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The Pamphlet Collection of Sir Robert Stout: Volume 73

A Talk About Money

A Talk About Money.

I propose to continue the discussion of the subject at this stage by reading to you an unpublished dislogue between three New Zealand settlers:—

Smith—"What is the goo[unclear: d] coin? We cannot eat it; it is [unclear: n] clothing nor shelter. We need those things, but why should it be necessary to buy gold money in order [unclear: t] get them, I want to know?"

Jones—"You want to kno[unclear: w] lot! and more anyway than I can tell you. All I know is I cannot get aught at the store unless I produce the 'tin,' so it must be necessary and correct. To be sure they always take Bank notes, and will take a cheque sometimes, but it is supposed to be as good as gold, else it would not be taken. All the world goes on the same lines, and you must therefore have the gold."

Smith—"But gold is expensive to buy, and surely if the law fixed the value by placing the Queen's head on it, a piece of paper with the Queen's head on it ought to serve the same purpose. The gold in the page 9 sovereigns cannot itself make a better medium of exchange, for the simple reason that but for the stamp on it neither the timber merchant, the bootmaker, nor the grocer would want the gold, as they would have to sell it like any other products for coined money to use in their businesses. Gold is chiefly valuable because it is the metal chosen by law out of which to coin money. But for that it might not be worth more than silver or tin."

Robinson—"You are right, Smith. Gold is not necessary, and a cheaper kind of money would be of more use to the community, if the community only understood the importance of the" matter. It is difficult to get people to apply common-sense to this question, and to get rid of their erroneous impressions and prejudices. We have all for generations been brought up to look upon gold-money as indispensable—to consider that unless notes can be converted into gold 'on demand,' they can be of no value—and so we find it difficult to realise any other method as right or safe for effecting exchange among ourselves of articles required. And yet it is a curious, but absolutely certain, fact that there does not exist in any country in the world a twentieth part of the quantity of gold-money that would be necessary to meet the amount of Bank-notes and other promises to pay in circulation if payment were demanded. If all the Banks in New Zealand were called upon to pay up in gold, they would every one of them be bankrupt because the gold-money needed does not exist. Whenever a run on a Bank occurs, unless it is of a limited temporary character, the Bank has to close its doors and refuse to pay—in other words, it becomes bankrupt. So that the idea of the backing, or security of payment in gold, is a farce; the solvency of a Bank does not depend on such backing; it depends entirely on whether the public believe in the Bank and trust its management. A Bank, as presently existing in New Zealand, is simply a trading concern, which buys and sells money and credit for profit just as a merchant buys and sells grain. And this gold basis or backing is neither more nor less than a device by which the public are kept in ignorance of how they are bled to pay large dividends to, and create large reserve funds by, Banks and money-brokers out of the products and earnings of the public."

Jones—"You astonish me, Robinson; but I have not got a right grip of your arguments, and I am afraid people will not accept you as an authority. But let's have some more of your views. You know I go for what we have been used to, as the safe thing, and do not like newfangled notions."

