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Modern Economic Problems by Frank Albert Fetter

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Economics--Volume II









1. Material resources of the nation

2. The present economic system


3. Nature, use, and coinage of money

4. The value of money

5. Fiduciary money, metal and paper

6. The standard of deferred payments


7. The functions of banks

8. Banking in the United States before 1914

9. The Federal Reserve Act

10. Crises and industrial depressions

11. Institutions for saving and investment

12. Principles of insurance


13. International trade

14. The policy of a protective tariff

15. American tariff history

16. Objects and principles of taxation

17. Property and corporation taxes

18. Personal taxes


19. Methods of industrial remuneration

20. Organized labor

21. Public regulation of hours and wages

22. Other protective labor and social legislation

23. Social insurance

24. Population and immigration


25. Agricultural and rural population

26. Problems of agricultural economics

27. The railroad problem

28. The problem of industrial monopoly

29. Public policy in respect to monopoly

30. Public ownership

31. Some aspects of socialism



The present volume deals with various practical problems in economics,
as a volume published a year earlier dealt with the broader economic
principles of value and distribution. To the student beginning
economics and to the general reader the study of principles is likely
to appear more difficult than does that of concrete questions. In
fact, the difficulty of the latter, tho less obvious, is equally
great. The study of principles makes demands upon thought that are
open and unmistakable; its conclusions, drawn in the cold light of
reason, are uncolored by feeling, and are acceptable of all men so
long as the precise application that may justly be made of them is
not foreseen. But conclusions regarding practical questions of public
policy, tho they may appear to be simple, usually are biased and
complicated by assumptions, prejudices, selfish interests, and
feelings, deep-rooted and often unsuspected.

No practical problem in the field of economics can be solved as if
it were solely and purely an economic problem. It is always in some
measure also a political, moral, and social problem. The task of the
economist "as such" is the analysis of the economic valuation-aspects
of these problems. We may recall Francis A. Walker's comparison of the
economist's task with that of the chemist, which task, in a certain
case, was to analyze the contents of a vial of prussic acid, not to
give advice as to the use to make of it. Accordingly, in the following
pages, the author has endeavored primarily to develop the economic
aspects of each problem, and has repeatedly given warning when the
discussion or the conclusions began to transcend strict economic
limits. In many questions feeling is nine-tenths of reason. If the
reader has different social sympathies he may prefer to draw different
conclusions from the economic analysis.

The outlook and sympathies that are expressed or tacitly assumed
throughout this work are not so much those personal to the author as
they are those of our present day American democratic society,
taken at about its center of gravity. When the people generally feel
differently as to the ends to be attained, a different public policy
must be formulated, tho the economic analysis may not need to be
changed. Therefore, in some cases, the author has discussed merely the
economic aspect, or has referred to the general principles treated in
volume one, and has purposely refrained from expressing his personal
judgment as to "the best" policy for the moment.

The present volume was planned some years ago as a revision of a part
of the author's earlier text, "The Principles of Economics" (1904).
The intervening years have, however, been so replete with notable
economic and social legislation and have witnessed the growth of a
wider public interest in so many economic subjects, that both in
range and in treatment this work necessarily grew to be more than
a revision. Except in a few chapters, occasional sentences and
paragraphs are all of the specific features of the older text that
remain. Suggestive of the rapid changes occurring in the economic
field is the fact that a number of statements made in the manuscript a
few months or a few weeks ago had to be amended in the proof sheets to
accord with recent events.

The author's debt for information, inspiration, and assistance in
various phases of the work is a large one. The debt is owing to
many,--authors, colleagues, and students. A few of the sources that
have been drawn upon will be indicated in a pamphlet following the
plan of the "Manual of References and Exercises in Economics," already
published for use in connection with Volume I; but the limits of space
will prevent a complete enumeration. I wish, however, in particular,
to acknowledge gratefully the aid and friendly criticisms given in
connection with the chapters on money and banking, on labor problems,
and on the principles of insurance, respectively, by my colleagues,
E.W. Kemmerer, D.A. McCabe, and N. Carothers.

In completing, at least provisionally, the present work, the author
cherishes the hope that it will be of assistance not only to teachers
and to students in American colleges, but also to citizen-readers
seeking to gain a better and a non-partisan insight into the great
economic problems now claiming the nation's conscience and thought.


Princeton, N.J., October, 1916.





Sec. 1. Politico-economic problems. Sec. 2. American economic problems
in the past. Sec. 3. Present-day problems: main subjects. Sec. 4. Attempts
to summarize the nation's wealth. Sec. 5. Average wealth and the problem
of distribution. Sec. 6. Changes in the price-standard. Sec. 7. A sum of
capital, not of wealth. Sec. 8. Sources of food supply. Sec. 9. The sources
of heat, light, and power. Sec. 10. Transportation agencies. Sec. 11. Raw
materials for clothing, shelter, machinery, etc.

Sec. 1. #Politico-economic problems.# The word "problem" is often on our
tongues. Life itself is and always has been a problem. In every time
and place in the world there have been questions of industrial
policy that challenged men for an answer, and new and puzzling social
problems that called for a solution. And yet, when institutions,
beliefs, and industrial processes were changing slowly from one
generation to another and men's lives were ruled by tradition,
authority, and custom, few problems of social organization forced
themselves upon attention, and the immediate struggle for existence
absorbed the energies and the interests of men. But our time of rapid
change seems to be peculiarly the age of problems. The movement of
the world has been more rapid in the last century than ever before--in
population, in natural science, in invention, in the changes of
political and economic institutions; in intellectual, religious,
moral, and social opinions and beliefs.

Some human problems are for the individual to solve, as, whether it is
better to go to school or to go to work, to choose this occupation or
that, to emigrate or to stay at home. Other problems of wider bearing
concern the whole family group; others, still wider, concern the local
community, the state, or the nation. In each of these there are more
or less mingled economic, political and ethical aspects. Economics
in the broad sense includes the problems of individual economy, of
domestic economy, of corporate economy, and of national economy. In
this volume, however, we are to approach the subject from the public
point of view, to consider primarily the problems of "political
economy," considering the private, domestic, and corporate problems
only insomuch as they are connected with those of the nation or of
the community as a whole. Our field comprises the problems of national
wealth and of communal welfare.

What then are our politico-economic problems in America? They are
problems that are economic in nature because they concern the way that
wealth shall be used and that citizens are enabled to make a living;
but that are likewise political, because they can be solved only
collectively by political action.

Sec. 2. #American economic problems in the past.# With the first
settlements of colonists on this continent politico-economic problems
appeared. Take, for example, the land policy. Each group of colonists
and each proprietary landholder had to adopt some method of land
tenure whether by free grant or by sale of separate holdings or by
leasing to settlers. In one way and another these questions were
answered, but rapidly changing conditions soon forced upon men the
reconsideration of the problem as the old solution ceased to be

In large part our political history is but the reflection of the
economic motives and economic changes in the national life. Thus
the American Revolution arose out of resistance to England's trade
regulations, commercial restrictions, and attempted taxation of the
colonies. The War of 1812 was brought on by interference with American
commerce on the high seas. The Mexican War was the result of the
colonization of Texan territory by American settlers and the desire
of powerful interests to extend the area of land open to slavery. The
Civil War arose more immediately out of a difference of opinion as to
the rights of states to be supreme in certain fields of legislation,
but back of this political issue was the economic problem of
slave labor. Illustrations of this kind, which may be indefinitely
multiplied, do not prove that the material, economic changes are the
cause of all other changes, political, scientific, and ethical; for in
many cases the economic changes themselves appear to be the results
of changes of the other kinds. There is a constant action and reaction
between economic forces and other forces and interests in human
society, and the needs of economic adjustment are constantly changing
in nature.

Sec. 3. #Present-day problems: main subjects#. The particular economic
problems in America at this time are determined by the whole complex
economic and social situation. Two main factors in this may be
distinguished: the objective and the subjective, or the material
environment and the population composing the nation. The one is what
we have, the other is what we are, as a people. These factors are
closely related; for what we are as a people (our tastes, interests,
capacities, achievements) depends largely on what we have, and what we
have (our wealth and incomes) depends largely on what we are. We may
consider the following phases; the first two of the objective factor,
and the last two of the subjective factor.

(a) The basic material resources, consisting of the materials of the
earth's surface and the natural climatic conditions which together
provide the physical conditions necessary for human existence, and
which furnish the stuff out of which men can create new forms of

(b) The industrial equipment, consisting of all those artificial
adaptations and improvements of the original resources by which men
fit nature better to do their will. These two (a and b) become
more and more difficult to distinguish in settled and civilized
communities, and become blended into one mass of valuable objects, the
wealth of the nation.

(c) The social system under which men live together, make use of
wealth and of their own services, and exchange economic goods.

(d) The people, considered with reference to their number, race,
intelligence, education, and moral, political, and economic capacity.

The particular economic problems which are presented to each
generation of our people are the resultant of all these factors taken
together. A change in any one of them alters to some extent the
nature of the problem. The problems change, for example, (a) with the
discovery or the exhaustion (or the increase or decrease) of any
kind of basic material resources; (b) with the multiplication or
the improvement of tools and machinery or the invention of better
industrial equipment; (c) with changes in the ideals, education, and
capacities of any portion of the people whether or not due to changes
in the race composition of the population; (d) with the increase or
decrease of the total number of people, and the consequent shift in
the relation of population to resources. Many examples of such changes
may be found in American history, and some knowledge of them is
necessary for an appreciation of the genesis and true relation of our
present-day problems.

Sec. 4. #Attempts to summarize the nation's wealth.# If we seek to
compare the material resources of the nation at one period in our
history with those at another period, we find that it is impossible
to find a single satisfactory expression for them. Let us examine
the figures for the (so-called) "wealth of the people of the United
States",[1] as it has been calculated by the census officials.

total per capita
Population. "wealth." wealth.

1850 23,200,000 $7,136,000,000[a] $308
1860 31,400,000 16,160,000,000[a] 514
1870 38,600,000 24,055,000,000[a b] 624
1880 50,200,000 43,642,000,000 870
1890 62,900,000 65,037,000,000 1,036
1900 76,000,000 88,517,000,000 1,165
1904 82,500,000 107,104,000,000 1,318
1912 95,400,000 187,739,000,000 1,965

[Footnote a: Taxable only; all other figures include exempt.]

