A Fraudulent Standard

CHAPTER IX**AN INVARIABLE MONETARY UNIT**

ALTHOUGH the question of an invariable monetary unit or standard, has of late received the more serious attention of economists than formerly, it is still regarded by the majority as practically unattainable. And yet it is selfevident that no honest or equitable currency system can be established, without the discovery and adoption of some such unit. So long as economists cling to the popular superstition which regards value as a physical property of commodities, like porosity and, ductility, so long will they be justified in regarding the pursuit of an invariable unit of purchasing power, as an ignisfatuus.

Although the problem at first sight, appears far more difficult than that which our earlier scientists were called upon to solve in discovering the conditions necessary to obtain invariable units of physical measurement, like those of length and weight, there are certain data which lead us to believe that the problem can be solved.

We have already seen that exchange-values are the relations which commodities hold to each other as expressed by the relative quantities in which they become exchange-equivalents. We know also that all commodities are of equal exchange-value when arranged in certain quantities at any given time, and that the values of these commodities per unit of quantity are inversely proportional to the numbers representing these quantities.

We know further that the wealth of any nation or community must be a certain—although probably unknown—multiple of the purchasing power of any single commodity composing such wealth at any given instant of time. It is also a mathematical fact, as stated by Mr. C. Moylan Walsh in his *Fundamental Problem in Monetary Science*, that the total exchange-values of all things in given quantities together are constant, and the general exchange-values of any one commodity or of money is to be estimated only by reference to the total of other commodities.

We also know from the quantitative theory of money that exchange-values remain invariable so long as the two forces of supply and demand remain equal.

With the above data we ought to succeed in solving this problem of all the ages.

The key to this solution has already been given in Chapter V.

We start with the assumption that all wealth consists of a certain but unknown number of parts of equal exchange-value at any given instant of time. These parts are necessarily of different dimensions, weights, quantities, etc., but they constitute exchange-equivalents at a given instant of time.

The total number of these parts we call X. This number depends upon the magnitude of each division.

We might, for example, divide the wealth of the United Kingdom into ten million imaginary parts all of equal value at a given time and call the value of each division a “ pound,” a “ rouble,” a “King,” or a “Briton,” or simply y. Such a unit would represent a definite fraction, viz., ^{1}/_{10,000,000}th part of the national wealth at the time when the system started.

Fortunately, for convenience’ sake, we don’t have to adopt anything quite so novel nor so revolutionary. Our national wealth is already expressed in terms of pounds, shillings and pence, so that we do not have to invent any other monetary denomination. All we have to do is to make the pound an invariable unit, which can be done by attaching it permanently to the exchange value of the golden sovereign or one pound note at a given time and **holding it there**, so that whatever tricks gold may play in the future, will not affect the general purchasing power of the one pound monetary unit. We could start the system say at noon January 1st, 1918, by representing all our national wealth as equivalent in value to X pounds. Hence the pound unit would represent
the value of ^{1}/_{x}th of the national wealth at that
particular time. Since this wealth is naturally changing in volume every second of time, it follows that the fraction ^{1}/_{x} applies only to the time we commence.

For example, suppose we start at noon, as stated, January 1, 1918. Our wealth is then X pounds. Suppose by noon, January 1, 1919, our wealth has increased 10 per cent., then our total wealth = (X+^{1}/_{10}X) pounds and the pound which equalled ^{1}/_{x}th of the national wealth, January 1, 1918—becomes ^{1}/_{X+1/10X}th of the national wealth in January, 1919.

Reduced to actual figures it would appear as follows. Suppose our national wealth to be equal to £12,000,000,000 in January, 1918, and to increase 10 per cent. by January, 1919. Our pound at first is ^{1}/_{12,000,000,000}th part of 12,000,000,000 and in 1919 it is ^{1}/_{13,200,000,000}th part of £13,200,000,000, which shows that the pound remains invariable in relation to the national wealth when the system was started. So much for the theoretical side of the problem. But what of the practical side ? What of the monetary system ? How can we hold the pound to its original dimensions ? This depends entirely upon keeping the supply of currency units proportional to the demand. In other words the issue of money, whether credit or legal tender, must be maintained at all times equal to the demand in order to preserve the invariability of the value of the pound. ... As we have seen, the material of which the pound is made doesn’t affect its value unless it affects the number of pounds issued, and so affects the supply.

The question of an invariable unit or standard therefore depends wholly upon our banking and legal-tender laws as they affect the money supply.

The next part of the problem is, by what means can the supply be kept proportional to the demand ? The answer to this will be found by ascertaining what causes the monetary unit to vary under present conditions.

