, must very nearly correspond. When there is any unusual demand for bullion in the arts, coin is melted down; and when, on the contrary, there is any unusual demand for coin, plate is sent to the mint, and the equilibrium of value maintained by its fusion.

So long, therefore, as competition is allowed to operate without restraint on the production of gold and silver, their value will vary, as above stated. And, while gold or silver coins constitute the currency, the prices of commodities, or their values rated in such coins will vary, not only according to the variations in the values of the commodities themselves, but also according to the variations in the value of the metal of which the coins are made.

II. Happily it is not possible to monopolise or limit the supply of the precious metals; but if such a thing were possible, or if none but government could use the mint, or issue coins, the value of the latter would no longer depend on their cost. Suppose, to illustrate the principle, that gold is used as money, that government issues a certain amount of coins and then shuts the mint; and that, after such limitation, the population of the country, and the products to be circulated, are largely increased. In such case it is plain that the exchanges which the limited amount of money would have to perform would be proportionally augmented. A smaller sum would, therefore, have to be appropriated to each transaction, or, which is the same thing, money prices would be diminished. This conclusion is so self-evident as to admit neither of doubt nor cavil. And, therefore, it appears that when the supply of money is limited, the amount of it given in exchange for commodities varies inversely as the demand, and is affected by nothing else.

That we might simplify the subject, we have assumed, in this statement, that the substitutes which may be used for money, and the methods by which it may be economised, were the same throughout the period, when the other changes referred to took place. It is easy, however, to allow for any variation in the one or the other. And, supposing this allowance to be made, it follows, if double the usual supply of commodities were brought to market in a country with a limited currency, that their money price would be reduced a half; and that, if only half the usual supply were brought to market, it would be doubled; and this, whether the cost of their production had increased or diminished. Products are not then exchanged for money, because it is a commodity which may be advantageously used in the arts, and has cost a certain quantity of labour, but because it is the universal equivalent, or legal tender, adopted by the society, and will, as such, be willingly received by every one. The remark of Anacharsis, the Scythian, that gold and silver coins seemed to be of no use but to assist in numeration and arithmetic, would, if confined to a limited currency, be as just as it is ingenious. Sovereigns, livres, dollars, etc., would then really constitute mere tickets or counters for computing the value of property, and transferring it from one individual to another. And as small tickets or counters would serve for this purpose quite as well as large ones, and those of brass, tin, or paper, quite as well as those of gold, there can be no doubt that by sufficiently limiting its quantity, a currency, though destitute of intrinsic worth, may be made to circulate on a level with gold or silver, or higher, if it be desired.

When a currency is mixed, or consists partly of coin and partly of paper-notes immediately convertible into specified amounts of coin, the value of the notes is necessarily measured by, and is in fact identical with the value of the coins which may be obtained for them, and which they are truly said to represent. But when, as has often been the case, notes which are not convertible into coin are notwithstanding legal tender, then it is plain that their value cannot be in any wise dependent on the value of coins. Such notes are not representatives of money, but are themselves a variety of money. They circulate because their issuers have power to make them legal tender, and because money of one kind or other is indispensable. Notes of this description have little or no intrinsic worth, so that their marketable or exchangeable value depends entirely on the extent to which they are issued, compared with the business they have to perform. If their supply be sufficiently restricted, their value may be maintained on a level with that of gold, or even raised above it. In their case everything depends on the discretion of the issuers. If they abuse their power, as they almost invariably do, by throwing too great quantities of notes on the market, their value is proportionally reduced; and if the issuers do not pull up in time, the notes will eventually become, like the assignats in France, wholly worthless.

Speaking generally, the value in exchange of a currency consisting of the precious metals is coincident with the cost of their production. If a sovereign commonly exchange for two or three bushels of wheat, or a hat, it is because the same labour is commonly required for its production as for that of either of these commodities; while, if with an inconvertible paper money, they exchange for a one-pound note, it is because such is the proportion which, as a part of the mass of commodities offered for sale, they bear to the supply of paper in the market. This proportion would, it is evident, be not only immediately, but permanently affected by an increase or diminution either of paper or commodities. But the relation which the latter bear to a freely supplied metallic currency is not permanently changed, except by a change in their cost, or in that of the metals.

We have already seen in how far these conclusions are liable to be affected by the peculiar circumstances under which gold and silver are frequently produced. But however much their value in exchange may diverge for a while from the cost of their production, its uniform tendency is to coincide with that cost; and though the value of bullion, as compared with other articles, may differ very widely at different periods, these differences are usually manifested by slow degrees. The vast extent of the surface over which the precious metals are spread, and the many purposes to which they may be applied, prevents even the largest additional supplies from suddenly reducing their value; while, on the other hand, their great durability prevents any sudden diminution of their quantity, and the influence of a falling off in the supply, from being speedily visible.

It may, therefore, be laid down generally, that the value of money depends on the quantity of it in circulation compared with the exchanges to be effected by its means, or with the business it has to perform. When, however, money consists of coins, their value is most commonly limited by, and proportioned to, the cost of their production; whereas, when it consists of paper, not convertible into coin, its value is exclusively determined by the magnitude of its issues, and has nothing to do with the cost of its production. That cost may, indeed, in its case, be regarded as zero.

Such seem to be the circumstances which regulate the value of money, both when the power to supply it is unfettered by any restraints, and when it is restrained and limited. In the former case, its value depends, like that of the greater number of commodities, on the cost of its production; while, in the latter case, its value is wholly unaffected by that circumstance, and depends on the extent to which it has been issued, compared with the demand.

The conclusions deducible from these principles are most important. A metallic currency, on the coinage of which a high seignorage or duty was charged, and a paper currency not convertible into the precious metals, have been occasionally seen to circulate at the same value with a metallic currency of full weight, and which had been coined at the expense of the state. No rational or consistent explanation of these apparently anomalous results could be given until the effects produced by limiting the supply of money had been appreciated. Now, however, that this has been done, these difficulties have disappeared. The theory of money has been perfected, and we may estimate, a priori, what, under any given circumstances, would be the effect of imposing a seignorage, or of issuing inconvertible paper.