THE MONEY PROBLEM

Chapter XIII.

MONEY SUPPLY AND
DEMAND



AS a necessary consequence of regarding money from the commodity standpoint, economists have found themselves confronted with all sorts of unanswerable problems.  For instance, if money is a commodity, how can we prevent it from fluctuating in obedience to the law of supply and demand ?  And if it is continually varying, how can money be a common denominator of values, or a standard of deferred payments ?  Will not every variation in the supply and demand interfere with its functions as an invariable denominator ?  And why should not this commodity be governed by the law governing other commodities, and its production tend to cheapness and low cost instead of dearness and high cost ?  I have already shewn, when dealing with the subject of price, how a variable denominator disorganizes the whole world of exchange transactions by raising and lowering prices.  Under these conditions, instead of facilitating exchange, this value denominator becomes a hindrance and an obstruction, and in place of functioning as the mere medium of exchange, it dominates and controls it.  Economists shew very clearly how the purchasing power of money rises and falls with every diminution and increase in its supply, the demand remaining constant.  “ The value of money,” says John Stuart Mill, “ other things being the same, varies inversely as its quantity ;  every increase in quantity lowering its value, and every diminution raising it in a ratio exactly equivalent.”*

The result to which economists are naturally led involves an extraordinary contradiction, viz., that exchanges must be limited to the supply of money.  This is what is implied by the expression “ over≠trading.”  This is surely a reversal of the natural order of things.  What would be said of a theory which propounded that the amount of land cultivated should be governed by a certain limited production of agricultural implements, or the volume of railway traffic by the production of locomotives, or the road transportation of the country by an artificially regulated supply of horses ?  And yet, such propositions would be wisdom itself compared to that of allowing commerce to adjust itself to a legally restricted supply of money.  Experience has taught us the wisdom of allowing the production of commodities to be limited only by the wants and needs out of which their production arises.  Thus, the production of agricultural implements is governed by the demand which arises from the cultivation of land, and the production of locomotives is controlled by the demand arising from transportation, and so on.  Since all industries are dependent for their existence on money, in some form or other, the amount of money issued should be governed wholly by the demand arising from trade and commerce.

We are now in sight of the shoals and quicksands where the commodity-money advocates inevitably founder.  They stand between two horns of a dilemma, each involving a contradiction.  For the claim that money is a commodity means the surrender of money to the influences governing commodities, such as supply and demand, under which it must fluctuate and cannot therefore be a standard.  It is incapable of registering fluctuations in the values of other commodities.

On the other hand, in order to save money from such fluctuations and preserve it as a standard, it is necessary to shield it from supply and demand influences, and this takes it at once out of the realm of commodities.

In other words, when treated as a “ standard of value ” or of deferred payments, money is no longer a commodity ;  and when treated as a commodity, it is no longer money.  Nothing is more amusing than to witness the alarm and consternation into which the “ hard ” or commodity-money people are thrown the moment their theories are seriously and intelligently discussed.  If you try to shew them what money really is, in its scientific aspect, they talk about the impossibility of carrying on commerce without “ a standard of value.”  If you take them on their own ground and insist upon treating money as a commodity, and strive to shew them that the inevitable tendency of industry is towards cheapness in the production of commodities, and the necessity therefore of cheapening the production of this commodity by the free coinage of silver, etc., they become frightened, and talk of the ruin of the country, the disorganization of prices, etc.

Consider for a moment what money really is.  Commencing with Aristotle, who had probably the most marvellous mental perception of any man of ancient times of whom we have knowledge.  He says, “but with regard to a future exchange (if we want nothing at present, that it may take place when we do want something) money is, as it were, our security.  For it is necessary that he who wants it should be able to get what he wants.”

