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CHAPTER IV.

THE FARMER AND THE CURRENCY.*

F I have sheep to spare and need wheat I do not have to

find one who has wheat to sell and needs sheep; whoever needs sheep will give me money and with the money I can buy wheat. One of the functions of money in this transaction is that of a "medium of exchange." In common language I am said to turn my sheep into money and my money into wheat.

In regard to money as a medium of exchange there are always questions of convenience arising, as, for example, with reference to its form, denominations, and the like, and with respect to paper money, the question of responsibility--that is whether it shall be issued by banks or government-seems to me connected mainly with this function; with this exception, however, which has been discussed in another chapter, there is no "Question of the Day" in regard to money as a medium of exchange; such questions as arise are settled by the authority whose duty it is to deal with them, with little or no concern on the part of the public.

The usefulness of money as a medium of exchange, however, involves one characteristic which all good money possesses, and without which it is not good money; it must be something which every one is willing to take in exchange for whatever he has to part with. I do not mean something which some are willing to take, or all are willing to take for some things, or which all ought to be willing to take, but something which as a matter of fact all are willing to take at all times.

The only substances which all men are willing at all times

*See also Book Fourth, Chapter I and Appendix G.

to take in exchange for all commodities are the precious metals-gold and silver. These constitute what is called international money because they are recognized as money by all civilized nations. Considered merely as instruments of exchange these metals constitute the best money.

Instead of the metals themselves, promises to pay the metals, in the form of notes issued by responsible governments or banks, are more convenient when large sums are involved, and are preferred by some for use even in small amounts; these constitute good money so long as they can as a matter of fact be exchanged at any time for the metals which they represent, and so long as everybody believes they can be so exchanged. Such notes constitute what is called "representative money." If, as a matter of fact, they can not be exchanged, on demand, for what they represent, these notes are not really good money, even though they are believed to be, and perform the office of good money until their true character is discovered. A counterfeit note does the work of good money until it is found to be counterfeit, when it immediately loses its value.

A note that can really be exchanged for the metal it represents is not good money if any one to whom it is offered doubts whether he can get coin for it on demand or fears that he might not be able to make the demand. No farmer in the United States doubts that if he should present a note of the Bank of England at the counter of the bank he would get gold for it, but he can not go to the Bank of England, and he may not find any one who can conveniently send it there, and, not being familiar with its appearance, he might fear that it might be counterfeit, and so might be unwilling to receive it, even although actually good; a United States "greenback" would be in a similar situation in England, while each will circulate freely in its own country. No merely representative money is therefore "international money," although the notes. of contiguous nations often circulate readily among themselves, as those of France and Belgium and the United States and Canada do to-day. Circumstances, however, are at any time liable to arise to prevent the convenient return of repre

sentative money to the place of redemption, so that it never is certain to be at all times the best money.

Sometimes national or bank notes are known not to be redeemable according to their face at the time, and yet it is believed in regard to them that they will sometime be redeemed. That was the case with United States "greenbacks" for many years after 1861, and is the case with regard to the notes of many other countries to-day. Such notes may still be good money, or they may not. If no more are issued than would represent the metallic money which would have circulated had no paper money been issued,* it is the opinion of most economists that they would circulate as freely as if actually redeemable, and be "good money" in the sense of being able to buy as much as the coin which they represent. As no such experiment has ever been made, however, we do not actually know this; no nation refuses to redeem its paper money if it can help it, and no nation, once started in the practice of issuing currency not actually redeemable on demand, has ever yet refrained from issuing very much more than the coin which would have circulated in the absence of paper money. When this happens the paper money still circulates, but not at its face value. It is said to be "inflated." It ceases to be even good national money. It is received at some lower value, which is fixed partly by the general opinion as to the probability of its ultimate redemption, but more especially by the amount of excess issues. The larger the issue the greater the depreciation. I shall discuss this further in connection. with the functions of money other than as a medium of exchange. A familiar instance of excessive issue is our greenback and national bank circulation issued during the Civil War. Probably few doubted the ultimate redemption, in coin, of all paper money there issued, by the United States, but at

* Under ordinary circumstances, when nothing impedes the natural flow of undepreciated money, there will always be present sufficient to make the exchanges, just as there will be food to eat and clothes to wear. As the people need it, somehow they will get it. There will be something for sale, and those who wish to buy will send money to pay for it.

one time one gold or silver dollar would buy two and one-half times as much as a paper dollar. This was the result of excessive issues. When, however, it becomes evident that representative money will never be redeemed, it very soon loses all value. "Confederate" bills, after Appomattox, were known to be valueless, and nobody would take them at any price. Until other currency could be provided such exchanges as were necessary took place by means of barter, which is the exchange of one commodity for another. But where there are goods to be exchanged there money will go, and there was very soon other money in circulation.

Money is an element so essential to the transaction of modern business-barter being so extremely inconvenientthat no community will do without it. If gold and silver are not available, something will be substituted as a temporary expedient. Horace White enumerates the following as having been used as money within historical times: cattle, cacao beans, salt, silk, furs, tobacco, dried fish, wheat, rice, olive-oil, coconut oil, cotton cloth, cowry shells, iron, copper, platinum, nickel, silver, and gold; indeed, he says, "it would be difficult to say what has not been used as money at some time or place." The "wampum" and tobacco currencies of our early colonial times are familar to every one. On the Pacific Coast, cattle were commonly used as money up to recent times. The abstract of my farm in California shows two cases in which the property was sold for "cattle" with no money value attached to them, and to be delivered at a future time.

It is even insisted by some that notes upon which are printed by national authority the words, "This is a dollar," or some equivalent expression, are as good as any money for all necessary purposes, even though issued with no promise or intent to redeem in anything. There is just enough of truth in this contention to make it a very dangerous error among those who have not thought carefully about money, and who are anxious to be able to get money cheaply. There is no doubt that the necessity of money is so great that, in the absence of anything better, such money as this would perform all the necessary functions of money within the territory of

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the nation authorizing it, but provided only that no more of it were issued than would equal in nominal value the gold and silver necessary to conduct the business, if that could be had. Such money is called "fiat money," "fiat" being a Latin word meaning, "let it be done," that is, in this case, "let this be money." The people of a new country, like our first colonists, have no means of getting gold and silver-international money-except by the exportation of goods. But exchanges among themselves are all the time going on, domestic exchanges, in fact, at all times greatly exceeding international exchanges in volume, and for these money is needed. such cases there is no doubt that, as a temporary expedient, fiat money carefully restricted in volume would be much better money than cattle, or tobacco, or rice, whose production would increase, and ought to increase, and so cease to be a good medium of exchange. When such money had served its turn it would be received in payment of taxes and so return to the authority which originally received goods for it. Practically, however, there are difficulties in the way of even this use of fiat money. The infirmity of human nature is such that no government would be able to restrict its issues of fiat money to the amount required to pay for what itself required, which would be very small, because, when issued, it would immediately begin to return in taxes, so that the government would soon receive money enough for its uses in the ordinary way. This would not satisfy the people, who would insist upon the government printing the money and lending it to them. This would very quickly introduce into circulation a much greater amount of money than would naturally be present of gold and silver or its representatives, in the course of freely moving national and international exchanges, when it would immediately depreciate, and cease to be a good medium of exchange. And still it is true that pure fiat money, with issues carefully restricted to displace only its face value of metallic or representative money, would probably make an entirely satisfactory medium of domestic exchanges. I say "probably," because the experiment has