The currency.—The last essential in perfect freedom of exchange is a satisfactory means of transferring completely and quickly all property right in any article of trade. Exchange of commodity for commodity or service for service is possible to a very limited extent, since the man who wants my horse may have nothing which I want in return, or if he has, the values may be unequal, and one or the other must remain in debt, which means that one of the articles belongs in part to both. In some new countries exchanges are confined to this slow and uncertain method of barter, where nobody can buy until he finds a neighbor wanting just what he himself [pg 131] has to sell. Traders in such countries contrive to accumulate a variety of things needed by all sorts of people, that they may be ready with some kind of exchange to meet particular wants. No community, however, begins to reap the clear advantages of exchange until some universally acceptable medium of exchange is discovered and accepted. The process of developing this medium is essentially the same as that described in establishing a standard of value; and so the word money naturally represents both the standard of value and the common currency of trade. It is easy, however, to see by further examination that the two functions of money are quite easily separable, and that, while it is difficult to substitute for the standard of value, a variety of substitutes can serve as currency.
In speaking of coinage hitherto, the standard of value has been assumed to be the most important, but in fact a large proportion of our coin serves simply as currency without materially affecting the standard of value. This is true of all the fractional coins, which are purposely over-valued, and equally true of the silver dollar under existing circumstances. In fact, the primary use of coin was simply for the purpose of transferring property. In the words of Aristotle, 350 B. C., “Men invented among themselves, by way of exchange, something which they should mutually give and take, and which, being really valuable in itself, might easily be passed from hand to hand for purposes of daily life.” This coined money supplies the needed means of exchange most readily because it carries its value with it. In all civilized communities, and in many only partially [pg 132] civilized, it is readily exchangeable for any article of commerce. It is also valued in proportion to its weight, so that any bulk in gold or in silver may be easily divided by exchange for smaller coins. With a little painstaking the coins are made identical in value, so that every trader knows what he gives and receives. They are exceedingly durable, resisting almost all the forces of nature with little loss. For this reason they are likely to have an almost universal value, that is to be wanted by everybody, in any place, at any time, and under any circumstances. These facts are proved by the tendency to hoard such coins whenever individuals have a surplus of wealth beyond present wants, or whenever there is risk in using wealth as capital because of distrust of government, of individuals or of future enterprise. A buried treasure is almost sure to be in the form of coins.
Under a system of coinage, inequalities in exchange are easily adjusted, like “the boot” in a horse trade, or the balance between produce carried to the store and the articles carried away. Most of all, coin is used where for any reason there is distrust of the future. Coin, or its equivalent in bullion, is needed in all transactions where credit is wanting. This appears prominent in all lawless communities with a fluctuating population, and may be found in ignorant communities where methods of credit are not established. It is often essential in the settlement of claims between hostile countries, and is the final means of adjusting balances in all foreign trade. Occasionally this need appears in a universal panic, where each man takes his fellow by the throat, saying, “Pay me that thou owest.”
Coin a part of a country's capital.—The coined money of a country thus becomes wealth in store for constant use as a machine of exchange. Its operation is effective when it keeps in constant motion, being itself consumed very slowly in the wear and tear of motion. It is sometimes compared to an endless screw, transmitting motion to everything else with which it comes in contact. Like other machines, it may be either too abundant or too scarce for the best advantage of the country. In either case there is waste. When the coin is idle it is unproductive, but suffers less waste from deterioration than almost any other kind of machine. In case of scarcity the cost of its use is increased under the general law of supply and demand, exactly as the cost of other machinery in use is advanced when many desire to use it. This machine is a prominent part of the capital of a country, greater in some countries than in others. In France the value of coin is estimated to be 3 per cent of the value of all real estate, including buildings. The use of such a machine makes a material part of the annual cost of exchanges. The coin of England, where interest is comparatively low, costs for its use in interest, wear and tear, and re-coinage more than $20,000,000 annually.
An additional cost to individuals is in the extra risk of carrying such wealth, as shown in express charges and special insurance, and still greater expense for safe keeping, and a considerable use of time in counting. These facts have led to many devices for lessening the need of keeping wealth in this form.
