 The unit of account has often and for long periods been nothing but a quantity--which has almost always if not always meant a weight--of a particular metal. The English "pound," still indicated by the initial letter of the Roman libra, being the name of a weight as well as a unit of account, serves to remind us of that time. The introduction of coinage makes it possible to count the amount of metal, "reckon it by tale," instead of weighing it with scales every time it passes from hand to hand, which is a great improvement, but it need not make, and sometimes has not made, any material difference to the value of the unit; a mint may coin all the bullion which any one chooses to bring to it and give it back to him free of any deduction or charge, while at the same time the law allows any one to do what he likes with the coin--to export it from the country in which it is or to melt it down at home for any purpose whatever. In this case a pound weight of bullion is freely convertible into a pound weight of coin and a pound weight of coin is freely convertible into a pound of bullion, and the two must therefore be of equal value: if the coin were worth more than an equal weight of uncoined metal, people would be carrying the uncoined to the Mint: if coin were worth less than uncoined, they would be melting the coin down. The fact that the uncoined metal and the coined continue to exist side by side is proof of their being, weight for weight, of equal value. We are not to say that the value of the coin is determined by that of the uncoined metal any more than we are to say that the value of the uncoined metal is determined by that of the coin, but we can say unhesitatingly that the two are connected together and must stand at the same level just as much as the water in two cisterns connected by a large pipe.
The value of a precious metal is dependent on just the same things as the value of any other metal. If more people demand it (that is want it and have means to pay for it), or if the same number of persons demand more, it will rise in value, and vice versa. If more persons are willing and able to produce it, or if the persons already engaged in its production are able and willing to produce more of it, its value will tend to fall.
No one will find much difficulty in appreciating this so far as the demand for purposes other than currency are concerned. Any one can see that gold is a metal which is prized for purposes of ornament, which is extraordinarily convenient for hoarding as a store of treasure to be expended at a future date, and which is at present very useful for many industrial purposes and would be gladly used for many more if only it were cheaper. About the changes of demand in relation to all these there is so little difficulty that they are often ignored. But they are far too important for that, as is suggested by the fact that they are estimated in ordinary times to take somewhere in the neighbourhood of a half of the annual product of the metal. We must always remember that the demand tends to increase as people become richer and more numerous, that it tends to decrease as security grows and the habit of keeping hidden hoards decays, and that it varies with industrial discovery, as for example, the invention of gold plates in dentistry, which increased the demand, and the invention of vulcanite plates, which diminished it. Further we must note that for many industrial uses the demand is extraordinarily elastic, since if gold were cheaper its use would be extended enormously--if it were cheap enough an enormous number of poor people who now have no gold ornaments would have some, and if it were cheaper still it would be largely used for roofing houses.
The demand for gold for purposes of currency is more difficult to deal with, owing to our being accustomed to think of demanding other things in exchange for currency rather than of demanding currency in exchange for other things, and also, perhaps, owing to our habit of taking examples of demand in connexion with commodities quickly consumed, like wheat, rather than commodities which only perish slowly, like houses. If we can shake ourselves loose from the effect of these habits, we shall soon find the subject less anomalous than it is often supposed to be.
The amount of metallic money in existence at any one moment of time is the sum of the amounts in the possession of individuals and institutions at that moment. It cannot grow larger without an increase either in the number of individuals and institutions who have holdings or an increase in the average magnitude of the single holding. Other things being equal, therefore, an increase in the numbers of persons and institutions with separate holdings will increase the aggregate demand for coin in just the same way as, other things being equal, an increase in the number of persons with separate houses will increase the demand for houses. Such an increase may of course be brought about by an increase of population if the additional numbers do not consist entirely of very small children, very infirm or aged persons, paupers and others who have no separate holdings of coin. That qualification suggests that an increase may also be brought about by increasing the proportion of the people having separate holdings and by increasing the number of institutions with separate holdings: for example, when a number of old people were taken out of the workhouses and given money upon which to maintain themselves, a large number of new holdings were created, each old-age pensioner now having his little stock: and when a new company for supplying anything is established, a fresh separate holding of coin is almost always set up. This part of the subject presents no difficulty.