[Footnote b: Estimated on a gold basis.]

A detailed comparison of the classes of concrete things making up the
totals is possible only in the last three sets of figures (1900 to
1912), and they are here given (omitting 000,000).

1900. 1904. 1912.
1. Real property (excepting
some items below) 52,538 62,331 110,700
2. Irrigation enterprises [a] [a] 360
3. Agricultural equipment
(livestock, tools, etc.) 3,822 4,919 7,706
4. Manufacturing equipment 2,541 3,298 6,069
5. Transportation agencies 11,249 14,434 22,360
6. Telegraph and telephones 612 813 1,304
7. Waterworks (privately owned) 263 275 290
8. Electric lighting plants 403 563 2,099
9. Products (still in trade)[b] 8,294 10,212 21,577
10. Direct goods in use[c] 6,880 8,250 12,758
11. Gold and silver 1,677 1,999 2,617

[Footnote a: No figures for these years.]

[Footnote b: The main items are agricultural and mining products and
imported merchandise.]

[Footnote c: The main items are clothing, personal adornment, furniture,
and carriages.]

Sec. 5. #Average wealth and the problem of distribution#. The foregoing
figures make a most satisfactory showing, and appear to indicate
that mere economic problems are rapidly being solved by the growth
of national wealth. But unfortunately these figures have little
significance in connection with such an inquiry, if indeed they are
not badly misleading.

In the first place, the final figures of "per capita wealth" are
merely averages; a per capita increase, therefore, may appear when
total wealth increases, altho the total may be due to the growth of
comparatively few very large fortunes. The fact is evident that vast
numbers of individuals and families are nearly propertyless and in
so far as this is true there is involved one of the greatest of our
socio-economic problems, that of the distribution of wealth and income
among the people. The more unequal the distribution, the greater, in
all likelihood, is the discontent; and the greater the effort of many
men to find some methods by which greater equality may be attained.

Sec. 6. #Changes in the price-standard#. These figures, moreover, are
expressed in terms of the monetary price-unit, in dollars of the
gold standard, and therefore the increasing total figure (and
correspondingly, the increasing per capita) may be but the reflection
of a change in the value of the monetary unit. It is well known that
the gold dollar has now less purchasing power than in 1880, and less
also than at any intervening time.[2] To the extent that this is true
the increase in the figures of wealth (total and per capita) is only
nominal and does not indicate increase in the quantity and betterment
in the quality of real wealth. This fact is so evident that it would
seem unnecessary to call attention to it, if it were not constantly
overlooked in citing these figures.

Sec. 7. #A sum of capital, not of wealth#. Consider further, that the
figures here given for wealth really express but the sum of capitals
of the individuals (or private corporations) of the nation. These
do not constitute a sum of social wealth in any proper sense of the
term.[3] Arithmetically it is a fallacious kind of a total, for the
sum of the individual capitals contains some items that should
be canceled to find the sum of wealth. Moreover, capital is an
acquisitive concept. It is an expression of the value of a man's
possessions, and not of the utility[4] of them. It measures intensity
of desire for goods and not necessarily the degree of welfare. Such a
total, therefore, embodies the difficulties of the paradox of value;
in some cases increased value reflects a growing scarcity and not
greater abundance.[5]

For example, between 1900 and 1915, with the growth of population, the
total number of improved acres in farms in the United States increased
but little, and the per capita number diminished. At least in part
as a result of this fact, the prices of nearly all kinds of food rose
rapidly, as did also the price of farm land. The prices (and estimated
values) of farm lands are the expression of the individual capitals,
which formed each year an increasing statistical total of so-called
wealth. The people had less land per capita, and were poorer per
capita as respects this item of landed-wealth, had less meat per
capita, and had to give more labor in exchange for food, at the same
time that the statistical per capita of land values increased.

So it may be as respects forests, coal, cotton, and eventually iron,
copper, and many other things. When forests were plentiful, lumber and
fire wood were free goods in many neighborhoods. Forests entered into
the total of national "wealth" in 1850 and 1860 at a comparatively
small sum. But in 1910 when the forests had been half used up they
appeared as a greater total and probably as a greater per capita
item of "wealth" than in 1850. The figures reflect changes in the
paradoxical section of the scale of values, and express scarcity
rather than wealth.

Altho the wealth of a nation may not be expressed as a single sum of
values that accurately reflects the weal-bringing things composing its
environment, some conception of the situation is to be gained by an
enumeration of goods in their kinds and quantities and by studying
their relations to the life of the people. Objects of wealth may be
grouped in various ways. The following may serve our purpose of a
general survey of our present resources.

Sec. 8. #Sources of food supply#. The land area of the country in 1910
was about 1,900,000,000 acres, of which 879,000,000 acres were in
farms, this being 46 per cent of the total area. A very small part
of the remainder is used for residential and commercial purposes,
the rest being barren mountains, deserts, swamps, and forests. Of the
total in farms a little more than one-half was improved, 478,000,000
acres altogether, a per capita average of 5.2 acres; and a little
less than one-half was unimproved, 400,000,000 acres altogether, a
per capita average of 4.3 acres. The improved land produced not merely
food but many kinds of materials, such as cotton, wool, hides,
and lumber, while much of the unimproved land was either in farm
wood-lots, or in rough range pasture. Of course the kinds and amounts
of produce per acre vary with the climate, particularly with sunshine
and rainfall; possibly the proportion of the area of the United States
that is true desert and infertile mountain land is greater than that
of any other equal area in the temperate zones. The actual productive
capacity per acre of the lands of America cannot be expressed in a
very helpful way as a general average per acre, but each area must be
carefully studied in respect to its climate, rainfall, and possibility
of irrigation and drainage. It is evident that a very large number of
economic problems must arise in connection with the land supply
for food: such as problems of land-ownership, taxation, irrigation,
drainage, forestry, and encouragement or limitation of population. We
are just beginning to awaken to the needs in this direction.

The rivers, lakes, and ocean waters near our coasts are other great
sources of food, but no statistics are available to show adequately
their yield. Few of them are in private possession and they do not
appear at all in a total of "capitals," yet they are more important to
the nation than a large part of the land area. They are only beginning
to be developed artificially by the propagation of oysters, clams, and
fish. The development of a proper policy in this matter is one of our
economic problems.

There were in 1910 (mostly on farms) about 64,000,000 beef and dairy
cattle, 60,000,000 swine, 56,000,000 sheep and goats, and there were
raised in the one year nearly 500,000,000 fowls of all kinds.

Sec. 9. #The sources of heat, light, and power#. The law of the
conservation of energy expresses the fundamental likeness of heat,
light, and power. The principal sources from which man derives these
agencies are coal and falling waters, tho wood is of importance as
fuel in some localities. About 500,000 square miles of land (about 13
per cent of the area of the country) are underlaid with coal. These
deposits are widely distributed, so that nearly every part of the
country is within 500 miles of a mine. The enormous deposits if used
at the present amounts per year would last probably 2,000 to 4,000
years, but if used at the present increasing rate (doubling the
product every ten years) they would, it has been estimated, last but
150 years. What shall be the actual rate as between these extremes
is a question whose answer depends on our economic legislation as
to ownership, exploitation, prices, use, and substitution. This is
another of our important socio-economic problems.

The one great available substitute for coal as a source of heat and
light and power is water power. It is estimated that in 1908 but
5,400,000 horse power was being developed from water falls, whereas
about 37,000,000 primary horse power[6] was available; but, by
the storage of flood waters so as to equalize the flow, at least
100,000,000 horse power, and possibly double that amount, could be
developed. As it requires ten tons of coal to develop one horse power
a year in a steam engine by present methods, there is here a potential
substitute for coal equal to two to four times our present annual use
of coal (about 500,000,000 tons in 1912).

But this does not mean that it would be economical, at present costs
of mining coal and of building reservoirs, to make this substitution
now. To determine when, how far, and by what methods to develop this
water power from lakes and rivers for the use of the people and to
make this substitution, is another of our great economic problems.

Petroleum and natural gas, of which our original reservoirs were
perhaps the richest in the world, are being rapidly exhausted. These
may be merely mentioned as being related to coal in the source
of their supply, in the nature of their uses, and in the economic
problems to which they give rise.

Sec. 10. #Transportation agencies#. First to mention among the means of
transportation are the navigable waters--oceans, lakes, rivers, and
canals, with the necessary equipment of dredged inlets, harbors,
docks, locks, and lighthouses. Few of these appear in the total of
"capitals," for they are not in private possession. Yet a good system
of natural waterways may be greater wealth to one nation than costly
additional railroads are to another. Good natural harbors on the
waterways leading out to the oceans are a most important kind
of national wealth, as are the navigable great lakes within the
boundaries or on the borders of a country. Just in proportion as these
natural means of transportation are lacking, is the need to build
costly artificial means of transportation.

Both in natural and in artificial means of transportation, America
is well provided. The straight coast line is 5700 miles long, and the
line following indentations of the coast is about 64,000 miles. The
Great Lakes with a straight shore line of 2760 miles are the most
important inland waterways in the world. The 295 navigable rivers in
the country have a length of 26,400 miles of navigable water. About
2000 miles of canals are still in operation. On the waterways some
27,000 American vessels are in use, with a capacity of 8,000,000 gross

There are about 250,000 route miles of steam railroads, or with
additional tracks, yard tracks, and sidings, a total of about 370,000
miles. On these are over 63,000 locomotives, 52,000 passenger cars,
and 2,400,000 freight and company cars. Besides these are 45,000 track
miles of electric railways and nearly 100,000 cars. These railroads
include an enormous aggregate of works and structures in the form of
tunnels, cuts, banks, bridges, stations, and shops.

There are in the country (1914) about 2,228,000 miles of public
roads, of which 10 per cent are "surfaced" roads. No figures are now
available of the number of wagons, horses, automobiles, and
other vehicles in use on the roads and streets for purposes of

Many of our economic problems are presented by these transportation
agencies, from the question of opening a new dirt road in a rural
township to that of building an inter-oceanic canal, from the question
whether to have free public roads or toll roads to that of regulating
the railroad rates on the whole railroad system of the country.

