ELEMENTS OF POLITICAL ECONOMY.

Lyttelton Times, Volume CXX, Issue 14983, 1 May 1909, Page 12

ELEMENTS OF POLITICAL ECONOMY.

(By H. D. BEDFORD, M.A., Lecturer on Political Economy, Otago University). XIII—PAPER MONEY AND DEPRECIATION.

In the preceding article were cited many historical instances of the fatal facility of paper money to become depreciated in value. But why should it be moro liable to this evil than gold or silver? The reason is not far to seek. Depreciation only occurs when an amount of money is issued in excess of the needs of business for the purposes of exchange. Now, there are natural restraints upon the increase of gold in circulation from which paper money is immune. To begin with, gold requires labour for its production. The very difficulty of extracting the metal from the mines imposes a strict limitation upon tho amount that can bo turned into currency in the course of a year, whereas, in the case of paper money, no limit can be set to the quantity capable of manufacture, oven in a day. The increase of gold money is necessarily gradual and by small increments, Uiat of incontrovertible paper money depends only upon the fiat of the Government, and may be sudden and to any amount. .The result is tho world aas never suffered to any appreciable extent from too much gold money. But what is to prevent a country like Australia, which produces such a large portion of the world’s gold supply, from having a great deal more .netallic money in proportion to its business than other countries? Australia produced last year £14,000,000 of gold. If that amount were to passs every year into the currency of tho country the purchasing power of money would fall tremendously. The depreciation of money would be just as groat as if 14,000,000 inconvertible pound notes were issued. Paper money, let it be remembered, does not depreciate because it is paper. If all the gold and silver at present in circulation were replaced by paper notes, those notes would have precisely the samo value as die coins they supplanted. It is only over-issue which causes depreciation, and if gold is over-issued it will depreciate—or its power of purchasing commodities will fall—just to the samo extent as paper when overissued. Nevertheless, as the necessity of digging for tho gold checks its overissue in the world at large, so its exportability checks its over-abundance in,any one country. When any locality gets an overplus of coin, relief is obtained—depreciation is arrested —by exporting the excess. To make tho matter clear, let us suppose that Australia were to pass through, tho mint the whole output of her gold mines and put all the coin into local circulation. Prices would at once begin to rise; when the currency was doubled the price of all things would be doubled; and so on. But the abnormally high prices ill Australia would attract foreign merchants with pods for sale. Commodities would begin to pour in from all parts in quest of the high prices. Moreover, the very cause which would stimulate tho import of commodities would check tho export. Australian producers would not send their produce to Europe if the price in the local market was much higher, i'iius the redundancy of money, occasioning high prices, would promote importation and arrest exportation. Such being the case, tho only way in wind, the foreign merchants could bo paiu for their wares ihl be by tho export. of money -Id. This outflow of gold would e.. jo until Australian prices were reduccu to normal. The fact is that ntoney, like water, finds its own level. The excess of oik' country always runs to meet the scarcity of another. In the country where money is scarce, general prices arc low; foreign merchants will not send their goods to such a _ country when they can get better prices elsewhere; so that importation is stopped. A 5 am. local producers will not sell in tho local market where prices are abnormally low when there is open to them a country with excess of money where prices aro abnormally high. So, by tile effect of prices in governing the movements of trade, the country suffering from scarcity of money will export goons and import money, and the other country will import goods and export money. This process will go on until both countries have reached the normal level of prices. Bv the action of international trade, then, the metal money of the world is distributed evenly among the different countries, according t-o the requirements of their commerce. Such adjustment, however, is not possible in case of the over-issue of paper money. This money has no intrinsic value, and is worth less outside the boundaries of the country whore it is issued.

Wlien prices were rising' phenomenally iu France and America, and all the available gold had been exported, no roliof could eomo from the exportation of paper money. No f-oi'eign merchant would accept it in payment of his goods. There is, therefore, no outlet for tlio excess. There is no means by which the glut of money can be relieved. The paper must depreciate, and prices rise more and more with every further issue, until disaster, such ns that which overtook America and France, brings all commerce to an end. It is this non-exportability of an inconvertible currency which renders its over-issue so calamitous. If Governments could always bo relied on to keep the issue within the limits required by bona fido trade, paper would serve us as well as gold—for internal exchanges, at any rate—and have the merit of costing practically nothing to produce. Unfortunately, history does not warrant ns irt assuming that Governments can bo so trusted.

