A Fraudulent Standard

CHAPTER VII

THE GREAT PEEL FALLACY



SIR ROBERT PEEL, to whom we owe our present banking laws, attempted to deal with the whole subject of a standard of value in his speech delivered in the House of Commons, May 6, 1844, prior to his introduction of the famous Bank Charter Act.

“ My first question,” said Sir Robert Peel, “ is, what constitutes this measure of value ?  What is the significance of the word ‘ pound’?  Unless we are agreed on the answer to these questions, it is in vain we attempt to legislate on the subject.  If a ‘ pound ’ is a mere visionary abstraction, a something which does not exist either in law or practice, in that case one class of measures relating to paper currency may be adopted, but if the word ‘pound,’ the common denomination of value, signifies something more than mere fiction—if a ‘ pound ’ means a quantity of the precious metals of certain weight and certain fineness—if that be the definition of a ‘ pound,’ in that case another class of measures relating to paper currency will be requisite.  Now, the whole foundation of the proposal I am about to make, rests upon the assumption that according to practice, according to law, according to the ancient monetary policy of this country, that which is implied by the word 'pound’ is a certain definite quantity of gold with a mark upon it to determine its weight and fineness, and that the engagement to pay a 'pound’ means nothing, and can mean nothing else, than the promise to pay the holder, when he demands, that definite quantity of gold.  What is the meaning of the ‘ pound’ according to the ancient monetary policy of this country ?

“ The origin of the term was this :  In the reign of William the Conqueror a pound weight of silver was also the pound of account.  The ‘ pound ’ represented both the weight of metal and the denomination of money.

“ By subsequent debasement of the currency a great alteration was made, not in the name, but in the intrinsic value of the pound sterling, and it was not until a later period of the reign of Queen Elizabeth that silver, being then the standard of value, received that determinate weight which is retained without variation, with constant refusals to debase the standard of silver, until the year 1816, when gold became the exclusive standard of value.”

By this definition of the monetary pound, which forms the basis of our Legal Tender and Bank Charter Acts, Sir Robert Peel forged a chain which has hampered our trade and industries and has shackled the feet of labour and capital for the past seventy years.  Moreover the definition is one of the greatest fallacies ever uttered !  It will be observed that Peel claimed that his definition agreed with “ practice,” “ law ” and “history.”  Here we get a glimpse of the official mind of the average British statesman.  Neither reason nor lessons from experience are permitted to interfere with tradition.  Sir Robert Peel treated the pound, not as an invention—the mechanism of exchange—which like all inventions is capable of improvement from time to time,—but as though it were some subject of natural history.  The barbarism and ignorance of mediæval times must be handed down century after century, and perpetuated by Acts of Parliament in order to conform to tradition !

golden sovereign One has only to put the definition of a “ pound ” to a practical test to see how absurd it is.  According to Peel, the promise to pay a pound in English money means “the promise to pay a definite weight of gold with a mark upon it to determine its weight and fineness.”  Is this true ?  Put it to the test.  Ask any tradesman, manufacturer, wage-earner or professional man—in fact any person outside of the banking, bullion or money­lending profession—the weight of gold in a sovereign, and there is not one in a thousand, probably not one in ten thousand, who could answer without referring to a text-book or a banker.  Peel actually led himself to believe that when a mechanic or tradesman offered his services or goods for the sum of £3 17s. 10½d., he was not stipulating for so much purchasing power with which to purchase so much food, clothing and comforts, but one troy ounce of gold !  Nobody outside of a bullionist’s or money changer’s office ever thinks of or employs money in terms of its weight.  To tell the average man that a Dread­nought costs between twenty and thirty tons of gold would convey no intelligible idea.  He would have first to convert tons into grains and grains into sovereigns to grasp the meaning of such an equation.  Peel’s definition is untrue on the face of it.  It has never been true since coinage was generally adopted.  It was no truer in Peel’s time that it is to-day.  This is proven by the fact that in the very Act which he later introduced and foreshadowed in his speech from which I have quoted, he provided that the Bank of England could issue £11,000,000 in notes against the National Debt without keeping an ounce of gold in reserve for their redemption !

