Poor on Jevons
Thomas Allen
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.
William Stanley Jevons (1835-1882) was a British economist and mathematician. He developed the theory of marginal utility, i.e., utility determines value. Among his works are The Theory of Political Economy (1871), Money and the Mechanism of Exchange (1875), which Poor uses for much of his critique, and Principles of Economics (1905). We will look at his discussion on Jevons. My comments are in brackets. Referenced page numbers enclosed in parentheses are to Poor’s book.
Jevons states that countries use gold and silver coins because they greatly facilitate trade. In time, people discover that token base-metal coins and paper money of nominal value pass as signs of the ownership of gold and silver coins. Over time, people become so accustomed to paper currency that it ceases to represent gold and silver coins and becomes money in its own right. Thus, paper currency can continue to circulate even after the metal that it represents is removed. [This phenomenon is witnessed today throughout the world as paper currency ceased representing gold and silver in the years following World War I.] Jevons points to Scotland and Norway as examples where paper currency circulated and gold coin did not. Paper promising to pay in gold was preferred to gold coin (pp. 384-385).
Jevons does acknowledge that unlike gold coins, paper currency “will not circulate beyond the boundaries of the district or country where it is legally current and habitually employed” (p. 386). [This is not exactly true in today’s world where every country has paper fiat money. Paper money, such as the U.S. dollar, that is considered relatively strong, i.e., loses purchasing power more slowly compared with a local currency, will circulate in a country with a weak currency, i.e., loses purchasing power more quickly.]
Jevons notes that under the gold standard when paper money of one country is exchanged in another country for that country’s money, this paper money becomes an obligation of the issuing country that has to be paid in gold (p. 384). When a country’s paper money is inconvertible domestically, it must still be redeemed in gold to foreigners to maintain the value of the paper money. If it is not, the county will have too much money in circulation, and its paper money will depreciate against gold (p. 386). [This is the quantity theory of money at work.]
Poor responds that “all convertible currencies . . . are regularly retired within periods of, say ninety days from their issue” (p. 386). [This is the real bills doctrine at work.] He continues, “It does happen that large amounts of paper money get into circulation, having no more value than worthless bits of leather or paper; but they get into circulation for the reason that it is always believed that a metallic basis of value underlies them. If they have no such basis, those who take them are deceived” (p. 386). [This true only with the silver or gold standard, which existed at the time Jevons and Poor wrote. It is not true today as none of today’s paper money has an underlying gold or silver basis of value. However, arguably, people are still being deceived as the value of today’s money depends almost entirely on confidence, which is highly fickle.]
To Jevons’ example of the notes of Scottish banks, Poor replies “that they rested on a basis of metals, or upon that which would produce metals” (p. 368).
Poor also condemns Jevons assumption “that worthless bits of paper — the basis of metal being wholly removed — circulated by the same law as that which controls the circulation of coin, or that which was convertible on demand into coin” (pp. 386-387) and “has exactly the same capacity for driving out standard money that light or depreciated coins possess” (p. 387). Poor asserts, “Convertible paper money exerts no such tendency; on the contrary, its tendency is to bring metallic money into the country to form the basis of its issue. The two are equal in value, and move harmoniously side by side” (p. 387).
As for debased coins, they drive “out standard coin, only for the reason that it has the same competency in the payment of debts; and, of two equally competent instruments, the less costly will be preferred” (p. 387). When a debased coin is demonetized, it passes at its real value and not its denominational value. That is, it passes based on the weight of gold or silver that it contains and not by the value stamped on the coin.
Jevons writes, “The State may either take the issue of representative money into its own hands, as it takes the coining of money; or it may allow private individuals, or semi-public companies and corporations, to undertake the work under more or less strict legislative control” (p. 387). Poor asks, “What would the money of a State represent? A beggared treasury and a parcel of ignorant and listless officials. No State money issued as currency ever represented any thing else” (pp. 387-388). [Like most of the founding fathers, Poor was not fond of governmentally issued paper money. He wrote Resumption and the Silver Question condemning the U.S. notes. However, he erred in his prediction about the U.S. note. If gold only backed half the U.S. notes in circulation, he thought that the value of a $10 U.S. note would only be worth $5 in gold. He was proved wrong as U.S. notes exchanged at par when they became convertible in gold, although gold backed only about one-third of the U.S. notes.]
