Tuesday, July 25, 2017

Poor on Stewart

Poor on Stewart
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 Dugald Stewart. My comments are in brackets. Referenced page numbers enclosed in parentheses are to Poor’s book.
    Dugald Stewart (1753-1828) was a Scottish philosopher and mathematician, who popularizing the Scottish Enlightenment. He was a professor of moral philosophy at the University of Edinburgh. Among his writings are Elements of the Philosophy of the Human Mind (in three volumes, 1792, 1814, and 1827), Outlines of Moral Philosophy (1793), and The Philosophy of the Active and Moral Powers (1828). Poor reviews Stewart’s monetary philosophy as presented in his Lectures on Political Economy.
    Poor writes, “Stewart was an ardent admirer of [Adam] Smith, and assumed to reduce to precise and logical terms what his great master only more generally outlined”  (p. 171). Nevertheless, Stewart objected to Smith’s belief that the value of gold and silver depended largely on “their beauty, utility in the arts, and scarcity; that such qualities, among others still more important, fitted them to serve as money” (p. 171). For Stewart, the intrinsic value of gold and silver in a coin is “merely accidental circumstances.” Stewart asserts, “When gold is converted into coin, its possessor never thinks of any thing but its exchangeable value” (p. 171). If the intrinsic value of gold and silver are annihilated, i.e., their conversion to flatware, jewelry, etc., they could still function as money as they did when they had intrinsic value. Money is merely a ticket or counter. “It is general consent alone which distinguishes them [gold and silver], when employed as money, from any thing else which circulates in a country; from the paper money, for instance, which circulates in Scotland and England.” (p. 172). If a country were isolated from the rest of the world, gold or silver coin as a medium of exchange would have no advantage over paper currency. Also, whether the circulation medium consists of gold or paper would make no difference on the national wealth. Moreover, according to Stewart, whether gold or silver was abundant or scant would not matter. “The only utility which is essential to gold and silver as media of exchange is their peculiar adaptation (divisibility, durability, &c.) to this purpose” (p. 172). [For the most part, fiat money proponents agree with Stewart’s monetary theory.]
    Poor replies that like Smith, Stewart errs in his assumption “that money was an invention, — an arrangement entered into from a sense of its necessity” (p. 172). Stewart also errs in his conclusion “that value is not a necessary attribute of money” (p. 173). [Poor is correct: Money was not an invention. It evolved over time from spontaneous market operations. Only after money came into being did governments get involved.]
    However, Stewart’s idea of money is a logical derivation from Smith’s idea. From the premises laid down by Smith, Stewart concluded that “value is no attribute of money.” Poor remarks, “the real value of money must equal its nominal value, or, in case of symbols, the values of what they represent must equal their nominal value in coin, or value is no attribute of money whatever” (p. 173). [Today’s fiat paper money is based on Stewart’s premise that value is no attribute of money. That is, the quality of money is irrelevant. Force is the only thing behind, or backing, today’s fiat paper money.]
    Stewart states, “We never think when we receive the precious metals as money, of their value in the arts” (p. 173). To which Poor replies, “But were they not first taken, and chiefly, for their value in the arts? and if we do not now consciously go through the same mental process that was gone through when they were first taken, is it not that such consciousness is concealed from us by habit, not that it does not exist” (p. 173)? People practice many things without conscious thought about how such practice came into being. Acting this way “is no proof that the mind is not engaged in one case as in the other” (p. 173). Poor notes:
Stewart, however, wholly misstated the fact that gold and silver are taken without any consciousness of their value in the arts. As a rule, we do not raise the inquiry; we assume from experience that coins are what they purport to be: but let it be noised abroad that debased coins of a particular denomination are in circulation, then every one of the kind, good or bad, will be subjected to the closest scrutiny, and, if taken at all, will only be taken at its value in the arts, measured by the amount of pure metal it contains (pp. 173-174).
    Stewart claims that if all gold and silver mines were exhausted, all the gold and silver in existence would be converted to money. Poor disagrees. First, he doubts the possibility of exhausting of all mines. If gold and silver were to disappear, civilization would disappear with them. However, if all mines were exhausted, Poor doubts that all gold and silver would be converted to money. Poor writes:
As it [gold] gradually disappeared from loss and attrition, commerce and trade, and with these, civilization and wealth, would gradually die out. As these disappeared, gold and silver would gradually flow back into the arts, and almost wholly in time; for, as there would be no trade, money would not be wanted. It is a fact of universal observation, that gold and silver possessed by the savage races are not used as money, but almost wholly in the arts (p. 174).
