Chapter 10 — Confusions Arising from the Use of Money

It is 
to confusions of thought growing out of the use of money that we may trace the belief that a nation profits by exporting and loses by importing — a belief to which countless lives and incalculable wealth have been sacrificed in bloody wars, and which today molds the policy of nearly all civilized nations and interposes artificial barriers to the commerce of the world.

The primary form of trade is barter — the exchange of commodities for commodities. But just as when we begin to think and speak of length, weight, or bulk, it is necessary to adopt measures or standards by which these qualities can be expressed, so when trade begins there arises a need for some common standard by which the value of different articles can be apprehended. The difficulties attending barter soon lead, also, to the adoption by common consent of some commodity as a medium of exchange, by means of which he who wishes to exchange a thing for one or more other things is no longer obliged to find someone with exactly reciprocal desires, but is enabled to divide the complete exchange into stages or steps, which can be made with different persons, to the enormous saving of time and trouble.

As civilization advances, as society becomes more settled and orderly, and exchanges more numerous and regular, gold and silver are gradually superseded as mediums of exchange by credit in various forms. By means of accounts current, one purchase is made to balance another purchase and one debt to cancel another debt. Individuals or associations of recognized solvency issue bills of exchange, letters of credit, notes and drafts, which largely take the place of coin; banks transfer credits between individuals, and clearing-houses transfer credits between banks, so that immense transactions are carried on with a very small actual use of money; and finally, credits of convenient denominations, printed upon paper, and adapted to transference from hand to hand without indorsement or formality, being cheaper and more convenient, take in part or in whole the place of gold or silver in the country where they are issued.

The part which money plays in social life and intercourse is so necessary, its use is so common in thought and speech and actual transaction, that certain confusions with regard to it are apt to grow up. It is not needful to speak of the delusion that interest grows out of the use of money, or that increase of money is increase of wealth, or that paper money cannot properly fulfill its functions unless an equivalent of coin is buried somewhere, but only of such confusions of thought as have a relation to international trade.

When the growth of commerce made it possible to raise large revenues by indirect taxation, kings and their ministers soon discovered how easily the people could thus be made to pay an amount of taxes that they would have resisted if levied directly. Import taxes were first levied to obtain revenue, but not only was it found to be exceedingly convenient to tax goods in the seaport towns from whence they were distributed through the country, but the taxation of imported goods met with the warm support of such home producers as were thus protected from competition. An interest was thus created in favor of "protection," which availed itself of national prejudices and popular habits of thought, and a system was by degrees elaborated, which for centuries swayed the policy of European nations.

This system, which Adam Smith attacked under the name of the mercantile system of political economy, regarded nations as merchants competing with each other for the money of the world, and aimed at enriching a country by bringing into it as much gold and silver as possible, and permitting as little as possible to flow out. To do this it was sought not only to prohibit the carrying of precious metals out of the country, but to encourage the domestic production of goods that could be sold abroad, and to throw every obstacle in the way of similar foreign or colonial industries. Not only were heavy import duties or absolute prohibitions placed on such products of foreign industry as might come into competition with home industry, but the exports of such raw materials as foreign industries might require were burdened with export duties or entirely prohibited under savage penalties of death or mutilation. Skilled workmen were forbidden to leave the country lest they might teach foreigners their art; domestic industries were encouraged by bounties, by patents of monopoly and by the creation of artificial markets — sometimes by premiums paid on exports, and sometimes by laws which compelled the use of their products. One instance of this was the Act of Parliament which required every corpse to be buried in a woolen shroud.

But to attempt to increase the supply of gold and silver by such methods is both foolish and useless. Such amounts of the precious metals as are needed for use as money will come to every nation that participates in the trade of the world, by virtue of a tendency that sets at naught all endeavors artificially to enhance supply, a tendency as constant as the tendency of water to seek a level. Wherever trade exists all commodities capable of transportation tend to flow from wherever their value is relatively low to wherever their value is relatively high. This tendency is checked by the difficulties of transportation, which vary with different things as their bulk, weight, and liability to injury compare with their value. The precious metals do not suffer from transportation, and having (especially gold) little weight and bulk as compared with their value, are so portable that a very slight change in their relative value is sufficient to cause their flow.

