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she country, tends to raise prices. But noney hoarded does not act on prices. Money kept in reserve by individuals ..o meet contingencies which do not occur, does not act on prices. The money in the coffers of the Bank, or retained as a reserve by private bankers, does not act on prices until drawn out, nor even then unless drawn out to be expended in commodities. It frequently happens that money, to a considerable amount, is brought into the country, is there actually invested as capital, and again flows out, without having ever once acted upon the markets of commodities, but only upon the market of securities, or, as it is commonly though improperly called, the money market. Let us return to the case already put for illustration, that of a foreigner landing in the country with a treasure. We supposed him to employ his treasure in the purchase of goods for his own use, or in setting up a manufactory and employing labourers; and in either case he would, catteris aribus, raise prices. . But instead of #. either of these things, he might very probably prefer to invest his fortune at interest; which we shall supFo him to do in the most obvious way, y becoming a competitor for a portion of the stock, exchequer bills, railway debentures, mercantile bills, mortgages, &c., which are at all times in the hands of the public. By doing this he would raise the prices of those different securities, or in other words would lower the rate of interest; and since this would disturb the relation previously existing between the rate of interest on capital in the country itself, and that in foreign countries, it would probably induce some of those who i. floating capital seeking employment, to send it abroad for foreign investment, rather than buy securitics at home at the advanced price. As much money might thus go out as had previously come in, while the prices of commodities would have shown no trace of its temporary presence. This is a case highly deserving of attention: and it is a fact now beginning to be recognised, that the passage of the precious metals from country to country is determined much
more than was formerly supposed, by the state of the loan market in different countries, and much less by the state of prices. Another point must be adverted to, in order to avoid serious error in the interpretation of mercantile phenomena. If there be, at any time, an increase in the number of money transactions, a thing continually liable to happen from differences in the activity o speculation, and even in the time of year (since certain kinds of business are transacted only at particular seasons); an increase of the currency which is only proportional to this increase of transactions, and is of no longer duration, has no tendency to raise prices. At the § periods when the public ividends are paid at the Bank, a sudden increase takes place of the money in the hands of the public; an increase estimated at from a fifth to two-fifths of the whole issues of the Bank of England. Yet this never has any effect on prices; and in a very few weeks, the currency has again shrunk into its usual dimensions, by a mere reduction in the demands of the public (after so copious a supply of ready money) for accommodation from the Bank in the way of discount or loan. In like manner the currency of the agricultural districts fluctuates in amount at different seasons of the year. It is always lowest in August: “it rises generally towards Christmas, and obtains its greatest elevation about Lady-day, when the farmer commonly lays in his stock, and has to pay his rent and Summer-taxes,” and when he therefore makes his principal applications to country bankers for loans. “Those variations occur with the same regularity as the season, and with just as little disturbance of the markets as the uarterly fluctuations of the notes of the Bank of England. As soon as the extra payments have been completed, the superfluous” currency, which is estimated at half a million, “as certainly and immediately is reabsorbed and disappears.”* f extra currency were not forth
* Fullarton on the Regulation of Currencies, 2nd edit. pp. 87—9.
coming to make these extra payments, one of three things must happen. Either the payments must be made without money, by a resort to some of those contrivances by which its use is dispensed with ; or there must be an increase in the rapidity of circulation, the same sum of money being made to perform more payments; or if neither of these things took place, money to make the extra payments must be withdrawn from the market for commodities, and
rices, consequently, must fall. An increase of the circulating medium, conformable in extent and duration to
the temporary stress of business, does not raise prices, but merely prevents this fall.
The sequel of our investigation will point out many other qualifications with which the proposition must be received, that the value of the circulating medium depends on the demand and supply, and is in the inverse ratio of the quantity; qualifications which, under a complex system of credit like that existing in England, render the proposition an goney incorrect expression of the act.
of THE v.ALUE of MonEy, As DEPENDENT on cost of PRODUCTION.
§ 1. BUT money, no more than commodities in general, has its value definitively determined by demand and o; The ultimate regulator of its value is Cost of Production.
We are supposing, of course, that things are left to themselves. Governments have not always left things to themselves. They have undertaken to prevent the quantity of money from adjusting itself according to spontaneous laws, and have endeavoured to regulate it at their pleasure; generally with a view of keeping a greater quantity of money in the country, than would otherwise have remained there. It was, until lately, the policy of all governments to interdict the exportation and the melting of money; while, by encouraging the exportation and impeding the importation of other things, they endeavoured to have a stream of money constantly flowing in. By this course they gratified two prejudices; they drew, or thought that they drew, more money into the country, which they believed to be tantamount to more wealth; and they gave, or thought they gave, to all producers and dealers, high prices, which, though no real advantage, people are always inclined to suppose to be one.