Robinson—"You are a duffer, Jones; and there are crowds more like you in this country. Regular Hodges they are, who will go on with their horses and cattle and pigs from year's end to year's end, and never try to think. No wonder money does as it likes when it has such as you are to deal with. I will try to get a new idea into your head if possible. You are, however, far worse than the Scotchman, for it is only a joke he cannot see, while you will hardly take in plain fact. Last year you know you took some extra paddocks, because your stock was increasing, but not enough to stock page 10 up the land. Well, you went to the—————Bank, and you asked the manager for an advance to help you to buy some dairy cows. You got an overdraft from the manager, and he took security over your whole stock. The amount was £200, and the interest was 10 per cent. The security deed cost you £5 5s. You never got any gold-money from the Bank, but when you drew to pay for your purchase of stock, you got the Bank's 20s notes, or promises to pay on demand. The seller to you could have refused to take those notes in payment, because in this country, as in Great Britain, all debts over 40s are payable in gold-money only. But he considered the Bank good, and took the notes, and delivered to you the cattle. You see the Bank was safe, because it got security over your whole stock, and it got besides £10 per cent, interest for the use of its name or its notes. I think most of us would like to do that kind of business. Don't you think so? It would be better than following the plough or getting up at 3 a.m. to milk cows till your fingers are like to drop off with downright tiredness. Then, although a sound transaction is said to be 'as safe as the Bank,' you know we have had Banks toppling over info bankruptcy in Melbourne; and in New Zealand the Bank of New Zealand has had to be saved from the same fate, and from its enemies, by our Government stepping in to guarantee two millions for it. And suppose bankruptcy were to happen to your Bank, where would you be? You took its £200 in notes, and you are a debtor for that amount and interest. The money is immediately required, and money being 'tight' at the time, you cannot find the amount. Your stock would be seized and sold [unclear: fo] what they would fetch, and you would most likely be ruined, or at least seriously crippled. That would be rather a serious outlook, would [unclear: i] not? Why should you run that risk, or any risk? you may ask. And I say, why should you? But you do, all the same, and you were not aware of it, and perhaps only now dimly realise what may happen to you any day."

Jones—"I have always supposed Banks to be perfectly safe, and nobody ever dreams of not accepting the notes of a Bank in payment. As you say, however, one is apt to over-look all that by habit, and to be content with what is. It is to much trouble to think about all these questions. But how would you avoid the risks you speak of?"

Robinson—"Well, you know [unclear: I], may not be, certainly am not, regarded as an authority upon money questions. I have not written any book on the subject, and do [unclear: n] pretend to be able to do so; bu[unclear: t] have some judgment and common-sence which I can and ought to use and so ought you. And all boob particularly books on this subject, are not reliable either in their facts on conclusions. Often they are written to deceive. But I shall be able to give you some very high authorities for the way in which the risks referred to may be escaped. This brings me back to Smith's question 'Why should it be necessary to by gold-money in order to get thing[unclear: s] require?' I say we should no[unclear: t] obliged, and have no need to buy it And all that it is necessary to d[unclear: o] for Parliament to pass a law to create page 11 one State Bank for New Zealand, with power and instructions to issue State notes, small and large, sufficient for the internal trade and exchanges of the country, and to regulate and be responsible for the amount in circulation; to declare the same to be a legal tender for all debts and taxes; and to provide against the issue of any other notes in New Zealand. You see we have at least 700,000 people in New Zealand, who are all fed, clothed; housed and otherwise provided for out of what is produced in the country. If you allow £30 per head per year as a low average of the cost and expense of living, that gives a total consumption per annum of the products of the country equal to twenty-one millions sterlingin value. In addition to this there is the enormous amount of fixed property or realised wealth to deal with. To enable each person to get what he or she requires, a medium of exchange is necessary, and the State Bank's notes would form that medium, and would be used by every resident in New Zealand for that purpose. It is the Government fiat alone that creates money—legal tender—and paper money issued by Act of Parliament in a reasonable and proper manner (as all money whether metal or paper money ought to be), that is to say, against adequate spcurity only, and up to not more than say half market value of security, would be the best possible money any country could have. It would be 'as safe as the country,' which would be a great deal safer than 'as safe as the Bank.' Is not that good common-sense? And we have no business to acquiesce in anything—specially our monetary system—unless it commends itself to our common-sense. It is our duty to think the matter out each one of us, because the responsibility (and it is very great indeed) is ours, for we have to suffer the consequences of mistake in a matter so important to the well-being and prosperity of the country as a sound and cheap monetary system."

Smith—"You have made this question pretty clear to me, and I believe your proposal is a sound one. But what do you say as to paying interest? and perhaps you will let us have some authorities who support the proposal you have stated?"