Sec. 11. #Raw materials for clothing, shelter, machinery, etc.# The farm
lands supply, besides food, a large part of the raw materials for many
other goods, such materials as cotton, flax, wool, hides, feathers,
lumber, and firewood. The farm woodlots compose about 200,000,000
acres, and the large forests, public and private, about 350,000,000
acres, a total of about one-fourth the area of the country in
forests, containing about one-half of the lumber that the country once
possessed. The economic problem of a sound forestry policy is one of
the largest we have to solve.

The most important other sources of raw materials for industry are
the mineral deposits in the earth's surface.[8] This country is stored
more bountifully, probably, than is any other country, with the metal
ores of iron, copper, lead, zinc, gold, and silver. Aluminum is the
most abundant metal, composing about 8 per cent of the crust of the
earth, but by present methods it can be extracted only at considerable
cost from certain compounds that are limited in amount. The details as
to our metal stores are too complex for fuller treatment here, and may
be found in treatises on economic geology or on industrial geography.
The determination of wise policies as to the use of these stores
involves many economic problems, private and public.

Another great class of material wealth is in the form of tools,
machinery, and other agencies for carrying on the industrial
processes of farming and of manufacturing. These are sometimes called
instrumental goods, or the industrial equipment. Still another class
consists of the great mass of completed direct goods, such as houses
to live in, libraries, museums, school buildings, theaters, all kinds
of buildings and equipment for pleasure and entertainment, parks, and
pleasure resorts in mountains, at lakes or sea shore. The possession
and use of these forms of wealth give rise to some economic problems
of public ownership and to others connected with the institution of
private property in general, as sketched in the following chapter.

[Footnote 1: It is to be observed that these figures appear under
the general title of Part I, "Estimated valuation of national wealth:
1850-1912," and the tables are spoken of (volume on Wealth, Debt, and
Taxation, p. 20) as "estimates of the aggregate wealth of the nation
as prepared by the United States censuses," but the tables themselves
are described (pp. 23-25) as the "estimated true valuation of all
property," this phrase being used as equivalent to "wealth." For the
definitions of wealth and property see Vol. I, pp. 264-265.]

[Footnote 2: This change will be described below in ch. 6, in treating
of the standard of deferred payments.]

[Footnote 3: See Vol. I, pp. 265, 278, 508 for the distinction between
wealth and capital.]

[Footnote 4: See Vol. I, p. 25, for the definition of utility.]

[Footnote 5: See Vol. I, p. 510 on the paradox of value.]

[Footnote 6: That is, "the amount which can be developed upon the
basis of the flowage of the streams for a period of two weeks in which
the flow is the least," all the rest being allowed to escape unused.
Van Hise, "Conservation of Natural Resources," p. 119.]

[Footnote 7: These and other figures in this section relate to the
year 1913.]

[Footnote 8: Coal has been mentioned above, sec. 9.]



Sec. 1. The place of private property. Sec. 2. Nature of property. Sec. 3.
Relation of wealth, property, and capital. Sec. 4. Some theories of
private property. Sec. 5. Origin vs. justification. Sec. 6. Limitations of
private property. Sec. 7. Limitations of bequest and inheritance. Sec. 8.
Social expediency of private property. Sec. 9. The monetary economy.
Sec. 10. The competitive system. Sec. 11. Limitation of competition by
custom. Sec. 12. Effect of modern forces upon custom. Sec. 13. Adam
Smith's influence. Sec. 14. The wage-system.

Sec. 1. #The place of private property#. Of fully equal importance with
material wealth in determining the economic power of a people is the
_social system_ under which the nation lives. This is the term applied
to the whole complex of institutions and arrangements in which and
by which people live together in society. It is the embodiment of the
opinions, ideas, and habits of life inherited by each generation from
its forbears. It is, indeed, a people's whole state of civilization
with its political, economic, intellectual, scientific, religious, and
esthetic aspects.

The most important economic aspect of the existing system is, broadly
speaking, the institution of private property. So closely connected
with this that they are hardly more than different phases of the same
thing, are the use of money (the monetary economy), the wage system,
and competition as a mode of distribution. "The institution of private
property" is the general expression for the way in which men in the
modern state make use of their own energies and of material wealth
within the nation. Nearly all the total of the things mentioned in the
table in Chapter 2, section 4, are owned by private citizens.[1] We
live in a regime of private property, and all our economic problems
are affected by that fact. The determination of the exact boundaries
of private property makes up a large part of the politico-economic
problems which the people in each generation have to solve. A large
share, possibly, in a certain sense, every one of the economic
problems that are discussed involve change, limitation, definition,
or, more radically, abolition of present laws of property. Broadly
understood, as above, therefore, determination of the nature of
private property is _the essential_ economic problem.

Sec. 2. #Nature of property#. Property means ownership, and "ownership"
is the abstract noun expressing the quality of possessing a
thing. Correspondingly, "owner" is the Anglo-Saxon equivalent of
"proprietor." Property thus, fundamentally, means not an object held,
or possessed, but the right in or belonging to a person to control
something that he owns. Ownership is a legal right to control under
certain conditions.[2] Physical, possession of an object is not
necessarily ownership.

There are different kinds of ownership. It may be private, as that
of individuals, families, partnerships, or corporations; or it may be
public, as that of nations, states, counties, cities and towns, owning
such things as public buildings, parks, highways, the Adirondack
forest-reserve, or the Erie Canal. These two kinds are equally
effective as against the claims of outsiders, but the rights of those
inside the circle of ownership differ. For example, the rights of one
shareholder against another, or the rights of one member of a family
as against another, are not the same as the rights against outsiders.
Private property is the characteristic feature of our present
industrial society, but it exists side by side with public property
and with many intermediate grades between private and common property.

Tho property meant originally and essentially the intangible right to
a thing, the word came to be applied also to the object of the right.
This is done both in common speech and in judicial decisions, with
inevitable ambiguity. This may be readily seen by trying to substitute
the word ownership for property, a thing quite simple in some cases
but impossible in others. One would not point to a house and say,
"This is my ownership," but either, "This is my property," or "I
exercise ownership over it." It is well recognized that a man may have
a property right in this abstract sense in or over his own services,
as to practise a trade or in the "good will" of a business or in
an intangible patent or a copyright, quite as well as in a material

Sec. 3. #Relation of wealth, property, and capital#. A failure to see
this distinction and to keep it clearly in mind has led to confusion,
even on the part of legislatures, learned judges, and able economists.
If property is said to be (for example) a house and lot and at
the same time the right to that house and lot, then there are two
properties at once for each economic good, viz.: the object itself and
the right to it.[3]

This difficulty could be avoided by the consistent definition and use
of terms. A material economic object is a good, is a form of wealth.
The usance of wealth and the service of laborers at the moment
rendered constitute forms of income. The right of ownership, i.e., the
right to control, use, or direct the use of wealth and services, is
property, which is therefore the right to receive incomes. The value
of the incomes of an individual constitute his capital. Goods, rights
to goods, value of rights to goods: these three things are clearly

Sec. 4. #Some theories of private property#. Various theories have been
framed to explain the origin and to justify the existence of private
property. The occupation theory is that property is based upon
the priority of claim of one who finds wealth without an owner and
appropriates it. This is not an explanation of the property rights
that are arising every moment, nor does it give a logical reason for
the continuance of ancient property rights. It is a statement applying
to a case that has rarely happened, the settlement of an unoccupied

More adequate to explain many cases is the conquest theory, that
property is based on force; for nearly all lands to-day are occupied
by the descendants of conquering invaders who took the lands and
natural resources from the former inhabitants, who in turn had taken
them from other occupants, many centuries before. The conquest theory
applies, for example, to the invasion of the Roman provinces by
barbarian tribes who divided the country and developed the feudal
system based on land tenure. But it hardly applies to present-day
happenings, and at its best it cannot, to modern minds, "justify"
present property rights.

The labor theory, meeting some queries where others fail, is that
ownership is based on the act of production. It is declared that
every man has a right to that to which his brain and his muscle
have imparted value. It is evident that this test leaves without
explanation or justification a great number of things that do exist
and have existed as property. Usually the basis of the labor theory
of property is declared to be each individual's natural right to the
results of his own labor, which claim is assumed to be an ultimate,
undebatable, axiomatic fact. However, that type of natural-right
doctrine, which makes no appeal to experience and results, is now
quite discredited in political science.

Another form of natural-rights theory is that property is necessary
for the realization of the dignity of human nature and every
individual has the natural right to self-realization. This theory
is, in a way, based on an appeal to experience, as to the effect of
property on human character, and it has the virtue of expressing one
of the ideals of modern democracy. Altho, in common with various other
"natural-rights" theories, it must be deemed too absolute and too
individualistic, it contains a far-reaching truth, of which due
account must be taken in our social philosophy.

The legal theory is that property exists because the law says it
shall. This expresses a truth, but is no more than a truism. The law
determines the limits of property, but what determines the limits of
the law? What practical or social justification is there for passing
and continuing such law? The legal theory does not contain a final
explanation. Each of these theories has its defects, but each points
to some fact important and significant, at certain times and places,
in the explanation of this widespread institution.

Sec. 5. #Origin vs. justification#. The question of the origin is not the
same as that of the present justification of the existing system of
private property. The institution of private property has evolved
under diverse conditions. In early societies individual property
rights were not very clearly marked. Every tribe asserted against
other tribes, and tried to uphold by war, its claims upon its
customary hunting grounds; but the claims of the individual hunters
on land within the tribe did not often come into conflict. Private
property at the outset was in personal possessions, ornaments,
weapons, utensils, which were very meager in that primitive society
in which it was the custom "to go calling with a club instead of a
card-case." Only later came individual property in land. A few years
ago it was generally believed that the organization of the old German
tribes was politically an almost perfect democracy, and economically
a communism in which all had equal claims upon the land. To-day this
opinion is very seriously questioned. It seems probable that there was
a goodly measure of communism in the control and use of lands (tho not
in other things), but this was largely confined to an oligarchy of the
favored; whereas the masses lived in subjection, cut off from all but
a meager share in the common lands. However that may have been, strong
forces within historic times have put an end to the common ownership
and tillage of land as it existed among the peasants of Europe. That
system was shown by experience to be wasteful. Competition tended to
bring the economic agents into more efficient hands, and the movement
was furthered by many acts of injustice and violence on the part of
those in power.