    To Stewart’s belief that “gold and silver, as a medium of exchange, would possess no value over the most worthless of substances” (p. 175), Poor replies:
This absurdity is repeated by every subsequent writer upon the subject of money. Suppose England to be the world, what then? Would all sense of beauty, of utility or value be lost to its people? Suppose, as Stewart assumes, England isolated, a Yorkshire grazier should take with him to London a lot of beeves; and upon their sale should be offered a leather medal, with curious hieroglyphics stamped upon it, in payment. The seller at first might consider the offer as a good joke; but, on finding the purchaser in earnest, he would believe himself to be dealing with a madman, and would take good care to get his beeves into his possession again, and to rid himself of such a dangerous customer. To be logical, Stewart must assume that, were England isolated from all the world, its people would have a sense of neither use nor beauty; in other words, that they would be lower in the scale than any race or tribe ever yet discovered. If the precious metals have no intrinsic value, then the Scythian was correct in assuming money to be useful only for the purpose of assisting in numeration and arithmetic. It is for this reason that Stewart held their value to be disadvantageous, in complicating thereby the theory of money. If value be not an attribute of money, he was quite right in eliminating from it all idea of such quality (p. 175).
[The fiat paper monetary system that has now taken over the world supports Stewart’s notion of money better than it does Poor’s. However, Poor’s notion is much closer to the truth than Stewart’s. Because of believing Stewart, the world is now on the edge of a monetary crisis the likes of which the world has never before witnessed. Civilization is on the verge of collapsing into an economic abyss from which it may never recover, such as that which happened when the dying Roman civilization collapsed into the Dark Age — only this time the collapse may be worse. Only a return to a commodity monetary standard, such as the gold standard, where money has real value in non-monetary uses and can extinguish debt because it is no one else’s obligation, can save it.]
    Poor asks if Stewart is correct in that money as such has no value, then what harm can come from debasing coins? When a coin is debased, the denomination remains the same. However, the precious metal content of the coin is reduced. [Historically, when precious-metal coins were debased, prices quickly rose to adjust to the precious metal content of the debased coin. Even the death penalty could not deter this price adjustment.] Poor remarks, “If the sole use of money, as asserted by Stewart, be to assist in numeration and arithmetic, then the different denominations of coin have only the force of numerals; and a piece of leather upon which is imprinted the word ‘dollar’ is in its proper essence the same thing as a piece of gold upon which the same word is impressed” (p. 176). He continues,
Hume was more logical and consistent. Agreeing with Stewart that the only value of money, as such, was to assist in numeration and arithmetic, he took the ground that the currency should be debased, as the means of eliminating value from it; naively remarking, that such debasement should be effected in such a sly way that the people should not discover the swindle. Of the two, Hume is to be preferred. The admission that the debasement was a swindle had the merit, at least, of putting the people on their guard (p. 176).
    Stewart writes that money provides a “scale of value” instead of a “standard of value,” which is the term that Smith uses. Thus, Stewart is more accurate than Smith about his concept of money. Poor notes, “It would be a contradiction in terms to call that a standard of value which had no value. A thing may be a scale, without being a standard. A yardstick is a scale for measuring distance or extension, but not the standard of distance or extension” (p. 177).
    Poor asks, “If all value is to be abstracted from money, then of what advantage are the qualities of divisibility and fusibility, in the materials composing it” (p. 177)? These are two of the qualities that Stewart claims make gold useful as money (p. 176). Moreover, Poor continues, “Why not have the denominations which are fitted to express ‘every conceivable variation, of value’ all of the same size and fineness? A bank-note for a thousand dollars has precisely the same size and quality of material as a note for one dollar. The only difference is in their inscriptions” (p. 177).
    Continuing his comment on Stewart’s claim that divisibility and fusibility were qualities that fitted gold and silver for money, Poor writes, “According to Stewart’s theory, the qualities which fit gold and silver for money — divisibility and fusibility — are of the least importance; for pieces of similar size may be made by their inscriptions to express ‘every conceivable variation of value’” (p. 177).