Money becomes more valuable whenever wealth is offered in exchange for it in a greater proportion than that which the prevailing money prices represent. For example, supposing in a given trading community the volume of money—including both legal tender and credit—is represented by £100,000,000, which at a given velocity of currency circulation effects an annual turn-over of £1,000,000,000. Supposing some financial syndicate to succeed in withdrawing £50,000,000 of this currency, and the producing and trading classes continue to send the same quantity of goods to market as previously, it is evident that the amount of the turn-over (supposing, of course, that the velocity of currency circulation remains the same) will now be represented by £500,000,000—instead of £1,000,000,000, notwithstanding that the quantity of goods sold is the same as the year previous.

By the mere act of refusing banking accommodation and so reducing the currency by one-half, according to the quantitative theory prices would be reduced to a similar proportion, viz., 50 per cent., whilst the monetary unit would gain in purchasing power 100 per cent. Evidently, therefore, the solution of this question is to be found in establishing a banking system which shall furnish sufficient currency at all times to satisfy the effective demands of trade and industry. This could be safely achieved by issuing credit against wealth in a safe proportion, say from 50 per cent. to 75 per cent. of its legally appraised value.

It will be seen that the money unit here suggested cannot be defined in any fixed commodity terms like the golden pound, and it would have no material existence except as the representative of so much purchasing power, the realization of which would occur whenever it was exchanged for goods or services. Its actual purchasing power would be known by consulting the daily market reports. And whilst the values of commodities would vary from time to time by reason of variations in the supply of and demand for them, the unit would, under the conditions above described, maintain a definite and invariable relation to the quantity of wealth which existed at the particular time the system was initiated.

Although I have suggested continuing the use of the one pound as our denominator and monetary unit, it will be understood that this unit is merely the purchasing power of the pound taken at a given instant of time. The purchasing power of any other commodity, such as a bushel of wheat, a ton of pig iron, etc., might be similarly used if its relations to all other commodities are known when the system is started.

How vast a difference there is between employing a “ commodity monetary unit ” and an “ ideal unit ” as I have suggested, the following will show. An example of the former is Peel’s pound, viz., the golden sovereign, whilst the present one pound Treasury note, which represents merely the **purchasing power** of the sovereign, may be cited as an example of the ideal unit. Provided that the supply is so regulated and maintained that it preserves the uniformity of an invariable index number, the one pound Treasury note would approach the standard of physical measurement so far as reliability and honesty are concerned. Let us imagine a small and isolated community with its own free market where goods are exchanged. This illustration will explain precisely what happens almost continually in the world’s markets. For convenience we will imagine that the only goods brought to this closed exchange circle are the following : 10,000 oranges, 20,000 apples, 30,000 bananas, 400 golden sovereigns. We will further suppose that these groups of commodities are all of equal exchange power in the respective quantities mentioned. Then 10,000 oranges = 20,000 apples = 30,000 bananas = 400 sovereigns. Now it follows that so long as exchanges occur within and are confined to this circle, the wealth which consists of these combined groups of commodities must be represented by a **constant number**, no matter how the exchange relations vary within the circle. For whatever exchange power one group of commodities may lose, a corresponding gain must naturally be acquired by the other groups with which it is exchanged. Indeed this is what we mean when we speak of goods going up and down in price. If bread advances 50 per cent., money becomes cheaper to a similar degree in relation to bread. A simple analogy will make this clearer. Suppose we have a vessel divided into three watertight compartments, A, B, and C (Fig. 1). And
suppose we pour water into each compartment so that the level in A is X, the level in B is Y, and in C, Z. And suppose again that the amount of water in A is 3 gallons, that in B is 2 gallons and that in C equals 1 gallon. Then the total amount of water in the vessel equals 6 gallons. Now it is evident that so long as no water escapes from the vessel, we may alter the respective levels in each compartment without affecting the total volume. We might run a gallon from A into B, or into C, or we might bore holes in the partitions and reduce the water to the same level in all three compartments, but this will not alter the original quantity. If we take the quantities in each compartment respectively as *a, b*, and *c*, we can say that *a* plus *b* plus *c* = 6 gallons, no matter how *a, b*, and *c* may vary with each other. This principle must hold good regarding values for any closed and independent commodity exchange circle such as the combined markets of the world.

To return to our imaginary exchange circle. Let us first use the commodity unit which I have termed **Peel’s pound**.

Then we have :—

EXAMPLE I.

10,000 oranges = 400 (Peel-pounds)

20,000 apples = 400

30,000 bananas = 400

400 sovereigns = 400

The total exchange-values of these goods, viz., oranges, apples, bananas, and sovereigns = £1,600 (Peel-pounds).

