Robinson Crusoe's Money; / or, The Remarkable Financial Fortunes and Misfortunes of a Remote Island Community

by David Ames Wells

There was also a curious phenomenon incident to the situation, and pertaining to the rate of interest, which excited no little comment and attention. Every body took it for granted that with an unlimited supply of money a low rate of interest would prevail, and that, however much the financiers and philosophers might disagree about other things, this one result would be certain. An eminently practical man in one of the public debating societies of the island thought he had definitely, and for all time, settled the question by authoritatively remarking that “an abundance of money does produce enterprise, prosperity, and progress;” “that when money was plenty interest would be lower,” just as when horses and hogs are abundant, horses and hogs would be cheap. He, for one, “put aside all these old theories, these platitudes of finance.” There was “no vitality in them.” He preferred “to take the actual results, and the actual condition of the country, and let theory go to the dogs.”[3]

There was so much of originality and home sense in these remarks, so much of a lordly contemning of the teachings of musty old experience, that the friends of the orator thought him much more worthy than ever of the executive chair formerly filled by the wise Robinson Crusoe. But, unfortunately for the orator, he hadn’t got far enough along in his financial primer to appreciate the difference between capital and currency; and in the simplicity of his heart imagined that it was all the same, whether we had pictures of horses, hogs, and money, or real horses, hogs, and money, which represent and are accumulated by labor. So the things which he thus settled in opposition to theory and experience wouldn’t stay settled; and the islanders in due time came to a realizing sense of the following truths: that the more of a redundant, irredeemable paper that is issued, the more it depreciates, and the more it is depreciated, the more there is required of it to transact business; and that if any one borrows depreciated money to do any thing, he has to borrow a greater nominal amount than he would of money that was not depreciated; and that it is on the number of nominal dollars, and not on their purchasing power, that the rate of interest is always calculated. The invariable rise in prices consequent on the depreciation of money (price as already explained being the purchasing power of any commodity or service expressed in money), furthermore stimulates borrowing for the purpose of speculation; and the more borrowers, the more competition; and the more the competition to obtain an article or service, the higher the price demanded for it.

Again, the currency of the island having been made artificially abundant, its exchangeable value was always uncertain; and capital, therefore, as it always does at such times, locked up its pockets, hesitated to take risks, and, if it consented to loan at all, demanded extra pay by reason of the increased risk or induced scarcity.[4]

After testing all these principles experimentally for a considerable time, the people on the island came to see that the possession of money was the consequence rather than the cause of wealth; and that, except under special circumstances and conditions, the rate of interest depends on the abundance or scarcity of that part of the capital of a community which does not consist of money; and that it can not be permanently lowered by any increase in the quantity of money.[5]

In this way, through the school of hard experience, the people on the island came gradually to understand that there were certain economic truths which had got to be accepted and lived up to in order to insure either individual or national prosperity. They came to understand that property is a physical actuality, the result of some form of labor; that capital is that portion of the results of production which can be reserved and made available for new and further production; that money is an instrumentality for facilitating the distribution and use of capital and the interchange of products and services; that production alone buys production; that when one buys goods with a paper representative or symbol of money, the goods are not paid for until the representative is substituted by a value of some sort in labor, or money, or some other commodity; and, finally, that a country and its inhabitants increase in wealth or abundance by increasing their products, rather than by inordinately multiplying machinery for the exchange of products. They also saw that the promises to pay which they had been using and regarding as money were debts; and that debts, as well as all other forms of title, are but shadows of the property they represent; and that, in endeavoring to all get rich by first creating debts, then calling the debts money, and the money wealth, they had been led, successively, into speculation, extravagance, idleness, and impoverishment; and, like the dog in the fable, which let go of the meat in crossing a stream for the sake of grasping its shadow, they had lost much of real wealth resulting from previous industry by trying to make the shadow of wealth supply the place of its substance.

The hungry dog and the shadow.

Grasp at the Shadow and lose the Substance.

Coming to gradually realize, also, that one of the first requisites for an increase of trade was that confidence should exist between the buyer and the seller, but that such confidence never would exist so long as the representatives of value, or other intermediate agencies made use of for facilitating exchanges, were of an uncertain, fluctuating character, they also came finally to the conclusion that there was no economy in using cheap money; or, in other words, that the loss and waste inevitably resulting from the use of poor tools (money being a tool) was many times in excess of the interest accruing from any increased cost of good tools. So reasoning, gold, or undoubted promises to pay gold, gradually came once more into use as money on the island.

There were some prophecies, and a good deal of apprehension, that there would be difficulty experienced in obtaining sufficient gold to serve as money or as a basis for currency, especially when it was remembered that the influence of all that had recently happened had been to encourage the export of all the gold that was owned or produced on the island. But as the goldsmiths and the jewelers never experienced any difficulty during the war with the cannibals, or afterward, in obtaining all the gold they wanted, no matter how scarce and valuable it was as compared with currency, and could have had a hundred times more than they actually used, if their customers had been willing to pay for it; so the merchants, traders, and people at large on the island, as soon as they became satisfied that it was economical to use gold, and determined to have it, experienced no difficulty in obtaining an ample supply.