Inquiries into the origin and development of any social institution
are interesting and helpful in forming an estimate of its present
significance, but the problems of the past are not those of to-day.
Whether or not the ancient beginning of property in Europe was in
violence and evil has but a remote bearing on the question as to the
present working of it. Social conditions and needs have not changed
more than have the forms and limits of property itself. Each
generation has its own problems to solve, and ignoring for the most
part the evils of the distant past, each generation must test existing
institutions by their present results.

Sec. 6. #Limitations of private property#. It is well, in discussing
private property, to rid the mind at once of the idea that it is an
absolute and unchanging thing. Few realize the manifold ways in which
property rights are limited. Unmodified private control of property is
unknown; the public makes many reservations in its own interest. There
is, first, a whole set of limitations to prevent nuisances. An owner
in many situations is not free to build a slaughter-house or to start
a glue-factory on his land. Property is governed by general public
utility, and anything that threatens to become a nuisance or a danger
may be excluded. Under the right of "eminent domain," the state or the
railroad takes the old homestead from the owner who would live and die

Altho pecuniary damages are paid to him, this is a limitation of his
property rights. Rights of way on property exist either by contract
or by prescription permitting its public use. Most important of all
limitations is the right of taxation, by which society takes more or
less of private incomes for purposes of which the individual owners
may not approve.

The law enforces a multitude of private claims by some persons against
others. A variety of rights called easements or servitudes may attach
to private property, modifying its exclusive use. Leases for any
period are a limitation of the owner's control. Both the holder of
the lease and the owner of the property have certain rights before the
law. The lender of money secured by mortgage has a legally recognized
and enforceable interest in the mortgaged wealth. Property is left in
trust for the benefit of persons or of institutions or of the public,
and is administered by trustees who are strictly bound to execute the
terms of their instructions. Contracts of many sorts are entered
into by owners, limiting their control in manifold ways, and the
law enforces these contracts. These all form a complex of equitable
claims, which together equal in value one undivided property right,
which in turn equals the value of the wealth.[4]

Sec. 7. #Limitations of bequest and inheritance#. The term bequest
implies a will, usually a written will in which the person, in
anticipation of death, expresses his wishes as to the disposition of
his property. It is said sometimes that bequest is a "logical" result
of private property, but the law does not treat it as such. The
right of bequest, or of gift at death, is limited in various ways
in different countries. In countries where hereditary aristocracies
exist, primogeniture is in some cases required by law, in others
so strongly favored by public opinion that it is practically always
followed. Custom limits bequests in England to members of the family,
and wills given outside the family are rare, and are almost always
broken in the courts. John Stuart Mill contrasted this with the
practice in America, frequent even in his day and still more frequent
now, of rich men giving for public purposes. In France the right of
bequest outside the family is legally limited; only the share of one
child can be willed away by the father, and the rest must be equally
divided among the children. Settlements and _fidei commissa_ are
limited in many countries, because of the recognized social evils
resulting from the tying up of estates for generations. Throughout the
history of England, Parliament has given attention to the question of
mortmain, which chiefly concerned the drifting of great estates into
the hands of the church or of corporations, as the result of bequests
by the pious. In England, of late (and to a less extent in this
country), the policy of permitting unlimited endowments to charitable
institutions has been seriously questioned, and by legislation some
of the old endowments have been diverted from their original purposes
when these have ceased to be of social utility. Inheritance, in
contrast with bequest, usually means succession to the property of
one who has died intestate, that is, has made no will. The law of
inheritance likewise varies greatly with time and place.

Sec. 8. #Social expediency of private property#. In the light of present
political philosophy the explanation and justification of private
property must be on grounds of social expediency. This is a broad
explanation and it has the fault of a broad explanation, that it needs
to be further explained. Under it can be brought the many varying
conditions. Even if private property works hardship to individuals in
many cases, yet it may be justified if, on the whole, it is best for
the progress of society. Laws must be judged by their average working,
not by exceptional cases. In general, the system of private property
must be judged by this test: Does it further the welfare of the nation
better than would any alternative plan for the control of economic
wealth? The question is not whether it is faultless, for no human
institution is so. Nor must it be assumed that the rule of property
needs to be uniform in respect to all kinds of wealth. There are
many kinds of property, and the test may be applied separately to the
different forms and to the varying degrees of property rights. The
varied and often strict limitations of property mentioned above are
all determined by some thought, wise or foolish, of social expediency.
Different parts of wealth may be treated in different ways: there may
be private property in wagons, and public property in roads; private
property in houses, and public property in forests; private property
in automobiles, and public property in railway carriages. But any rule
of property, like any other workable human law, must be applicable to
all individuals that meet the conditions.

The very acceptance of the theory of social expediency implies the
need of frequent readjustment of the institution of private property.
The essential thought in the various attacks on the institution of
property is that, because it either causes or makes possible the
inequality of incomes, it is not socially expedient. Private property,
as it is found to-day, is complicated by many historical accidents.
Survivals of ancient injustice and relics of feudal institutions that
rest on no vital reason remain in our new country as well as in the
older ones. The limits of property in many respects are determined not
according to the logic of expediency, but by the social inertia which
often governs successive generations.

The question is raised in many minds: If private property is not an
absolute right, what shall be its limits? What changes should be made
in it? These questions put the greatest economico-political problem of
our day, one that contains within it, indeed, many minor problems. A
number of these will receive attention in the following pages.

Sec. 9. #The monetary economy#. So greatly does the use of money
facilitate the transfer, buying, and selling of private property and
so closely are property and pecuniary trade connected in practice and
in the thoughts of men, that every radical proposal to abolish private
property has included a plan to do away with money also. But money and
private property are not essentially and logically bound up together,
for a certain measure of private property always has been found where
money was little or not at all used. True, if there were absolutely no
private property, there would be little use for money, altho it might
still be used as a form of counter by the communistic state. We have
already seen[5] how a monetary unit comes into use, and we shall treat
more fully of the nature of money in later chapters. We may note here
merely that the use of money is an outstanding feature of the present
economic system and gives rise to many of the problems of political

Sec. 10. #The competitive system#. The existing system is likewise
characterized by competition[6] in the buying and selling of wealth
and of the usances and services of economic agents. By competition we
mean here the condition of political freedom on the part of each man
to trade his property (goods, uses, or services) as he chooses, and
this combined with the disposition on his part to get what he
values most highly for himself and his family. Whenever any one else
(official or citizen) forbids and prevents a man from getting all he
can, in so far competition is limited. Whenever any one is deterred by
fear of, or by affection for, some other trader, from getting all he
can, in so far competition is limited. Whenever any one conspires with
another trader to act together with him to withdraw or to alter his
bid, in so far competition is limited. Private property and economic
competition do not merely happen to exist side by side, forming more
or less favored conditions each for the other; they are essentially

It is not our task at this point to present the advantages and
disadvantages of competition, but merely to indicate its important
place in the actual economic world. Like private property, competition
is not the universal feature of our present system, but it is the most
general and characteristic method of valuation, of price fixing, and
of trade.

Sec. 11. #Limitation of competition by custom.#[8] The relatively large
influence of competition in present society appears more plainly in
comparing the present system with that of an earlier state of society
or with that of a present savage tribe. A member of the lowest human
societies is subject to law; tho he is a savage he is not "untutored."
On the contrary he is bound in many ways to follow customary lines
of conduct, and a large part of his time is given to learning the
traditions and then to observing the ceremonials of the tribe.
Primitive customs always take on a religious sanction, and every
member of the tribe is piously bound to do as his fathers have done
and as his neighbors are doing. This limitation applies to the choice
of food to eat, clothes to wear, time to hunt, plant, and harvest,
weapons and tools to use, where and how to trade, how much to give or
take, and to countless other details of economic choice. So, in early
society, economic relations were complex and but slowly changing from
generation to generation. Custom, rather than competition, ruled in
manifold ways the economic actions of men.

Custom continued to rule a large share of the individual life of the
peoples of northern Europe through barbarian and feudal times. Its
force has gradually decreased, but even yet is not entirely set aside.
Political and economic interests were not clearly distinct in the
Middle Ages. Land was the all-important kind of wealth. Military
and other public services were performed by the higher landlords (as
vassals of their overlords) who in this way paid at the same time what
we to-day would call rent and taxes. The landlord in turn received
from his underlings services and goods in kind (food and supplies) and
so (in modern eyes) was both a collector of taxes and a receiver of
rent. The rent, however, was not a competitive price, but consisted
of the dues and services which the forefathers had been accustomed to
pay. In many ways also in the towns, close organizations of craftsmen
and of merchants regulated prices and kept others out of their
industries. Industrial privilege pervaded the life of that time.

Yet through all the Middle Ages ran the forces of competition. The
inefficiency of customary services and the high prices charged
by selfish privilege were constant invitations to men to become
competitors. Men strove to break over the barriers of custom and of
prejudice. Their efforts to attain freedom to compete was the vital
force of the time. The industrial history of the Middle Ages was
largely the story of the struggle of the forces of competition against
the bonds of custom and privilege.

Sec. 12. #Effect of modern forces upon custom#. The industrial events
following the discovery of America strengthened the forces making for
economic freedom. Discoveries in the Western hemisphere opened up a
wide field for the adventure and enterprise of Europe. Commerce is the
strongest enemy of custom, and new opportunities gave a rude shock to
the conservatism both of the manor and of the village. With the rapid
growth of industry and manufactures, old methods broke down. In an
open market custom declines; it flourishes best in sheltered places.
Further, the movement of thought in the Reformation, and the spirit
of the times which expressed the principle of personal liberty
and allowed the individual to follow his own opinions and take the
consequences, were favorable to competition. Despite these facts, the
restraints of the national governments on trade continued great,
in some respects increasing during the seventeenth and eighteenth
centuries, in France, Holland, and England. The regulation before
attempted by towns and villages was employed on a larger scale by
national governments with their industrial systems. The colonies in
America were used for the economic ends of the "mother country"
and for the selfish interests of the home merchants in Europe. The
American Revolution was one of the bitter fruits of the English policy
of trade restriction.