The effect of artificially increasing the supply of precious metals in any country must be to lower their value as compared with that of other commodities. The moment, therefore, that restrictions by which it is attempted to attract and retain the precious metals begin so to operate as to increase the supply of those metals, a tendency to their outflowing is set up, increasing in force as the efforts to attract and retain them become more strenuous. Thus all efforts artificially to increase the gold and silver of a country have had no result save to hamper industry and to make the country that engaged in them poorer instead of richer. This, experience has taught civilized nations, and few of them now make any direct efforts to attract or retain the precious metals, save by uselessly hoarding them in burglar-proof vaults.

The notion that gold and silver are the only true money, and that as such they have a peculiar value, still underlies protectionist arguments, and the habit of associating incomes with sales, and expenditure with purchases, which is formed in the thought and speech of everyday life, still disposes men to accept a policy which aims at restricting imports by protective tariffs.

When we say that a merchant is doing a profitable business because his sales exceed his purchases, what we are really thinking of as sales is not the goods he sends out, but the money that we infer he takes in in exchange for them; what we are really thinking of as purchases is not the goods he takes in, but the money we infer he pays out. We mean, in short, that he is growing richer because his income exceeds his out-go. But, manifestly, when we compare the trade of a merchant carried on in the usual way with the trade of a nation, it is not the goods that a merchant sells, but the money that he pays out, that is analogous to the exports of a country; not the goods that he buys, but the money he takes in, that is analogous to imports. It is only where the trade of a merchant is carried on by the exchange of commodities for commodities, that the commodities he sells are analogous to the exports, and the commodities he buys are analogous to the imports of a nation.

The fact is, that all trade in the last analysis is simply what it is in its primitive form of barter, the exchange of commodities for commodities. The carrying on of trade by the use of money does not change its essential character, but merely permits the various exchanges of which trade is made up to be divided into parts or steps, and thus more easily effected. When commodities are exchanged for money, but half a full exchange is completed. When a man sells a thing for money it is to use the money in buying some other thing — and it is only as money has this power that anyone wants or will take it. Our common use of the word "money" is largely metaphorical. We speak of a wealthy man as a moneyed man, and in talking of his wealth say that he has so much "money," whereas the fact probably is, that though he may be worth millions, he never has at anyone time more than a few dollars, or at most a few hundred dollars, in his possession. His possessions really consist of houses, lands, goods, stocks, or of bonds or other obligations to pay money. The shrewd business man does not stow away money. On the contrary, with the money he obtains from his sales he hastens to make other purchases. If he does not buy commodities for use in his business, or commodities or services for personal gratification, he buys lands, houses, stocks, bonds, mortgages, or other things from which he expects a profitable return.

The trade between nations, made up as it is of numerous individual transactions which separately are but parts or steps in a complete exchange, is in the aggregate, like the primitive form of trade, the exchange of commodities for commodities. Money plays no part in international trade, and the world has yet to reach that stage of civilization which will give us international money. Paper currency — which in all civilized nations now constitutes the larger part of their money — is never exported to settle balances, and when gold or silver coin is exported or imported it is as a commodity, and its value is estimated at that of the bullion contained. What each nation imports is paid for in the commodities which it exports, unless received as loans, or investments, or as interest, rent, or tribute. Before commerce had reached its present refinement of division and subdivision this was in many individual cases clear enough. A vessel sailed from New York, Philadelphia, or Boston carrying, on account of owner or shipper, a cargo of flour, lumber; and staves to the West Indies, where it was sold, and the proceeds invested in sugar, rum, and molasses, which were brought back, or which, perhaps, were carried to Europe, there sold, and the proceeds invested in European goods, which were brought home. At present the exporter and importer are usually different persons, but the bills of exchange drawn by the one against goods exported are bought by the other, and used to pay for goods imported. So far as the country is concerned, the transaction is the same as though importers and exporters were the same persons, and that imports exceed exports in value is no more proof of a losing trade than that in the old times a trading ship brought home a cargo worth more than that she carried out was proof of an unprofitable voyage.