<SPAN name="toc152" id="toc152"></SPAN>
<SPAN name="pdf153" id="pdf153"></SPAN>
<SPAN name="Book_III_Chapter_VI" id="Book_III_Chapter_VI" class="tei tei-anchor"></SPAN>
<h2><span>Chapter VI. Of The Value Of Money, As Dependent On Cost Of Production.</span></h2>
<SPAN name="toc154" id="toc154"></SPAN>
<h3><span>§ 1. The value of Money, in a state of Freedom, conforms to the value of the Bullion contained in it.</span></h3>
<p>
But money, no more than commodities in general,
has its value definitely determined by demand and supply.
The ultimate regulator of its value is Cost of Production.</p>
<p>
We are supposing, of course, that things are left to themselves.
Governments have not always left things to themselves.
It was, until lately, the policy of all governments to
interdict the exportation and the melting of money; while,
by encouraging the exportation and impeding the importation
of other things, they endeavored to have a stream of
money constantly flowing in. By this course they gratified
two prejudices: they drew, or thought that they drew, more
money into the country, which they believed to be tantamount
to more wealth; and they gave, or thought that they
gave, to all producers and dealers, high prices, which, though
no real advantage, people are always inclined to suppose to
be one.</p>
<p>
We are, however, to suppose a state, not of artificial regulation,
but of freedom. In that state, and assuming no charge
to be made for coinage, the value of money will conform to
the value of the bullion of which it is made. A pound-weight
of gold or silver in coin, and the same weight in an ingot,
will precisely exchange for one another. On the supposition
of freedom, the metal can not be worth more in the state of
bullion than of coin; for as it can be melted without any loss
of time, and with hardly any expense, this would of course
be done until the quantity in circulation was so much diminished
as to equalize its value with that of the same weight in
bullion. It may be thought, however, that the coin, though
it can not be of less, may be, and being a manufactured article
will naturally be, of greater value than the bullion contained
in it, on the same principle on which linen cloth is
of more value than an equal weight of linen yarn. This
would be true, were it not that Government, in this country
and in some others, coins money gratis for any one who furnishes
the metal. If Government, however, throws the expense
of coinage, as is reasonable, upon the holder, by making
a charge to cover the expense (which is done by giving back
rather less in coin than has been received in bullion, and is
called levying a seigniorage), the coin will rise, to the extent
of the seigniorage, above the value of the bullion. If the
mint kept back one per cent, to pay the expense of coinage,
it would be against the interest of the holders of bullion to
have it coined, until the coin was more valuable than the
bullion by at least that fraction. The coin, therefore, would
be kept one per cent higher in value, which could only be
by keeping it one per cent less in quantity, than if its coinage
were gratuitous.</p>
<span style="font-size: 90%">
In the United States there was no charge for seigniorage
on gold and silver to 1853, when one half of one per cent was
charged as interest on the delay if coin was immediately delivered
on the deposit of bullion; in 1873 it was reduced to
one fifth of one per cent; and in 1875, by a provision of the
Resumption Act, it was wholly abolished (the depositor, however,
paying for the copper alloy). For the trade-dollars, as
was consistent with their being only coined ingots and not legal
money, a seigniorage was charged equal simply to the expense
of coinage, which was one and a quarter per cent at
Philadelphia, and one and a half per cent at San Francisco on
the tale value.
</span>
<SPAN name="toc155" id="toc155"></SPAN>
<h3><span>§ 2. —Which is determined by the cost of production.</span></h3>
<p>
The value of money, then, conforms permanently,
and in a state of freedom almost immediately, to the value
of the metal of which it is made; with the addition, or not,
of the expenses of coinage, according as those expenses are
borne by the individual or by the state.</p>
<p>
To the majority of civilized countries gold and silver are
foreign products: and the circumstances which govern the
values of foreign products present some questions which we
are not yet ready to examine. For the present, therefore,
we must suppose the country which is the subject of our inquiries
to be supplied with gold and silver by its own mines
[as in the case of the United States], reserving for future
consideration how far our conclusions require modification
to adapt them to the more usual case.</p>
<p>
Of the three classes into which commodities are divided—those
absolutely limited in supply, those which may be
had in unlimited quantity at a given cost of production, and
those which may be had in unlimited quantity, but at an
increasing cost of production—the precious metals, being the
produce of mines, belong to the third class. Their natural
value, therefore, is in the long run proportional to their cost
of production in the most unfavorable existing circumstances,
that is, at the worst mine which it is necessary to work in
order to obtain the required supply. A pound weight of
gold will, in the gold-producing countries, ultimately tend
to exchange for as much of every other commodity as is
produced at a cost equal to its own; meaning by its own
cost the cost in labor and expense at the least productive
sources of supply which the then existing demand makes it
necessary to work. The average value of gold is made to
conform to its natural value in the same manner as the values
of other things are made to conform to their natural value.