If Peel’s definition and statements were correct, the issue of these notes was nothing less than a legalized fraud !  Within two years after the Bank Charter Act became law the complete refutation of Peel’s financial theories was demonstrated by the panic of 1847, which was stopped by suspending gold payments and permitting the Bank to issue inconvertible notes !  The same thing occurred in 1857, and again in 1866.  So long as the public could draw bank-notes with which to pay their private debts and taxes they cared little or nothing for gold.  The notes did their work as the medium of exchange and saved the nation on each and every occasion.  Moreover, since August, 1914, every inhabitant of Great Britain has witnessed the daily refutation of Peel’s definition of the “pound.”

What was the cause of Peel’s failure to grasp the true meaning of money ?  Apparently he had been greatly influenced by Lord Overstone, the chairman of Lloyds Bank, and by various foreign traders.  Sir Robert confined his attentions exclusively to the value of the pound in the foreign exchanges, where trade is barter pure and simple and money, properly speaking, does not function.

Unintentionally, no doubt, his legislation was solely for the benefit of the bankers and foreign traders.  Sir Robert’s chief object appears to have been to make the British pound valuable abroad where its legal tender functions disappear, and the commodity alone counts.

By doing this, he not only robbed his country of the use of its credit (associated with legal tender) but exposed British industry and trade to the ravages of foreign merchants who could exercise adverse influence upon our markets.  They could send their commodities and take our gold in exchange, reducing our currency and credit facilities and thereby crippling our home trade, whilst increasing the credit facilities in their own country.

The fundamental error into which our statesmen fell was through confounding gold with its legal tender powers—in failing to distinguish between the metal and the functions legally conferred upon it.  It is too often forgotten that gold owes its universal economic supremacy entirely to the laws and customs of nations which have made it compulsorily the debt-paying instrument.  Any other metal would acquire the same power and value by similar legalization provided its supply could always be controlled within similar bounds.

Legal tender is as much an invention—a mere contrivance for effecting certain ends—as the telephone or the sewing machine.  If we take a sovereign and examine it we find it consists of a certain mass of gold alloyed with copper, shaped as a circular disk with milled edges, and bearing certain images and inscriptions.  Now, in what part of the coin does the money reside ?

Suppose we take a hammer and carefully deface the inscriptions, or suppose we melt it and reduce it to a mere mass of alloy.  Evidently we have destroyed the money !  No one would take it as a piece of money.  Its monetary functions have vanished, and they can only be restored at the Government Mint by recoinage.  Although the commodity remains as before so far as weight and quality of metal are concerned, the legal tender functions conferred originally by the State having been destroyed, can only be reconferred similarly by the State.  And if after melting the sovereign the coinage laws should be repealed and the Mint closed to the free coinage of gold, we should find the legal tender functions of the defaced sovereign had been destroyed for ever.  Examples of this were given during the great silver agitation in the United States twenty years ago, after the silver coinage laws were repealed.  Silver dollars were worth the same as paper dollars, and five silver dollars were exchangeable for a five-dollar gold coin.  But when a silver dollar was melted, its value as money was entirely destroyed, whilst the silver of which it was composed was worth only its commodity price, viz., one half of the dollar.  In short, the doctrine which certain British and American economists had hitherto preached, viz. that “money is a commodity, and its value depends entirely upon the material of which it is made,” was demonstrated to be utterly false !

In spite of these object lessons, there are still many writers who have the temerity to propound the same stupid theory.

Legal tender functions conferred by the Government upon the precious metals can and do add to the commodity-values of these metals by increasing the demand for them.  But the value of these metals in the arts can never increase their legal tender value.  If, for example, gold is worth more as a commodity than as money, it would immediately be withdrawn from circulation.  Consequently gold coins owe their purchasing power wholly to their legal tender privileges.

It has been claimed by certain Socialist writers that the gold standard is virtually a labour standard.  They assert that the high esteem in which the so-called precious metals are held, is really due to the labour expended in producing them, and consequently gold represents “ frozen labour.”  There is, of course, no truth in the assertion, as a moment’s consideration will show.  The gold nuggets found by accident, requiring practically no labour, have the same purchasing power as that produced after years of search and toil.  There is no difference in the value of the gold produced by the cheap cyanide process and that from the more expensive roasting treatment of arsenical pyrites.  A considerable amount of the gold in use was produced by cheap Chinese and even slave and convict labour.  Is this the sort of labour such writers would wish to establish as a “ standard ” ?  To get over this difficulty, some writers claim that we must take the average labour expended.  But what is the average between free and slave labour ?  And how is one to average the cost and productiveness of labour expended 1,000 years ago and that of to-day ?