Given the number of separate holdings, the aggregate amount of coin will depend on the magnitude of the average separate holding. The foundation of a person's or an institution's demand for such a holding of coin is easy to see: it is the necessity or convenience of having means of payment at hand.
Before the introduction of paper currencies and methods of setting one payment against another provided by such machinery as bills of exchange and banks, the magnitude of the demand for these stocks of coin must have depended largely on the amounts of money which the holder had to spend in the year and on the length of the periods for which payments such as rent and wages were made. A rich landlord with a large rent roll would be likely to have a bigger amount of coin in his possession at any time than the landlord with a small rent-roll.
Nowadays the situation is very different. Methods of setting one payment against another through banking and other agencies have done away with the necessity of a tenant holding an amount of coin in preparation for paying his rent and gradually increasing it as quarter day draws nearer, and also with the necessity of landlords holding a large amount of coin after quarter day and letting it down only gradually during the quarter. The rent is paid by a bank writing certain figures in its books which enable the landlord instead of the tenant to draw out the sum: the bank does not keep one stock of coin for the tenant and another for the landlord; both stocks are dispensed with.
Paper currencies containing notes of small denomination have obviously relieved every one except banks and governments of the necessity of holding coin unless in preparation for paying sums under the amount of the smallest note. Coin is only wanted as "the change" of a note.
How much coin will be held by the governments which issue paper currency and by banks, whether they issue bank-notes or not, actually depends at present not so much on what would be thought necessary or desirable by a dispassionate and well-informed observer who could feel confidence that his opinion would be accepted by all, but on the decision arrived at by government and banking authorities, who often accept wholly erroneous theories, and who have to be guided to a large extent by the erroneous theories held by the public even when they do not accept them. So we find in different countries very different amounts of coin held "in reserve" against liabilities which seem on the face of them very much the same, and very great changes in quite short periods. In practice therefore in modern times, any considerable and rapid change in the currency part of the demand for the precious metals, especially gold, comes from change in the policy of governments.
Some find a great difficulty at this point. They say they can appreciate in the abstract the argument that increased demand for coin and for the metal of which the coin is composed must tend to raise the value of both the coin and the uncoined metal, but that they cannot see how the result comes about. If more gold is demanded for dental plates, it seems reasonable to expect that more will have to be paid for it, but then it is paid for in gold sovereigns, and cannot be worth more than before in them, for the two are the same thing; so, too, if more coin is demanded it is all very well to expect it to rise in value, but how can it, seeing that you only give other money for it, which money is equivalent to it?
The exposition so far given may seem to leave no place for the theory of value being connected with marginal utility, as taught in the economic textbooks in regard to ordinary commodities. But marginal utility plays just the same part with regard to gold (both for ordinary purposes and for currency) as it does with other commodities. The lower the value of gold, the lower will be the uses to which it will be put, and the poorer will be the classes of people who are able to use it; as has been suggested above, if gold were cheap enough, it would be used for roofs, and many people who do not have things which are now made of gold because they cannot afford them would have them. This is really easy enough to understand, but it may be a little difficult to see how the marginal utility theory applies to currency. Can we say that the value of sovereigns falls as they become more plentiful and their marginal utility diminishes? Where is the marginal purchaser or the marginal purchase? Where the elasticity of demand? The answer is that the difficulty we feel is only the result of the strangeness of estimating the value of sovereigns in other things instead of, as usual, the value of other things in sovereigns. The marginal purchaser is the man who is only just convinced, or in practice in modern times the bank or Government which is only just convinced, of the desirability of increasing or diminishing the stock of coin in hand, just as the marginal purchaser of house room is the man who is only just convinced of the desirability of paying for more accommodation. The marginal purchase is the increase or decrease which some one is only just persuaded to make; and the elasticity of demand comes in because greater cheapness of the coin will persuade people or governments to go a little further in their purchases of it, and persuade them to go much further or only a little further according to circumstances. Demand is checked by the rise of value just as in the case of other things.
The supply side of the problem of the value of the precious metals is no more anomalous than the demand side.
