Sunday, July 04, 2010

Cheap-Money Experiments in Past and Present Times

THERE are a few elementary principles in economic science the mastery of which by
the great body of the American people would be of incalculable value to us as a nation. One of
these is that no government can create money out of anything which it may choose to call money.
Another is that all classes of the people, rich and poor, laborer and employer, are far better off with
a sound and stable currency than they are with any of the varieties of "cheap money." Another
is that no part of the financial or business world can be benefited or injured by changes in the
monetary standard of value without corresponding benefit or injury to the other parts.
Still another is that the larger part of the business of the country is transacted upon credit, and that
anything which tends to disturb or to foreshadow disturbances of the monetary standard of value
cripples credit and demoralizes all business. Finally, though we have by no means exhausted the
list, it would be of the highest importance for the common people to become thoroughly convinced
of the fact that in every instance in which the financial world is disturbed by changes or threats
of changes in the standard of value the sufferers are always the poorer people and the beneficiaries
always the rich, for the latter are able to guard against the coming trouble which they are quick
to scent, while the former are powerless to take the necessary precautions even if they were able
to anticipate it.
The harmful delusion that the Government has the power to create money is traceable directly to
the Legal Tender Act of 1862. Previous to that time the American people, in common with those
of other enlightened nations, believed that the sole function of government in relation to money was
to certify to the weight and purity of the metal contained in it. This view, which, it is scarcely
necessary to say, has been shown by the experience of all civilized countries to be the only sound
one, was completely upset in the minds of thousands of uninstructed people by the issue of the
legal tenders and the subsequent decisions of the Supreme Court upholding the right of Congress
to make such issue. The pernicious doctrine that anything which the Government might choose to
stamp as money paper, or silver, or nickel, or copper became ipso facto money for the amount
named on its face obtained so firm a lodgment in the popular mind that calls began to be heard
from all quarters for the liberal issue of Government money in almost every form except gold.
The country has passed safely through several varieties of the "greenback craze," which was the
most radical and dangerous form of the delusion, but it has yet to reach the solid ground occupied
before the war. So long as the admission is allowed that the Government can create money
there is no satisfactory answer to be made to the questions, "Why should we have a gold standard?"
"Why should we have national banks ?"
or " Why should we have any limit put to the volume of our currency ?
" If the Government can create money, why should it not create all
that everybody wants? Why should anybody
work for a living?
We must get back as a people to a just comprehension of the truth that no government can make
an inferior form of money equal in value to a superior form like gold by enacting a law decreeing
that it shall become so, and that it cannot do. this for the simple reason that the superior form
costs more, and it is this cost which constitutes its value as a medium of exchange. The kind of
money which every man wants is the kind which will buy the most of the things which he needs
that is, have the largest purchasing power. Nothing is clearer than that cheap money means high prices,
and dear money means low prices. Cheap money is as costly for a nation as it is for an individual.
Mr. H. C. Adams has demonstrated very convincingly that the legal tenders made the expense
of our civil war greater by $800,000,000 than it would have been had they never been issued.

CHEAP-MONEY EXPERIMENTS
IN PAST AND PRESENT TIMES
REPRINTED, WITH SLIGHT REVISION, FROM
" TOPICS OF THE TIME" IN
THE CENTURY MAGAZINE

,1892

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