Suppose that it were selling above its natural value; that is,
above the value which is an equivalent for the labor and expense
of mining, and for the risks attending a branch of industry
in which nine out of ten experiments have usually
been failures. A part of the mass of floating capital which
is on the lookout for investment would take the direction
of mining enterprise; the supply would thus be increased,
and the value would fall. If, on the contrary, it were selling
below its natural value, miners would not be obtaining
the ordinary profit; they would slacken their works; if the
depreciation was great, some of the inferior mines would
perhaps stop working altogether: and a falling off in the
annual supply, preventing the annual wear and tear from
being completely compensated, would by degrees reduce the
quantity, and restore the value.</p>
<p>
When examined more closely, the following are the details
of the process: If gold is above its natural or cost
value—the coin, as we have seen, conforming in its value
to the bullion—money will be of high value, and the prices
of all things, labor included, will be low. These low prices
will lower the expenses of all producers; but, as their returns
will also be lowered, no advantage will be obtained by any
producer, except the producer of gold; whose returns from
his mine, not depending on price, will be the same as before,
and, his expenses being less, he will obtain extra profits, and
will be stimulated to increase his production. <span class="tei tei-hi"><span style="font-style: italic">E converso</span></span>,
if the metal is below its natural value; since this is as much
as to say that prices are high, and the money expenses of all
producers unusually great; for this, however, all other producers
will be compensated by increased money returns; the
miner alone will extract from his mine no more metal than
before, while his expenses will be greater: his profits, therefore,
being diminished or annihilated, he will diminish his
production, if not abandon his employment.</p>
<p>
In this manner it is that the value of money is made to
conform to the cost of production of the metal of which it is
made. It may be well, however, to repeat (what has been
said before) that the adjustment takes a long time to effect,
in the case of a commodity so generally desired and at the
same time so durable as the precious metals. Being so
largely used, not only as money but for plate and ornament,
there is at all times a very large quantity of these metals in
existence: while they are so slowly worn out that a comparatively
small annual production is sufficient to keep up
the supply, and to make any addition to it which may be
required by the increase of goods to be circulated, or by the
increased demand for gold and silver articles by wealthy consumers.
Even if this small annual supply were stopped entirely,
it would require many years to reduce the quantity
so much as to make any very material difference in prices.
The quantity may be increased much more rapidly than it
can be diminished; but the increase must be very great before
it can make itself much felt over such a mass of the
precious metals as exists in the whole commercial world.
And hence the effects of all changes in the conditions of
production of the precious metals are at first, and continue
to be for many years, questions of quantity only, with little
reference to cost of production. More especially is this the
case when, as at the present time, many new sources of supply
have been simultaneously opened, most of them practicable
by labor alone, without any capital in advance beyond
a pickaxe and a week's food, and when the operations are as
yet wholly experimental, the comparative permanent productiveness
of the different sources being entirely unascertained.</p>
<p class="tei tei-p" style="margin-bottom: 0.90em"><span style="font-size: 90%">
For the facts in regard to the production of the precious metals,
see the investigation by Dr. Adolf
Soetbeer,</span><SPAN id="noteref_230" name="noteref_230" href="#note_230"><span class="tei tei-noteref"><span style="font-size: 60%; vertical-align: super">230</span></span></SPAN><span style="font-size: 90%"> from which
Chart IX has been taken. It is worthy of careful study. The
figures in each period, at the top of the respective spaces, give the
average annual production during those years. The last period
has been added by me from figures taken from the reports of
the Director of the United States Mint. Other accessible
sources, for the production of the precious metals, are the
tables in the appendices to the Report of the Committee to
the House of Commons on the </span><span class="tei tei-q"><span style="font-size: 90%">“</span><span style="font-size: 90%">Depreciation of Silver</span><span style="font-size: 90%">”</span></span><span style="font-size: 90%">
(1876); the French official Procès-Verbaux of the International
Monetary Conference of 1881, which give Soetbeer's
figures to a later date than his publication above mentioned;
the various papers in the British parliamentary documents;
and the reports of the director of our mint. Since 1850 more
gold has been produced than in the whole period preceding,
from 1492 to 1850. Previous to 1849 the annual average product
of gold, out of the total product of both gold and silver,
was thirty-six per cent; for the twenty-six years ending in
1875, it has been seventy and one half per cent. The result
has been a rise in gold prices certainly down to 1862,</span><SPAN id="noteref_231" name="noteref_231" href="#note_231"><span class="tei tei-noteref"><span style="font-size: 60%; vertical-align: super">231</span></span></SPAN><span style="font-size: 90%"> as shown
by the following chart.