Robinson—"Very well; I shall first give you some authorities, and afterwards state my views as to interest. Mr John Twells, a London Banker, being examined by a Parliamentary Committee in 1847 in regard to the failure of the Bank of England, gave the following evidence:—

"What do you consider the advantage of an inconvertible note over a conver. tiblo note payable to bearer on demand?" Answer: "It would prevent a drain of bullion when it is required for foreign trade, and it would, give us, what is very essential, a domestic currency which is not influenced by any foreign transactions whatever. If France or America want gold, that ought not to interfere with our domestic currency. Our merchants and all our trade ought not to suffer because America wants gold."

"Do you think that that currency would run the risk of ever being depreciated in value—that is to say, that inconvertible five-pound notes would not exchange for five sovereigns?" Answer: "I do not know us compared with sovereigns; that, I think, is of no consequence in the world. We want it for internal commerce, and we want it to pay Government our taxes."

page 12
David Ricardo, a great English Broker, and writer on Finance, writing at the time of the war with France, says:—

A well-regulated paper currency is so great an improvement in commerce, that I should greatly regret if prejudice should induce us to return to a system of less utility. The introduction of the precious metals for the purposes of money may with truth be considered as one of the most important steps toward the improvement of commerce and the arts of civilised life, but it is no less true that with the advance of knowledge and science we discover that it would be another improvement to banish them again from the employment to which, during a less enlightened period, they have been so advantageously applied . . . By limiting the quantity of coin, it can be raised to any conceivable value. [Hence its value does not reside in itself but in its quantity]. It is on this principle that paper-money circulates. Though it has no intrinsic value, yet by limiting its quantity its value in exchange is as great as an equal quantity of coin or of the bullion in that coin. . . .. .. On these principles it will be seen that it is not necessary that paper-money should be payable in specie to secure its value. .. ... .. ... It is evident, therefore, that if the Government were to be the sole issuer of paper-money, instead of borrowing it of Banks, the only difference would be with respect to interest—the Banks would no longer receive interest, and the Government would no longer pay it.

Professor Jevons, a high authority on Political Economy and Finance, writes:—

There is plenty of evidence to prove that inconvertible paper-money, if carefully limited in quantity, can retain its full value. . . . But there is abundance of evidence to prove that the value of gold has undergone extensive changes. Between 1789 and 1809 it fell 46 per cent., as I have shown in a paper on variations in prices since 1782; from 1809 to 1849 it rose in value 145 per cent.

J. R. McCulloch, the great Scotch Political Economist, writes as follows:—

It had been proposed previous to the suspension of the Bank of England in 1797 that Bank notes would not circulate unless they were convertible into cash, but the event showed, comformable to principles that have been fully explained, that this was not really the case. . . . Though the notes of the Bank of England were not publicly declared to be a legal tender, they were rendered so in practice by being received as cash in all transactions on account of the Government and of the vast majority of individuals. For the first three years after suspension they usually bore a premium in gold.

As no means have been found to limit the supply of promises to pay issued by private individuals, their value, it is plain, could not be maintained. But it is otherwise with the promisory notes issued by the State or by a Company acting under its control. The quantity of such notes may be effectually limited; and we have seen that when this is the case, intrinsic worth is not necessary to a currency, and that by properly limiting the supply of paper, declared to be legal tender, its value may be sustained on par with gold or any other commodity.

Being issued in such quantities as to preserve its value, relatively to the mass of circulating commodities, nearly equal, the precious metals might be entirely dispensed with not only as a circulating medium, but also as a standard to which to refer the value of such paper-money.

Professor Bonamy Price, Professor of Political Economy at Oxford, says:—

Experience has proved that it (inconvertible paper-money) need not suffer any depreciation in value . . . . The public has a certain definite want for notes to use in the daily operations page 13 of buying and selling. It is plain that the prohibition to pay the notes can make no difference in the extent of the use that exists for them:—so far as this reaches, it is immaterial whether the notes will or will not be paid on demand. . . . . Paper-money has a further superiority of great importance over specie: its comparative cheapness, combined with equal efficiency.

