INFERENCES
DERIVED FROM THE THEORY

Essay on Money IV

As a Medium of Commerce;
With Remarks on the Advantages and Disadvantages
of Paper Admitted into General Circulation.

by John Witherspoon

Having thus laid down the theory of money, and having supported it by history and experience, I proceed to draw a few inferences from it, and apply them to some opinions which have taken place, and some measures which have been adopted or proposed with respect to currency and commerce in this country.

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In the first place, the above theory will enable every intelligent person to fix in his mind precisely what is or ought to be the meaning of a circulation medium. This phrase is on every body's mouth, and we meet with it continually in the day, published in the news papers and the speeches of senators in public assemblies. We may say of this as controversial divines used to say long ago, that a misconception of this is the protone pferdos, the radical error.

Not long since a writer in one of the papers said it was agreed on all hands that there is at present a scarcity of a circulating medium. To this I answer, that it is not agreed upon on any hand, but among those who are wholly ignorant of the meaning of the expression. The circulating medium is not yours nor mine; it is not the riches of Holland, nor the poverty of Sweden. It is that indefinite quantity of the precious metals that is made use of among the nations connected in commerce. Whether any particular person, city, or nation, is rich or poor, has more or less comparatively of it, is nothing to the purpose.

Every one will receive of the circulating medium that quantity which he is entitled to by his property or industry. It has been shown that rarity, one of the qualities of a circulating medium, if it were more rare than it is, a less quantity would be sufficient to represent a stated measure of property. If it were more plentiful than it is a greater quantity would be necessary; but the comparative riches or poverty of nations or persons would be altogether the same.(23.3)

Is any body ignorant that half a century ago in this country, a man might have bought a bushel of wheat for one quarter of a dollar? Was not the quarter dollar then as good a circulating medium as the whole dollar is now? And was not the man just as rich who had it in his pocket? Undoubtedly. Nay, I must further say, it was a better circulating medium, because it was of less size and weight. Has not the quantity of the precious metals increased greatly since the discovery of the mines of South America? Is not the quantity now necessary for any considerable purchase so great as to be burdensome in the transportation? The price of a good horse in silver would at present be a great encumbrance on a long journey.

How easy were it to point out places and countries in which there is a greater quantity of the circulating medium than any where else, and yet at the same time greater national and personal poverty, and probably for this very reason. What would it signify to a laborer in the mines of Peru if he should get a half johannes, of even two, for a days work, if at the same time he could hardly purchase with both as much provision as to keep body and soul together? Are they not known to be so?

What then must we say of the extreme ignorance and inattention, to say no worse, of those persons who are continually telling us that there is a want of a circulating medium? Are not gold and silver a circulating medium whose currency is universal? Are these then too scarce for that purpose, when there is hardly a negro slave, male of female, without silver buckles in their shoes, and many of them with rings and other ornaments of gold which five hundred years ago would have denoted a prince or princess?

Perhaps I have emphasized this more than necessary, but I have been induced to by the frequent complaints on this subject, and the absurd application of the phrase, a circulating medium. More reflection will occur, connected with this subject, in the subsequent parts of my discourse. In the mean time I will close by saying to my reader, you and I may be poor men, the state in which we live may be a poor state, we may want property, rents, resources and credit, but a circulating medium we want not.

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2 Money itself must be a commodity as well as sign and standard

From the principles above laid down it will appear that money, having as one of its essential qualities, an intrinsic, that is to say, a commercial value, it must be not only a sign and standard of a medium of commerce, but be itself a commodity, or a subject of commerce. There are many transactions respecting money in a trading nation, in which it is considered singly in this view. These it is unnecessary for me to enumerate, but even where it is applied directly or principally as a medium of alienation, its value as a standard does and must always follow and accommodate itself to its value as a commodity.

Hence it follows necessarily that money must be subject to every rule that other commodities are subject to in buying and selling. One of the most important of these is, that it must rise and fall in price compared with the demand there is for it. This is an unavoidable consequence, and as necessary in the case of money as in that of any commodity whatever. If a greater quantity of money than before is brought into any country, even though brought by the fairest and most honorable means, vis. increasing industry and profitable trade, it will have the effect of raising the price of other commodities in general and of industry, which is the source of all commodities.

But we must observe, that men are apt to view this in a wrong light. One commodity may rise or fall by its own plenty or of scarceness; but when there is a great and general rise of prices, of all commodities, it would be at least as proper, or rather much more so, to say that money had fallen than that goods had risen.