Credit by accounts.—The most obvious method of [pg 134] avoiding the use of coin in exchanges is a current account between individuals having many transactions in trade. A farmer carries his butter, eggs, fruits, grains and live stock, perhaps, to a single dealer in all these articles, and takes in return articles of household use or for any necessity as he requires them, from a spool of thread to a harvester. If both keep accurate accounts, a settlement once in six months satisfies most conveniently all the requirements of perfect trade. Indeed the settlement is needed only that the accounts may be verified. Except for the dangers of waste in unlimited credit and carelessness in expenditure where future wealth is drawn upon, this method of exchange is simple and inexpensive. In the nature of the case, however, it must be limited, for safety, to trade between people having confidence in each other's honesty of purpose and ability to keep correct accounts. It also requires a mutual expectation of ability on the part of either to meet indebtedness at any future time of settlement.
Credit by due-bills.—An extension of this credit in well established countries, so as to take in other persons than the two involved in book account, is found in due-bills, notes of hand payable on demand, or more formal securities, any of which may require a final decision in court. These pass from hand to hand, often in connection with coin, and under ordinary circumstances serve their purpose cheaply. In some countries a note of hand, with endorsement of each user, may make exchanges until it is covered with endorsements. The danger of waste is considerable from the impossibility of [pg 135] knowing the financial standing and honesty of the various endorsers, and the system is limited, of course, to the range of confidence in such trustworthiness. So easy is it to extend this credit of individuals beyond the range of safety that most governments have found it necessary to protect their citizens against its dangers by limiting or prohibiting its use as currency.
Credit currency.—So convenient, however, and so economical is the use of credit, that all well established nations have developed systems for the issue of a credit currency founded upon the stability of strong corporations or upon the national credit. Nations themselves have often issued bills of credit in the form of notes, or promises to pay at the national treasury. If these are payable on demand in the coin of the realm, they are said to be redeemable. If the time of payment is uncertain, or indefinitely postponed, they are said to be irredeemable. Thus we have the many forms of paper money so familiar to everybody and the various practices and speculative theories regarding it, which make a large part of the discussion of financial questions throughout the world.
No one doubts the worthlessness of currency in any form of note, from individual or firm, which cannot be paid when presented. The notes of the government, so long as that government is considered stable, may circulate readily, and even after doubts exist as to the final ability of the government to redeem, they still circulate, perhaps with greater readiness, in the feeling that hoarding is utter loss and the stopping of trade in the ordinary perishable products of industry will be an enormous [pg 136] disaster. This feeling often leads to the use of a currency without value, like the token money used for change in the absence of legal coins. Though nobody is bound to redeem these tokens, everybody takes the risk of loss as less disastrous than no exchange. Paper money issued by corporations is universally considered dangerous to the interests of communities, unless very carefully restricted within distinct and clearly understood limits. The discussion of such issues will be given in another chapter devoted to banking. The issue of paper money by governments has been a frequent device for enforcing contributions of citizens to extraordinary expenses in war or other disaster. A history of such issues cannot be given within the limits of this book, but is well worth the study of those who seek an understanding of the powers and limitations of government under natural laws, in making a satisfactory currency. A government's stamp upon the piece of paper is so far good, and only so far, as it secures to the receiver of the paper an equivalent value to what he gave for it. If the government itself is unable to give that value, it can never insure the ability or the willingness on the part of any individual to give such value. While millions of dollars in such form may serve as currency without any deterioration, as at the present time, when government promises in all the various forms amount to nearly $1,000,000,000, should any of these, on any day, be refused payment for want of means in government possession, every individual in the land would feel that the value of his possessions in the shape of such notes was made just so far doubtful as the [pg 137] chances of redemption are postponed. All issues of such notes at once become certificates of debt rather than credit, and lose, to greater or less extent, their exchangeable value.
In the extraordinary issue of “greenbacks” during the civil war, the purchasing power of a paper dollar was reduced to less than half, and gradually appreciated in value as the expectation of early redemption increased. The effect of such issues upon government revenues will be treated in its proper connection. As currency, it certainly robs each creditor and holder while depreciating, and as surely robs each debtor while appreciating. As wage earners are universally creditors, according to prevailing customs, they suffer most in a depreciation of money values: i. e., they work for dollars at one value and a week or a month later receive them to expend at a less value. Speculative debtors, on the other hand, always thrive on depreciating currency, paying their debts in what costs less exertion. Under appreciating currency, the creditors gain, be they bankers or workmen.