</span><span style="font-size: 90%">
It will be observed how much
higher the prices rose
during the depression after 1858
than it was during a period of
similar conditions after 1848.
The result, it may be said, was
predicted by Chevalier.</span><SPAN id="noteref_232" name="noteref_232" href="#note_232"><span class="tei tei-noteref"><span style="font-size: 60%; vertical-align: super">232</span></span></SPAN></p>
<SPAN name="Chart_IX" id="Chart_IX" class="tei tei-anchor"></SPAN>
<p>
Chart IX.</p>
<p>
<span class="tei tei-hi"><span style="font-style: italic">Chart showing the Production of the Precious Metals,
according to Value, from 1493 to 1879.</span></span></p>
<table summary="This is a table" cellspacing="0" class="tei tei-table" style="margin-bottom: 1.00em"><colgroup span="4"></colgroup><tbody><tr class="tei tei-row"><td class="tei tei-cell">Years.</td><td class="tei tei-cell">Silver.</td><td class="tei tei-cell">Gold.</td><td class="tei tei-cell">Total.</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1493-1520</td><td class="tei tei-cell">$2,115,000</td><td class="tei tei-cell">$4,045,500</td>
<td class="tei tei-cell">$6,160,500</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1521-1544</td><td class="tei tei-cell">4,059,000</td><td class="tei tei-cell">4,994,000</td>
<td class="tei tei-cell">9,053,000</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1545-1560</td><td class="tei tei-cell">14,022,000</td><td class="tei tei-cell">5,935,500</td>
<td class="tei tei-cell">19,957,500</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1561-1580</td><td class="tei tei-cell">13,477,500</td><td class="tei tei-cell">4,770,750</td>
<td class="tei tei-cell">18,248,250</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1581-1600</td><td class="tei tei-cell">18,850,500</td><td class="tei tei-cell">5,147,500</td>
<td class="tei tei-cell">23,998,000</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1601-1620</td><td class="tei tei-cell">19,030,500</td><td class="tei tei-cell">5,942,750</td>
<td class="tei tei-cell">24,973,250</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1621-1640</td><td class="tei tei-cell">17,712,000</td><td class="tei tei-cell">5,789,250</td>
<td class="tei tei-cell">23,501,250</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1641-1660</td><td class="tei tei-cell">16,483,500</td><td class="tei tei-cell">6,117,000</td>
<td class="tei tei-cell">22,600,500</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1661-1680</td><td class="tei tei-cell">15,165,000</td><td class="tei tei-cell">6,458,750</td>
<td class="tei tei-cell">21,623,750</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1681-1700</td><td class="tei tei-cell">15,385,500</td><td class="tei tei-cell">7,508,500</td>
<td class="tei tei-cell">22,894,000</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1701-1720</td><td class="tei tei-cell">16,002,000</td><td class="tei tei-cell">8,942,000</td>
<td class="tei tei-cell">24,944,000</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1721-1740</td><td class="tei tei-cell">19,404,000</td><td class="tei tei-cell">13,308,250</td>
<td class="tei tei-cell">32,712,250</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1741-1760</td><td class="tei tei-cell">23,991,500</td><td class="tei tei-cell">17,165,500</td>
<td class="tei tei-cell">41,157,000</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1761-1780</td><td class="tei tei-cell">29,373,250</td><td class="tei tei-cell">14,441,750</td>
<td class="tei tei-cell">43,815,000</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1781-1800</td><td class="tei tei-cell">39,557,750</td><td class="tei tei-cell">12,408,500</td>
<td class="tei tei-cell">51,966,250</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1801-1810</td><td class="tei tei-cell">40,236,750</td><td class="tei tei-cell">12,400,000</td>
<td class="tei tei-cell">52,636,750</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1811-1820</td><td class="tei tei-cell">24,334,750</td><td class="tei tei-cell">7,983,000</td>
