The Value of Money

by Benjamin M. Anderson

The fact of free coinage means, substantially, that the state has made the money form a free good. How much value is thereby destroyed we may best see if we ask precisely how much the money form could mean at the limit. Initially, the money form means simply the certification of weight and fineness by a trusted authority. It saves, therefore, the delay and expense of testing the weight and fineness by assay, etc. It saves the trouble and delay of subdivision of a formless metal. It averts many difficulties. For small retail transactions, indeed for retail transactions in general, the conveniences of coined over uncoined metal are very great. Small transactions do not justify the trouble and expense of assaying and weighing and subdividing gold! In a country, therefore, where the bulk of the money work is in effecting small transactions, we might expect a considerable agio for coined over uncoined metal. This would be especially true if that country had few facilities for credit substitutes for the coin, particularly for small transactions. In a country like the United States, however, where checks are often drawn for amounts less than a dollar, and where the bulk of the gold, or standard money, is to be found, not in circulation but in reserves, one need not anticipate that the medium of exchange function would give a big agio to gold coin, even if free coinage ceased. So long as coinage means merely a certification of weight and fineness, this conclusion will hold. For purposes of large transactions, the item of weighing and assaying would not be serious. Indeed, American banks are accustomed to weigh even gold coin, in quantity. It goes by weight, rather than by tale, and if light-weight, it counts for less than its nominal value. The writer knows a bank which has a considerable store of light-weight gold coin that has been in its vaults for over twenty years. Such coin may be counted at par in reports by the bank to the Government.[494] It might be paid out through the window to customers, who would not weigh it, in case of a "run" on the bank. But it cannot be used in dealings with other banks without loss.

Does the legal tender aspect of coin count for more? Under a smoothly working system of free coinage, where moreover, all forms of money are kept at a parity by ready redemption, we have seen that the legal tender feature makes no difference. Would it make a difference where coinage is restricted? If we assume that the use of checks for small payments, and the use of bullion in reserves, in a given case, prevents the existence of an agio growing out of the other functions of money, I think it clear that the legal tender feature alone will not create one. But suppose that there is an agio from other causes, will not the legal tender aspect of money tend to increase it? Will not men demand coin, which bears an agio, rather than bullion, when they have the right to demand either? And will not the agio then, in a way, grow out of itself, a bigger agio appearing, because an agio has already appeared? It does not seem to me that this need follow. If there be an agio, then creditors will demand either coin, or bullion on a different basis from coin. But so long as they get the benefit of the agio, either in the form of coin, or of a larger amount of bullion, particular circumstances, rather than a general rule, will determine which they will demand. The banker might well prefer bullion. The international banker would prefer bullion. The man who wishes money for retail transactions will take coin. Men will use the legal tender quality of money as a means of getting the benefit of what agio there is (though contract right, where the contract calls for coin, would accomplish all that a legal tender law would accomplish), but whether they take 23.22 grains of coined gold, or 25.5 grains of gold bullion, will depend on which they prefer in the circumstances. I do not see that the legal tender feature adds anything to the case of restricted coinage that it does not add to the case of free coinage.[495] In either case, there will be temporary emergencies, when panics arise, when legal tender money gets an agio over any possible substitute. Solvency may depend on it. This might arise under free coinage, if the panic were acute, and if settlements had to be made immediately. But as long as there is time for men to work things out, I should not expect the legal tender feature, per se, to add to the agio of coined metal even under restricted coinage.

In general, the possibility of an agio for coined metal, under restricted coinage, rests on the extent to which coin has a unique function. In so far as substitution is possible, there is no room for an agio. For many purposes, bullion may be substituted. To the extent that credit is developed, and is flexible, various other substitutes are possible. To the extent that barter can be used, still other substitutes are possible.

