ELEMENTS OF POLITICAL ECONOMY.

Lyttelton Times, Volume CXX, Issue 14977, 24 April 1909, Page 13

ELEMENTS OF POLITICAL ECONOMY.

(By IT. D. BEDFORD, M.A., Lecturer on Political Economy, Otago University.) XII.—PAPER MONEY.

The only thing we want money for is to act as a medium for the exchange of our products, and to serve purposes incidental to this main one. If that is so, why will not a piece of papor do as well, as gold? We know, as a matter of experience, that a banknote is as serviceable as a sovereign. It is true the bank-note is convertible at any time into gold. But why should it be so con%'ertible ? What need of the-precious metal at all? Thia all-important question is thus put by Walker: "If, then, a money consisting of coloured bits of paper, of a cost so small as to bo inappreciable, may serve as a medium, of exchange, and may register the comparative purchasing power of commodities, and thus perform the function ordinarily spoken of as measuring values, and may oven act as a standard for deferred payment©, to fix the obligation of debtors, why should not.such money be adopted by all civilised communities, and the vast amount of wealth and labour now expended in raising gold and silver from the mines bo applied to occupations more immediately productive of'health, comfort and happiness?" It does seem foolish to go to the expense and trouble of delving in the bowels of tho earth for metal for money if slips of paper will do as well. MONEY AND THE LEVEL OF PRICES. This question cannot bo satisfactorily answered without a short preliminary inquiry into tho effect of money on prices. The leading principle to grasp is that the more money there is in circulation the higher general prices will bo. In other words, commodities will become dear, or tho shilling will not purchase as much as formerly. A simple illustration may help to elucidate the truth.

Suppose that next pay-day every wage-earner in tho dominion finds his money wages increased two-fold. There will then be twico as many sovereigns, shillings or bank-notes offered in purchase'of goods as there were on tho previous pay-day. But there will bo no more commodities in existence. Doubling tho money has not doubled the things that are wanted for consumption in exchange for tho money. There are no moro boots, or clothes, or butter in tho market. What happens then? Wo nre assuming that all the increased money goes into circulation. Prices rise, so that every piece of money that tho labourer has will bo sent to somo shop or other in the purchase of goods. There will thus bo twico as many pieces of money going in quest of commodities, but this will in no wav increase tho supply or the things'waixted. Tho sellers will be quick to discern this sudden increase in the demand for their goods, and will raise their prices. Prices always rise when the supply is constant and tho demand increases. The practical effect of doubling tho monev in circulation will be to bring two purchasers to a shop -for every one that formerly came. Where formerly there was £1 being offered for dupery or groceries, there will now bo £2. It thus appears that increasing the money in circulation does not of itself increase the wealth of a community, it merely increases prices. We are now in a ]X),sition to examine the effects ol inconvertible paper money. ITS HISTORY.

Time after time in the history of tins world paper has been-tried as a substitute for gold and silver, but, unfortunately, with littlo success so far. It must not be forgotten that we are now speaking of paper money, which lias no basis in the precious metals. Untler present conditions the banks in Mew Zealand and Great Britain always keep a reserve of gold to meet claims for the conversion of their notes. These notes are really nothing but promises to pay gold on demand, and tho banks cannot force their customers to take them in tho place of gold. Most nations, however, at soma tune or another, havo made paper money which is inconvertible into com legal tender. That is they havo by statutory enactment compelled creditors to accept it at its face value in discharge ot debts. China seems to have led the way in this experiment. As far hack as the beginning of the ninth century she decreed that paper money (really the inner bark of the mulberry tree) inconvertible into anything of intrinsic value should be employed in trade. In 1160 tho svstem had gone to suon. excess that, says a contemporary', ' the empire- was flooded with rapidly predating paper." . The 'Persian monarch in 1294, finding himself in need of cash endeavoured to escape from Ins difficulties by following China's example. What' had been formerly said ot the Chinese Emperor applies equally well to tho lersian: "And tho Kaan causes every year' to bo made such a vast quantity of this) money, which costs him nothing, that it must equal all tho treasure m tho world. With these pieces ot paper, made as I havo described, he causes all payments on his account to bo made; and he makes thorn to pass current universally over all his kingdoms, provinces and territories, and whithersoever his power and sovereignty extends. And nobody, however important hn may think himself, dares to refuse them on pain of death. But after a few years of enforced circulation the people rose in rebellion, tho markets were closed, the officials in charge of the paper money department were murdered, and the project was abandoned. , Tho Japanese had a paper currency in tho fourteenth century. But the most instructive instances of the use of inconvertible paper money are to be found in tho history of tho American colonies and at tho time of the great revolution in France. It will be noticed that this inconvertible paper has never been resorted to except by governments which wero sorely straitened from lack of money. THE EXAMPLE OF THE UNITED STATES. Massachussets was the first Stato to try tho experiment of meeting financial embarrassment by the issue of paper money. In 1690 it embarked upon an expedition against the French in Canada, and, being unable to raise tho needed 'money in tho ordinary way, it paid its soldiers in paper. The amount not being excessive, tho effect on prices was not very marked. The apparent success of the device