Jevons writes:
Assuming an inconvertible paper currency to be issued, and to be entirely in the hands of government, many of the evils of such a system might be avoided, if the issue were limited or reduced the moment that the price of gold in paper rose above par. As long as the notes, and the gold coin which they pretend to represent, circulate on a footing of equality, they are as good as if convertible (p. 388).Poor concedes that this is true. Then he asks what happens if the holder of a gold coin refuses to exchange it for an equal amount of inconvertible paper money (p. 388). [When the U.S. government issued U.S. notes, an inconvertible legal-tender paper currency, gold coins were allowed to circulate alongside U.S. notes. U.S. notes quickly fell in value relative to gold and did not exchange at par with gold coin until they became convertible in gold on demand.]
Jevons believed that inconvertible paper money can maintain its full value if its quantity is carefully limited (p. 389). Poor doubts that any inconvertible paper money can retain its full value for long.
Jevons considered the issue of notes more analogous to the government “function of coinage than to the ordinary commercial operating of drawing bills” (p. 390). Thus, the government or “its agents acting under the strictest legislative control” (pp. 390-391) should be the sole issuers of paper money. [Poor does not mention Jevons position on checkable deposits. Now most economists consider checkable deposits to be functionally equivalent to bank notes, which Jevons believes should be either a government monopoly or a governmentally granted monopolistic privilege of the central bank. As checkable deposits are equivalent to bank notes, then under Jevons’ scheme, the government should hold all checking accounts or its strictly controlled agent should. {For more on Jevons’ view of checkable deposit, see below.}]
In summary, Jevons is a proponent of the quantity theory of money. The quantity of money determines its purchasing power. Even inconvertible paper money can maintain par with gold if its quantity is properly controlled. Moreover, he advocates the government monopolizing the issue of paper money.
[In Money and the Mechanism of Exchange, Jevons has a chapter titled “The Quantity of Money Needed by a Nation.” He concludes “that the only method of regulating the amount of the currency is to leave it at perfect freedom to regulate itself.”[1] Such a conclusion fits well with the gold standard accompanied by the real bills doctrine where no bank has a monopoly on issuing notes and bank notes are not legal tender and are converted to gold coin on demand. However, it seems to conflict with Jevons’ advocacy of monopolizing the issue of notes and of the government strictly controlling the quantity of notes issued. He remarks that the quantity of money, gold coins and paper notes representing gold coins, cannot and should not be regulated, but it should be allowed to fluctuate to meet the changes of commerce. However, the government should strictly regulate the quantity of paper notes. Under his strict regulation, paper notes are fully backed by gold with no restriction placed on the quantity of gold exchanged for paper notes.
Jevons either disregards or rejects the regulation of bank notes pursuant to the real bills doctrine as Poor advocates. Under the real bills doctrine, bank notes are not fully backed by gold. However, they are fully backed by gold or bills of exchange, commercial money, which mature in gold coin in the near future. The real bills doctrine automatically expands and contracts the quantity of money to match the needs of commerce.
Unlike the real bills doctrine where real bills of exchange function as money in discharging debt, Jevons’ system seems to prohibit such use of bills of exchange. However, he acknowledges that bills of exchange do serve as money to a limited degree. His system limits the quantity of money to the quantity of gold available for use as money. It only offers the market the choice of using gold coin or paper notes representing gold coin for exchanges. Under the real bills doctrine, the quantity of paper notes is limited more by commercial activity than by the quantity of gold. Gold serves as the regulator of the quantity of notes issued.
Jevons views checks as a credit clearing system that balances debts against each other, such that money is never touched. Apparently, unlike most economists today and many then, he does not consider checks to be functionally the same as paper notes. Nevertheless, they are. Both are credit money representing gold coin. Both can discharge debt, but neither can extinguish debt. Furthermore, both are orders to transfer gold from one person to another. The major difference between the two is that a note may pass through many hands before it is returned for redemption or cancellation of debt while a check usually passes through one or two hands before it is returned for redemption or cancellation of debt.
Under Jevons’ system, the total quantity of money cannot expand or contract rapidly enough to accommodate commerce satisfactorily. If enough monetary gold is available to serve the needs of commerce under his system during periods of high demand for money, then gold is diverted from financing capital to serving as circulating media and too much money, i.e., monetary gold, exists for periods of low demand for money. Thus, the result is a rise in price during times of high demand for money and a fall in prices during the times of low demand for money. However, this situation does not exist under the real bills doctrine. Under the real bills doctrine, the money supply can expand rapidly to match rising demands for money. Moreover, it can contract rapidly when the demand for money slackens. Thus, the quantity of money increases and decreases quickly and automatically to satisfy the needs of commerce. The real bills doctrine, which Poor promotes, is superior to the system promoted by Jevons.]
Endnote
1. W. Stanley Jevons, Money and the Mechanism of Exchange (New York, New York: D. Appleton and Co., 1896), p. 340.
Copyright © 2016 by Thomas Coley Allen.
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