(Continued from October issue)
Now for a few words on the question of money. To know the relative value of an article we must give that value an independent form; a form apart from the form of the article whose value we wish to indicate. This we do when we say that there is ten shillings worth of value in 20 loaves. The value concealed in the loaves is put into the form of ten shillings and we are then able to compare the value of the loaves with the values of other articles whose value is expressed in a similar form. It is like comparing the weights of given quantities of soap, iron, and lead, by expressing their weights in hundredweights, quarters, and pounds. The ten shillings is the price or monetary expression of the value of the loaves, or, in the language of economics, the value equivalent. As previously mentioned it represents a definite portion of gold.
Gold is the money commodity and the basis of all currencies to-day. Gold can only serve as the value equivalent because it is also a product of labour and has a value determined by the quantity of labour required to produce it. As the universal equivalent it gives a visible expression to the values of all other commodities, but to find out the relative value of gold you must reverse the relation and look upon all other commodities as the expression of the value of gold, an unending series.
Gold has only become the universal equivalent as the result of the action of custom. In early times cattle, silver, and many other things occupied the part of universal equivalent, but owing to its handiness, durability and malleability gold finally replaced all the others as the generally accepted substance of money. It is obvious that the money commodity must be subject to little variations in value through wear and tear, and comprise in a small compass as much value as possible; gold fufilled this better than anything else, and thus became the national and international medium of exchange.
Money has several functions and we have already indicated its function as a measure of value. As a medium of circulation it circulates commodities; commodities are transformed into money and the money received is transformed into other commodities, so the process goes on in an unending series in which commodities come into circulation and disappear; money remains in the sphere of circulation although it is occasionally hoarded for a time. Commodities drop out of circulation to be consumed but money is never consumed.
Another function of money is that of acting as standard of price—tons, pounds, and ounces of gold, a measure of the weight of gold, and as such it never varies. However prices may change, an ounce of gold is always an ounce of gold, in the same way as a yard measure is always a yard long.
For currency purposes money functions as money of account; coins of a certain weight, purity, and size are struck for the purpose of carrying about and making reckoning easier. Up to 1914 gold coins circulated in England as currency, and the following remarks apply to that period; the effect of the withdrawal of gold coins from circulation we will see later.
To continue then, on the pre-1914 basis. In those days the Mint price of gold, the amount per ounce which the Mint was always prepared to pay for gold, until England went off the Gold Standard (refused to pay in gold the face value of its bank notes), was £3 17s. 10½d. This was not really a price but a statement of the number of gold coins of the necessary weight and fineness which can be struck from a given weight of gold. 1869 sovereigns can be struck (or coined) from 40 pounds of gold, and, therefore, three sovereigns and a fraction (17/10½ in silver and copper) from one ounce. In practice people sold gold to the Bank for £3 17s. 9d. (the Bank price) and the Bank sold it to the Mint for £3 17s. 10½d. It is important to bear in mind that an ounce of gold is the standard, and is divided arbitrarily into £3 17s. 10½d. in a similar way to which a foot is divided into twelve inches and a circle into 360 degrees. Only the gold coin circulates at its value, its divisions are represented by silver and copper symbols. The latter have no direct relation to the value of silver and copper, and there was a strict limitation upon the amount of each that was legal tender. No matter how the value of gold might alter or prices change an ounce of gold always coined into £3 17s. 10½d., and the Mint would always pay this "price” for it. Gold sent abroad figured at this “price” less cost of transport and insurance.
In another function of money, as means of payment, it was found that gold could be conveniently replaced by paper symbols, bank notes. This symbolic money turned out to be a source of considerable trouble. Banknotes were printed in various denominations and engraved with a statement to the effect that the issuers would always pay their face value in gold on demand. A separate department of the Bank of England was set up for the sole purpose of dealing with notes, the Issue Department. This department kept in its vaults a quantity of gold, plus a small percentage of government securities, that covered every note issued; the notes were referred to as “gold backed.” Thus a £5 note was backed by gold, exchangeable into gold at any time, and therefore as good as five golden sovereigns. Anyone, could present a note at the Bank and had to be paid in gold if he demanded it. As long as gold circulates freely in currency, or, to put it another way, as long as there is a free market for gold, the gold-backed paper symbols played their allotted parts adequately.
The sum total of money current (or in currency) during a period is equal to the sum of the prices to be realised plus the sum of the payments falling due, minus the payments that balance each other and minus the number of times in which the same coins pass from hand to hand, in turn as means of circulation and means of payment. Money is current that represents commodities long since sold, and commodities circulate whose equivalent in money will not appear till some future date; debts contracted each day, and payments falling due on the same day, are not quantities that can be measured in order to foretell the exact amount of currency that will be required on a given day.
As long as gold coin circulates a surplus of currency will find its way back to the bank and can be melted down for export or for other purposes. When part of the currency consists of the gold-backed notes we have described the surplus notes can be withdrawn and their gold backing subjected to the same process as gold coin.
After 1914 inconvertible bank notes (bank notes that would not be exchanged-for gold at face value on demand) were issued, the celebrated "Bradburies,” and then notes began to get out of touch with the sum of gold they were supposed to represent; currency became overstocked with a paper that could not be drained away. When crises came gold was demanded as the only form of wealth whose value remained dependable (hard cash) and higher paper prices were paid for gold. The decline in the value of paper money, as it was losing direct touch with gold, meant that more paper money was required for currency purposes and so, once inflation had commenced, the situation got worse until the time arrived when the curious position arose of an ounce of gold, equal to about £4 in gold coins, costing £8 in paper notes. We will conclude these remarks on money with a quotation from “Capital” relating to bank notes:—
“The State puts in circulation bits of paper on which their various denominations, say, £1, £5, etc., are printed. In so far as they actually take the place of gold to the same amount, their movement is subject to the laws that regulate the currency of money itself. A law peculiar to the circulation of paper money can spring up only from the proportion in which that paper money represents gold. Such a law exists; stated simply, it is as follows: the issue of paper money must not exceed in amount the gold , (or silver as the case may be) which would actually circulate if not replaced by symbols. Now the quantity or gold which the circulation can absorb, constantly fluctuates about a given level. Still, the mass of the circulating medium in a given country never sinks below a certain minimum easily ascertained by actual experience. The fact that this minimum mass continually undergoes changes in its constituent parts, or that pieces of gold of which it consists are being constantly replaced by fresh ones, causes of course no change either in its amount or in the continuity of its circulation. It can therefore be replaced by paper symbols. If, on the other hand, all the conduits of circulation were to-day filled with paper money to the full extent of their capacity for absorbing money, they might to-morrow be overflowing in consequence of a fluctuation in the circulation of commodities. There would no longer be any standard. If the paper money exceed its proper limit, which is the amount in gold coins of the like denomination that can actually be current, it would, apart from the danger of falling into general disrepute, represent only that quantity of gold, which, in accordance with the laws of the circulation of commodities, is required, and is alone capable of being represented by paper. If the quantity of paper money issued be double what it ought to be, then, as a matter of fact £1 would be the money-name not of ¼ of an ounce, but of ⅛ of an ounce of gold. The effect would be the same as if an alteration had taken place in the function of gold as a standard of prices. Those values that were previously expressed by the price of £1 would now be expressed by the price of £2” (page 103-4, Glaisher edn., 1909).
Gilmac.
(To be continued)
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