Gold and silver are produced like other things, because the producers want to get money. But it is just as true here as elsewhere that people only want money in order to buy other things with it, so that their real aim is the acquisition of these other things and services. Thus though they produce gold in exchange for money, which may be gold, or based on gold, they are really exchanging it for other commodities and services. There is nothing mysterious about the way gold comes from the sources of supply into the hands of the people, either as currency or as other things made of gold. It is exchanged for commodities and services just like coal or any other mineral. The workers earn bread and meat and other things by their labour in producing it just like workers in other industries. The owners of the machinery employed obtain profits and with these profits buy the things which they want in just the same way as the owners of machinery employed in other ways. The owners of the mines or other sources of supply sometimes live in luxury in Park Lane and sometimes starve in Soho or on unproductive and unhealthy diggings, but all that they do get is got in the same way--by exchange of gold for money which is immediately paid away for other commodities and services--these being the real thing ultimately got in exchange. Every ounce of gold coming into the commercial world is exchanged for-"sold," if we may turn the word round to signify its converse--for commodities and services other than gold, and when plentiful in relation to them, it will tend to be of smaller value--will be cheaper--than when it is less plentiful. The truth of this is illustrated by the high prices of commodities and services in newly discovered or inaccessible gold-producing areas. In an area in which gold has only just been discovered gold will be of small value (general prices will be high) because it is plentiful there in comparison with commodities which have to be brought there, and with services which have to be performed by persons brought there: if the area is easily accessible, this will only be temporary, for the high prices and earnings will speedily attract commodities and workers.
Obviously there would not, and the reason would be that the services and commodities would soon be present in sufficient quantities to equalize matters.
When gold mining was carried on in so speculative a manner as it was till quite recent times, people were tempted to think that cost of production had little or nothing to do with the value of gold. But now we hear of mines on the margin which cannot be worked if the prices of commodities and services continue so high. This simply means that they cannot be worked when gold is so cheap. We are sometimes told that gold is unlike other commodities in the fact that the stock is so large in comparison with the annual output, and this is put forward to justify regarding the value of gold as being not affected by the cost of production like that of other commodities. But there are other commodities besides the precious metals, for example, houses, of which the stock is large in proportion to the annual output, and no one thinks of suggesting that cost of production does not play its usual part in relation to these. Producers of gold sometimes reap large profits and sometimes small profits, and so do producers of houses. A largely increased demand for gold cannot be satisfied rapidly, neither can a largely increased demand for houses. Double the output of plums in any one year, and you will enormously reduce the value of plums: double the annual output of gold or houses and you will produce nothing like as much effect.
Anticipation, correct and incorrect, plays the same part in regard to the value of gold as in regard to that of other things. The terms on which people exchange things depend not on what is, but on what the exchangers believe. About the present they are often misinformed, but their mistakes soon appear and mostly cancel each other; about the future they can only speculate, some time must elapse before the truth appears, and the mistakes are often mostly in one direction so that they do not cancel each other.
Now the price of a thing at any moment is constantly influenced by anticipations of what the demand for and the supply of the thing is going to be in the future, and the more durable the thing is, the more important are the effects of these anticipations likely to be.
Whatever the cause of a boom, the high prices which mark it are synonymous with a low value of gold, which seems in strange contradiction with the ordinary view that in a boom "every one wants money." But the contradiction disappears if we bethink ourselves what every one wants the money for: it is to buy commodities and services in hopes of making a profit because "things are going up." People may want money, but they only want it because they want commodities and services; the fact that commodities are supposed to be going up makes it desirable to lay money out on them at once: if the money is kept, it will not buy so much. The pressure is not to add to money stocks by selling, but to deplete the stocks of money by buying as far as can be done without too great inconvenience and risk. Individuals and banks will try their hardest to carry on with the smallest possible stocks of gold, when gold is the one important thing which they do not expect to rise in value.
Thus, even if every one always paid in gold for everything immediately on receiving it, a preponderance of expectation of higher general prices (lower value of gold) in the future would to some extent raise general prices (lower the value of gold) in the present. But people do not always pay on delivery: they frequently induce the seller to let them have the goods on condition that they will pay some time (in all important cases at some definite time), after delivery. The seller then gives the goods for nothing at the moment because he contracts to receive a certain agreed sum of gold at the agreed future date. The buyer of the goods contracts to deliver this gold at the future date. If both buyers and sellers are influenced by some wave of sentiment which makes them believe prices will go higher, the prices at which these contracts are concluded will be higher, whether there is any justification for the belief or not.
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