Sec. 13. #Adam Smith's influence#. "The Wealth of Nations," the first
great work on political economy, was published in the year 1776. That
was the "psychological moment" for its appearance, as public thought
was so prepared for it that it had its maximum possible influence.
The year of the American Declaration of Independence gave the most
striking object lesson on the evils of a selfish colonial policy that
interfered on a grand scale with economic freedom. The old customs had
become ill fitted to life, ill adapted to the rapid industrial changes
that were going on. What was needed in many directions, both
in politics and in industry, was merely negative action by the
government, the repeal of the old laws, the overthrow of old abuses.
The French Revolution, following a few years later, emphasized this
thought in the political field. The philosophers of the time believed
in a "natural law" in industry and politics. The reformers of the
time wished to throw off the trammels of the past and to give men
opportunity to exert themselves "naturally." In America the old abuses
never had taken deep root, as the conditions of a new continent were
not favorable to monopoly and privilege. Altho the movement for the
repeal of medieval laws has continued in Europe from 1776 till the
present time, yet custom still is stronger to-day in Europe than
in America. Serfdom was not abolished until the first half of the
nineteenth century in Austria and southeastern Europe, and not until
the last half in Russia. Many economic and cultured forces furthered
this movement, but the most powerful intellectual force in its favor
was the work of Adam Smith. So strong an impression did Smith's book
make, that in the minds of men "free trade" became almost identical
in thought with political economy, whereas that was but the temporary
economic problem of the eighteenth century.

Many men then thought that in "free and unlimited competition" had
been found a solution of all economic problems for all time. But soon,
it was apparent that it was no such simple and absolute solution.
Indeed many of the present economic problems--in one sense all of
them--center around this one: to determine the proper forms and limits
of competition. The varied aspects that this problem takes will appear
in every portion of the following pages.

Sec. 14. #The wage-system.# Viewed in another aspect the present economic
and social order is called the wage-system.[9] The wage-contract, like
the use of money, is not essential to the existence of a system of
private property. Communities such as the American colonies and as
many of the newly settled states, may consist almost entirely of
self-employed owners of land. Bulgaria, before the Balkan wars called
the peasant state, presented this organization (tho of course with
some wage-payment), as did also its neighbor Serbia. But given the
institution of private property with competition (freedom to buy
and sell), let manufactures and commerce develop to any extent,
and inequalities of fortunes increase while an increasing number of
persons work for wages. It is noteworthy that as this goes on (as
it has done in America at an increasing rate since the middle of the
nineteenth century) it is the agricultural and rural hand industries
that continue to be mainly worked by owner-managers and workers,
while it is the manufacturing, transporting, and large commercial
enterprises in which the labor is done for wages. The acceptance of
the wage-system thus far has been the inevitable price to be paid
for manufacturing and industrial development; and one of our economic
problems is to determine whether this must continue, and if so,
whether in the same measure as in the past.

[Footnote 1: The exceptions are probably unstated amounts of exempt
real estate (owned by municipalities, state, and nation), some of the
irrigation plants, part of the canals, and that part of the gold and
silver which is in the public treasury.]

[Footnote 2: See Vol. I, pp. 264-267. The law makes between property
rights and equitable rights some subtle distinctions, which have their
reason in the history, if not in the logic, of the law but which are
not essential to economic discussion. In some states this distinction
has been in large measure abolished. What interests us are the rights
(claims) that men have to the control of wealth and services, whether
by technical law these are called legal or equitable, and this right
is what is meant by "property" in our discussion of it.]

[Footnote: 3 This confusion has had important practical consequences
in the field of taxation. See Vol. I, pp. 265-267, and below, ch. 17.]

[Footnote 4: These claims mutually delimit each other (whether they be
called equitable claims, or liens, or property rights), and wealth
is not multiplied by multiplying the claims, as is unfortunately
sometimes assumed to be the case. See above, sec. 3.]

[Footnote 5: See Vol. I, p. 51.]

[Footnote 6: See Vol. I, p. 73.]

[Footnote 7: This will appear in comparing the competitive method of
distribution with other methods in ch. 31.]

[Footnote 8: See Vol. I, p. 143, on medieval land tenures; p. 158, on
customary rents; p. 190, on the effect of caste.]

[Footnote 9: See Vol. I, p. 227.]





Sec. 1. Origin of money. Sec. 2. Qualities of the original money-goods.
Sec. 3. Industrial changes and the forms of money. Sec. 4. The precious
metals as money. Sec. 5. Gold-using countries. Sec. 6. Varying extent of
the use of money. Sec. 7. Money defined and reviewed. Sec. 8. Metal money
without or with coinage. Sec. 9. Technical features of coinage. Sec. 10.
Seigniorage defined.

Sec. 1. #Origin of money#. Everywhere in the world where the beginnings
of regular trade have appeared, some one of the articles of trade soon
has come to be taken by many traders who did not expect to keep or use
it themselves, but to pass it along in another trade.[1] This made it
money, for money is whatever comes to be used as a general price-good.
The character of a _general_ price good clearly distinguishes money
from goods bought and sold by a particular class of merchants, such
as grain, cattle, etc., to be sold again. It is only in so far as a
particular good comes to be taken by persons not specially dealing in
it, taken for the purpose of using it as a price-good to get something
else which they desire, that a thing has the character of money. The
thing called money thus is a durative good passing from hand to hand
in a community, and completing its use in turn to each possessor of it
only as he parts with it.

The use of money is of such social importance, that it would be
impossible for modern industrial society to exist without it. The
discussion of money touches many interests, it raises many questions
of a political and of an ethical nature. There are perhaps more
popular errors on this than on any other one subject in economics, but
the general principles of money are as fully understood and as firmly
established as are any parts of economics.

Sec. 2. #Qualities of the original money-good#. The selection of any
money-commodity has not been mere chance, but has been the result of
that object being better fitted than others to serve as a medium of
exchange. The main qualities that affected the selection of primitive
form of money were as follows: 1. Marketability (or saleability); that
is, it must be easy to sell. The first forms of money had to be things
which every one desired at some time and many people desired at any
time. That was the essential quality that made any one ready to take
it even when he did not wish to use it himself. Many kinds of food and
of clothing are very generally desired goods. But few of these classes
of goods have in a high measure certain other important qualities, now
to be named.

2. Transportability; that is, the money material must be easy to
carry, it must have a large value in small bulk and weight. To carry
a bag of wheat on one's back a few miles requires as great an effort
ordinarily as does the raising of the wheat, and the cost of carriage
for fifty miles even by wagon will often equal the whole value of the
wheat. Cattle, while not comparatively very valuable in proportion to
weight, and not possessing the other qualities of money in the highest
degree, have the advantage that they can be made to carry themselves
long distances, and therefore they have been much used as money in
simpler economic conditions.

3. Cognizability; that is, the money-good must be easy to know, and
to judge as to quality. If expert knowledge or special apparatus are
needed to test it in order to avoid counterfeits, few could be ready
to take it and trading would be a costly process.

4. Durability; that is, the money-good must be easy to keep without
much loss in amount or in quality, perhaps for long periods, until it
can be passed on in trade. Few kinds of food answer very well to this
last requirement, being organic and perishable. But all four qualities
above named were pretty well embodied in primitive times in rock salt,
in rare flints and bits of copper suitable for tools and weapons,
in furs in northern countries, and in many articles of personal
adornment, such as beads, feathers, jewels, and metal ornaments.

5. Divisibility; that is, the quality in the monetary material that
permits it to be divided easily into smaller amounts and then to be
united again into larger masses at little cost and without loss in
amount or in quality. This quality is present only when the material
is quite homogeneous throughout the whole mass, a condition fulfilled
more completely by the metals than by any other goods. This quality
makes it possible to put the governmental stamp upon the money
material, and to produce pieces, some of which are exact duplicates
and some exact multiples, of others. In this manner pieces of money
are provided suitable for transactions of different magnitudes, down
to small fractional amounts. A monetary system of this kind aids
greatly the development of the sense and habit of exact estimation of

Sec. 3. #Industrial changes and the forms of money#. The money use, as
has just been shown, is a resultant of a number of different motives
in men. The changing material and industrial conditions of society
change the kind of money that is used. Things that have the highest
claim to fitness for money with a people at one stage of development
have a low claim at another. The final choice of the money-good
depends on the resultant of all the advantages. Shells are used for
ornament in poor communities but cease to be so used in a higher state
of advancement, and thus their saleability ceases. Furs cease to be
generally marketable in northern climes, when the fur-bearing animals
are nearly killed off and the fur trade declines. When tobacco was the
great staple of export from Virginia, everybody was willing to take
it, and its market price was known by all. It served well then as the
chief money, but, as it ceased to be the almost exclusive product
of the province, it lost the knowableness and marketability it had
before. In agricultural and pastoral communities where every one had
a share in the pasture, cattle were a fairly convenient form of money,
but in the city trade of to-day their use as money is impossible.
Thus, in a sense, different commodities compete, each trying to prove
its fitness to be a medium of trade; but only one, or two, or three at
the most, can at one time hold such a place.

While industrial changes and conditions affect the choice of money, in
turn money reacts upon the other industrial conditions. If a new and
more convenient material is found or the value of the money metal
changes to a degree that affects the generalness of its use, industry
is greatly affected. The discovery of mines in America brought into
Europe in the sixteenth century a great supply of the precious metals,
and this change in the use of money reacted powerfully upon industry.
Money, being itself one of the most important of the industrial
conditions, is affected by and in turn affects all others.

Sec. 4. #The precious metals as money#. Certain of the metals early began
to show their superior fitness to perform the monetary function. The
metals first used as money were copper, bronze (an alloy of copper
with nickel), and iron. These were truly precious metals in
early times for they were found only in small quantities in a few
localities. They, therefore, were widely sought and highly valued as
ornaments and for use as tools and weapons. But as the great ancient
nations emerged into history, these materials were already being
displaced in large measure. Their value fell greatly as a result of
greater production due to somewhat regular mining. As wealth grew, as
trade increased, as the use of money developed, as commerce extended
to more distant lands, the heavier, less precious metals failed
to serve the growing monetary need, especially in the larger
transactions. Silver and gold, step by step, often making little
progress in a century, became the staple and dominant forms of money
in the world, while copper and nickel still continued to be used for
the smaller monetary pieces. Every community has witnessed some stages
of this evolution. In this contest silver had proved itself a few
centuries ago to be on the whole the fittest medium of exchange for
most purposes, though gold was at the same time in use in larger
transactions and in international trade.