Hence

100 oranges = £4

100 apples = £2

100 bananas = £1 6s 8d

1 sovereign = £1

Now let us suppose, soon after establishing our market, an alteration occurs in the exchange relations of these commodities, so that 200 oranges = 100 apples = 400 bananas = £3 (Peel-pounds). Now it is evident that no matter how these exchange-values alter among themselves, the total value of all must be constant, unless the unit itself is fraudulent. Then our total wealth expressed in Peel-pounds has varied as follows :—

EXAMPLE 2.

10,000 oranges = 150 (Peel-pounds)

20,000 apples = 600

30,000 bananas = 225

400 sovereigns = 400

Total = 1,375

Our exchange circle has apparently lost £225 by a mere variation in the exchange relations of the commodities with which we started ! Although we have lost not one solitary portion of our material wealth, not a single sovereign, not an apple, orange or banana, that which was originally represented as equivalent to £1,600 has suddenly fallen to £1,375 ! Surely this is a palpable absurdity ! And yet it is precisely what is happening daily throughout the markets of the world owing to the use of a fraudulent monetary standard. If the Government or the bankers suddenly withdrew from circulation a large proportion of bank credit or legal tender, our national wealth might shrink in terms of money to one-half or less of its present amount, whilst by suddenly increasing the supply of money it would be possible to double our wealth per saltum, i.e., £20,000,000,000 can be made to represent £10,000,000,000, or £40,000,000,000 by the mere manipulation of the money or credit supply which would affect the value of the monetary unit.

Now let us take the ideal unit, viz., **the purchasing power of the sovereign at the time our imaginary market commenced**. We start with the same kind and quantities of commodities as before, sovereigns and all. But our unit is now **not the golden sovereign per se**, but merely its **purchasing power** at the time we started. We have as before a total of 1,600 units of wealth, and this figure must be constant so long as the commodities remain qualitatively and quantitatively the same under any and all variations within our circle. If, then, the exchange relations alter as before, viz., 200 oranges = 100 apples = 400 bananas = £3, we find our commodities represented as follows :—

EXAMPLE 3.

10,000 oranges = £174 11s (Ideal units)

20,000 apples = £698 3 s 6frac12;d

30,000 bananas = £261 16s 4½d

400 sovereigns = £465 9s 1d

Total = £1,600

Here it will be seen how seriously the general purchasing power of the sovereign has changed during the variations in the exchange relations of the other commodities which the sovereign is supposed to measure. By taking the purchasing power of the sovereign at a **given time**, i.e., the time our market first opened, we are thus able to express the **variations in the value of gold itself**, which is quite impossible where the gold standard is used. In the last illustration our 400 sovereigns, which originally represented 400 units of purchasing power, have grown to represent 465^{5}/_{11}th units, that is, each sovereign is worth nearly 16½ per cent. more than when we started, **in relation to all these other commodities !**

The serious difference between these two results may be readily seen.

WITH THE PEEL-POUND. WITH THE IDEAL POUND.

100 oranges = £1 10s 0d 100 oranges = £1 14s 11d

100 apples = £3 0s 0d 100 apples = £3 9s 9¾d

100 bananas = £0 15s 0d 100 bananas = £0 17s 5¼d

100 gold soveregns = £100^{1}100 sovereigns = £116 7s 3¼

The illustration just given is worthy of careful study, for it exposes the character of the fraud which any commodity-money standard—and particularly the gold standard—perpetrates upon the industrial and trading classes universally. We started our imaginary market by assuming that the whole of our marketable wealth consisted of 1,600 divisions or groups of commodities of equal exchange value. The number of these divisions is determined by the particular unit adopted. In this instance we adopted the gold sovereign. These 1,600 groups are made up as follows :—

EXAMPLE 4.

400 groups of oranges of 25 each = 10,000

400 groups of apples of 50 each = 20,000

400 groups of bananas of 75 each = 30,000

400 sovereigns of 1 each = 400

Total 1,600 groups or divisions.

Now let us see what happens to these groups after their exchange-values have altered as described in Example 2. Here again the grouping and number of divisions depend upon our standard unit. If we keep our original golden-sovereign-unit after the change in values, the following are the results of dividing our original wealth into groups of equal exchange-value corresponding to that of the sovereign viz. :—

EXAMPLE 5.

150 groups of oranges of 66.6 each = 10,000

600 groups of apples of 33.3 each = 20,000

225 groups of bananas of 133.3 each = 30,000

400 groups of sovereigns 1 each = 400

Total 1,375 groups.

Here it will be seen that although we have not lost a single commodity we have somehow lost 225 groups of commodities equal to £225. And this is due to our using the commodity gold unit and assuming that it remains unchanged, although the values of all the other groups have varied ! This assumption is equivalent to the belief that in a vessel containing water and fitted with compartments as in Fig. 1, but perforated with holes near the bottom so that the water has a free passage to each compartment, it is possible to force down the level of the water in one compartment without raising the level in all the others !

