This section is from the "Elementary Principles of Economics" book, by Richard T. Ely and George Ray Wicker. Also available from Amazon: Elementary Principles Of Economics: Together With A Short Sketch Of Economic History
The Amount of Money Needed. The question has often been asked, How much money does a country need ? And the answer has sometimes been given: " It makes no difference how much money there is. If the supply is abundant, prices will be high; if the supply is small, prices will be low and the same amount of money will go farther. A little money will do the work as well as a large supply." It is true that there is a relation between the supply of money and its value, although this relation is by no means simple, but rather extremely intricate ; and it is true that other things being equal, large supply means small value per piece, and small supply large value; but the conclusion which was drawn from these facts in the above answer does not follow from the facts themselves. When the amount of money is small, barter is extensively practised, with resulting loss and inconvenience to trade. There should certainly be a sufficient stock of money to effect all ordinary transactions of life for which credit instruments are not readily available. Now, one of the most common business transactions is the payment of wages, and money should therefore exist in such quantities that it will not be too valuable to use for that purpose. In other words, the supply of money should be great enough to make the value of a coin of convenient size not greater than the value of the day's wages of an unskilled laborer. It is even desirable that money should be still cheaper, so that the earnings of such a day's labor may be divided into parts. It is not, however, necessary that money should be cheap enough to enable us to make our smallest purchases with full legal tender money, since in addition to full legal tender money, all countries have subsidiary coins like our fractional parts of a dollar, which are legal tender only for small payments. These subsidiary coins contain less than the proportionate amount of pure metal. In the United States, the subsidiary coins are the half-dollar, quarter-dollar, and the ten-cent pieces. These are legal tender to an amount not exceeding $10 in any one payment. Besides the subsidiary coinage there is the so-called minor coinage, which in the United States consists of nickels and coppers, and is legal tender in payments up to twenty-five cents.
Fluctuations in the Volume of Money. The grounds just given for the need of a certain amount of money are not the only considerations of importance in determining how much a country needs. Provided the above requirement has been satisfied, it may make little difference whether the amount of money at any one time be large or small, but it does make a great deal of difference, as we have shown in discussing inflation and contraction, whether the amount of money remains the same or increases or decreases. It is not the " much or little," but the " more or less " that counts. Obligations have been made in the past which must be met in the present or future. Now, to decrease the amount of money, other things remaining the same, raises the value of every debt and adds to the burden of every debtor. It increases the value of notes, mortgages, and railway bonds, and of local, state, and Federal bonds as well. It enriches the few at the expense of the many.
We must not forget, however, that the quantity of money is by no means the only factor in determining the value of the money. So many forces are present in determining general prices that any conclusion based solely upon the relation between the quantity of money and its value must be accepted with the utmost caution. Thus in our day credit is becoming a more and more important instrument of exchange, and we must remember that whatever impairs confidence so shrinks the volume of credit and credit instruments that it produces a stringency in the money market, and thereby raises the value of money.
Bimetallism. Our discussion of the amount of money needed by a country naturally brings us to the much-debated question of bimetallism. To institute a system of bimetallism, three things are necessary: two metals, free coinage of both at a fixed ratio, and both made legal tender. Silver and gold have both been generally used as money, the government determining at what ratio the two should be coined. A ratio that has been quite generally used is 15½ to 1, which means that in full legal tender coins under such a system, one ounce of gold is treated as equal in debt-paying power to 15½ ounces of silver. This has been the general European ratio, while that of the United States, established in our first coinage act of 1792 at 15 to 1, was changed to 16.002 to 1 and then to 15.988 to 1 by Acts of 1834 and 1837.
The Latin Monetary Union. The European ratio was maintained with free coinage of both metals for about seventy years during the nineteenth century by the action, first of France, and then of a combination of countries, called the Latin Monetary Union, in which France, Belgium, Switzerland, and Italy were most prominent. Under their system, every one who had gold or silver in any form could have it changed to money at the established ratio of coinage.
Demonetization. About 1873, however, Germany, which had before given free coinage only to silver, decided to change to a gold basis, and threw upon the markets of the world an immense amount of silver at the same time that she increased the demand for gold. In the same year, our own country dropped the silver dollar from the list of coins to be struck at the mint, thus putting us on the basis of gold monometallism, although, as a matter of fact, no silver dollars had been coined for years. Because of the rapid decline in the value of silver, the Latin Union also soon after suspended its free coinage. To add to the confusion, large discoveries of silver at about the same time brought about a great and rapid increase of the supply. The result of these changes was a violent fluctuation from the old market ratio between the two metals, silver falling so much in value as measured by gold that to-day it requires about thirty-eight ounces of silver to purchase one of gold. In other words, the market ratio has changed from near the old mint ratio of 15½ to 1 to a ratio of about 38 to 1.
Results of Monetary Changes. The changes which we have described naturally increased the value of money, and thus incidentally all debts, and produced great distress. But the increase in the debts was only a part of the mischief. South America and the Oriental countries being on a silver basis, trade had easily been carried on with them as long as gold and silver readily exchanged at an established ratio ; but when the ratio began to fluctuate, an uncertain and disturbing element was introduced into trade, rendering it highly speculative, and therefore on the whole less profitable to the world. The merchant in Liverpool who sold goods to a merchant in India would agree to receive in exchange a fixed sum of silver money ; but, as it was necessary for the English merchant to exchange this silver for gold, a fall in the value of silver during the progress of the transaction might bankrupt him. Under these conditions exportation of manufactured goods to the Orient was impeded, and to the same extent production in India and China was artificially stimulated. These, in brief, are some of the difficulties that are believed by many to have resulted in great measure from the general demonetization of silver. Bimetallism has been proposed as a remedy. Under bimetallism government would coin at a fixed ratio all gold and silver that anybody desired to have coined ; in other words, government would coin gold and silver on private account. Bimetallic coinage by one country alone is called national bimetallism. It is generally agreed among economists to-day that national bimetallism is utterly impracticable, because, according to their view, no country is commercially powerful enough to furnish such a demand for both metals as would be necessary to maintain parity of value at any coinage ratio yet proposed. If, on the other hand, the proposed ratio could not be maintained, then other countries might send to it all their silver and take away its gold, by the simple action of Gresham's Law, thus practically reducing the country to a silver basis.
With international bimetallism, however, which means bimetallism based on an agreement like that of the Latin Monetary Union before 1874, the case is quite different. Economists were at one time inclined to favor such a monetary policy, and even to-day there are in Europe and America some economists who believe such international action feasible and desirable. They believe that if, for instance, England, the United States, Germany, and France should enter into such an agreement, those countries could maintain the ratio. International bimetallists remind us that gold and silver are used principally for money, and that owners of gold and silver would be obliged by the international agreement either to have the metal coined at the government ratio, or to sell it in the market for use in the arts. But the arts absorb only a relatively small portion of the annual product, and a very much smaller portion of the total existing supply. It is therefore maintained that governments are in the position of monopolists, and by agreement could maintain a fixed coinage ratio. Moreover, international bimetallists declare that as a result of such action greater justice would be done to creditors and debtors alike, and that the world's business would be increased because of the greater convenience of commerce between gold-using and silver-using countries.