Sec. 5. #Gold-using countries#. At the beginning of the nineteenth
century nations were divided, in accordance with the metals they used
as standards, into two great groups, silver- and gold-using. Since
that time, and more rapidly after 1850, gold has displaced silver as
the standard money. In a higher degree than any other one material,
gold has the qualities of a good standard for rich and industrially
developed communities. England for a long period practically has had
gold as its standard money; the United States since 1834 (except for
the period of paper money from 1862 to 1879); France since about 1879,
having shifted gradually from silver, after 1855, under the working
of the bimetallic law; Germany since 1873; and Japan since the later
nineties. Other countries have been striving to attain it. Since
about 1890 some states (including Mexico) and some of the colonial
possessions of the great nations (including India and the Philippines)
have adopted the plan of "the gold-exchange standard." By this plan
gold is the standard price unit, while silver continues to be used
all but exclusively as the material in circulation, its amount being
controlled and its value regulated on principles to be explained below
under coinage, seigniorage, and foreign exchange. There are now left
but a few silver-standard countries, the most important being China.
There are, however, numerous countries, notably in South America and
Central America, which have fiduciary paper-money standards.[2]

Sec. 6.# Varying extent of the use of money#. Trade by the use of money
at no time has become the exclusive method. Barter still lingers
to-day.[3] The extent to which, on an average, money is used in
different parts of the world differs widely. The use of money in
Siberia is less than in European Russia, and its use is less there
than in western Europe. The use of money as compared with barter is
generally much greater in the cities than in the rural districts. In
the cities of Mexico not only money, but banks and credit agencies are
in general use; whereas the rural districts are more backward and make
far more use of barter than is the case in the United States. At the
ports in the cities of China, India, and South America the use of
money may be very like that in European cities; but go a little way
into the interior of these countries and conditions as to the use of
money change greatly.

However, the comparative per capita amounts of money (in terms of
American dollars) in circulation in different countries is far
from being a true index of their industrial development or of their
commercial activity. Indeed, beyond a certain point the larger average
amount of money in circulation in a country may indicate backwardness
in the development of banks and other credit agencies rather than
greater amount of wealth or of business. Notice, for example, the
medium position of the great commercial countries, Germany and the
United Kingdom, as compared with other countries above and below them
in the following list.


France..................$48.91 America (U.S.)..........$32.98

Australia............... 38.45 Portugal................ 29.46

Canada.................. 33.57 Netherlands............. 26.86

Switzerland............. 24.32 Mexico.................. 9.17

Germany................. 21.36 Finland................. 8.38

United Kingdom.......... 21.21 Chile................... 8.24

Spain................... 19.96 Turkey.................. 7.09

Brazil.................. 18.79 Russia.................. 6.45

Denmark................. 17.73 Japan................... 5.68

Belgium................. 15.83 Bulgaria................ 5.57

Austria-Hungary......... 14.68 Serbia.................. 5.49

Rumania................. 13.24 Venezuela............... 5.51

Italy................... 13.09 India (British)......... 5.19

South Africa............ 12.93 Ecuador................. 4.62

Norway.................. 12.50 Peru.................... 3.17

Sweden.................. 11.59 Colombia................ 2.32

Greece.................. 11.02 Paraguay................ .57

7. #Money defined and reviewed#. Money may be defined as a material
means of payment and medium of trade, generally accepted as the
price-good and passing from hand to hand. The definition contains
several ideas. The words "generally accepted" imply that money has a
peculiar social character, is not an ordinary good. As a price-good,
money itself must be a thing having value, otherwise it could not be
accepted. Trade means the taking and giving of things of value. Money
is, therefore, not merely an order for goods, as a card or paper
requesting payment; it is itself a thing of value (tho this value may
be due partly or solely to its possessing the money function). Such
things as a telegram when transferring an order for the payment of
money, as the spoken word, and as a mere promise to pay, are not
money. Even checks and drafts are merely substitutes for money. Money
passes from hand to hand, is a thing that can be handled, and is or
can be bodily transported.

The application of the definition is not always easy, for money shades
off into other things that serve the same purpose and are related in
nature. In many problems money appears to be at the same time like
and unlike other things of value, and just wherein lies the difference
often is difficult to determine. Even special students differ as to
the border-line of the concept, but as to the general nature of money
there is essential agreement.

8.# Metal money without or with coinage#. In antiquity the metals
were used as money in bulk; that is, the amount was weighed at each
transaction and the quality was tested whenever there was doubt.[4]
In countries industrially backward, payments are still made in this
manner. For some time after the discovery of gold in California, gold
dust was roughly measured out on the thumb-nail. In shipments of gold
to-day by bankers to settle international balances, metal may be in
the form of bars that bear the mark of some well-known banking house.
In all of the cases of this kind the gold is money in fact, but not by
virtue of any act of government. The metal is simply a valuable good,
the receiver of which values it according to its weight and fineness.
This is true even when the government mint, for a small charge, tests
and stamps the bars at the request of citizens.

Very early it became the practice of governments to shape and stamp
pieces of metal to be used as money, so as to indicate their weight
and fineness. The act of shaping and marking metal for this purpose is
called coinage.[5] The coinage by government had notable advantages in
giving to the monetary units uniformity of size, fineness, and value,
with the stamp that was readily recognized. But in its simplest form
coinage in no way changed the value of the money, and any other mark
equally plain put upon it would have served equally well, if only it
had carried with it equal assurance of the quality and weight of the

9. #Technical features of coinage#. For each kind of metal money there
is an established _ratio of fineness_ for the more precious material,
which is mixed with baser metals used as alloys. In the United States
all gold and silver coins are made nine-tenths fine; in Great Britain,
eleven-twelfths. The established weight of the gold dollar in the
United States is 25.8 grains of standard gold which contain 23.22
grains of fine gold. The _limit of tolerance_ is the variation either
above or below the standard weight or fineness that a coin is allowed
to have when it leaves the mint. This is different for each of the
principal coins, being about one-fifth of one per cent on a gold
eagle. The _par of exchange_ between standard coins of different
countries is the expression of the ratio of fine metal in them.
Thus the par of exchange between the American dollar and the English
sovereign (the "pound") is 4.866; that is, that number of dollars
contains the same amount of fine gold as an English gold sovereign.
The embossed design is merely to make the coins easily recognizable
and difficult to counterfeit; and milled or lettered edges are to
prevent clipping and otherwise abstracting metal from the coins.

10. #Seigniorage defined#. Coinage, as practised by early governments
and rulers, came to be a function of great importance politically as
well as economically. The right to issue money came to be one of
the most essential prerogatives of sovereignty. The prince, king, or
emperor stamped his own device or portrait upon the coin; hence the
term seigniorage from _seignior_ (meaning lord or ruler). Seigniorage
meant primarily the right the ruler, or the estate, has to charge
for coinage, and hence it has come to mean also the charge made for
coinage, and often, in a still broader sense, the profit made by the
government in issuing any kind of money with a value higher than that
of the materials (whether metal or paper) composing it. Coinage is
rarely without charge, and often has been a source of revenue to the
ruler. In antiquity and in the Middle Ages this right was frequently
exercised by princes for their selfish advantage to the injury and
unsettling of trade. This introduced a very great problem of value
into the use of money.

The coinage is said to be _gratuitous_ when no charge is made for
coinage. Coinage is said to be _free_ if the subject or citizen
may take bullion to the mint whenever he pleases, paying the
usual seigniorage. Coinage is _limited_ if the government or ruler
determines when coinage is to take place. Thus, coinage may be both
free and gratuitous, when citizens are allowed to bring bullion
whenever they please and have it converted into coins without charge
or deduction. But coinage is free without being gratuitous when any
citizen may bring metal to the mint, whenever he chooses, to be coined
subject to the seigniorage charge.

[Footnote 1: See Vol. I, pp. 15-16 and 50-53 for an introductory
statement of the origin of money in connection with markets.]

[Footnote 2: See ch. 5.]

[Footnote 3: See Vol. I, p. 43, on the decline of barter.]

[Footnote 4: "I will ... refine them as silver is refined, and will
try them as gold is tried." Zech. xiii, 9. "I bought the field ...
and weighed him the money, even seventeen shekels of silver. And I ...
weighed him the money in the balances." Jer. xxxii, 9, 10. A shekel
was 224 grains, troy weight, which is about equal to six-tenths of the
pure metal in a silver dollar to-day and worth now about twenty-four
cents in gold. At that time, however, the purchasing power of silver
was many times greater than it now is.]

[Footnote 5: From the French _coin_, in turn from Latin _cuneus_,
wedge, suggestive either of an earlier wedge-shaped piece, or of a
wedge-shaped mark on the piece. The German word _Muenze_ is from the
Latin _moneta_ (as is the English _mint_, the place where coins are
made), which meant money, that name being taken from the temple of
Juno, called _Moneta_, where coins were made.]



Sec. 1. Standard-commodity money. Sec. 2. Alternative uses of the money-good.
Sec. 3. Money as a valuable tool. Sec. 4. Relative importance of
money. Sec. 5. Concept of the individual monetary demand. Sec. 6. Concept
of the community's monetary demand. Sec. 7. The money-material in
its commodity uses. Sec. 8. The general level of prices. Sec. 9. Effect of
increasing gold production. Sec. 10. The quantity theory of money. Sec. 11.
Interpretation of the quantity theory. Sec. 12. Practical application of
the quantity theory.

Sec. 1. #Standard-commodity money#. The actual money in use in almost
every country to-day consists of a wide and confusing variety: gold,
silver, nickel, copper, paper in various forms, issued by various
authorities under various conditions as to amount and as to
seigniorage. But among all the kinds, in each country some one kind
is found standing preeminent and in a peculiar position, as the
_standard_ money to which the value of all the other kinds of money is
in some manner adjusted. Usually this standard money is composed of
a material (gold or silver) which is a commodity; but there are
many examples of paper money being for the time the standard. The
difficulties of the money problem must be attacked at the point
of standard-commodity money, where it is nearest to ordinary value
problems and is less complicated than when the various other kinds of
money and the various money substitutes are included.

We mean by standard money that kind, no matter what its form, which
serves in any country as the unit in which the value of other kinds of
money is expressed. The standard usually is a quantity of metal of a
certain weight and fineness, which, as a commodity, has a value also
in industrial uses. Coins of this standard are called full, or real,
money by some writers that deny the title of money to everything else.