<td class="tei tei-cell">32,317,750</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1821-1830</td><td class="tei tei-cell">20,725,250</td><td class="tei tei-cell">9,915,750</td>
<td class="tei tei-cell">30,641,000</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1831-1840</td><td class="tei tei-cell">26,840,250</td><td class="tei tei-cell">14,151,500</td>
<td class="tei tei-cell">40,991,750</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1841-1850</td><td class="tei tei-cell">35,118,750</td><td class="tei tei-cell">38,194,250</td>
<td class="tei tei-cell">73,313,000</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1851-1855</td><td class="tei tei-cell">39,875,250</td><td class="tei tei-cell">137,766,750</td>
<td class="tei tei-cell">177,642,000</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1856-1860</td><td class="tei tei-cell">40,724,500</td><td class="tei tei-cell">143,725,250</td>
<td class="tei tei-cell">184,449,750</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1861-1865</td><td class="tei tei-cell">49,551,750</td><td class="tei tei-cell">129,123,250</td>
<td class="tei tei-cell">178,675,000</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1866-1870</td><td class="tei tei-cell">60,258,750</td><td class="tei tei-cell">133,850,000</td>
<td class="tei tei-cell">194,108,750</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1871-1875</td><td class="tei tei-cell">88,624,000</td><td class="tei tei-cell">119,045,750</td>
<td class="tei tei-cell">207,669,750</td></tr><tr class="tei tei-row"><td class="tei tei-cell">1876-1879</td><td class="tei tei-cell">110,575,000</td><td class="tei tei-cell">119,710,000</td>
<td class="tei tei-cell">230,285,000</td></tr></tbody></table>
<p></p>
<ANTIMG src="images/gold-prices.png" width-obs="539" height-obs="1095" alt="Illustration: Rise of Average Gold Prices." title="Chart showing rise of average gold prices after the gold discoveries of 1849 to 1862." />Chart showing rise of average gold prices after the gold
discoveries of 1849 to 1862.
<p class="tei tei-p" style="margin-bottom: 0.90em"><span style="font-size: 90%">
The fall of prices from 1873
to 1879, owing to the commercial
panic in the former year,
however, is regarded, somewhat
unjustly, in my opinion, as an
evidence of an appreciation of
gold. Mr. Giffen's paper in
the </span><span class="tei tei-q"><span style="font-size: 90%">“</span><span style="font-size: 90%">Statistical Journal,</span><span style="font-size: 90%">”</span></span><span style="font-size: 90%"> vol.
xlii, is the basis on which Mr.
Goschen founded an argument
in the </span><span class="tei tei-q"><span style="font-size: 90%">“</span><span style="font-size: 90%">Journal of the Institute
of Bankers</span><span style="font-size: 90%">”</span></span><span style="font-size: 90%"> (London), May,
1883, and which attracted considerable
attention. On the other
side, see Bourne, </span><span class="tei tei-q"><span style="font-size: 90%">“</span><span style="font-size: 90%">Statistical
Journal,</span><span style="font-size: 90%">”</span></span><span style="font-size: 90%"> vol. xlii. The claim
that the value of gold has risen
seems particularly hasty, especially
when we consider that after
the panics of 1857 and 1866
the value of money rose, for reasons
not affecting gold, respectively
fifteen and twenty-five
per cent.
</span></p>
<p class="tei tei-p" style="margin-bottom: 0.90em"><span style="font-size: 90%">
The very thing for which the precious metals are most recommended
for use as the materials of money—their </span><em class="tei tei-emph"><span style="font-size: 90%; font-style: italic">durability</span></em><span style="font-size: 90%">—is
also the very thing which has, for all practical purposes,
excepted them from the law of cost of production, and caused
</span><span style="font-size: 90%">
their value to depend practically upon the law of demand and
supply. Their durability is the reason of the vast accumulations
in existence, and this it is which makes the annual product
very small in relation to the whole existing supply, and so
prevents its value from conforming, except after a long term
of years, to the cost of production of the annual supply.