Among an ignorant people, little accustomed to developing new expedients, having an economic life that is not flexible, having an economy based on petty economic units, having little development of credit, accustomed to the use of money in most transactions, money might well be, in many connections, highly important if not indispensable. In England, before the War, where no bank-notes under five pounds were in circulation, and where small checks were little used, an agio on coin might appear if coin got so scarce as to be inadequate for retail trade, but for bank reserves bullion would have served virtually as well as coin, and with the stock of coin she had at the time England could have gone on for a long time indeed with no more agio than just enough to prevent the melting down of the coin. In the United States, where checks can be used for very small transactions, and where a high percentage (very conservatively estimated by Kinley at from 50 to 60%) of retail business is done with checks, the agio on coins of a dollar or over growing out of retail trade might be expected to be very slight. On the other hand, the legal requirements for reserves in specified types[496] of money might, in time, lead to some agio. I do not think that the reserve function in England would ever do so. If we could combine our use of checks in retail trade with England's absence of legal reserve requirements, I should think that the agio would have little chance indeed of growing great! If to this could be added Canada's extensive use of small elastic bank-notes, the chance would be still less. If bank-notes of one dollar could be issued, the agio would be less still.

It is in the case of coins of very small denomination that the agio might appear most readily. Such coins, if limited in amount, and if given the usual restricted legal tender,[497] do not need redemption to circulate at face value, even when made of baser metals. It is quite thinkable that such coins should, even when redeemable, circulate at an agio over the redemption money. In small retail transactions the need for money to do business is most imperative. Even here, however, there is large flexibility. The present writer, during the period of money stringency in the Panic of 1907, made much larger use of checks in very small payments than was his usual practice, and the same was true of various of his acquaintances.

I think that the quantity theorist, with his doctrine of an unlimited agio through the restriction of coinage proportionate to the restriction, is best understood if we say that he has taken an exaggerated estimate of the imperativeness of the need for formed money in the smallest retail transactions as typical of the whole situation.[498] I have elsewhere shown, however, that, in so far as Kinley's figures for 1909 give us a clue,[499] the total retail trade of the United States is less than one-eleventh of the total of all transactions calling for the use of money and checks. Of that total retail trade, the part in which money is actually used is, on Kinley's high estimate, between 40 and 50%,[500] and the part in which money is imperative is much lower still. Small retail transactions do not give the type for the pecuniary transactions in the United States! They more nearly do so in India, and the possibility of agio is, doubtless, greater there. For our larger transactions, there is an almost indefinite possibility of substitutes for coined money, if profits can be made by making the substitutions. Beating the agio would be a source of profits.

I repeat what was said in the chapter on "Dodo-Bones" differentiating this doctrine of the agio from the quantity theory doctrine: (1) This doctrine presupposes value for the money article from some non-monetary source. It relates only to a differential portion of the value of money. (2) This doctrine denies the law of proportionality even for this differential portion. (3) This doctrine is concerned, not with the general level of prices, but with the absolute value of money measured in the ratio of coin to bullion.

Under the system of free and gratuitous coinage, no agio of coined over uncoined bullion is possible. Where small brassage charges are made, as in France (or as in England, where the interest lost during the period of coinage is charged to the man who exchanges bullion for coin at the Bank of England) there may be an agio of this amount, though it often happens that this agio disappears, particularly in England. So perfectly is bullion a substitute for coin in England, that the Bank of England will often forego its privilege of taking the slight toll in interest, and will credit men depositing bullion with as much as if they had deposited coin. From what has gone before, as to the possibility of an agio, I conclude that the United States, England, Canada, and possibly France, would be unable to make large brassage charges. If the brassage charge were much larger than the charges made by reputable and well-known jewelers for assaying and weighing, etc., there would be a large substitution of bars for coins, and the mints would have little to do. However, it needs no arguing that with free coinage, and either very low or no brassage charges, the value of bullion and of coin will, quality for quality and weight for weight, be virtually identical, within a narrow range of variation.

What, then, shall we say of the way in which the forces drawing gold from the arts into money manifest themselves?

How describe the equilibrium between the value of gold as money and the value of gold in the arts? How construct intersecting curves, presenting a marginal equilibrium? The problem is baffling, and I frankly confess that what I shall have to say does not satisfy me. I hope that some critic may solve the problem better. I can point out the difficulties of the situation, and can indicate reasons why the sort of solution which the economist's training in marginal analysis leads him to desire are not easily found. But I fear that I shall fail to satisfy the demand for an application of curves to the problem!