Sec. 2. #Alternative uses of the money-good.# Let us consider the
problem of money-value as it would present itself if only one kind of
commodity money were in use. This doubtless was in large measure,
if not entirely, the case for a time in early societies after one
material had proved itself to be the best suited for the purpose. The
history of many kinds of money may, we have seen, be traced back to
a point where they were not money, but commodities with a direct
value-in-use. Such were ornaments, shells, furs, feathers, salt,
cattle, fish, game, and tobacco. Each of these materials has, in each
situation, a value which is the reflection of its power to appeal
to choice. Now, if to the commodity-use is added the money-use, this
increases the demand for that good. No new theory is required to
explain the value of a commodity as it gradually acquires the added
use of a medium of trade. The money use is one that works no physical
or visible change in goods except a slight unavoidable abrasion, and
at any time a person receiving a piece of commodity money may retain
it for its use-value, as food, ornament, tool, or weapon, or may
retain it for a time and then spend it as money. This case of value is
no more difficult than that of anything else having two or more uses.
For example, cattle are used for milk, for meat, and as beasts of
burden. Each of these uses is logically independent as a cause
of value, yet all are mutually related, the value of cattle to a
particular person being determined by the consideration of all the
uses united into one scale of varying gratification.

Sec. 3. #Money as a valuable tool.# Money is often, by a figure of
speech, called a tool. A tool is a piece of material taken into the
hand to apply force to other things, to shape them or move them.
Figuratively, this is what money does. A man takes it not to get
enjoyment out of it directly, but to apply force, to move something,
and that which he moves is the other commodity. Money thus (as money)
is always an indirect agent. Adam Smith aptly likened money to the
roads and wagons that transport goods, thus gratifying desires by
putting goods into more convenient places. The fundamental use that
money serves is to apportion one's income conveniently as it accrues
and as it is spent. The use of money increases the value of goods by
increasing the ease with which trade takes place. Like any tool or
agent, money is valued for what it does or helps to do. It enhances
the value of the goods that it buys and sells by dividing them into
quantities convenient for use and by making them available at
the right times. In the light of the principles of diminishing
gratification and of time-preference it is clear that the amounts in
which, and the times at which, goods are available have an essential
bearing on their values. Money is the most successful device ever
discovered for distributing the supplies of a journey along its
course, and the goods of daily need over a period of time. The use of
money as a storehouse of value by hoarding it is merely a more extreme
case of keeping income until a time when it will have a greater value
to the owner than it has in the present.[1]

Sec. 4. #Relative importance of money.# Because money is the general
expression of purchasing power, and comes to symbolize all other
wealth, it often assumes undue and exaggerated importance in men's
eyes. Money is but one of many forms of wealth. It constitutes but a
small percentage of the total wealth of a country, and it is far from
being the most indispensable to human welfare. Yet its importance,
as a whole, in determining the form of industrial organization is
enormous. In a society without money, industrial processes would be
very different, and trade would be hampered in manifold ways.

A poor community has little money because it cannot afford more; it
gets along with less money than is convenient just as it gets along
with fewer agents of every other kind that it could use. Pioneers in a
poor community where the average wealth is low cannot afford to keep
a large number of wagons, plows, good roads, or schoolhouses. If the
members of the community were wealthy enough each would have more
of these and of other things, and the sum total of money would be
greater. Great as is the convenience of money, poorer communities have
to do with little of it. It is, therefore, a confusion of cause and
effect when poor communities imagine that their poverty is due to lack
of money.

Sec. 5. #Concept of the individual monetary demand.# Let us now seek
to get in mind the idea of an _individual monetary demand,_ as that
amount of money which at any time is required by an individual to make
his purchases in expending his income. Every man may be thought of
as having an average monetary demand, or his average individual cash
reserve, throughout a period. A man with a salary of $50 a month
paid monthly has ordinarily a maximum monetary demand of $50. If his
expenditures are made in two equal parts, the one on pay-day, the
other thirty days later, his average monetary demand during the month
is a little over $25. If most of his purchasing is done in the first
week of the month, his average monetary demand may be perhaps $10.
Many a workman purchases on credit, running accounts at the stores for
a month. Then on pay day he spends his entire month's wages the day
he receives it, and goes without money for the rest of the month. His
average monetary demand throughout the month would then be about
equal to one day's wages. Evidently any person's cash reserve may
be expressed as that proportion of his income that is to him of more
value retained in money form for any period than if at once expended.

In this conception of the individual monetary demand, must, however,
be included not merely the demands of retail purchasers, made by
themselves, but also those of all agencies such as merchants, bankers,
and transportation companies, serving the needs of ultimate consumers
of goods. The use of money may be necessary several times before a
commodity completes its journey from producer to consumer.

Of two persons whose expenditures of money are of the same kind and
made at the same rate, the one having the larger amount of purchases
to make has the larger monetary demand. But the amount of purchases
does not always vary directly with the amount of real income[2]; for
example, a farmer and a village mechanic may have at their disposal
incomes equal in the quantities of goods, such as food, fuel,
clothing, and house-uses (worth, let us say, $1000 for each), but the
farmer would be getting a larger part of his goods directly from his
farm and by his own labor, while the mechanic would be getting first
a money income to be expended afterward for food, clothing, and rent.
The mechanic would in this case have an average monetary demand much
larger than the farmer.

We see thus that a person's monetary demand at any time is that amount
of money which rests in his possession as the necessary condition to
making his purchases as he desires. Individual monetary demand varies
in proportion directly to the delay, and inversely to the rapidity
with which the individual passes the money on; and directly to
the amount of the person's income that is received and expended in
monetary form.

Sec. 6. #Concept of the community's monetary demand.# The monetary demand
of a community at a given time is the sum of the monetary demands of
the various individuals and enterprises. It is that stock of money
which is necessarily present to effect the exchanges of the community
in the prevailing manner at the existing price level. A single
dollar as it circulates helps to supply the monetary demand of many
individuals in turn: the more quickly each person spends the piece
of money he receives, the greater its rapidity of circulation. Let us
suppose that every piece of money passed from one person to another
once each day. Then a dollar would, in the course of a business year
(about 300 days), serve to buy (and at the same time to sell) $300
worth of goods. If the average purchases of each individual amounted
to $1000 a year, the average monetary demand of each would be about
3-1/3 dollars.

But every moment beyond the average time that any one kept money would
increase his monetary demand. If he delayed a day, a week, or a
month in spending the money, waiting until he could buy in some other
market, or until a better time to buy, he would thus increase insomuch
the amount of money needed to make the trade (on that scale of
prices). It requires more slow dollars than swift dollars to make a
given volume of purchases.

Evidently the times of maximum monetary demand of the different
individuals do not coincide; rather they alternate with each other,
and the community's total monetary demand at a given time is a
composite of the many individual variations. The amount of money that
will remain in circulation in a community depends on several factors,
the chief among them being the amount of goods to exchange, the
methods of exchange, and the prevailing scale of prices. The amount
of goods to be exchanged may change even when the amount produced is
unaltered (e.g., a change from agricultural to industrial conditions).
The methods of exchange may alter so as to require either more money
(e.g., cash instead of credit business), or less money (e.g., use of
bank checks displacing use of money by individuals). Or, apart from
the other factors, the scale of prices may change as the conditions of
gold and silver production are altered. The interrelations of gold
and silver production, paper money issues, banking growth, and
money-inflow and outflow in foreign exchanges give rise to the most
interesting and important problems in the field of monetary theory.

Sec. 7. #The money-material in its commodity uses#. We are now prepared
to take up the question: What determines the ratio at which money
exchanges for other goods? And, as money comes to be the unit in which
prices are generally expressed, the question becomes: What determines
the general level of monetary prices? We have this problem in its
simplest form in the case of a commodity-money such as gold. It may be
looked upon merely as so much precious metal. The problem of its value
as bullion is the same as that of the value of pig iron or of zinc,
of meat or of potatoes. There is here no special monetary problem.
The value of gold as bullion and its value as money are kept in
equilibrium by choice and by substitution. The several uses of gold
are constantly competing for it: its uses for rings, pens, ornaments,
championship cups, photography, dentistry, delicate instruments, and
as a circulating medium. If the metal becomes worth more in any one
use, its amount is increased there and is correspondingly diminished
in other uses.[3]

When coinage is free and gratuitous[4] the standard money is a
commodity. Such coinage is essentially but the stamp and certificate
that the coin contains a certain weight and fineness of metal. Where
coinage is free and gratuitous each coin will be worth the same as the
bullion that is in it so far as the citizens exercise their choice.
They will not long keep uncoined metal in their possession when it is
worth more in the form of money, nor will they long keep money from
the melting-pot when it is worth more as bullion. Yet there may be
a slight disparity between the bullion value and the monetary value
before the metal is converted into coin or the coin melted down into

This adjustment of the value of commodity-money to other things is
made also on the side of supply, in the use of labor and material
agents to produce the precious metals and to produce other things.
Gold-mining, for example, is one among various industries to which men
may apply their labor and their available material agents. Some mines
are superior, others medium, others marginal which it barely pays
to work. There is, therefore, a rise and fall of the margin of
gold production with changes in prices and changes in the cost of
production. Large new deposits of gold are discovered from time to
time and new methods of extracting gold are invented. If, when it
barely pays to work a mine, such changes occur, gold becomes worth
less, and the poorer mines eventually must go out of use. As gold
rises in value some abandoned mines again come into use. A similar
variation may be noted in the utilization of marginal land, marginal
factories, marginal forges, and marginal agents of every kind.[5]

Sec. 8. #The general level of prices#. We come now to a more peculiar
aspect of the monetary value problem. In performing its function
as general medium of trade, money determines the general level
of monetary prices. We have the idea of a general level of prices
whenever we contrast the price ratio of money to other commodities at
one time with its ratio at another time. Now the monetary prices
of the various commodities are constantly changing, and in somewhat
different degrees, but on the average there may be a general trend
upward or downward, and this is called a change in the general scale
(or level) of prices, as contrasted with changes in the values of any
two commodities in terms of each other. The general price level will
be more fully discussed below (Chapter 6, section 3) in connection
with the method of measuring by index numbers its changes. This brief
explanation may, perhaps, be enough for our present purpose. Our
question now is: What is the effect of changes in the quantity of
money (considered apart from chance accompanying changes) upon the
general level of prices?

