Poor on Hume

Poor on Hume

Thomas Allen

   In 1877, Henry Varnum Poor (1812-1905) wrote Money and Its Laws: Embracing a History of Monetary Theories, and a History of the Currency of the United States. He was a financial analyst and founder of a company that evolved into Standard & Poor’s. Poor was a proponent of the real bills doctrine and the classical gold-coin standard and, thus, the quality theory of money. He gave little credence to the quantity theory of money — especially if credit money, such as bank notes, were convertible on demand in species. Also, he contended that the value of money depends on and is derived from the value of the material of which it is made and with paper money, its representation of such value.
    In the latter part of his book, he discusses leading monetary theorists from Aristotle (350 B.C.) to David A. Wells (1875). Most of the economists whom he discussed were proponents of the quantity theory of money. We will look at his discussion on David Hume. My comments are in brackets. Referenced page numbers enclosed in parentheses are to Poor’s book.
    David Hume (1711-1776) was a Scottish historian and philosopher. He influenced two schools of philosophy: skepticism and empiricism. His writings include A Treatise of Human Nature (1739-1740), Essay Moral and Political (1741-1742), An Enquiry Concerning Human Understanding (1748), Political Discourses (1749-1752), and History of England (1754-1762).
    According to Poor, Hume was a disciple of Aristotle. However, Aristotle was more truthful and had an earnestness that attracted sympathy. On the other hand, to Hume, “truth was a matter of secondary importance” (p. 89), and Hume’s lack of earnestness repelled sympathy. Also, like Aristotle, Hume “assumed all his premises without consideration or reflection, and disposed, by a single stroke of his pen, of questions, to solve which by any proper method a lifetime might hardly suffice” (p. 89).
    Hume believes that the value of money (gold and silver) is mostly fictitious and that this value is of no consequence. Money is not a subject of commerce; it is only an instrument agreed upon to facilitate trade. Moreover, the quantity of money that a country possesses is immaterial. Only governments receive any advantage from a large supply of money, and then only in regards to wars and negotiations with foreign countries. Hume states, “dearness of every thing, from plenty of money, is a disadvantage which attends an established commerce, and sets bounds to it in every country by enabling the poorer States to undersell the richer in all foreign markets” (p. 90). An increase in money leads to an increase in trade, which results in a shortage of labor. Moreover, Hume doubts the benefit of banks and paper credit. He states:

But there appears to be no reason for increasing that inconvenience by a counterfeit money which foreigners will not accept of in any payment, and which any great disorder in the State will reduce to nothing. . . . And in this view it must be allowed that no Bank could be more advantageous than such a one as locked up all the money it received (as was the case with the Bank of Amsterdam), and never augmented the circulating coin, as is usual, by returning a part of its treasure into commerce. A public Bank by this expedient might cut off much of the dealings of private bankers and money-jobbers; and though the State bore the charge of their salaries to directors and tellers of this Bank (for according to the preceding supposition it would have no profit from its dealings), the national advantage resulting from the lower price of labor and the destruction of paper credit would be a sufficient compensation (p. 90).