    Stewart claims that a scale of value renders “the ideas of value much more precise and definite than they otherwise would have been” (p. 177). Poor asks, “But how can ideas of relative value be made more precise by comparing them with a scale from which all value is abstracted? How can nothing be made to be the measure of the value of something” (p. 177)? [A great question. As far as I know, no one has satisfactorily explained how something of no value and does not represent something of value can measure value.] Continuing with an example, Poor writes, “A definite idea is conveyed in the statement that a gold dollar measures the value of a bushel of corn; but what idea can be formed of the value of the corn from a statement that its value is that expressed upon a worthless piece of leather or paper” (p. 177)? [With today’s fiat paper money, value is “measured” with worthless pieces of paper. Perhaps trying to measure something with nothing explains, at least in part, the devastating economic crisis looming before the world.]
    Stewart also suggests that “the quantity of money required by a community was in ratio to the rapidity of its circulation” [i.e., the velocity of money or the velocity of circulation] (p. 178). [The concept of the velocity of money is an important component of the quantity theory of money.] To which Poor replies, “This suggestion, which naturally resulted from the assumption that money is not capital, but a scale of valuation, or an aid in enumeration and arithmetic, has become an axiom among all modern Economists” (p. 178). [Today, nearly all economists continue to agree with Stewart on this issue.] Commenting on the event that Stewart used to deduce his conclusion on the rapidity of circulation, Poor writes:
The result of these transactions was, that in the course of seven weeks the garrison had been paid 49,000 florins, the sutlers had sold supplies to the amount of 49,000 florins, and the commandant or government owed them 49,000 florins: so that in the end the latter had converted their supplies into money, and had in hand 7,000 florins, and a debt against the government or commandant for 49,000 florins. From all this Stewart deduces a law, — that the amount of currency required is in ratio to its activity. Suppose the garrison had required a certain amount of forage lying twenty miles off; and that, having but one horse, ten days were required for its transportation. With ten horses, the same work might have been done in a single day. Would Stewart from this fact have attempted to prove that one horse could do the work of ten? We wonder he did not fortify his argument by the following syllogism: ‘ten horses can do so much work in one day; one horse can do the same work in ten days; therefore one horse can do the work of ten horses (p. 179).
    Stewart states “that the quantity of money and notes in circulation must bear but a small proportion to the value of the goods to be bought and sold, and that this proportion must vary according to the quickness with which the money circulates or shifts from one hand to another” (p. 179). To this claim, Poor replies, “If the proportion of money to the goods to be bought and sold be small, then the amount of goods bought and sold will be small. Stewart has only shown that, with a small amount of money, seven weeks were required to effect exchanges which might, with an adequate amount, have been made in one” (p. 179).
    Continuing his comments on the rapidity of the circulation of money, Poor writes:
If money be capital, or the representative of capital, and if when it is exchanged it is exchanged for other kinds of capital, then there can be no greater activity in money than in other kinds of capital; and there can be no relation whatever between its activity and quantity. There would be just as much sense in saying that the quantity of wheat necessary for the consumption of a community was in ratio to the rapidity of its movement: that is, if the rapidity of its motion be made twice as great, one-half the ordinary quantity will suffice. . . . [Stewart] overlooked the fact, that, when money was used as the measure of value or the scale of valuation, the thing, the scale itself, passed from the party using it to the party whose goods had been purchased and measured by it. . . . With Stewart . . . money is an entity, possessed of volition and will, flying about the country eager to do some good deed; an active and lively piece doing twice the work of a dull, phlegmatic one. But money cannot move unless something else moves, no matter how eager it may be for work. Its eagerness must find its complement in some other kind of property; so that if volition, will, and activity be predicated of one, volition, will, and activity must be predicated of the other. Money has no attribute of activity different from that possessed by all other kinds of merchandise. The use of one involves the use of the other; the employment of one involves the employment of the other (pp. 180-181).
    Poor concludes his review of Stewart with this comment:
One of the great evils resulting from the reputation of such a man as Dugald Stewart is, that every word that he uttered, which was recorded by himself or by others, is carefully gathered up and put into his ‘works.’ In the case of Stewart, these are swelled to eleven ponderous volumes, full of propositions of the correctness of not one of which the reader can have the least assurance. Had his ‘literary executor,’ instead of carefully raking up, burned three quarters of all he left, he would have rid the world of a vast mass of rubbish, and the painstaking student of a great deal of the most irksome toil. It may be set down as a maxim, that a person who assumes to write authoritatively upon every subject will write well upon none. Life is not long enough for one man to know every thing, or to construct an universal science (p. 182).

