Principles of Political Economy

by Arthur Latham Perry

10. The steady experience of civilized men for two milleniums and a half seems to demonstrate, that gold and silver constitute the best Money; and we must now investigate the reasons, one by one, why they are the best money. The reasons appear to be three. Of these the first is by much the most important.

(1) The first and main reason why gold and silver make the best money is to be found in their comparatively steady general Value. Since Money is a Measure of all other valuables, its success as a measure must depend on its own steadiness of value, and gold and silver meet this test better than anything else. Money is a valuable, and not in any sense a representative of value; except as to the subsidiaries, a coin does not owe its value at all to the stamp impressed upon it or to the law authorizing it, since the metal in it is worth as much out of the coinage as in it; coin-values arise under the same conditions as all other values, and are variable by any change in any one of the four elements which alone can vary the value of anything; and it would seem that nothing more is needed in order to remove the last vestiges of the dark cloud which has so long overhung this subject of Money, than to familiarize ourselves first of all, as we have already done, with the true doctrine of Value in general, and then to hold fast the truth exemplified on every hand, that the value of Money is just like every other value. Let us examine then, first, why the value of gold and silver is so steady.

(a) On account of the comparatively steady Demand for these metals. Gold and silver are wanted for two general purposes: first, to be used as money, and second, to be used in the arts; and the usual estimate is, that about ²⁄₅ of the aggregate quantity in the world is in the form of money, and the other ³⁄₅ in the form of plate and utensils and ornaments. Now, so far as the element of Desire controls Value, the purpose for which any article is desired is a matter of indifference. The aggregate desire for it for all purposes, accompanied with the offer of something with which to buy it, constitutes the Demand; and the more universal the desire, no matter for what use, the steadier the Demand and so far forth the steadier the Value. It is a point still too little noticed, that the combined demand for the precious metals for all uses is what helps determine their general value, and not the demand for them as coin alone; just as the value of barley is regulated partly by the demand for it for food, and partly by the demand for it for malting purposes. Hence an ounce of bullion of the standard fineness destined for the smelting-pot of the artisan is worth within a very trifle as much as an ounce of coined money.

For example, by the law of the Bank of England an ounce of standard gold (¹¹⁄₁₂ fine) is coined into £3 17s. 10½d., and the Bank is obliged to buy all bullion and foreign coins of the standard fineness offered to it at £3 17s. 9d. per ounce,—a difference of only three half-pennies. Now, gold and silver are so indispensable in the form of money, so beautiful in the form of ornaments, so well adapted to serve the purposes of luxury and love of distinction, and so really useful in the arts, that the Demand for them is constant and well-nigh universal; and should there be in the progress of civilization a lessened demand for them for purposes of personal ornamentation and luxury, and a less quantity be required for coins on account of the multiplied use of cheques and other credit-forms, as seems likely in both cases, a greater quantity will doubtless be required for all the other uses old and new, and so, as the Demand in the past has been steady, and probably steadily increasing, there is every reason to expect the same course of things for the time to come. Moreover, it contributes to the steadiness in value of the gold and silver coin, that there is at hand at all times, in the form of plate, a reservoir from which a chance chasm in the coin may be replenished, or an extra demand for it answered.

(b) On account of their tolerably uniform Cost of Production. Not Desires only but Efforts as well determine Value. Supply is the correlative of Demand; and when to a steady demand there answers a steady supply realized under conditions of pretty uniform difficulty, there will be as a matter of course a pretty steady Value. Nature herself, that is to say, God himself, has indicated in a manner not to be mistaken the intention, that these precious metals should be the Money of the nations. They are scattered all over the earth, and so scattered that the cost of their production has been on the whole pretty steady ever since civilization and commerce began in earnest. God is a God of order throughout all His works. Corresponding to the nature and necessities of men is the whole structure of the outward world. Science builds only on these predetermined lines of Order. Induction is only possible where original Resemblances run through great departments of phenomena. To be enabled to buy and sell to any considerable extent in order to meet their subjective wants, men must have an objective measure of mutual Services, and this measure must be a valuable steady in its purchasing-power: very well; such a possible measure was all provided for beforehand, when the foundations of the earth were laid.