The world’s supplies, we must remember, are the accumulations of many centuries.  Some authorities have tried to prove that the real cost of our gold supplies is far in excess of its present value.  If we include the oppression, the suffering and misery the use of this metal has inflicted upon humanity as part of the costs, there can be no doubt as to the truth of this claim.

Evidently, therefore, labour cannot be either the cause or the “ measure ” of the value of the precious metals.

It must be evident to any one who gives the subject the slightest consideration that the monetary “ pound ” cannot possibly be a certain weight or mass of a certain metal.  To reduce the definition to common sense, one must regard the “ pound ” merely as the purchasing power of the legal tender unit.  It would be just as rational to define the standard of length as the weight of the bronze bar and gold studs which fixes the British yard measure, as to define the monetary pound in terms of so many grains of gold.  Let us take another illustration.

According to Peel’s definition, it would be utterly impossible to express or calculate the wealth of nations or communities in monetary terms with any approximation to truth.  Take the wealth of Great Britain, which is variously estimated at from £15,000,000,000 to £20,000,000,000.  What is the meaning of these figures ?  According to Peel, they mean 15,000,000,000 to 20,000,000,000 golden sovereigns—or more correctly, somewhere between 150,000 and 200,000 tons of pure gold !  This amount is probably from four to five times more than all the gold that has ever been produced !  Moreover, if it were suddenly produced, it would be worth less than the gold already existing, which is one of the many paradoxes with which this science abounds !  For such a vast augmentation of the supply would be likely to create panic and lead to its demonetization.  Evidently old Euclid had not studied the laws of value when he wrote his famous axiom that “ the whole is greater than a part.”  In short, Peel’s definition makes all financial calculations and expressions of large sums meaningless.  What every one means by these figures is not so much weight of gold, but 15,000,000,000 times the present purchasing power of one pound !

Between these definitions, viz., a certain weight of gold and the purchasing power of that gold when coined, there is all the difference in the world.  A monetary system based on the former definition involves an exclusively gold currency.  If a pound is what Sir Robert Peel defined it, then it must be regarded as fraudulent for the Government to authorize the use of any currency other than gold.

Bank of England note Peel’s definition makes the tender of Bank of England notes and Government notes issued against the national credit, a fraud on the public, unless every single note representing a pound is backed by its legal weight in gold !  On the other hand, if the pound is merely the purchasing power of so much gold, it can be expressed and issued in any convenient form—paper, or any other method—so long as it enables the holder to purchase the equivalent of so much gold.  Further, the pound is only the purchasing power of so much gold, so long as the mints remain open to its coinage at the present ratio.  If the mints were ever closed, if the governments of the world were to treat gold as they treated silver, it would soon be discovered that the present purchasing power of gold is due to the legal privilege granted it as the debt-paying instrument.  These laws prevent the metal from falling below the purchasing power of the gold coins defined as monetary units.

The variability of the purchasing power of gold, which must have been known to Sir Robert Peel and his associates, ought to have suggested to our legislators the necessity of defining the standard unit, not with reference merely to a certain weight or mass of gold, but to its purchasing power at a given time and place.  If one promises to pay a given number of pounds at any future time, both debtor and creditor ought to be assured that the pound is not going to vary in relation to the whole realm of commodities generally, by the time the payment is due, because money is accepted in settlement of debts not for obtaining possession of gold or silver coins, but for obtaining the means of purchasing such goods as are needed and desirable.

If Sir Robert Peel had defined the “ standard of value” as the purchasing power of 113 grains of pure gold, he would have been nearer to truth and common sense than when he defined it by weight of metal.  But this definition alone would not establish invariability, which is the very essence of a standard.  Just as the standard of length and weight are fixed in relation to temperature and pressure, so any commodity employed in connection with a unit of purchasing power, should be similarly fixed in relation to time and place.  Thus, supposing Peel had announced that the purchasing power of the pound at noon, January 1, 1845, would thereafter constitute the standard monetary unit throughout Great Britain, he might have established a scientific system which would have ushered in a new era for trade and production.  The pound would then have represented a certain fraction of the total national wealth as it existed at that date.