Copyright © 2016 by Thomas Coley Allen.

More money articles.

Sunday, July 16, 2017

Judging People by Their Character

Judging People by Their Character
Thomas Allen

    Martin Luther King said,  “I look to a day when people will not be judged by the color of their skin, but by the content of their character.” Progressives, liberals, libertarians, neoconservatives, academics, and old media personalities, and most religious leaders, constitutionalists, and conservatives continuously dote over this saying of King.
    Most of these doters (idolaters?) have elevated King to sainthood, and many have defied him. They have even placed King above Jesus. People may blaspheme Jesus with immunity. Blaspheming Jesus even receives support from governments and the old media, and often receives indifference from the new media. However, to tell the truth about King brings condemnation from nearly all spectrums of society — from right to left. Moreover, those who fail to saint King are universally vilified as racists. (Therefore, people are judged not by their character, but whether or not they worship, or at least esteem above all other, King.) Such acceptance of the treatment of King and Jesus proves that King has supplanted Jesus as the central figure of religious and even nonreligious America. King has replaced Jesus as the representation of God on Earth. King’s teachings are esteemed far more than Jesus’. While the government church, public schools, bans Jesus, they indoctrinate King’s dogmas.
    However, these doters never investigate or consider the character of the womanizing King, who left a trail of destruction and blood as he fornicated across the country. They overlook his betrayal of his wife with his adultery. (If a man will betray his most sacred vows, such as his marriage vows, how can he be trusted with less important things?) Also, they do not consider or try to find out what King meant by “content of their character.” As judged by King’s actions, only non-Whites and White Marxists had any content of character worth possessing. If a White is not a Marxist, he has a low quality of character. To King, skin color, i.e., race, and Marxist character appear almost synonymous. Moreover, if Saint King’s character is so sterling, why do federal agencies have to conceal the information that they have collected about him?
    To judge people by their character requires unlimited resources, unlimited time, and an extremely long lifespan. Being finite with highly limited resources and time, people are forced to judge by categorization. Race is perhaps the best categorization to use to judge character, especially when immediate judgment is required. (An example of judging character by race is the Black cab driver who refused to take passengers to Black neighborhoods at night as occurred in the District of Columbia some years ago.) When known, ethnicity, which is a subdivision of race, may be an even better indicator of character than mere race.  (For example, if one knows that he is dealing with a Yankee, he knows, with high probability, that he is dealing with a person of a meddlesome, self-righteous, and generally low character.) Moreover, the Bible endorses the use of ethnicity, and by that race, to judge character. In Titus 1:12, Paul writes, “. . . the Cretians are alway liars, evil beasts, slow bellies.”
    The following two tables illustrate racial differences in character. Table 1[1] shows more recent studies while Table 2[2] shows earlier studies.