    Hume remarks, “money is nothing but the representation of labor and commodities, and serves only as a method of rating or estimating them” (p. 90). Furthermore, he contends that greater quantity of money is an inconvenience because the greater quantity requires more trouble to keep and transport it. Greater quantities of money lead to higher prices and wages (p. 91).
    According to Poor, “Hume followed Law where the latter was wrong, and rejected him wherever he was right” (p. 91). About the value of money, Poor summarizes Hume’s notion: “The value of money . . . is fictitious; its greater or less quantity, therefore, is of no consequence; nothing is to be gained by increasing the dimensions of a fiction; it is not valuable to a country in its commerce, for it is not the subject of commerce, only the oil which lubricates its wheels” (p. 91).
    Poor refutes Hume’s idea that money is a fiction with a question: “Is not that a subject of commerce, the possession of which is the great object of commerce, and in which all the profits or balances arising in commerce are payable” (p. 91)? People who pay and receive money do not act as though it is a fiction. Moreover, if money is a fiction in one country, why would it not be a fiction in another country or even all countries? Why would a large quantity of this fiction give one country an advantage over another country with which it wars? How can a thing considered pure fiction in one country be a solid reality in another? Then Poor asks, “Is not that valuable which every people seek to obtain by exchanging therefor whatever they possess; and which will always, at its cost, command all other kinds of property” (p. 91)? [This notion that money is a fiction shows up in the arguments of many proponents of fiat paper money and its electronic equivalent. The government can decree whatever it wants to be money as money. Moreover, it can decree the value of the monetary unit and can maintain this value by following some magic formula or scheme.]
    According to Hume, “In all respects, except in wars and negotiations, the abundance of money . . . may be, and often is, a disadvantage, as prices are raised thereby in ratio to its abundance. In this way, poor countries having no money are enabled to undersell the rich having a great deal of money, and drive them out of their accustomed markets” (p. 91). [Wars often lead to an overabundance of credit money, that is, inflation. This inflation often leads to a rise in general prices during and after the war.] Poor declares, “The exact reverse of all this is the truth” (p. 91). He continues, “Prices are either low in ratio to the abundance of money, or, what is the same thing, the amount which a people are able to consume is in ratio to such abundance” (pp. 91-92). He illustrates his assertion with examples of poor countries lacking money to import goods because they lack money to transport what they do have to trade. Thus, the price of imported goods is inverse to the amount of money available (p. 92).
    About paper money, Poor writes, “So with a symbolic currency, — with paper money. This is the representative of capital. If one be abundant the other must be; and, if abundant, prices must be low, for prices are high or low in ratio to the abundance or want of the articles to which they relate. Whatever the form of money or currency, therefore, the greater the abundance the lower are prices” (p. 92). [Poor is correct if the money comes into existence via production. However, if the money comes into existence by governmental fiat, spoils of war, or thief, the results is usually higher prices. These higher prices may show up in financial assets like bonds and stocks or they may appear in commodities and consumer goods.]
    He continues, “Paper credits — that is currencies — issued by Banks are one of the most important conditions of low prices, as they serve as the cheapest possible means of distribution” (p. 91). [Here, Poor is referring to the real bills doctrine. Bills of exchange are a form of credit money, commercial money, created by the manufacturer or wholesaler and the retailer. When a bank discounts a bill, it converts it to bank credit money, bank notes or checkable deposits. The bank has not really added to the money supply. It has merely converted one form of credit money, commercial money, to another and more usable form of credit money, bank credit money. This is the type of credit money to which Poor refers. However, when a bank buys a financial bill, like a treasury bill, with bank credit money it expands the money supply because financial bills do not come into being as a result of production. Poor opposes creating bank credit money to buy financial bills.]
    Poor comments on Hume’s claim that a compensation “for the inconvenience of too great an abundance of coin [is] that it can be used in foreign wars, but Bank paper can never be used out of the country in which it is issued” (p. 92). Poor notes that the costs of articles used in a war far exceed the coin available. [At the time Hume and Poor wrote, most countries used gold or silver coin for money.] Poor asks, “If they [articles of war] can be had by means of paper money, equally with coin, does not the former possess for the government the same value as coin” (p. 92)? He continues: “Hume would have all Banks . . . collect every thing into their vaults, and let nothing out! But how, in such case, are exchanges to be effected? There must be either coin or symbols, or all commerce must speedily come to a dead stand. In such event, a people, in the course of a few months, would be reduced to the very brink of ruin” (p. 92).
    Continuing on Hume’s opinion about gold and silver as money, Poor writes, “With Hume, gold and silver derive their importance to a nation solely from their use in its wars and negotiations. Considered by itself, their abundance is of no consequence whatever” (p. 93).
    Poor identifies an inconsistency or contradiction in Hume’s assertion about money: “Hume asserts the value of money to be imaginary, and at the same time that a great abundance of it is injurious by raising the price of commodities” (p. 93). [If the value of money is imaginary, then its quantity should be irrelevant. If its abundance raises price, then it must have some value so that it can raise prices — at least until hyperinflation destroys all its value.]
    About value, Poor notes:

