[Liberty, June 13, 1891.]

Readers of Liberty will remember an article in No. 184 on The Functions of Money, reprinted from the Galveston News. In a letter to the News I commented upon this article as follows:(80 ¶ 1)

I entirely sympathize with your disposal of the Evening Post’s attempt to belittle the function of money as a medium of exchange; but do you go far enough when you content yourself with saying that a standard of value is highly desirable? Is it not absolutely necessary? Is money possible without it? If no standard is definitely adopted, and then if paper money is issued, does not the first commodity that the first note is exchanged for immediately become a standard of value? Is not the second holder of the note governed in making his next purchase by what he parted with in his previous sale? Of course it is a very poor standard that is thus arrived at, and one that must come in conflict with other standards adopted in the same indefinite way by other exchanges occurring independently but almost simultaneously with the first one above supposed. But so do gold and silver coins come in conflict now. Doesn’t it all show that the idea of a standard is inseparable from money? Moreover, there is no danger in a standard. The whole trouble disappears with the abolition of the basis privilege.(80 ¶ 2)

The News printed my letter, and made the following rejoinder:(80 ¶ 3)

It will occur that in emphasizing one argument there is such need of passing others by with seeming unconcern that to some minds other truths seem slighted,—truths which also need emphasizing perhaps in an equal, or it may be, for useful practical reasons, in a superior degree. The News aims at illustrating one thing at a time, but it is both receptive and grateful to those correspondents who intelligently extend its work and indicate useful subjects for discussion, giving their best thought thereon. A Boston reader, speaking of the standard of value, states an undeniable truth to the effect that without a thing or things of value to which paper money can be referred and which can ultimately be got for it, such money would be untrustworthy or worthless. The News in a past article was discussing primary commerce and the transition to indirect exchange. No agreed standard for valuation is needed while mere barter is the rule; but it is indispensable as soon as circulating notes are issued. The vise of the greenback theory is that the notes do not call for anything in particular, and so, if their volume be doubled, their purchasing power must apparently decline one-half. A note properly based on gold, silver, wheat, cotton, or other commodity has a tangible security behind it. The one thing may be better than the other, but the principle is there in all. It is, however, a notable truth that the standard for valuation can be nothing better than an empirical one. Like mathematical quantities, value has no independent existence, but, unlike mathematical quantities, value has not even existence as a quality of one object. It cannot be compared to a measure of length, which possesses the quality of extension in itself. Gold is assumed to vary little in relation to other things, and they to vary much in relation to gold. Nobody can know how much gold does vary in the relation. The notable steadiness is in the amount of labor which will produce a given quantity and the length of time which it will last. The basis of the assumed steadiness of gold is thus found. But if the standard for use in making valuations be confessedly empirical and value an elusive quality not of things separately, but of things in relation, there is a countervailing difference between a standard of length and a standard of value, which results in disposing of the objection that the standard is empirical. Why would it be a serious objection to a yardstick if it were longer or shorter from day to day? Because thus the customer would get more or less cloth than was intended. But why is that? Because the function of the yardstick is to measure for delivery as great a length of cloth as its own length. But now let us visit a bank or insurance office. We want a loan of circulating notes or a policy of insurance. The property offered as security is valued. Assume that gold is taken as the standard, and that the loan or the policy is for $600 on a valuation of $1,000. It is no matter in these cases if the standard varies, provided it does not vary to exceed the margin between the valuation and the obligation. The property pledged is merely security for the loan, or, in the case of insurance, the premium paid is a percent of the amount insured. The margin between the valuation and the loan is established to make the loan abundantly safe. The policy is safely written through the same expedient. The empirical standard of value has a needful compensation about it which the yardstick or other measure neither has nor needs,—viz., the valuing goods does not deliver them. It is provisional. In case of default in paying back the loan, the goods are sold and the same money borrowed is paid back, but the residue goes to the borrower. It is therefore an efficient compensation for the lack of an invariable standard of value that the actual standard in any case is simply used as a means of estimating limits within which loans are safe. All danger is avoided by giving the borrower the familiar right in case of foreclosure. It is sometimes a fine thing to discover distinctions, but it is frequently a finer thing to discover whether or not the distinctions affect the question.(80 ¶ 4)

While not hesitating for a moment to accept the News’s explanation that, when hinting that a standard of value is not indispensable, it was speaking of barter only, I may point out nevertheless that there was a slip of the pen, and that the words actually used conveyed the idea that something more than barter was in view. Let me quote from the original article:(80 ¶ 5)

It is manifest that a medium of exchange is absolutely necessary to all trade beyond barter. A standard of value is highly desirable, but perhaps this is as much as can be safely asserted on that question.(80 ¶ 6)

It seems to me a fair interpretation of this language to claim the meaning that in trade beyond barter it is not sure that a standard of value is absolutely necessary. And this interpretation receives additional justifications when it is remembered that the words were used in answer to the Evening Post’s contention that, in comparing the two functions of money, its office of medium of exchange must be held inferior to its office of measuring values.(80 ¶ 7)

However, the News now makes it sufficiently clear that a standard of value is absolutely essential to money, thereby taking common ground with me against the position of Comrade Westrup. Still I cannot quite agree to all that it says in comment upon the Westrup view.(80 ¶ 8)

First, I question its admission that a measure of value differs from a measure of length in that the former is empirical. True, value is a relation; but then, what is extension? Is not that a relation also,—the relation of an object to space? If so, then the yardstick does not possess the quality of extension in itself, being dependent for it upon space as gold is dependent for its value upon other commodities. But this is metaphysical and may lead us far; therefore I do not insist, and pass on to a more important consideration.(80 ¶ 9)

Second, I question whether the News’s countervailing difference between a standard of length and a standard of value establishes all that it claims. In the supposed case of a bank loan secured by mortgage, the margin between the valuation and the obligation practically secures the note-holder against loss from a decline in the value of the security, but it does not secure him against a loss from a decline in the value of the standard, or make it impossible for him to profit by a rise in the value of the standard. Suppose that a farmer, having a farm worth $5000 in gold, mortgages it to a bank as security for a loan of $2500 in notes newly issued by the bank against this farm. With these notes he purchases implements from a manufacturer. When the mortgage expires a year later, the borrower fails to lift it. Meanwhile gold has declined in value. The farm is sold under the hammer, and brings, instead of $5000 in gold, $6000 in gold. Of this sum $2500 is used to meet the notes held by the manufacturer who took them a year before in payment for the implements sold to the farmer. Now, can the manufacturer buy back his implements with $2500 in gold? Manifestly not, for by the hypothesis gold has gone down. Why, then, is not this manufacturer a sufferer from the variation in the standard of value, precisely as the man who buys bloth with a short yard-stick and sells it with a long one is a sufferer from the variation in the standard of length? The claim that a standard of value varies, and inflicts damage by its variations, is perfectly sound; but the same is true, not only of the standard of value, but of every valuable commodity as well. Even if there were no standard of value and therefore no money, still nothing could prevent a partial failure of the wheat crop from enhancing the value of every bushel of wheat. Such evils, so far as they arise from natural causes, are in the nature of inevitable disasters and must be borne. But they are of no force whatever as an argument against the adoption of a standard of value. If every yardstick in existence, instead of constantly remaining thirty-six inches long, were to vary from day to day within the limits of thirty-five and thirty-seven inches, we should still be better off than with no yardstick at all. But it would be no more foolish to abolish the yardstick because of such a defect than it would be to abolish the standard of value, and therefore money, simply because no commodity can be found for a standard which is not subject to the law of supply and demand.(80 ¶ 10)