    For most of these characteristics, genetics plays an important role, often the dominated role, in their determination. Of course, exceptions exist. However, they are exceptions because they are not the expected.
    Professor Lynn supports the conclusions in the above tables. He shows that psychopathic personality is, to a significant degree, genetic and varies by race. Blacks have a high psychopathic personality while East Asians have the lowest. Whites are between them. Blacks are less able to sustain consistent work behavior than are Whites and East Asians. Conduct disorder (lying, stealing, truancy, fighting, vandalism, sexual precocity, cruelty, and the like) is about twice as high among Blacks as among Whites. Blacks are much more likely to fail to keep their financial obligations than are Whites. Moreover, Blacks are much more aggressive than Whites or East Asians, and, therefore, commit many more crimes in proportion to their population. East Asians are the least likely to commit crimes. Domestic violence is much higher among Blacks than among Whites. Furthermore, Blacks have much more difficulty forming stable, long-term loving relationships than Whites or East Asians, who are more likely than Whites to form such relationships. Also, Blacks have more sexual partners than do Whites, who have more than East Asians. Blacks are more impulsive than are Whites. Whites are more likely to delay gratification for a greater reward than are Blacks. Moreover, Blacks are more reckless and take greater risks than do Whites or Asians. Blacks are less likely to use contraception than Whites, and, thus, have more unplanned babies and more sexually transmitted disease than Whites and East Asians. Furthermore, Blacks are more likely to abuse and neglect their children than are Whites. Lynn cites numerous studies to support his conclusion.[3]
    Professor Levin shows that Blacks and Whites have a different concept of morality, mostly because of genetics. He defines morality as the rules that people want everyone to follow and that they want everyone to want everyone to follow. He uses honesty as an example. Thus, acts that most Blacks find morally acceptable, such as theft, drug use, and preoccupation with sex, most Whites reject. The opposite is also true: What Whites find morality acceptable, Blacks often reject. Because of genetics, “Black children cannot be expected to respond as white children do to externally imposed white socialization.”  Also, because of genetics, Blacks are more likely to kill with firearms because they lack the genes to restrain them from killing with weapons that they did not invent. Levin gives other examples.[4] Thus, race is a strong indicator of morality and values and, by that, character.
    Nevertheless, other categorizations can be used, but they are not nearly as accurate or precise as race. For example, occupation may be used as a shortcut or a preliminary judgment of a person’s character when one lacks the time and resources to know the person on a personal level. Certain occupations, such as the stereotypical politicians (the more prestigious the office, the lower the character), lawyers, used car salesmen, burglars, old media personalities and their bosses, and establishment hierarchs and their agents, indicate poor character. However, most occupations are useless as indicators of character. Moreover, determining a person’s race at a glance is much easier than determining a person’s occupation.  Likewise, nearly all other categorizations, including socioeconomic status, are inferior to race as an indicator or predictor of character.
    Intelligence offers another judgment of character without intimate knowledge. It is largely inherited and varies with race. The intelligence of Blacks on average is about a standard deviation below that of Whites. The intelligence of East Asians on average is slightly above that of Whites. For better or worse, genetics controls the character of a lower intelligent person more than it does the character of a higher intelligent person because the higher intelligent person is more likely to use his intellect to control his characters for better or worse. That is, highly intelligent people are much more likely to use their intelligence to overcome their genetically influenced good and bad character traits than are low intelligent people. Even so, character is more of a guide for intelligence than intelligence is for character. That is, character directs intelligence more than intelligence directs character. Thus, intelligence is not a good indicator of character. Furthermore, determining a person’s intelligence quickly is often difficult. As intelligence is related to race and as race is easier to determine, race is a better indicator of character, even if it is just used as a surrogate for intelligence.
    Genetics, culture, and environment form character. Intelligence is predominately determined by genetics: Genetics accounts for about 70 percent of a person’s intelligence. Intelligence creates culture and greatly controls or regulates environment. Therefore, genetics is the dominant force behind character. As race results from genetics, race is a good indicator of character.
    Here is the test. If you are walking down a dark street at night and you see a group of Blacks coming toward you and if you look across the street and see a group of Whites, would you cross the street? If so, you are not only judging character based on race, you are also a racist. Be honest: Your life may depend on it.
     People who rely on race to judge character will be accused of being prejudice. However, using race to judge character is not prejudice. T.B. Matson, an integrationist, defines “prejudice” as “a prejudgment, or judgment not based on knowledge or experience. It implies an opinion based on insufficient or irrelevant data.”[5]  This is a good definition. According to this definition, judging character by race is not based on insufficient or irrelevant data. People who judge character based on race are not making a judgment in a vacuum or based on irrelevant or insufficient data. Their judgment is based on statistics, knowledge, observation, and experience.
    Real prejudice is displayed by people who claim that the races are identical, equal, equivalent, or interchangeable, except for a few unimportant surface features such as the type of hair, the shape of the nose, or the color of skin.  They claim that the races do not differ in intelligence, temperament, or character or in any other nonmorphological trait. To support their assertion, they offer no evidence, studies, or facts. Moreover, they offer nothing but violence and coercion to counter and suppress the information, studies, or evidence that show that the races do differ genetically, innately, in intelligence, temperament, character, and other nonmorphological traits. Their resort to force proves that these people have nothing more to support their claim of racial equivalency except their personal biases and prejudices.
    In conclusion, when one lacks the time and resources to learn personally, with a good deal of interaction, the character of an individual, race serves as perhaps the best surrogate available in judging character. Besides, why would one want to waste valuable time and resources to learn personally the character of another only to discover that his character is despicable?