of Massachussota emboldened Connecticut to adopt the samo course. This State, however, disdained all restraints upon the issue of its paper. Whenever it wanted to make a payment it printed a pioco of paper, and forced its creditor to accept it. Issue after issue followed in quick succession. In consequence prices rose and money depreciated—that is, the purchasing power of money was diminished—more and more. In 1710 an ounce of actual silver could be purchased by ejght shilling's worth of paper money; in 1724 it required paper of the face value of 15s; in 1739, 265; in 1744, 325; in 1749, 60s; in 1755, 88s. Concisely put, the price of an ounce of silver rose from 8s to 88s in forty-five years. It took 88s in paper money to purchase what formerly could have been purchased for Bs.

This depreciation was due to the fact that tho Government had been increasing the money but not the wealth of the State. With a high disregard to the result it went on paying its debts by bits of paper which cost it nothing, until I'ricos roso so phenomenally that trade was paralysed and the utmost confusion prevailed. Merchants were reluctant to sell on ono day because a further issuo of Government money the following day or week might still further increase prices. The samo anticipation of moro paper monoy made purchasers clamorous to buy. Credit was at an end. No guide remained for estimating the future value of goods. Tho experience of Rhode Island was still worse. In 1706 £lB5 of paper money in tho State was worth £IOO in London. In 1749, after enormous issues of papor, £IOO in Loudon would purchase as much asgGIOOO of Rhode Island paper money. Tho time came in certain parts of tho United States when it was almost literally true that it took a waggon-load of paper money to purchase a waggon-load of provisions. The disasters which fell upon the country through the issues of inconvertible paper money were eo great that under the Constitution of the United States the issue of paper money of any kind by the individual States is prohibited. THE EXAMPLE OF FRANCE. The calamities which follow overissue of paper money wore still more inarked in the case of the French assign ats. These pieces of paper actually represented property. They -were issued against ecclesiastical property which the Revolutionary Government had confiscated. The property was assigned as security for the notes; but it makes no difference whether notes have landed property behind them or not. In any case, excessive issue will bring about the. same, result. As the millions of assignats were poured into circulation the depreciation went on apace, although the paper was based " unshakeably" on the "only real tho sole source of production, the soil on which we tread." The factories of the country were closed, vast numbers of workmen were thrown out of employment, yet millions of pounds of money wore put in circulation yearly. Capitalists dared not embark in industry; the changes in prices were so sudden and extreme. "Commerce was dead; betting took its place." The face value of an assignat was £4. At the last it would not purchase as much as could be purchased for 3d beforo assignats were issued. Tho fact stands out unmistakably—by increasing money wealth is not created. And yet the faith of the, average man in' the efficacy of abundant money as a panacea is hard to shake. Long as;o Jevons doprecatingly said: "All the" evils of tho day, slackness of trade, falling prices, declining revenue, poverty of tho peoplo, want of employment, political discontent, bankruptcy, and panic—have been attributed to* the want of money." To supply this abundance, and remedy economic ills, there are not wanting many men to-day who urge liberal issues of paper money. This is a most fatal delusion, and the statement of a groat financier is hardly exaggerated: "That of all the contrivances for cheating the labouring classes of mankind, none has been moro effectual than that which deluded them with paper money. It was the most effectual of inventions to fortiliso the rich man's fields by the sweat of the poor man's brow." It is not difficult to see that an overissue of paper, bringing about depreciation of its valuo, and a consequent rise in prices, is detrimental to the working classes. It lessens the purchasing power of their wages. It is extremely unsettling to business generally. In a time of rapid depreciation capitalists are loth to advance money on industrial enterprise. A man loses all security for adequate. repayment when the £IOO he lends to-day may havo lost half its purchasing power a week hence. A depreciating currency enables borrowers to pay back their loans with loss purchasing power than they received. Conversely, the lenders receive loss than they parted with. The reasons for the special liability of inconvertible paper money to over-is-sue and depreciation must be left over for the next'week's article.