Just here it should be pointed out that when we speak of gold or the golden sovereign as a unit, we mean its **variable** purchasing power as it varies from time to time. As we have already
shown, **neither gold nor any other commodity can function as a unit of value or purchasing power. But the purchasing power of a given commodity can so function, and since this is continually fluctuating, it creates all the economic evils in trade that a variable standard of length would create in our manufacturing industries**.

Now let us examine the case where our unit is equivalent to the purchasing power of the sovereign at the time **when our market first opened**. The invariability of this unit is shown by our ability to maintain the same number of groups or divisions into which our wealth was originally divided, each of which was the equivalent of the sovereign, in spite of any changes in the exchange relations of these commodities. It maintains an invariable value relation to the total quantity of goods within the circle.

After the alteration in the exchange relations, we get the following grouping by maintaining the same number of divisions (Example 3) :—

EXAMPLE 6.

174^{11}/_{20}divisions of oranges at 57.25 each = 10,000

698^{3}/_{20}divisions of apples at 28.64 each = 20,000

261^{17}/_{20}divisions of bananas at 115 each = 30,000

465^{9}/_{20}divisions of sovereigns at .86 each = 400

Total 1600 divisions.

It will of course be understood that these groupings are imaginary and need not be realized in practice. Here we find our unit remaining invariable with its original value after the change in the values of our various groups has occurred. That is to say it represents precisely what it did at first, viz., 1/1600th part of the total wealth of our exchange circle. During the change in values the sovereign gained about 16½ per cent. in purchasing power. It will be seen that this number of divisions is a purely arbitrary matter, and it would make no difference to the results whether we made our unit 1/1600th part or 1/800th part or 1/100th. **The main thing is to preserve the relation of the unit to the whole of our marketable wealth at the given time and place when and where our system started**. Invariability is what the world has been vainly groping after for ages. And as already stated this unit or standard would agree with the tabular standard, provided such table included all marketable commodities and every market transaction—an almost impossible task. I take it, however, that the result would be the same if we adopted our present value denominations—pounds, shillings and pence—and started on a given day to issue credit and legal-tender notes against existing wealth as already suggested in this chapter.

The economic evils of the present gold standard can readily be seen by the illustrations given. Suppose the orange merchant borrowed £100 when the exchange relations started. At that time this amount represented the equivalent of only 2,500 oranges. And now suppose he is called upon to repay the loan after the changes in values in Examples 2 and 3. Under the gold standard he must sell 6,666 oranges in order to secure the £100, with which to repay his loan. But under the invariable ideal standard he has only to sell 5,714 ! Of course, he has already lost on the loan by borrowing money when oranges were dear. But this is due to changes in the market relations of commodities and not to any changes in the money standard. It will be seen then that the gold standard has robbed him of 952 oranges on this loan transaction, apart from any interest charges.

And this is what is happening in every country the world over. People are robbed of their wealth and labour by the insidious, silent, secret operations of this fraudulent standard ! Every producer, other than the gold miner, every person in fact, is forced by law and circumstances to buy money with his services or produce. He must have money to pay his debts and taxes. And the all-important question is, “ How much of my services or produce must I give for a pound ? Is it to be so much this year and twice as much next year ? ” Similarly, if one is promised payment for goods or services rendered, one wants to know how much general wealth, goods that one requires, this payment will represent. If, for instance, the orange merchant (in Example 1) offered to pay one sovereign to a creditor, it would make a considerable difference both to the merchant and his creditor whether the sovereign represented 1/1600th part of all the goods in the market or 1/1375th part as in Example 2. Hence it is essential to know that money preserves a fixed relation to wealth in general.

It may be objected that such a unit is impossible since the volume of wealth is continually changing from hour to hour, and also because it is impossible to tell at any time exactly what proportion any given quantity is to the whole. We have already seen that wealth is necessarily some multiple of any unit that may be adopted. If we take the whole of our marketable wealth at a given instant of time, it can be represented as equivalent to X times one pound. And all additions and subtractions from such wealth would be additions or subtractions of so many pounds, i.e., so many fractional parts of the total wealth. It is not essential to transform the system into numbers.

The preservation of the ratio of the unit to the wealth of the community from the time the system started would be entirely dependent upon maintaining the supply of money equal to the demands of trade and commerce. This condition means simply freedom and means for the mobilization of all wealth as required, allowing a proper margin for fluctuations in values.

It also means permanently divorcing legal tender from its age-long association with both gold and silver !

^{1} Hence one sovereign equals £1 3s. 3½d. ideal units under the altered exchange relations.