Copyright © 2017 by Thomas Coley Allen.

More articles on social issues.

1. J. Philippe Rushton, Race, Evolution, and Behavior: A Life History Perspective (New Brunswick, New Jersey: Transaction Publishers, 1995), pp. 25, 48-49, 51-52, 58.

2. J. Deniker, The Races of Man: An Outline of Anthropology and Ethnography (London, England: Walter Scott, Limited, 1900), p. 121. Charles Morris, The Aryan Race: Its Origin and Its Achievements (Chicago, Illinois: S. C. Griggs and Company, 1888), pp. 24-27. A. H. Keane, Man Past and Present, revised by A. Hingston Quiggin and A. C. Haddon (Cambridge, 1920), pp. 41, 85, 133, 164, 219, 255, 333, 439.

3. Richard Lynn, “Race and Psychopathic Personality,” A Race Against Time: Racial Heresies for the 21st Century, ed. George McDaniel (Oakton, Virginia: New Century Books, 2002), pp. 204-211.

4. Michael Levin, “The Evolution of Racial Differences in Morality,” A Race Against Time: Racial Heresies for the 21st Century, ed. George McDaniel (Oakton, Virginia: New Century Books, 2002), pp. 266-271.

5.  T.B. Matson, Segregation and Desegregation: A Christian Approach (New York: The Macmillan Company, 1959), pp. 47-48.

Friday, July 7, 2017

Why Silver Fell in the 1870s and Gold Rose in the 1970s

Why Silver Fell in the 1870s and Gold Rose in the 1970s
Thomas Allen

    During the 1960s when the market price of gold began to rise above the official redemption rate of $35 per ounce of gold, economists and others began discussing the likelihood of the dollar no longer being redeemed in gold. When this event occurred, most expected the dollar price of gold to drop because the demand for gold as money would cease. Most expected a decline in the value in gold when redemption ended because of a decrease in demand.
    A similar discussion occurred in the late 1800s as the free coinage of silver ended and most of the world moved to the monometallic gold standard. Most argued that silver declined in value because of the demand for silver as money ceased except in subsidiary coins and its supply continued to rise. However, in 1971 when redemption in gold ceased, gold acted oppositely. Instead of falling in value, gold rose. Why?
    Several explanations have been offered to explain the decline of silver’s value (priced in gold). These explanations are mostly variations of the Quantity Theory of Money.
    Friedman and Schwartz assert that supply of and demand for silver explains its decline, “The reasons for the price decline seem fairly clear: on the supply side, rich new mines were opened in the American West, and there was a world wide increase in productivity; on the demand side, a number of European countries shifted from a silver or bimetallic to a gold standard and sharply reduced their monetary use of silver.”[1]
    The monometallists, advocates of the single gold standard of this era, claim that the increase in the supply of silver caused its fall in value. However, the fall in value began before the world’s silver stock had greatly increased. Moreover, gold production was relatively much greater than that of silver. To which the monometallists reply that the fall resulted from an anticipation of an increase in supply.
    Even today, the supply argument seems weak. In recent years (decades), the increase in the supply of gold has been relatively greater than that of silver. During this time, the demand for silver seems to have been much higher as its usages have been higher. Yet the value of silver generally lags that of gold.
    Laughlin opines that the abundance of gold caused silver to lose value relative to gold.[2] With the discovery of gold in America, enough gold came available to supplant silver coins. People preferred gold to silver because it had more value per unit weight. As the demand for gold grew, so did its value. As the demand for silver fell, so did its value. Moreover, the supply of silver began increasing after 1872. (Laughlin incorporates quality with his explanation: Gold has a higher value, purchasing power, per unit of weight, which contributes to its quality as money.)