</span></p>
<SPAN name="toc156" id="toc156"></SPAN>
<h3><span>§ 3. This law, how related to the principle laid down in the preceding chapter.</span></h3>
<p>
Since, however, the value of money really conforms,
like that of other things, though more slowly, to its cost of
production, some political economists have objected altogether
to the statement that the value of money depends on
its quantity combined with the rapidity of circulation, which,
they think, is assuming a law for money that does not exist
for any other commodity, when the truth is that it is governed
by the very same laws. To this we may answer, in
the first place, that the statement in question assumes no
peculiar law. It is simply the law of demand and supply,
which is acknowledged to be applicable to all commodities,
and which, in the case of money, as of most other things, is
controlled, but not set aside, by the law of cost of production,
since cost of production would have no effect on value
if it could have none on supply. But, secondly, there really
is, in one respect, a closer connection between the value of
money and its quantity than between the values of other
things and their quantity. The value of other things conforms
to the changes in the cost of production, without requiring,
as a condition, that there should be any actual
alteration of the supply: the potential alteration is sufficient;
and, if there even be an actual alteration, it is but a
temporary one, except in so far as the altered value may
make a difference in the demand, and so require an increase
or diminution of supply, as a consequence, not a cause, of the
alteration in value. Now, this is also true of gold and silver,
considered as articles of expenditure for ornament and luxury;
but it is not true of money. If the permanent cost of
production of gold were reduced one fourth, it might happen
that there would not be more of it bought for plate,
gilding, or jewelry, than before; and if so, though the value
would fall, the quantity extracted from the mines for these
purposes would be no greater than previously. Not so with
the portion used as money: that portion could not fall in
value one fourth unless actually increased one fourth; for,
at prices one fourth higher, one fourth more money would
be required to make the accustomed purchases; and, if this
were not forthcoming, some of the commodities would be
without purchasers, and prices could not be kept up. Alterations,
therefore, in the cost of production of the precious
metals do not act upon the value of money except just in
proportion as they increase or diminish its quantity; which
can not be said of any other commodity. It would, therefore,
I conceive, be an error, both scientifically and practically, to
discard the proposition which asserts a connection between
the value of money and its quantity.</p>
<span style="font-size: 90%">
There are cases, however, in which the </span><em class="tei tei-emph"><span style="font-size: 90%; font-style: italic">potential</span></em><span style="font-size: 90%"> change of
the precious metals affects their value as money in the same
way that it affects the value of other things. Such a case
was the change in the value of silver in 1876. The usual causes
assigned for that serious fall in value were the greatly increased
production from the mines of Nevada; the demonetization of
silver by Germany; and the decreased demand for export to
India. It is true that the exports of silver from England to
India fell off from about $32,000,000 in 1871-1872 to about
$23,000,000 in 1874-1875; but none of the increased Nevada
silver was exported from the United States to London, nor had Germany
put more than $30,000,000 of her silver on the market;</span><SPAN id="noteref_233" name="noteref_233" href="#note_233"><span class="tei tei-noteref"><span style="font-size: 60%; vertical-align: super">233</span></span></SPAN><span style="font-size: 90%">
and yet the price of silver so fell that the depreciation
amounted to 20-¼ per cent as compared with the average price
between 1867 and 1872. The change in value, however, took
place without any corresponding change in the actual quantity
in circulation. The relation between prices and the quantities
of the precious metals is, therefore, not so exact, certainly as
regards silver, as Mr. Mill would have us believe; and thus
their values conform more nearly to the general law of Demand
and Supply in the same way that it affects things other than
money.
</span>
<p>
It is evident, however, that the cost of production, in
the long run, regulates the quantity; and that every country
(temporary fluctuation excepted) will possess, and have in
circulation, just that quantity of money which will perform
all the exchanges required of it, consistently with maintaining
a value conformable to its cost of production. The
prices of things will, on the average, be such that money
will exchange for its own cost in all other goods: and, precisely
because the quantity can not be prevented from affecting
the value, the quantity itself will (by a sort of self-acting
machinery) be kept at the amount consistent with that standard
of prices—at the amount necessary for performing, at
those prices, all the business required of it.</p>
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