I CLASSICAL TESTIMONY. Hamilton, that greatest of American

financiers, whoso genius shines forth from tho Constitution of the United States, of which he was really th« draftsman, speaking of the prohibition of paper emissions by the individual States, says:—“They are of a nature so liable to abuse, and, it may even bo affirmed, so certain of being abused, that the wisdom of the Government will be shown in never trusting iteelf with tho use of so seducing and dangerous an expedient. ... In great and trying emergencies there is almost a moral certainty of its becoming mischievous. The stamping of paper is an operation eo much easier tnan the levying of taxes that a government, in the practice of paper emissions, would rarefy fail in any such emergency to indulge itself too far in the employment of this resource.” Walker says:—“Not only does tho danger of over-issue never cease to menace a community having such money in circulation, but the moment an over-issue in fact occurs the impulse to excess acquires violence by indulgence. The reason is obvious. To metallic money the formula of supply and demand applies. Demand creates supply; supply satisfies demand. If metallic money is brought in excess into any country, it runs off. Paper money cannot run off. It makes a swamp wherever it is poured out. There is no outlet for such money. When in excess prices rise, and may rise indefinitely without being corrected by international commerce.” Says Edmund Burke, writing on tho French Revolution :—“ Real money can hardly ever multiply too much in any country, because it will always, as it increases, be a certain sign of the increase of trade, of which it is the measure, and, consequently, of the soundness and vigour of the whole body. But this paper money may. and does, increase without any increase of trad©, nay,. often when trade greatly declines, for it is not the measure of the. trade of the nation, but of the necessity of the Government, and it is absurd and must be ruinous that the same course which naturally exhausts the wealth of a nation should likewise be the only productive cause of money.” “There has never bo a Government yet,” says Professor Perry, “of the many which have issued irredeemable paper which had tho wisdom and firmness to resist for any great length of timo tho strong temptation to overissues. . . - When once the press is set at work it must work on with livelier speed, because just in the ratio of tho depreciation is the greater amount required.” Lastly, listen to the words of Webster. one of America’s most sagacious and * eloauent statesmen :—“ The circulating medium of a commercial community must be that which is also the circulating medium of other commercial communities, or must- be capable of being converted into that medium without loss. It must be able not only to pass in payments and receipts among individuals of the same society and nation, but to adjust and discharge the balance of exchanges between different nations.” DEBASED COINS. If the excessive issue of paper money is fraught with disaster, the debasement of the coinage from alloy, abrasion, clipping, and sweating is attended with evils of almost equal magnitude. This was a device specially favoured. by English monarchs in the middle ages. Having the prerogative of coinage, they found it an easy way of replenishing exhausted resources to mix larger quantities of base metal with the silver and gold, and in other ways to diminish the quantity of standard metal in the co-in. The history of the English pound is a good illustration of this. The pound was once an actual pound-weight of silver; but a pound of standard silver is now coined not into twenty, but into sixty-six shillings. By successive reductions the quantity of silver in the shilling was diminished to less than one-third. The gain to the Sovereign authority was obvious. Tho King received the pound-weight of silver into his mint, returned twenty shillings to the owner, which, by royal fiat, were declared to be equal to a pound, and retained the balance of the silver to bo coined into shillings to discharge his debts. By the same means the “ pound Scots” was reduced to one-thirty-sixth of its original value. Even the material of coins has beeu changed by the exercise of this royal prerogative. The florin of France was once a pieco of gold ; it is now a piece of silver. The Spanish marayedi was once a pieco of gold; it is now a piece of copper. The debasement" of the coinage by kings to their own enrichment fills a large chapter in the history of tho world. It will be seen tl/at it is an expedient to meet financial embarrassment' analogous to the over-issue of inconvertible currency, though not attended with equal disaster to foreign commerce. Debasing coin is not so easy a process as printing paper money.