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CHAPTER IX.

OF THE VALUE 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 supply. 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 endeavored 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 endeavored 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 that 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 quantity in circulation was so much diminished 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

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.

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 labor 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 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 could 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 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 dividedthose absolutely limited in supply, those which may be had in unlimited quantity, at a given cost of production, and those which may be had in unlimited quantity, but at an increasing cost of production—the precious metals, being

• In England, although 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 £3 178. 101d.; but it was usually quoted at £3 178. 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 £3 178. 9d. VOL. II.

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the produce of mines, belong to the third class. Their natural value, therefore, is proportional to their cost of production in the most unfavorable 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 country of the mines, exchange on the average for as much of every other commodity, as is produced at a cost equal to its own; meaning by its own cost, the cost of producing it at the worst mines which the 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, above the value which is an equivalent for the labor and expense of mining, and for the risks attending a branch of industry in which nine out of ten experiments are 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, on 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, preventing 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, labor 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

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