Surely my authorities are numerous enough and great enough to satisfy any reasonable man that the issue by Government of legal tender paper-money in sufficient, and not more than sufficient, quantity to serve the purposes of internal trade and exchange is by far the best and safest money. But let me add one or two more short quotations on the subject of the propriety of Government only issuing money rather than private Banks. Mr J. S. Lloyd, one of the highest English authorities on Finance, says:—

An adherence to sound principles would certainly lead to the conclusion that the issue of paper-money should be confined to one body intrusted with full power and control over the issue, and made exclusively responsible for the due regulation of the amount.

Mr John Earl Williams, the great Mew York Banker, President of the Metropolitan Bank, New York, said:—

I would suggest: That Congress assume at once the inherent sovereign prerogative of a Government "of the people, by the people, and for the people," and exercise it by furnishing all the inhabitants of the United States with a uniform national currency. Surely the people, and the people only, have a natural right to all the advantages, emolument or income that may inure from the issue of either $1 bonds with interest, or $10 notes without, based on the faith and credit of the nation.

That is what we need to do in New Zealand in order to foster industries and trade, and to facilitate the exchange of commodities among the inhabitants of the country. At present our Parliament is swelling up the Statute-book with regulative and restrictive legislation of all kinds—Arbitration and Conciliation Acts, Contractors' and Workmen's Lien Acts, Truck Acts, and what is called labor legislation generally—all of which, whatever their advantages, truly only serve to stop holes and leaks, as it were, in the body politic, at great expense. But if Parliament would only deal in a statesmanlike fashion with this monetary question, and one or two other great kindred questions, such as Land Settlement and Old-age, &c., Pensions, and remove in great measure, if not altogether, the causes which have produced results calling for much of such restrictive legislation, the real good of the people would be better cared for. As to interest: such money as I propose might be issued at a nominal rate to cover merely risk, if any, and cost of management; but I should rather propose that it be issued at say 5 per cent, interest, the nett profits after deducting expense of management and creating a reserve fund being applied towards pensions for the aged, the sick, widows and orphans. The question of pensions is now before the country, and the great difficulty is the financial one. I think the banking profits would be the least felt and easiest method of providing the needful. And it would not be grudged by anyone. I hope I have now satisfied you, Smith, and have brushed off some of the cobwebs page 14 from your slow brain, Jones. Don't you think I have?"

Smith—"Not quite so fast, though. Are you going to shovel money into the people's pockets without costing anything? And must not money represent value or work?"

Robinson—"Ah! You have for-gotten what I said—I said it would be advanced against adequate security. I do not propose to shovel money into anybody's pockets. I said there could be no money without work and labor. I would absolutely prevent capitalists from securing legislation which enables them by manipulation and contraction of the currency to shovel money into their pockets at the expense of the producers, and the inhabitants of the country, and I would at same time give the producers fair opportunity and facilities, by cheap State money, to carry on their industries successfully. I believe my proposal would so act as to practically put an end in this country to the commercial crises, the hard times, which recur so frequently—crises which are directly and undoubtedly a result of the gold standard, by manipulating which the money-brokers and bankers can regulate and control prices of products to the ruin of the producers and workers who depend on them I believe it would almost annihilate strikes in trades, which result mainly from manipulation of gold and lowering prices of products; anyway, and at the lowest, it would enable the producers to live and carry on in bad times as they could not possibly do under monetary conditions such as now exist. And—with good land settlement laws and old age, &c., pensions—the people of New Zealand would become the most contented people in the world'

Jones—"Well, it does look stupid and senseless in so many [unclear: o] us sitting down contented with things as they are, but you see wed not know the outs and ins of this business, and so we are, I suppose served as we deserve to be. I shall see and get my loan squared as quickly as possible."