In this attempt to regulate the value
of money artificially by means of the supply, governments have never succeeded in the degree, or even in the manner, which they intended. Their prohibitions against exporting or melting the coin have never been effectual. A commodity of such small bulk in proportion to its value is so easily smuggled, and still more easily melted, that it has been impossible by the most stringent measures to prevent these operations. All the risk which it was in the power of governments to attach to them, was outweighed by a very moderate profit.* In the more indirect mode of aiming at the same purpose, by throwing difficulties in the way of making the returns for exported goods in any other commodity than money, they have not been quite so unsuccessful. They have not, indeed, succeeded in making money flow continuously into the country; but they have to a certain extent been able to keep it at a higher than its natural level; and have, thus far, removed the value of money from exclusive dependence on the causes which fix the values of things not artificially interfered with. We are, however, to suppose a state, not of artificial regulation, but of freedom. In that state, and assuming no charge to be made for coinage, the value of money will conform to the value of the bullion of which it is made. A pound weight of gold or silver in coin, and the same weight in an ingot, will precisely exchange for one another. On the supposition of freedom, the metal cannot be worth more in the state of bullion than of coin; for as it can be melted without any loss of time, and with hardly any expense, this would of course be done, until the uantity in circulation was so much }. as to equalize its value with that of the same weight in bullion. It may be thought however that the coin, though it cannot be of less, may be, and being a manufactured article will naturally be, of greater value than the bullion contained in it, on the same principle on which linen cloth is of more value than an equal weight of linen yarn. This would be true, were it not that Government, in this country and in some others, coins money gratis for any one who furnishes the metal. The labour and expense of coinage, when not charged to the possessor, do not raise the value of the article. If Government opened an office where, on delivery of a given weight of yarn, it returned the same weight of cloth to any one who asked for it, cloth would be worth no more in the market than the yarn it contained. As soon as coin is worth a fraction more than the value of the bullion, it becomes the interest of the holders of bullion to send it to be coined. If Government, however, throws the expense of coinage, as is reasonable, upon the holder, by making a charge to cover the expense, (which is done by giving back rather less in coin than has been received in bullion, and is called levying a seignorage), the coin will rise, to the extent of the seignorage, above the value of the bullion. If the Mint kept back one per cent, to pay
* The effect of the prohibition cannot, however, have been so entirely insignificant as it has been supposed to be by writers on the subject. The facts adduced by Mr. Fullarton, in the note to page 7 of his work on the Regulation of Currencies, show that it required a greater percentage of difference in value between coin and bullion than has
commonly been imagined, to bring the coin to the melting-pot.
the expense of coinage, it would be against the interest of the holders of bullion to have it coined, until the coin was more valuable than the bullion by at least that fraction. The coin, therefore, would be kept one per cent higher in value, which ...if only be by keeping it one per cent less in quantity, than if its coinage were gratuitous.
The Government might attempt to obtain a profit by the transaction, and might lay on a seignorage calculated for that purpose; but whatever they took for coinage beyond its expenses, would be so much profit on private coining. Coining, though not so easy an operation as melting, is far from a difficult one, and, when the coin produced is of full weight and standard fineness, is very difficult to detect. If, therefore, a profit could be made by coining good money, it would certainly be done; and the attempt to make seignorage a source of revenue would be defeated. Any attempt to keep the value of the coin at an artificial elevation, not by a seignorage, but by refusing to coin, would be frustrated in the same manner.”
§ 2. The value of money, then, conforms, permanently, and, in a state of freedom, almost immediately, to the value of the metal of which it is made; with the addition, or not, of the expenses of coinage, according as those expenses are borne by the individual or by the state. This simplifies extremely the question which we have here to consider: since gold and silver bullion are commodities like any others, and
* In England, though there is no seignorage on gold coin, (the Mint returning in coin the same weight of pure metal which it receives in bullion) there is a delay of a few weeks after the bullion is deposited, before the coin can be obtained, occasioning a loss of interest, which, to the holder, is equivalent to a trifling seignorage. From this cause, the value of coin is in general slightly above that of the bullion it contains. An ounce of gold, according to the quantity of metal in a sovereign, should be worth 31. 17s. 10%d.; but it was usually quoted at 31. 17s. 6d., until the Bank Charter Act of 1844 made it imperative on the Bank to give its notes for all bullion offered to it at the rate of 31, 178. 9d
their value depends, like that of other things, on their cost of production. To the majority of civilized countries, gold and silver are foreign products: and the circumstances which govern the values of foreign products, present some questions which we are not yet ready to examine. For the present, therefore, we must suppose the country which is the subject of our inquiries, to be supplied with gold and silver by its own mines, reserving for future consideration how far our conclusions require modification to adapt them to the more usual case. Of the three classes into which commodities are divided—those absolutely limited in supply, those which may be had in unlimited quantity at , given cost of production, and those which may be had in unlimited quantity, but at an increasing cost of production— the precious metals, being the produce of mines, belong to the third class. Their natural value, therefore, is in the long run proportional to their cost of production in the most unfavourable existing circumstances, that is, at the worst mine which it is necessary to work in order to obtain the required supply. A pound weight of gold will, in the gold-producing countries, ultimately tend to exchange for as much of every other commodity, as is produced at a cost equal to its own; meaning by its own cost the cost in labour and expense, at the least productive sources of supply which the then existing demand makes it necessary, to work. The average value of gold is made to conform to its natural value in the same manner as the values of other things are made to conform to their natural value. Suppose that it were selling above its natural value; that is, wbove the value which is an equivalent $or the labour and expense of mining, and for the risks attending a branch of industry in which nine out of ten experiments have usually been failures. . A part of the mass of floating capital which is on the look-out for investment, would take the direction of mining enterprise; the supply would thus be increased, and the value would fall. If, no the contrary, it were selling below