Sec. 9. #Effect of increasing gold production#. Let us take a case where
gold is in general use as money, and where for some time there has
been no noticeable change in the amount of business, the methods of
trade, and the general scale of prices. What would happen when new
gold mines were found that were much easier to operate, and gold began
to be produced at a much more rapid rate than formerly? The amount
of gold as compared with other forms of wealth evidently would be
increased. What if all the increase went into the industrial arts? The
value of gold in its industrial uses would fall. Then a part of the
increase must be diverted to monetary uses. When any man, by reason of
the increasing gold supplies, gets a larger stock of money than he had
before, the proportion formerly existing between his use for money
and his monetary stock is altered. He has more money than meets his
monetary demand at the existing prices. As he seeks to reduce his
stock of money to due proportions by buying more goods, he thereby
distributes a part of the excess of money to others. This bids up the
prices of goods further until the total value of goods exchanged again
bears the same ratio as before to the average monetary demand of each

Take an extreme case: if twice as many dollars get into circulation
in a community, either some few men may have far more dollars than
before, while others have nearly the same number; or every man may
have his due proportion of the new supplies, just twice as many as
before in proportion to his income. The latter result, "other things
being equal," is the logical one after equilibrium has been restored.
If prices of goods remained the same as before, there would be twice
as many pieces of money available to effect the same number of trades
at the same prices. There is no reason why each person should tie up
twice as large a proportion of his income in the form of money. If,
however, there is a concerted movement to spend the surplus money,
there results a general bidding down of the value of money, a general
bidding up of the prices of goods. At what point will this movement
stop? The rational conclusion must be that, other things being equal,
the new equilibrium will be established when the ratio between the
value of money and the price of the goods which each individual is
purchasing becomes the same as before. The money being doubled, prices
must be doubled, and likewise for any other change in quantity.

Sec. 10. #The quantity theory of money.# This explanation of the effect
of changes in the quantity of money in a country upon prices (the
general scale of prices) is known as the quantity theory of money.
This theory has, for a century, been very generally accepted by
competent students of the money problem. It may be summed up thus:
other things being equal, the value of the monetary unit, expressed
in terms of all other commodities, falls as the quantity of money
increases, and _vice versa_. That is, prices rise and fall in
direct proportion to changes in the total quantity. This is a simple
explanation of a complex and difficult set of conditions. The phrase,
"other things being equal," betokens the statement of a tendency where
there are several factors. The quantity theory explains what happens
when there is a change in one of the factors--the number of pieces
of money. There are three large sets of facts to be brought into
relationship with each other in the quantity theory: (1) the amount
of business, or the number of trades effected; (2) the rapidity of
circulation, depending on the methods by which business is done; (3)
the amount of money available. According to the quantity theory we
must expect that, when conditions (1) and (2) remain fixed, the value
of money will vary inversely as its quantity. This quantity theory may
be expressed in the formula P = MR/N when P is the symbol for price,
or the general price level, N is (1) above, R is (2), and M is (3).
P, therefore, changes directly with either M or R, or inversely with

Sec. 11. #Interpretation of the quantity theory.# The quantity theory
must be carefully interpreted to avoid various misunderstandings of it
that have appeared again and again in economic discussion.

(1) It does not mean that the price level changes with the absolute
quantity of money, independently of growth of population and of the
corresponding growth in the volume of exchanges.

(2) It is not a mere per capita rule to be applied at a certain moment
to different countries. For example, Mexico may have $9 per capita and
the United States $35, while average prices may not differ in anything
like that proportion. But in these two countries not only the amounts
of exchanges per capita but the methods of exchange and the rapidity
of the circulation of money differ greatly.[7]

(3) It cannot be applied as a per capita rule to the same country
through a series of years, without taking account of the many changing
factors. It is estimated that in 1800 the money stock was about $5
per capita in the United States, and in 1914 about $35[8], but average
prices have not necessarily changed in the same ratio. In a period of
years a country may change in a multitude of ways, in complexity of
industry, modes of exchange, transportation, wealth, and income. These
changes require, some larger, others smaller, per capita amounts
of money to maintain the same level of prices. For example, the
substitution of cash payments for book-credit in retail trade calls
for a larger per capita stock of money; whereas an increased use of
banks and checking accounts, by economizing the use of money, enables
a smaller amount of money to maintain the same level.[9]

(4) Tho applied originally to standard money, the quantity theory
applies to all other kinds of money circulating side by side and at
a parity of value, so far as these fulfil the definition of money and
are not merely supplementary aids of money. These substitutes for, or
supplements to, money enable each dollar to do more work, to circulate
more rapidly. If the standard money alone were doubled in quantity,
while the various forms of fiduciary money (smaller coins, bank notes,
government notes) remained unchanged, the quantity of money as a whole
would not be doubled. Indeed, in such a case, the method of exchange
would be greatly altered. According to the quantity theory, therefore,
prices would not be expected to double.

Sec. 12. #Practical application of the quantity theory#. Despite the
number of changing factors affecting the methods of exchange and
the amount of business, the quantity theory is a rule unable at any
moment. These various factors change slowly, and the quantity theory
answers the question: What general change occurs in prices as a result
of the increase or decrease of the money in a given community at a
given moment? Like the law of gravitation and the law of projectiles,
the theory must be interpreted with relation to actual conditions.

The quantity theory makes intelligible the great and rapid changes in
prices which have followed sudden changes in the quantity of money.
Inductive demonstration of broadly stated economic principles is
usually difficult, but there have been many "monetary experiments"
to teach their lessons. Many inflations and contractions of the
circulating medium have occurred, now in a single country, again
in the whole world; and the local or general results have helped
to exemplify richly the working of the quantity principle. With the
scanty yield of silver and gold mines during the Middle Ages, prices
were low. After the discovery of America, especially in the sixteenth
century, quantities of silver flowed into Europe. The great rise of
prices that occurred was explained by the keenest thinkers of that day
along the essential lines of the quantity theory, tho there were many
monetary fallacies current at that time. The experience in England
during the Napoleonic wars, when the money of England was inflated (by
the forced issue of large amounts of bank notes) and prices rose above
those of the Continent, led to the modern formulation of the theory by
Ricardo and others about 1810. The discovery of gold in California
and Australia in 1848-50 greatly increased the gold supply, and gold
prices rose throughout the world. Between 1870 and 1890 the production
of gold fell off while its use as money increased greatly, and prices
fell. A great increase of gold production has occurred in the period
since 1890. In part the rising prices since 1897 are explicable as the
periodic upswing of confidence and credit, but in the main doubtless
they are due to the stimulus of increasing gold supplies.[10] These
are but a few of many instances in monetary history, which, taken
together, make an argument of probability in favor of the quantity
theory so strong as to constitute practically an inductive proof.

[Footnote 1: The old-fashioned miser, however, withdraws his hoarded
gold for the time from its usual monetary function as an indirect
agent and treats it as a direct good yielding to him psychic income by
its mere possession.]

[Footnote 2: See on kinds of income, Vol. I, p. 26 ff.]

[Footnote 3: See secs. 1 and 2 of this chapter; also Vol. 1,
especially pp. 31-38 and 353-355.]

[Footnote 4: This means actually gratuitous, for any real difficulty
in getting metal to or from the mint operates as a cost in the
conversion of bullion into money, or _vice versa_; e.g., the gold may
be in Australia and the mint in London.]

[Footnote 5: See Vol. I, pp. 138 ff. and 361 ff.


The changes in gold production here shown have bearings not only
upon problems of money, but in some respects upon nearly every modern
economic problem. Compare in the present connection this figure with
Figure 3, in Chapter 6, Section 4, showing changes in index numbers of

[Illustration: FIG. 1. GOLD PRODUCTION OF THE WORLD. 1493-1710.

[Footnote 6: This formula is presented by E.W. Kemmerer in "Money and
Prices" (2d ed., 1909), p. 15 ff.]

[Footnote 7: See above, ch. 3, sec. 6, table.]

[Footnote 8:


1800......$4.99 1850......$12.02 1890......$22.82
1810...... 7.60 1860...... 13.85 1900...... 26.93
1820...... 6.96 1870...... 17.51 1910...... 34.33
1830...... 6.78 1880...... 19.41 1915...... 35.44

[Footnote 9: On the function of deposits, see below, ch. 7, sec. 11.]

[Footnote 10: Consult Figure 1 in ch. 4 and Figure 2 in ch. 6 for the
graphic presentation of these and related facts.]



Sec. 1. Commodity and fiduciary defined. Sec. 2. Present monetary system
of the United States. Sec. 3. Saturation point of fractional money. Sec. 4.
Light-weight fractional coins. Sec. 5. Worn coins and Gresham's law.
Sec. 6. A general seigniorage charge on standard money. Sec. 7. Coinage on
governmental account. Sec. 8. The gold-exchange standard. Sec. 9. Nature
of governmental paper money. Sec. 10. Irredeemable paper money. Sec. 11.
Theories of political money.

Sec. 1. #Commodity and fiduciary defined#. The actual moneys in
circulation in every modern country consist of a wide variety of
pieces, differing in denomination, physical size, shape and materials,
mode of issue, source or authority of issue, and legal character.
Among these kinds, one is the standard and is a commodity-money.[1] In
such cases the coinage is free and nearly gratuitous, and the value
of the money is kept close to parity with its value as bullion by
changing bullion into coin, or coin back into bullion, whenever there
is an appreciable difference between the values in the two uses. This
adjustment is brought about by the free action of the people. The
government, having declared what is the standard money unit, and
having provided a mint to make coins, leaves it to citizens, acting
from the ordinary competitive motives, to decide when they will reduce
or increase the number of coins in circulation.

The other kinds of money are not commodity-money and the materials of
which they are made, whatever they be, are not worth as much in any
other uses as they are in their present monetary form. Their value is
always referred to, and adjusted to, that of the commodity-money, so
long as any of it is in circulation. In contrast with commodity-money,
these other kinds may be called fiduciary money. By fiduciary money
we mean money that has not a commodity value equal to its money value,
but which is generally accepted because each receiver has faith that

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