But what constitutes the value of any article? The amount of demand that exists for it. There can be no other test or measure.  We can form no idea of the value of any article but by comparing it with that of some other. If it have no exchangeable value, it has no value. It may have uses, without having values.  . . . An imaginary value, therefore, is no value; so that the very foundation upon which Hume erected his argument has no existence whatever. Only that which possesses value can affect the value of other things. If money had no value, its greater or less abundance could exert no influence whatever on the value or price of other articles (p. 93).

[Poor does acknowledge that things, such as air, are important and even necessary for life, but they have no value in the proper economic sense of the term.]
    About Hume’s pontification on money, Poor remarks that “a little thought and reflection would have shown” (p. 93) him that he was wrong. “[B]ut this way was not Home’s way. Reflection and analysis are laborious and painful processes, to which he was by no means inclined. To truth he was wholly indifferent. His object was effect, provided that could be produced by very little labor and pains” (p. 93).
    Hume was also a proponent of coin debasement. He believed that if all silver coins were recoined to contain less silver but maintain the same denomination, prices would not increase. Moreover, foreign trade would be invigorated. Because of more coins circulating, domestic industry would also increase (p. 94). [Many advocates of fiat paper money believe that debasement of money enlivens the economy and is, therefore, good.]
    In effect, Hume claims that money can be debased, yet “at the same time maintain its value” (p. 94). Moreover, he claimed that while maintaining its value,  it would “derive an advantage from its debasement in diminishing prices” (p. 94). Thus, “[i]n the same sentence, the value of money was to be both maintained and reduced” (p. 94). Poor continues,

From diminished prices at home, foreign trade was to be enlivened, and domestic trade receive some increase and encouragement from the greater number of pounds and shillings in circulation. But how could more pounds and shillings be in circulation, if the debased coins would purchase as much as those of full weight and value? (p. 94)

[Historically, the purchasing power of debased coin fell to equal the purchasing power of its metal content — thus causing prices to rise in nominal terms, but not in metallic terms. Even draconian laws could not prevent the fall in value of the debased coin.]
    Commenting on Hume, Poor writes:

With Hume, from the perversity or credulity of human nature, a falsehood plausibly told, and well stuck to, would have all the potency of truth. . . . He contrived by artful fabrications to falsify the whole course of English history, and to make the world believe, almost for a century, that slavery, not freedom, was the birthright of Englishmen (p. 94).

    Hume maintains that if the quantity of money remains unchanged, then, over time, everything becomes cheaper. “[T]he proportion between the circulating money and the commodities in the market . . . determines the prices” (p. 95). Poor replies, “The degree of wealth of a people depends upon their means of distribution. The one must always be in ratio to the other. Their money must increase as their industries increase, by a law as inexorable as that of gravity” (p. 95).
    About Hume’s “plan for benefitting the public by reducing prices, by reducing the amount of money” (p. 95), Poor retorts that his plan “is equivalent to taking off one-half of the cars from a railroad, where the whole had only sufficed for its operations” (p. 95). Poor continues:

Such a process would reduce greatly the price or value of merchandise to the producer. It would, at the same time, add very largely to the price paid by the consumer. Both would be equally injured by the restricted capacity of the instrument of distribution. The former would receive much less; the latter would pay much more. So with money. With its decrease, production would decrease in far greater ratio. With such decrease, cost of production would increase (p. 95).

[Poor is thinking of the real bills doctrine where money supply matches production. The quantity of money grows as production grows and contracts and production contracts.]
    Hume claims, “These institutions of Banks and Paper Credits render paper the equivalent of money” (p. 95). To which, Poor responds:

It is the capital such paper represents that makes it the equivalent of money. By representing capital, and serving in the place of coin as the means of its distribution, it reduces instead of “raising proportionably the price of labor and commodities.” His assumption consequently is exactly opposed to the fact (pp. 96-97).