    The bimetallists, advocates of the silver-gold system with a legally fixed exchange rate or ratio between the two, claim that “demonetization” caused silver’s fall in value. They point to Germany ending the free coinage of silver in 1871, which glutted the market with silver. This action forced France and the other members of the Latin Union to abandon the silver standard, i.e., to end the free coinage of silver. The United States ended the free coinage of silver in 1873. During the 1870s, other European countries ended their silver standards or bimetallic silver-gold systems and adopted the monometallic gold standard. To the bimetallists, ending the free coinage of silver and by that discontinuing the use of silver as standard money caused its decline in value.
    One result in discarding the silver standard was an increase in demand for gold coins. This increase demand for gold coins would account for some of the decline in the value of silver in terms of gold. Not only were countries replacing the silver standard with the gold standard, they were also replacing fiat paper monetary standards with the gold standards.
    The abandonment of the silver standard around the world reduced the demand for silver. As countries moved onto the gold standard, the demand for gold increased. Thus, the value of silver was pushed down and that of gold was pushed up.
    Although silver ceased to be used as standard money in most countries (China and some Latin American countries being notable exceptions), it was still used in subsidiary coins in most countries and as fiat money in the United States. If merely ending the use of silver as standard money caused its fall in value, why did gold soar in value (in terms of standard fiat currencies) when its last legal connection to money was severed in 1971? Although the Quantity Theory of Money offers a reasonable explanation of silver’s fall in value, it fails to explain gold’s rise in value. Whatever explanation used to explain silver decline in value after 1873 needs to be able to explain golds rise in value after 1971.
    Rist offers this explanation for the decline of silver’s value and the rise of gold’s value when they ceased being standard money. (In the United States, silver ceased being standard money when the free coinage of silver ended in 1873. Gold ceased being standard money when the United States stopped converting the dollar to gold under the gold exchange standard, the Bretton Woods system.) When the free coinage of silver ended, people replaced silver with gold. Gold adequately performed all the basic functions of money. Silver was not needed to perform any of these functions. Therefore, the monetary demand for silver declined. As demand fell, so did its value. When gold redemption ended, people replaced gold with irredeemable paper money. Irredeemable paper money does not perform all the basic functions of money. As it nearly always depreciates, it fails as a store of value. Gold continued to perform a monetary function as a store of value. Therefore, a monetary demand for gold remained after its redemption ended. Thus, when gold replaced silver, it fulfilled all silver’s monetary functions. When irredeemable paper money replaced gold, it failed to fulfill all gold’s monetary functions.[3]
    Thus, the Quality Theory of Money is needed to explain gold’s rise in price in terms of irredeemable paper money. Being low quality money, irredeemable paper money cannot store value over time. Being high quality money, gold stores value over time. Consequently, gold rose in price after its formal use as money ended because people still demanded a form of money that stored value.
    As shown above, the Quantity Theory of Money can explain the fall of silver’s value after 1873, but it fails to explain the rise of gold’s value after 1971. The Quality Theory of Money is needed to explain gold’s rise in value. It can explain both silver’s fall in value and gold’s rise in value.

1.  Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the Untied States, 1867-1960 (Princeton, New Jersey: Princeton University Press, 1963), p. 114.

2.  J. Laurence Laughlin, The Elements of Political Economy (New York, New York: American Book Co., 1887), p. 311.

3.  Charles Rist, The Triumph of Gold, trans. Philip Cortney (New York, N.Y.: Philosophical Library, 1961, pp. 122-124, 151-153.

Copyright © 2016 by Thomas Coley Allen.