its natural value, miners would not be obtaining the ordinary profit; they would slacken their works; if the depreciation was great, some of the inferior mines would perhaps stop working altogether: and a falling off in the annual supply, *.*. the annual wear and tear from being completely compensated, would by degrees reduce the quantity, and restore the value. When examined more closely, the following are the details of the process. If gold is above its natural or cost value—the coin, as we have seen, conforming in its value to the bullion— money will be of high value, and the prices of all things, labour included, will be low. These low prices will lower the expenses of all producers; but as their returns will also be lowered, no advantage will be obtained by any producer, except the producer of gold: whose returns from #. mine, not deFo on price, will be the same as efore, and his expenses being less, he will obtain extra profits, and will be stimulated to increase his production. The reverse is the case if the metalis below its natural value: since this is as much as to say that prices are high, and the money expenses of all producers unusually great: for this, however, all other producers will be compensated by increased money returns: the miner alone will extract from his mine no more metal than before, while his expenses will be greater: his profits therefore being diminished or annihilated, he will diminish his production, if not abandon his employment. In this manner it is that the valus of money is made to conform to the cost of production of the metal of which it is made. It may be well, however, to repeat (what has been said before) that the adjustment takes a long time to effect, in the case of a commodity so generally desired and at the same time so durable as the precious metals. Being so largely used not only as money but for plate and ornament, there is at all times a very large quantity of these metals in existence: while they are so slowly worn out, that a comparatively small annual production is sufficient to keep up the supply, and to make any addition to it which may be required by the increase of goods to be circulated, or by the increased demand for gold and silver articles by wealthy consumers. Even if this small annual supply were stopt entirely, it would require many years to reduce the quantity so much as to make any very material difference in prices. The quantity may be increased, much more rapidly than it can be diminished; but the increase must be very great before it can make itself much felt over such a mass of the precious metals as exists in the whole commercial world. And hence the effects of all changes in the conditions of production of the precious metals are at first, and continue to be for many years, questions of quantity only, with little reference to cost of production. More especially is this the case when, as at the present time, many new sources of supply have been simultaneously opened, most of them practicable by labour alone, without any capitalin advance beyond a pickaxe and a week's food, and when the operations are as yet wholly experimental, the comparative permanent productiveness of the different sources being entirely unascertained.
§ 3. Since, however, the value of money really conforms, like that of other things, though more slowly, to its cost of production, some political economists have objected altogether to the statement that the value of money depends on its quantity combined with the rapidity of circulation; which, they think, is assuming a law for money that does not exist for any other commodity, when the truth is that it is governed by the very same laws. To this we may answer, in the first place, that the statement in question assumes no peculiar law. It is simply the law of demand and supply, which is acknowledged to be applicable to all commodities, and which in the case of money as of most other things, is controlled, but not set aside, by the law of cost of production, since cost of production would have no effect on value if it could have none on supply. But, secondly, there really is, in one respect a closer connexion be.
tween the value of money and its quantity, than between the values of other things and their quantity. The value of other things conforms to the changes in the cost of production, without re. quiring, as a condition, that there should be any actual alteration of the supply the potential alteration is sufficient: and if there even be an actual alteration, it is but a temporary one, except in so far as the altered value may make a difference in the demand, and so require an increase or diminution of supply, as a consequence, not a cause, of the alteration in value. Now this is also true of gold and silver, considered as articles of expenditure for ornament and luxury; but it is not true of money. If the permanent cost of production of gold were reduced one-fourth, it might happen that there would not be more of it bought for plate, gilding, or jewellery, than before; and if so, though the value would fall, the quantity extracted from the mines for these purposes would be no greater than previously. Not so with the portion used as money; that portion could not fall in value onefourth, unless actually increased onefourth; for, at prices one-fourth higher, one-fourth more money would be required to make the accustomed purchases; and if this were not forthcoming, some of the commodities would be without purchasers, and prices could not be kept up. Alterations, therefore, in the cost of production of the precious metals, do not act upon the value of money except just in proportion as the increase or diminish its quantity; ... cannot be said of any other commodity. It would therefore, I conceive, be an error, both scientifically and practi. cally, to discard the proposition which asserts a connexion between the value of money and its quantity. It is evident, however, that the cost of production, in the long run, regulates the quantity; and that every countr (temporary fluctuations excepted) wi possess, and have in circulation, just that quantity of money, which will perform all the exchanges required of it, consistently with maintaining a value conformable to its cost of production. The prices of things will, on the ave