    Poor notes, “With Hume, money was not capital at home while it was capital abroad” (p. 97). To the contrary, “[i]t is the highest form of capital at home, for that reason it is the highest form of capital abroad” (p. 97).
    Poor writes:

With Hume, the evil of paper money is, that it displaces a corresponding amount of coin, — sinks it below its level, compared with other countries. . . . Its paper currency, by assisting in the exchanges, may have secured to it a larger amount of coin than it would have had without such currency. His assumption, therefore, that the notes in circulation replaced a corresponding amount of coin is wholly gratuitous (p. 97).

    Poor adds,

It is from this assumption, however, that Economists have drawn their celebrated dogma or axiom that the proper measure of issue of paper money is the amount of gold that would have been in circulation but for such issue; overlooking the fact that paper money is not based upon coin so much as upon merchandise; and that the amount of the coin of a nation is to be measured not by that which it possesses, but by that which it can command (p. 97).

[Here, Poor is referring to the real bills doctrine. Bank notes come into circulation by converting bills of exchange, commercial money, into bank credit money, bank notes and checkable deposits. Bills of exchange arise out of production. Therefore, the quantity of bank notes in circulation depends on production and not on the quantity of gold. The greater a country’s production, the more gold it can command.]
    In his concluding remarks on Hume, Poor writes:

Hume was one of the earliest writers to refer to the subject of currency to be issued by Banks. An opportunity was thus opened to him, had he chosen, by unfolding its nature and laws, of performing a substantial service for mankind. He preferred to talk rather than to investigate, — to appear wise and learned rather than to be so. . . . As the reputation enjoyed by Aristotle forbade all investigation of the truth of his dogmas, and secured for them immunity through the ages, so Hume impressed himself so strongly upon the opinions of mankind as to be received, for nearly a century, as authority upon most of the subjects upon which he wrote, although his works were full of errors and falsifications. He is still constantly quoted, with approbation, upon the knotty points of monetary science; although, as far as any knowledge of the subject was concerned, a Kaffir might as well be quoted for an authoritative opinion upon the Code of Menu (p. 98).

Copyright © 2016 by Thomas Coley Allen.

More articles on money.

For Whom Is the Constitution Written?

For Whom Is the Constitution Written?

Thomas Allen

    For whom is the Constitution for the United States of America written? The answer is easy. The preamble clearly states for whom the Constitution is written. The preamble reads:

We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

    “We the People of the United States . . . to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.” Who are “ourselves” and “our posterity?” They are the people who wrote and adopted the Constitution and their descendants. That is, they are Aryans, Whites. As Aryans wrote and adopted the Constitution, it is solely for Aryans. As almost all Aryans then abided by the Biblical prohibition against interracial mating, they expected their posterity to be Aryan. (If any Aryan sinned and had a child by a person of another race, that child was not considered an Aryan.)
    Therefore, the Constitution is not written for Negroes. It is not written for Melanochroi from India, Pakistan, Saudi Arabia, Egypt, Somalia, etc. Moreover, it is not written for Turanians from China, Korea, Japan, the Philippines, Southeast Asia, etc. Nor is it written for the Turanian Indians and mestizos from Latin America. Likewise, it is not written for Indo-Australians and Khoisans.
     Supporting the notion that the Constitution is written for Aryans is the first naturalization law, which was enacted in 1790. It restricted naturalization to free Whites. It excluded Blacks, American Indians, Muslims, and later Asians. Furthermore, James Madison, Thomas Jefferson, Benjamin Franklin, John Jay, and other founding fathers declared that the United States was and should be a White man’s country. By the way, nearly every President, if not every President, held this sentiment until John Kennedy.
    In conclusion, Aryans wrote and adopted the Constitution for the United  States of America for Aryans. They did not write it for Negroes, Melanochroi, Turanians, Indo-Australians, or Khoisans. Until Whites in the United States realize and admit that the Constitution is written solely for them and for no other race, species of humans, the social, political, and economic problems affecting the United States will not be solved. Until ministers start teaching the Biblical prohibition against interracial mating, these problems will not be solved. Moreover, constitutionalists need to acknowledge that the Constitution is solely for Aryans and need to proclaim such. A necessary part of solving the social, political, and economic problems of the United States is returning to the Constitution in its original intent. Admitting that the Constitution is only for Aryans, Whites, is a necessary and essential part of this return. A return to Constitutional government cannot be made without this acknowledgment.
    The biggest hindrances to returning to Constitutional government are Christian ministers and constitutionalists. Because of political correctness, ignorance of the Bible, or fear of being called a “racist,” ministers fail to teach that the Scriptures prohibit miscegenation and interracial mating, that Adam was an Aryan, White, and only Aryans are created in the image of God, and that God is a segregationist and a racial separationist. (God confusing the languages of man as a result of constructing the Tower of Babel is perhaps the greatest act of segregation and racial separation ever experienced by mankind in recorded history.) Likewise, because of political correctness, ignorance of the Constitution, or fear of being called a “racist,” constitutionalists fail to identify the people for whom the Constitution is written and to teach that it is written solely for Whites.
    Before ministers and constitutionalists can return to the proper understanding of the Bible and the Constitution, they need to abandon the Deity of King. They need to cease the idolatry of bowing before his idol. To do this, they need to realize, acknowledge, and teach that Martin Luther King was a rabble-rouser, a scoundrel, a frontman for the Communist Party, and a leader of one of the most destructive movements that the United States have ever endured, the civil rights movement. (As a result of the civil rights movement, the immigration laws were changed to discriminate against Whites and to flood the country with non-Whites such that in a few years, Whites will be a minority in their own country. It also brought the war on poverty, racial and sexual quotas, affirmative action, effeminized and emasculated men, degraded women, homosexual marriages, legalized abortion, growth in out-of-wedlock children, genocide via interracial mating, etc.)

Appendix 1.
    Most people incorrectly refer to the Constitution for the United States of America as the Constitution of the United States of America. According to the preamble, the correct title is the “Constitution for the United States of America.”

Appendix 2.
    Most people refer to the United States in the singular: the United States is. However, the Constitution refers to the United States in the plural: the United States are. For example, Article III, Section 3, Paragraph 1 reads, “Treason against the United States, shall consist only in levying War against them, or in adhering to their Enemies, giving them Aid and Comfort.” The plural pronouns, “their” and “them” are used to refer to the United States.
    Some historians argue that Lincoln’s War to Suppress Southern Independence was fought over a verb. Lincoln and his supporters fought for “is” while the Southern States fought for “are.” Before the War, most people referred to the United States in the plural: they, them, their, are, etc. After the War, most people referred to the United States in the singular: it, its, is, etc.

Copyright © 2017 by Thomas Coley Allen.

More articles on politics.