F. Cradocke, a London merchant in the time of the commonwealth, says :  “—it is to be observed that money itself is nothing but a kind of security, which men receive, when parting with their commodities, as a ground of hope or assurance that they will be repaid in some other commodity, since no man will either sell or part with any, for the best money, but in hopes thereby to procure some other commodities or necessaries.”  Bishop Berkeley asks in his Querist, “whether the true idea of money, as such, be not altogether that of a ticket or counter ?  And whether money be not in truth, tickets or tokens for recording and conveying such power ?  And whether it be of consequence what material the tickets are made of ? ”

Henry Thornton says, “ money of every kind is an order for goods.”  Adam Smith says, “ a guinea may be considered as a bill for a certain quantity of necessaries and conveniences upon all the tradesmen in the neighborhood.”  So Bastiat speaks of money as “ an acknowledgment or title, an order of the state, a token, etc.”  Baudeau says, “it is a kind of bill of exchange or order payable at will of the bearer, etc.”

“ It is one of the special merits of the economists,” says Macleod, “that they clearly saw the true nature of money.”

If, then, money is merely a ticket, a token, a mark, a counter, an order, how can it be a commodity ?  Why should it be subjected to the laws of supply and demand ?  Tickets, counters, marks, are not subjected to any such laws.  When I purchase a ticket for a theatrical performance, or for a railroad journey, I pay a fixed sum arranged by the theatrical manager or the railroad company.  The ticket is merely the evidence of a debt or obligation on their part to render me a certain service.  This ticket is not a commodity, it is but a piece of paper.  It is of no worth per se, and is subject to no fluctuations.  This transaction means, that in paying them a certain sum of money I have given them an order on society, a note or coin possessing general purchasing power, which entitles the holder to any product or service desired, to the extent of the denomination of the note or coin.

In return they have given me an order on themselves, entitling me to a seat at the theatre at a particular time, to witness a performance, or to proper conveyance to a certain place.  Now the only difference, in reality, between money and a theatre ticket or railroad ticket is, that the former is a general order on society, the latter are special orders on particular persons or companies.  Their nature is otherwise precisely similar.  In purchasing such tickets we never think for a moment of the material of which the ticket is composed, nor, in fact, of the ticket at all, apart from what it represents.  In itself it is a piece of cardboard, which we should not trouble to pick up were it not for what it represents Further, we should consider an agent insane who made his tickets of gold or silver.  We should call it the most wanton form of extravagance.  Again, these tickets are not issued on any notion of maintaining the “value” of the tickets.  The number of seats sold or persons carried is not governed by the number of tickets issued ;  on the contrary, the number of tickets printed is governed by the number of people desiring to travel, or by the capacity of the theatre.  A theatre ticket or a railway ticket is merely a convenient means of recording a debt, and this is precisely what money is.  An individual issues one to society as an order on him to fulfil a certain pledge or obligation of a special nature.  Society issues the other to individuals as an order on it to fulfil its pledges or obligation of any nature.  The absurdity of limiting the amount of money issued, in order to maintain it at a certain “ value,” is equivalent to that of a railroad company limiting the number of tickets printed in order to maintain a certain fare.  What should we say if such a company issued tickets based upon a per capita calculation of the population of the towns through which it ran, and insisted that the traffic should be limited to this number ?  The disastrous effects of this limitation in the supply of money we shall hereafter see.  The question, therefore, as to the amount of money, needed by a nation, is one which no man can possibly answer, nor is it important that we should be able to do so.  The supply of money, like the supply of anything useful, must be governed by the transactions out of which its need arises, and its issuance must be made as free as the transactions themselves.

In answering the question, “ Can there be an over-issue of money ? ” two things must be considered.  If by issue is meant the mere printing of certificates or notes, the answer is that no harm is done beyond the slight loss in paper.

On the other hand, if by “issue” is meant the paying out of money by the government or individuals, in exchange for commodities and services, it is evident that there can be over-issues, just as a railroad company can sell more tickets than its carrying capacity, or a theatre manager more than his theatre will accommodate.  Money represents debts which society or individuals agree to redeem, and since there is a limit to the productive power of every one, there is also a limit to every one’s ability for settling debts ;  hence, there must be a limit to the issuance of money.  This limit, however, is only governed by the wealth or productive power of those issuing it.  Money must necessarily be backed by wealth, and so long as it does not exceed the purchasing power of the wealth behind it, there can be no danger of over-issue.