Of course such a system would have necessitated a properly regulated currency, i.e., where the currency supply would have been arranged to keep pace with the demand, which would have maintained its general purchasing power at a constant level.  Neither gold nor any other commodity-currency, would have functioned under such conditions.  Paper money—which is the money of civilization—would have proved the only rational system.

The relation of money to commodities has often been likened to a balance, one scale of which contains all the money in circulation, and the other scale the commodities sold for money.  Now at any given instant of time, the money scale must balance the commodity scale.  And if Peel’s theories were practicable and rigidly enforced, the money scale would always contain gold and nothing else.  But gold is conspicuous by its absence in the vast majority of exchanges.  Its place is taken by credit consisting of promises to pay gold, which performs the same exchange functions as gold, and is in fact its most active partner.  Gold may be regarded as the silent partner of credit.  If these promises are borrowed from our banks and credit dealers, they cost the borrower just as much as gold itself.

Now the great trouble is this.  In the money side of the scale, these credits—these promises to do the impossible, viz., redeem debts in gold on demand—balance just as many commodities, and therefore weigh as much as the gold they promise to pay.  And as such promises are quickly and inexpensively created, and may be as quickly cancelled, they necessarily produce rapid and sometimes violent oscillations of the balance.  And owing to the legal tender Act which makes gold the basis of debt-settlement, all this credit, this mountain of paper, gives to its owners the same power of purchasing goods, of booming and depressing trade, as if they owned a similar quantity of gold.  The scale is therefore fraudulent.  It gives the public the impression, that for all the goods they send to market, there exists somewhere—in those mysterious bank vaults or in the safes and tills of the money merchants, or some other hiding places—untold millions of bullion or golden sovereigns, the right to which is transferred to them by cheques and bills and other credit instruments.  Only in the realms of Finance and Christian Science does confidence work miracles.  There alone is the mere promise of a thing regarded as equivalent to the possession of the thing itself.

Peel’s law made the banker and financier so powerful, that they could say to trade, to commerce, and industry, “ Except ye believe in us and in our ability to perform our promises, ye shall all perish ” !  And it is this ability of credit to function as gold, that causes such enormous fluctuations in prices and in the conditions of trade and industry.

This illustration of the balance shows why a general rise and fall in prices is possible.  It is merely a movement of the balance in one or other direction.  It means that whatever one side loses in value, the other side must gain.

Any change in the purchasing power of money eventually affects all commodities.  Although the pound may have increased in value, the number of legal tender pounds in circulation are so disproportionate to the goods they exchange, that this increase in the value of the money is a mere fraction of the decrease created in all other goods.  In an exchange of £3,000,000,000, it has been estimated that the total sums of money employed did not exceed £75,000,000.  For this reason a nation can increase its material wealth, whilst apparently becoming financially poorer !

If for every sale of goods, Peel’s pounds were used, if all commodities exchanged were exactly balanced by an equivalent in gold, this paradox of an increase of wealth being represented by a decrease in the money value of such wealth, could not occur.  For the reason that whatever commodities lost, the money material (gold) would gain in value and vice versa, and the balance would then be maintained.

Now by getting rid of commodity money, by employing credit money merely as the representative of wealth, instead of falsely assuming that money Per se is a part of wealth, we get rid of our price scale as a thing apart and distinct from the scale of values, and money would then constitute the common denominator of the values of all commodities, including gold and silver, in the truest sense.  Values and prices would thus become synonymous terms.  The logical conclusion to which we are inevitably driven is one that will no doubt arouse considerable astonishment.  In order that it may satisfactorily perform its necessary functions—particularly that of a value denominator and accurately register the variations in the exchange values of commodities—money must be essentially a valueless token, similar to a railway or theatre ticket.  The one pound Treasury note, of course, meets this definition, provided its issue is not restricted by such absurdities as gold-redemption, and so long as the supply is sufficient to meet all the demands of trade, industry and commerce.