Discounting Accommodation Bills

Discounting Accommodation Bills

Thomas Allen

    Some proponents of the real bills doctrine and many opponents of the real bills doctrine present accommodation bills as legitimate bills for discounting. Some do so out of ignorance. Others do so to disparage the real bills doctrine.
    An accommodation bill is essentially a promissory note where the borrower secures accommodation from a bank on his own note, single name paper, or on an endorsed note of his customer, double name paper. Whereas real bills of exchange represent past transactions, accommodation bills represent future transactions. With a real bill of exchange, goods are in the process of being purchased or have been purchased. With an accommodation bill, the goods are not in the process of being purchased; they are to be purchased in the future.
    A real bill of exchange provides for its own payment; it is self-liquidating. When the retailer sells the merchandise represented by the bill of exchange, the retailer receives the gold necessary to pay the bill. Thus, a real bill of exchange is self-liquidating.
    An accommodation bill is not self-liquidating. As it represents goods not yet produced, whatever the accommodation bill represents does not provide the gold necessary to pay it.
    Discounting accommodation bills leads to inflation, i.e., more bank credit money (bank notes and checkbook money) enters the community than new goods. This inflation is eventually followed by an economic contraction.
    Discounting a real bill of exchange leads to a smooth operating economy. Credit money represents goods in the process of being sold, i.e., the goods represented by the bill of exchange, and provides the money to purchase the new merchandise. It also provides the funds to pay workers before the goods are sold without resorting to borrowing. As this credit money is removed when the merchandise is sold, it does not lead to inflation or economic contraction.
    The following example illustrates the difference between discounting a bill of exchange and an accommodation bill. New products of a community are being produced and consumed at the rate of £100,000,000. The value of these products is represented by bank notes and checkbook money via the discounting of bills of exchange. As far as currency is concerned, business would remain in a normal healthy condition.
    To this example, let’s add the assumption that banks want to maintain a 20 percent reserve in gold coins. That is, bank reserves equal £20,000,000. Furthermore, let’s assume that some smooth-talking pettifoggers convince bankers to discount their accommodation bills equal to £10,000,000. Now the community has £110,000,000 of credit money with which to buy £100,000,000 of goods. We also assume no lost in confidence.
    The result is inflation and a rise in prices. As the community was producing only £100,000,000 in products, much of the new demand will be met by increasing imports to absorb the additional £10,000,000. Gold would be used to pay for the imports as the foreign sellers have no need of the community’s credit money. The remainder of new demand would cause additional unsustainable domestic production.
    Having consumed the money for the accommodation bills, the drafters, the pettifoggers, would have nothing with which to pay the bills when they mature. Thus, the holders of the bank credit money created by the accommodation bills become creditors of the banks of the amount of £10,000,000 when the bills mature. Thus, the outstanding credit money would be presented to the banks for gold.
    If the banks had maintained their 20 percent reserve ratio, they would have £22,000,000 in gold backing their outstanding credit money issued to buy bills of exchanges and accommodation bills. If the excess credit money created by discounting the accommodation bills were redeemed, bank reserves would fall to £12,000,000. Thus, banks have to reduce new discounting to £60,000,000 to maintain a 20-percent ratio. Instead of being able to discount £100,000,000 in bills of exchange as the community requires, they could only discount £60,000,000.
    As a result of discounting accommodation bills, the quantity of credit money drops from £110,000,000 to £60,000,000. Economic stagnation quickly follows and bank runs become highly likely. As the banks lack the means, gold, to pay all their outstanding notes and checking account moneys, bankruptcy and suspension of payment results — all from discounting non-self-liquidating bills.
    As the above overly simplified example shows, banks should only discount self-liquidating bills, real bills of exchange, with bank credit money. Otherwise, economic disaster can, and often does, occurs.

Copyright © 2015, 2017 by Thomas Coley Allen.

Poor on Law

Poor on Law

Thomas Allen

    In 1877, Henry Varnum Poor (1812-1905) wrote Money and Its Laws: Embracing a History of Monetary Theories, and a History of the Currency of the United States. He was a financial analyst and founder of a company that evolved into Standard & Poor’s. Poor was a proponent of the real bills doctrine and the classical gold-coin standard and, thus, the quality theory of money. He gave little credence to the quantity theory of money — especially if credit money, such as bank notes, were convertible on demand in species. Also, he contended that the value of money depends on and is derived from the value of the material of which it is made and with paper money, its representation of such value.
    In the latter part of his book, he discusses leading monetary theorists from Aristotle (350 B.C.) to David A. Wells (1875). Most of the economists whom he discussed were proponents of the quantity theory of money. We will look at his discussion on John Law. My comments are in brackets. Referenced page numbers enclosed in parentheses are to Poor’s book.
    John Law (1671-1729) was a Scottish financier and gambler. He attempted to revive France by opening a bank to issue paper money. In 1716, he opened his bank, which became the Royal Bank with Law as its director. Reckless lending by his bank led to the financial panic of 1720. Poor reviews Law’s Money and Trade Considered (1705).
    Law argues “that articles of property, other than silver . . . might be made into money, or might be made the basis for the issue of paper money in place of one of silver” (pp. 81-82). [At the time that Law wrote, silver was the primary species in circulation.] According to Law, using items other than silver as money or as the basis for paper money should greatly benefit the public.
    Law declares, “The value of silver as money is its value in barter” (p. 82). He continues:

The additional value silver received from being used as money was because of its qualities which fitted it for that use, and that value was according to the additional demand its use as money occasioned. . . . Money is not a pledge, as some call it; it is a value paid, or contracted to be paid, with which it is supposed the receiver may, as his occasions require, buy an equal quantity of the same goods he has sold, or other goods equal in value to them; and that money is the most secure value either to receive, to contract for, or to value goods by, which is least liable to change in its value. . . . Thus silver having a value and qualities fitting it for money, which other goods had not, was made money, and, for the greater use of the people, was coined (pp. 82-83).

    Poor agrees that “Law was entirely right in assuming that the value of silver was its value in barter” (p. 83). However, Law “was mistaken . . . in asserting that it derives a value from its use as money, unless by its use as money he meant its use as reserves” (p. 83). [Most people who believe that money has value because of the material of which it is made believe that its use as money adds to that material’s value, whether such money is used as reserves or as a circulating purchasing medium.] Poor adds, “It is not their [gold and silver] use as a medium of exchange that constitutes their value: it is their value in the arts and their capacity to serve as reserves that give them their value in exchange” (p. 83). [In Dawn of Gold: The Real Story of Money, Philip Barton argues that gold originally received much of its value as money from its use in religion. William Carlile argues in The Evolution of Modern Money that gold evolved into money from its use as ornamentation as an expression of status.]
    Law argues:

Silver money is more uncertain in its value than other goods, so less qualified to serve as money. . . . Silver in bullion or money changes its value from any change in its quantity, or in the demand for it. . . . [S]ilver or money is dearer or cheaper, being more or less valuable, and equal to a greater or lesser quantity of goods. . . . More durable goods, as metals, materials for shipping, &c., increase in quantity beyond the demand for them, so are less valuable (pp. 83-84).

    Poor comments that Law’s assumption “are exactly opposed to the fact. The value of silver is uniform from the uniformity of its production and of the demand for it. Should there be some excess in production for one or more years, such excess would be taken up at previous prices to be held as reserves (so long as silver is legalized as money)” (p. 84). Poor continues, “Unlike other merchandise, the market for silver is the world. Until the markets of the world are glutted, it cannot fall materially in value from increase of production.” (p. 84). [As long as a country is on the silver standard, the “price” of silver will not change because the monetary unit is defined as a specific weight of silver. When the United States were on a de facto silver standard under its bimetallic system, one dollar would always buy 371.25 grains of silver because the dollar was defined as 371.25 grains of silver. That is, the “price” of 371.25 grains of silver was always one dollar, which was 371.25 grains of silver. {The price of 371.25 grains of silver was not fixed at one dollar, the dependent variable. The dollar was fixed at 371.25 grains of silver, the independent variable.} Moreover, Benjamin Anderson argues in The Value of Money that the supply of money and the demand for money does not determine its value. He argues that the “value of money is a quality of money, that quality which money shares with other forms of wealth, which lies behind, and causally explains, the exchange relations into which money enters.”[1] “Value {of money} is prior to exchange. Value is not to be denned as ‘power in exchange.’”[2] According to Anderson, the social value theory best explains the value of money: “the social value theory is the only way of giving a psychological explanation to the demand-curve, and a marginal value explanation of marginal demand-price.”[3]  Thus, the value of money derives from the value of the commodity of which it is made and from its services as money. The value of the commodity as money combines with the value of the commodity in its nonmonetary use. Like all other commodities, and everything else, the value of the monetary metal and of its use as money is psychological. Anderson concludes, “The physical weight in gold, which itself is an object of social value, is commonly the immediate basis of the value of the dollar to-day, but money may get its primary value from other sources than valuable bullion. Given this primary value, the dollar may get an enhancement in that value from the services which it performs in the social technology of adjustment.”[4].]
    Poor remarks:

Although at the outset some of Law's propositions in reference to money were eminently sound, he was compelled to sacrifice them so soon as he began to unfold his scheme. Those who came after him were incapable of appreciating him where he was right, but were certain to follow him wherever he was wrong. . . . Economists have borrowed greatly from Law, from whom, from the disgrace attached to his name, they could copy without reference and with impunity. They constructed, in great measure, from the ruins he left behind, their grotesque and absurd edifices (pp. 84-85).

    Law proposes to substitute paper money based on land instead of silver. Unlike silver, Law believes that his land-based paper money would not fall in value. Land is more likely to maintain its value than any other goods because it does not increase in quantity. [Law’s notion that land maintains its value is wrong. The value of land can vary greatly, even over a few years. In 1991, the aggregate value of all the land in Japan was almost four times that of the United States. By 2005, land in Japan had lost half its value while land in the United States had more than tripled in value.]
    Poor remarks that no one would borrow or accept Law’s land notes unless they could use them “to obtain coin, or merchandise, the equivalent of coin, — capital that could be used in their industries” (p. 86). Holders of these land notes could not convert them to the land backing them. Whether well secured or not, Law’s land notes “could never get into circulation” (p. 86). To avoid this difficulty, Law declared, “Money is not the value for which goods are exchanged, but the value by which they are exchanged. The use of money is to buy goods; and silver, while money, is of no other use” (p. 86).
    Poor is convinced that Law doubts that people would willingly receive his land money for other articles. Poor remarks, “As he [Law] could not give up his scheme, his principles had to give way to his necessities, and he was forced to assert the exact opposite to that which he had affirmed, and the truth of which he had conclusively demonstrated” (p. 86). Thus, Law declares that money “was not the value for which goods were exchanged, but the value by which they were exchanged” (p. 86). Poor continues, to Law money “was the yardstick by which goods were measured off, — a contrivance to assist in numeration, — a tally or counter to register the delivery of certain quantities or values of merchandise; in other words, value was not a necessary attribute of money” (p. 86). [This notion that money is merely a counter and that value is not a necessary attribute of money is held by most of the writers whom Poor reviews and by today’s fiat money proponents.]
    Law identifies several criteria that make land superior to silver as money. One is that land produces everything, including silver. Thus, silver is just a product. Another is that, unlike silver, land does not increase or decrease in quantity and is, therefore, more certain in its value. Also, unlike silver, land can be improved and, by that, increase the demand for it. Land cannot lose any of its uses whereas silver can. When land is used as money, it does not lose any of its other uses; however, silver used as money cannot simultaneously be used for other purposes. [See “Land-Backed Currency” by Thomas Allen, which explains the inferiority of land as the basis for money.] Poor replies, “A mortgage on real property may possess a high value, and yet bare no other attributes fitting it to serve as money” (p. 87).
    Law also knew that his land money would not be accepted abroad. Therefore, he asserts “that it was not necessary that it ever should pass abroad; that the domestic trade of a nation was alone to be considered” (p. 88).
    About Law, Poor writes:

He took the short cut of throwing his principles overboard without the least compunction, whenever they came into conflict with his purposes. He was a man of action, who never stopped to explain, but pushed right forward to the object he had in view. For him to doubt and inquire would be to give up the contest altogether. His life was a mission to promote, in the first place, the welfare of his own country, by supplying it with money — capital; and every consideration was subordinate to this grand idea (p. 88).

Copyright © 2017 by Thomas Coley Allen.

More articles on money.

Endnotes
1. B.M. Anderson, The Value of Money (New York: The Macmillian Co., 1917), pp. 8-9).

2. Ibid., p. 9.

3. Ibid., p. 42.

4. Ibid., p. 591.