This Money Business!

Northland Age, Volume 1, Issue 4, 30 October 1931, Page 8

This Money Business!

My dear Nephew

When you receive your monthly cheque from the factory, Jack, you pay it into your credit at the bank' and then—likely enough after a good deal of figuring as to how you are going to pay your various charges with the amount in these days when outgoings are heavy and incomings light you draw cheques against your credit to pay your bills. These cheques finally find their way into your bank and are charged up to you, leaving, it is to be hoped, a balance in your favour till your next factory cheque is due, and the process can be repeated. If your balance is depleted you have to cease drawing cheques until you can bring it into credit, either by paying more in or by your banker permitting you overdraw, for which you will have to pay him. Though your cheques are not, strictly speaking, money, they perform one of the main functions of money—they serve as a medium of exchange. But only on one condition —there must be a credit in your account. Of course you know that as well as I do, but I want you to ponder on that elementary fact for a moment, because it is the basic principle on which the whole of our monetary system is based, and to which we must always come back. So let us talk about the thing in some detail. Real Money and Token Money

Suppose, instead of paying your cheque into the bank, you cash it, you will receive money—notes, silver and copper—with which you can pay your debts or buy anything you need. The notes are on the face of them not money, but only promises to pay money on demand. But are they ? You take a £1 note to the bank and you will be promptly paid 20/ in silver. But is that twenty shillings full value for your pound? It is not. Once on a time a pound’s worth of silver was a troy pound weight of silver, 12 ounces. Now for your pound note you can buy about 19 ounces of pure silver. Your twenty shillings, which are not pure silver, weigh only a fraction of that. As long as they bear the King’s image and superscription, you can exchange them for a pound’s worth of goods. But take a hammer and beat them into a shapeless lump of metal, and nobody will give you five shillings for

it. And note this very significant fact. If you owe a man £IOO and offer to pay him in notes of a New Zealand bank he is bound by law to accept them and discharge the debt. But offer instead of paying him in paper money, of no value in itself, to pay him in “real” money, silver, and he can refuse to accept it. For your bank notes are “money” to any amount, but silver is only “money” to the extent of 40/. The case of copper coins is worse, because they are only money up to the value of a shilling. Why is this thus? Because bank notes are by law in New Zealand legal tender, the only legal money we have got. And though by themselves only worthless bits of paper, they fill all the functions of money to everybody’s satisfaction, because, and only because, there is wealth of some kind behind them, which they represent. The State Can’t Create Money Now, Jack, this has led manjl people to the conclusion that the State by its mere fiat can manufacture money, could pay off our national debt by printing a couple ~of hundred million notes and compelling people by law to accept them as. money. Well, you remember what happened in Germany only a few years ago when that trick was tried, and in a short time a hundred million marks of that State money wouldn’t pay for a dinner. As soon as the little value that was behind the notes when they started printing was exhausted, the notes were literally worth less than the paper they were printed on. For money is of no value in itself, it is valuable only as a symbol of value. What About Gold? Here I fancy you will disagree with me. “That may be true as regards New Zealand,” you will say, “but in England lately and here before the war we could take a bank note to the bank and get full value for it in gold.

Letters on the Monetary Question to My Nephew in the Country . .

A British sovereign as a coin or as shapeless metal will bring its full face value all over the world. Isn’t that our real money—our only real money—for which all other forms of money are only substitutes?” That, cf course, is quite true, but so is my assertion that money is only a symbol of value. We will talk a little later about gold as a money factor'—it is a most important one, the most important one at present—but I want to deal with a few fundamental facts first. Meanwhile I would just point out that here we get along quite comfortably without gold. It is true that our banks hold between five and six millions worth of it in their vaults, but decline to put a single coin of it into circulation. And did you notice that in Sir Otto Niemeyer’s report on our banking system he recommended it should all be sept to London, because it wasi quite unnecessary here, even for the reserve bank he recommends the Government' to create ? A Means of Exchange and a Measurt of Value Money, according to the text books is a medium of exchange and a meaS'

ure of value. Anything therefore that fulfils these functions is money. Our bank notes, for instance, are a perfect means of exchange with us, because everyone accepts them without question as a full equivalent for anything bought or sold, as we have seen. But .as a measure of value? Here, Jack, we strike a rather big snag. For what is value and how can it be measured? It is on definitions of value that the various schools of political economists differ, and over which war has raged ever since Adam Smith wrote “The Wealth of Nations.” ' The whole of Marxian Socialism, for 1 instance, is built on Karl Marx’s ’ theory of value, which to the ortho- • dox economists is a society-destroying heresy. But we won’t plunge into 1 these deep waters just yet. Let us go back to our butterfat for some * light on it.

The Creation of Wealth I need not tell you, Jack, that by your work on the lancf you are creating wealth, adding to the stock of the only true form of wealth. For wealth is what contributes to people’s “weal” or good, and nothing contributes more to that than the production of pure food. (It is worth noting that health and wealth come from the same root word). The golden stream of cream that pours with a little twist from your separator is wealth in an elementary form, and every drop of it has value, because it will minister to human needs in its final form. In the cans on the cream stand it represents so much value, for which you will receive an equivalent from your factory next month. (Not a full equivalent, you say). The carrier who lands the cans at the factory adds a little more value, for which he gets his equivalent. The factory labour that turns your cream into butter, the transport to the-freezing works, the storing and grading, the ocean carriage, the butter firms who.

put it on the market, the wholesaler

who sells to the retailer who sells to the housewife—all these and many more whom I have not mentioned have been adding value to your butter

and so demand and get their equivalent. For though you call yourself, quite rightly, Jack, a primary producer, your butter is not finally produced until it figures on the meal table, and goes to satisfy the healthy hunger of children and enable men and women to add their sharfe to the common wealth. (We will ignore the idlers and parasites for the present). It will help us. to get a grasp of the position if we always keep in mind the many thousands of people who give of their labour before a pound of butter can be put into consumption?, and that all necessary labour adds value to the butter. The Sharing Up Now lei us look at the return stream. The housewife pays .her eighteenpence, say, for butter, which the shopkeeper banks, deducts his equivalent and sends a cheque to the wholesaler. He repeats the process with the butter merchant, who deducts his equivalent and credits your company. He has already opened a

credit with a local bank out of which your monthly cheque was paid. But he takes care to get value first. For not a penny is advanced until your butter is shipped and the documents in the bank’s possession, and then only to, say, nine-tenths of the estimated value of the butter. At the end of the season there will be a final settlement, with, it is to be hoped, a surplus owing to your company which will give you a substantial bonus. Now the point I want you to note is that for value given each one takes what he considers a fair equivalent, or one settled for him by the higgling of the market (see, for instance, how cream carters are cutting rates this season). You get what is left, all stated in money termsi but all at bottom representing butterfat and its value. Does the money paid to you and the others represent a just measure of the value given, commencing with the price paid by the housewife? That, Jack, is your present problem, and we will have to try and get some light on it.

Now, Jack, this letter is already far longer than I intended, and I have told you nothing you don’t know already. But these things lie at the very roots of our problem, and must be firmly grasped if we are to make any progress.. Which is my excuse for dwelling so long on them. Believe me, your well-wisher, UNCLE JOE.

The “Red menace” which is causing the nations the greatest concern just now is the crimson hue of their budgets. * * * * It has been announced that the president of Duquesne University recently trisected an angle, a feat considered impossible for about 2500 years. Now perhaps the learned gentleman will show us how to male# both ends meet.

(To Be Continued]