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Quantity increase results in irregular depreciation

We had so large experience of this during the war, by the excessive emissions of paper money, that it needs hardly any illustration. It is true, some persons did then and do now suppose, that the depreciation of the money was owing as much to the disaffection of some inhabitants, and the counterfeiting, and other artful endeavor of our enemies to destroy it, as to the increased quantity.

But in this they were quite mistaken. Jealousy or suspicion of the money should have had very different effects from a gradual and continual rise of prices. If I meet with a suspicious piece of money I do not raise the price of my goods, but refuse to sell them. This was indeed the case with all those who doubted the money to congress in time of the war.

Besides it is plain, that the American cause was most doubtful, and its enemies most numerous in the years 1776 and 1777, and yet the currency of the money was then very general, and its depreciation slow; whereas in the three following years, when, in consequence of the French treaty and other European alliances, the confidence of the public in the cause was increased, the depreciation was accelerated in an amazing degree.

I must also here make a remark upon another opinion often expressed during the war, that the depreciation must have been owing to other causes than the quantity, because it was greater than what they called the natural depreciation, in consequence of the quantity. By this they meant, that it was not regular; but when the quantity had arisen, suppose to five for one, the depreciation was as fifteen or twenty for one. These persons did not understand the depreciation of a commodity in consequence of its quantity, for it is not regular and equable, as in arithmetical progression, but rapid and increasing so as soon to get beyond all computation. If there is in any country but one tenth part more of any commodity than there is any demand for, the price will probably fall more than one half, and if there is double or treble the quantity needed, it will be what merchants call a drug, that cannot be sold at all, but if it be a perishable commodity, must sink in the hand of the possessor.

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Depreciation results from industry and trade, but pernicious when from increased circulating medium not related to industry

I have said above that the increase of money, even though in consequence of national prosperity, that is to say, internal industry and profitable trade, will yet necessarily have the effect of raising the price of industry and its fruits. This, however, must evidently be in a far higher degree, and attended with much more pernicious effects, when it is thrown into circulation without industry; as when silver is found in capacious mines, or paper is issued by the authority of a state, without measure and without end.

I verily believe that if as many millions of silver dollars had fallen from heaven and been thrown into circulation as there were paper ones issued by the United States, the disorder would have been as great or greater than it was. At least it would have been so at first, the difference would have been, that silver being current ones all, it would have soon gone abroad and found its level, so that the alteration would have been ultimately not in the United States, but in the general circulating medium over the whole earth.

Those, however, among whom it was first found, and who received it without industry, would have suffered most by it. Among them it would have produced laziness and luxury. Other nations would have drained it from them only by superior industry. The state of the Spanish monarchy at present ought to be, and indeed in a great measure has been, a lesson to the whole world. The time when they got possession of South America they were the most powerful and wealthy state in Europe. Would any man at that time have been reckoned sound in his judgment who should have affirmed that they would grow poor by means of the gold and silver mines? Yet it has happened so, and now there is hardly any politician so shallow but he can assign the reason of it. They thought that gold and silver would at once procure them every thing without working; but forgot that the more they had of it they must pay so much the more to those who were willing to work for them.(28.7)

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Paper money is not money; legal tender an absurdity

The above principles will clearly show that what is commonly called paper money, that is, bills bearing that the person holding them is entitled to receive a certain sum specified in them, is not, properly speaking, money at all. It is barely a sign without being a pledge of standard of value, and therefore is effectually defective as a medium of universal commerce.

I will afterwards speak of the different kinds of it, and point out their real and proper uses; but in the mean time I observe, that to arm such bills with the authority of the state, and make them a legal tender in all payments, is an absurdity so great that is not easy to speak with propriety upon it. Perhaps it would give offence if I should say, it is an absurdity reserved for American legislatures; no such thing having ever been attempted in the old countries.

It has been found, by the experience of ages, that money must have a standard of value, and if any prince or state debase the metal below the standard, it is utterly impossible to make it succeed. How then can it be possible to make that succeed which has no value at all? In all such instances there may be great injuries done to particular persons by wiping off debt; but to give such money general currency is wholly impossible.

The measure carries absurdity in its very face. Why will you make a law to oblige men to take money when it is offered them? Are there any who refuse it when it is good? If it is necessary to force them, does not this demonstrate that it is not good? We have seen indeed this system produce a most ludicrous inversion of the nature of things. For two or three years we constantly saw and were informed of creditors running away from their debtor, and the debtors pursuing them in triumph, and paying them without mercy.(29.8)

Continue to Essay on Money V to discover the consequences of legal tender laws.

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