Poor on Macleod

Poor on Macleod

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 Henry D. Macleod. My comments are in brackets. Referenced page numbers enclosed in parentheses are to Poor’s book.
    Henry D. Macleod (1821-1902) was a Scottish economist. Among his works are Theory and Practice of Banking (1856), Elements of Political Economy (1858), A Dictionary of Political Economy (1859), Principles of Economist Philosophy (1873), and The Theory of Credit (1889). He is credited with coining the term “Gresham’s Law.” Poor reviews Macleod monetary theory presented in Theory and Practice of Banking.
    About Macleod, Poor comments that he “has erected a vast system, measured by the number of pages devoted to it, the fundamental principle of which is that gold and silver serve as money by reason of being representative of debt; that paper serves as such by reason of being the representative of transferable debt; and that whatever represents transferable debt is currency, — paper money” (p. 383). [Today, debt is money with no involvement of gold and silver. In today’s monetary system, money would cease to exist without debt. Under the gold standard, money would continue to exist as gold coin if all debt disappeared. {Some fiat money reformers would argue that government notes are not debt instruments. But they are albeit noninterest-bearing and nonpayable debt. They cannot extinguish debt; they can only transfer debt from one person to another, and eventually the government ends up with the country’s debt as government notes are its obligations.}]
    Macleod claims that the notion “that money represents commodities, and that paper currency may be based upon commodities” (p. 363) is a “stupendous fallacy” and a delusion. “Money does not represent commodities at all, but only debt; or services due, which have not yet received their equivalent in commodities” (p. 364). [This is a strange notion. In its origin, money did not represent a commodity, because it was a commodity, much less debt. In the ancient world, money was never thought of as representing debt. Credit and debt were not common and even abhorred. To discourage debt, much of the ancient world outlawed charging interest on loans.] Moreover, he claims that the quantity of money that a person has “is just the quantity of debt services due to him” (p. 364). Also, “the quantity of money a nation possesses is simply the quantity of accumulated industry it possesses over and above all commodities; but they have no relation to each other” (p. 364). Money “represents that portion of a man’s industry which is reserved for future use” (p. 364). He states that “the value of money depends upon its relations to what it represents, namely, debt, and not to commodities” (p. 364). Furthermore, he declares, “If money or currency increases faster than debt or services due, it immediately causes a diminution of its value. If debt increases faster than money or currency, then the value of money is raised” (p. 364). [Macleod errs with this statement. Raising prices nearly always results in a monetary regime of government notes and legal-tender bank notes, which are functionally the same as government notes. As such notes themselves are debt, debts are always increasing faster than money or currency. According to Macleod, the value of money, by which Macleod seems to mean the purchasing power of money, should rise, i.e., general prices should fall.] According to Macleod, John Law erred in basing his paper money on a commodity, land, instead of debt. Macleod writes, “Where there is no debt, there can be no currency” (p. 364). [As mentioned above, in the ancient world and even when Macleod wrote, many people used a currency that did not involve or represent debt. When people bought by shaving silver from a silver bar to buy goods priced in the weight of silver, as some people did in the nineteenth century, they were using a currency that neither involved nor represented debt. This seems to conflict with Macleod’s concept of money.] He also disagrees with the concept of bankers issuing bank notes on good bills, real bills of exchange (p. 365). Continuing, Macleod writes:

[T]hat the only true foundation of a paper currency is that substance which is the legal or the universally accepted representative of DEBT. . . . [A]mong all civilized nations, gold or silver bullion is the acknowledged representative of debt. Consequently, gold or silver bullion is the only true basis of a paper currency. Among all civilized nations, the weight of bullion is the acknowledged measure of value; and, consequently, bullion is the only true basis of the “promises to pay” (p. 365).

He continues:

[I]t is not as a commodity that bullion is the basis of a paper currency, but as the substance which is the accepted representative of debt. . . . Bullion, then, as the symbol of debt, is not only the sole proper basis of a paper currency, but is the only true regulator of its amount. As all paper currency is a “promise to pay” gold or silver bullion at some definite time, it is quite evident that the “promises to pay” floating in a nation must bear some proportion in quantity to the actual quantity of the bullion (pp. 365-366).

    Macleod claims that a yard of broadcloth or a Dutch cheese could represent debt and be the measure of value as well as gold (p. 365). Poor response to this notion as:

flippant and incoherent nonsense, swollen into two spacious volumes, when Dr. Schliemann shall have dug up at Troas or Mycenae Dutch cheeses perfectly fresh and sweet, and bearing upon their surfaces the dimples in the exact form and shape in which they were impressed by the tiny fingers of the pretty Dutch milkmaids three thousand years ago. Till then the habit or prejudice of mankind in assuming gold, as money, to be capital instead of debt, will be considered as resulting not from accident, but from law (p. 366).

    Next Macleod discusses inconvertible paper currency. If paper money ceases to be convertible into gold or silver, the paper money will establish a new standard that replaces the gold or silver standard (p. 367). [This occurred with the U.S. note when it was not convertible into gold.] The only way for an inconvertible paper currency to remain at par with gold is to limit its quantity. [Even reducing the quantity of U.S. notes could not keep it at par with gold. Only making U.S. notes convertible into gold on demand kept them at par with gold.] By limiting its quantity, he means, “devising some means whereby a greater quantity of it shall not be issued than if it were convertible into gold” (p. 367). If more than this is issued, the paper currency will trade at a discount to gold (p. 367). [Even with a fixed quantity several years before U.S. note became convertible into gold, they always traded at a discount to gold. Basically, what Macleod is proposing is using the price of gold as an index for regulating the quantity of paper currency.]
    About Macleod’s concept on inconvertible paper currency, Poor writes:

This is only the old story over again, that value is not necessary to the circulation of a government or inconvertible currency; that, no matter how worthless it may be, it will circulate at the value of coin, if it do not exceed the amount of convertible paper which would have circulated in its place, or if its quantity do not exceed the wants of the community in its exchanges (p. 368).

Copyright © 2017 by Thomas Coley Allen.

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