When treating of wealth I showed that a commodity was something useful and was exchangeable for some other useful thing.  Now money, as we have seen, is not a commodity ;  it is the medium between commodities by which they are proportioned and exchanged.  It is a very useful invention for facilitating and assisting commerce.  But the question arises, if money is useful and exchangeable, does it not answer to the definition of a commodity, just given ?  Is not money a useful invention, and is it not exchangeable for commodities ?  When discussing the subject of exchange, we saw that the test of a complete exchange was reciprocal satisfaction.  The exchange of commodities for money (i.e. a sale) does not afford reciprocal satisfaction.  As Francis Walker says, “ men take it (money) not for its own sake, but for what it will bring them ;  they hold it not to enjoy it, but to be ready for the moment when they shall part with it to obtain that which they will enjoy.”

Macleod also says, “the use of money, being to preserve the record of services due to its possessor for any future time, etc.”

So Thornton says, “ money of every kind is an order for goods.”  “ There is,” says Le Trosne, “ this difference between an exchange and a sale ;  that in an exchange everything is consummated or completed for each party.  They possess the thing which they desired to procure, and they have only to enjoy it.  In the sale, on the contrary, it is only the purchaser who has attained his object, because it is only he who is in a position to enjoy.  But everything is not ended for the seller.”

For this reason a sale is, as we have seen, a demi-exchange, or, as Francis Walker says, “only half a transaction.”  Money, therefore, is not itself, in the economic sense, an exchangeable commodity.  Money is not the thing itself exchanged ;  it is the medium of exchange, the middle thing, the symbol of satisfaction.

It is a “ticket,” an “order,” or “counter.”  A ticket for a theatre is a very useful institution, and is given to the purchaser for money ;  but nobody regards the acquisition of this mere ticket as of any account apart from what it represents.  Deprive it of its significance, and it is nothing but a piece of paper, utterly useless and valueless ;  the same is true of money.  Stripped of the power with which society has clothed it, it is worthless.  “ There cannot, in short,” says Mill, “be intrinsically a more insignificant thing, in the economy of society, than money, except in the character of a contrivance for sparing time and labor.  It is a machine for doing quickly and commodiously what would be done, though less quickly and commodiously, without it.”

Apart from its function as the medium of exchange, money is, therefore, nothing.  In fact, it is absolutely essential, from the very nature of things, that money should be nothing apart from its exchange functions.  Money is the common denominator of values, and values can be expressed only by numbers.  Now a denominator of numbers has no existence apart from the numerator.  Its raison d’Ítre is to qualify the numerator ;  it disappears with it.

Since money is created simply to fulfil a special function, it can have no independent commodity existence.  The values which it expresses do not reside in money, nor are they a part of it.  They are the attributes of the wealth that is behind it as guarantee of its redemption, and which cause it to circulate.  Money is not itself wealth, but merely its representative or symbol.  Like the denominator of a fraction, money expresses the value of the numerator, and disappears with it ;  or, like the sign of equality, it expresses the relation of two things, but is, apart from those things, meaningless.

We have also seen that so-called commodity-money is subjected to two conflicting forces, the stronger of which it is bound to obey.  As a commodity it is subjected to the law of supply and demand, and seeks that field where it can realize for itself the best returns.  Now it is only as a commodity that money is capable of being exploited.  It is in this capacity alone that money brokers and bankers are able to extort interest.  Money is a source of profit to those who deal in it, only so far as it is controlled by the laws of supply and demand.  Hence, with the adoption of an invariable ideal unit of purchasing power, and with freedom to monetize all forms of wealth alike, interest or payment for the use of money would die a natural death, since the supply of money would always equal the effective demand.  The first attack upon the unjust privilege accorded money by legislation was made by Adam Smith, who showed that it was not the highest form of wealth.  He strove to reduce it to the level of other commodities.  The death-blow to privilege will be by reducing money to its natural basis—which is beneath that of commodities—to the condition of a mere medium, or tool of commerce.




1 “ Principles of Political Economy.”