The precious metals have always been obtained in one or other of two ways: by surface diggings and washings, and by rock-mining. Both were employed in the very beginnings of Civilization. There is a description in the book of Job (chapter xxviii) of the way in which the ancient mines were wrought, and of the worth of the ores:

"Truly there is a vein for silver,
And a place for gold, which men refine.
Iron is obtained from earth,
And stone is melted into copper.
Man putteth an end to darkness;
He searcheth to the lowest depths
For the stone of darkness and the shadow of death,
From the place where they dwell they open a shaft.
Forgotten by the feet
They hang down, they swing away from men.
The earth, out of which cometh bread,
Is torn up underneath, as it were by fire.
Her stones are the place of sapphires,
And she hath clods of gold for man.
The path thereto no bird knoweth,
And the vulture's eye hath not seen it;
The fierce wild beast hath not trodden it;
The lion hath not passed over it.
Man layeth his hand upon the rock;
He upturneth mountains from their roots;
He cleaveth out streams in the rocks,
And his eye seeth every precious thing;
He bindeth up the streams, that they trickle not,
And bringeth hidden things to light."

These methods and difficulties in rock-mining, thus poetically and beautifully delineated, have been substantially the same from that early day to the present time; and, consequently, there have been but two or three striking changes in the general value of gold and silver in the commercial world during the last 500 years, at least changes owing to easier and larger Supply. The discovery of the mines of Potosi in 1545, and the large influx of silver into Europe from those and other American sources, together with the irrational stimulus thereby given to the working of European mines under the false impression not even yet wholly dissipated that Value can be clutched bodily in mining, so increased the stock of silver, that its value as measured in grain or other commodities declined in Europe in 70 years after 1570 to about 25% of its previous purchasing-power. Adam Smith expresses the opinion in his Wealth of Nations, that silver did not perceptibly fall before 1570, nor continue to fall further after 1640. The discovery of gold deposits on the Pacific coast of the United States in 1848, and a similar discovery in Australia in 1851, enlarged the annual supply of gold for the world from $40,000,000 in 1848 (Chevalier), to an average of $136,000,000 for the five years ending in 1859 (Jevons); and the latter writer estimated the fall of gold in general commodities from 1845 to 1862 at about 15%. But with exceptions like these, and similar ones are perhaps not likely to recur, the precious metals have always maintained and seem likely to maintain in the future a considerable uniformity of Value, as estimated by their power to purchase other valuables, so far forth as Cost of Production goes to determine their value. Even the great changes just noted in the cost of the metals issued only gradually in a rise of Prices, which many were able to foresee and thus to provide for, but by which many more were caught and brought into distress and even pauperism. The two classes that suffer the most under a fall in the Value of Money are the wages-receivers and the holders of long annuities and other similar obligations.

(c) On account of their Quantity. The amount of gold and silver in circulation in the commercial world, to say nothing of the quantity so easily brought into circulation from the reservoir of plate, is so vast, that it receives the annual contributions from the mines much as the ocean receives the waters of the rivers, without sensible increase of its volume, and parts with the annual loss by detrition and shipwreck, as the sea yields its waters to evaporation, without sensible diminution of volume. The yearly supply and the yearly waste are small in comparison with the accumulations of ages; and, therefore, the relation of the whole mass to the uses of the world, and the purchasing-power of any given portion, remain comparatively steady. It is probable, that production at the mines might cease altogether for a considerable interval without very sensibly enhancing throughout the commercial world the value of gold, as it is certain, from experience, that a production very largely augmented only very gradually and after a considerable interval of time diminishes its value. The mass of the precious metals has been aptly compared with the heavy balance-wheel in mechanics, which preserves an equable and working condition of the machinery under any sudden increase of the power, and even when the power is for a moment withdrawn.

Just at this point a caution is needful. Because it is affirmed that the great amount of the precious metals is a ground of their firm value, it must not be supposed that we are going beyond our general doctrine, and introducing another element, namely, Quantity, besides the four elements, which, as we have so often alleged, can alone vary the value of any Service. Quantity, in itself, is not an element capable of varying the value of anything, but taken in connection with durability, it is an element of what might, perhaps, be called with propriety the Inertia of Value, and tends to keep the purchasing-power of gold and silver where it is. Value and Steadiness of Value are two distinct ideas. The present value of an ounce of gold is decided by four things alone, two Desires and two Efforts; but other elements besides these may help determine that that ounce of gold shall have ten years from now a purchasing-power approximately the same as now. It will depend of course in the last analysis upon the relation of the then Demand to the then Supply; yet the vast quantity of the precious metals in existence, combined with their durability, prevents those fluctuations in the Supply which are so destructive to a steady value. It is not with them as with the fruits and the cereals, whose value varies perpetually with the seasons, and which are so perishable that they must be sold quick or never. Gold and silver are almost indestructible, and the existing mass is not liable to be lessened except by wear and accident, and in so far as the annual production from the mines exceeds the yearly waste there is a natural provision made for the natural increase of Demand to supply the wants of the world for money and for the arts without much disturbing the relation of the Demand and the Supply; and so Quantity in connection with durability helps preserve to them a tolerably steady value from generation to generation.