Russel Wallace : Alfred Russell Wallace (sic)
Now, the whole of this I maintain to be erroneous. There is no monopoly of money, and no scarcity; and neither workers nor producers of any kind suffer loss or inconvenience to any appreciable amount from such alleged scarcity. This is a subject which has been so obscured by vague generalisation and a misleading terminology that it is necessary to come down to plain concrete facts in order clearly to see what happens.
If, owing to some continuous increase of business, an increasing amount of money (gold and silver) is required for payments of weekly wages, &c., and the banks have any difficulty in supplying the amounts needed, any of the largest houses who are inconvenienced may purchase gold and send it to the Mint to be coined; but usually the Bank of England does this, because it first feels the scarcity, and the coinage goes on till the supply of coin in circulation is found to be sufficient. So, when silver and copper coin become scarce, and the Bank of England cannot supply the increasing demand of their customers, they apply to the Mint, which then coins more silver and copper till the demand ceases. The supply of metallic money is therefore strictly regulated by the demand; the Mint exists for the purpose of supplying the demand, and no scarcity that can affect producers to any perceptible extent ever occurs.
And on the side of the producers and workers the same result is everywhere seen. Anyone who holds goods or produce of any kind for which there is an efficient demand can always sell it for cash, at retail prices if he takes it to market himself; at wholesale prices if he prefers selling it to a merchant or dealer. No doubt the dealer will sometimes say that he has no money and will offer to buy the goods on credit; but that is not in any way due to there being any real scarcity of money in the country, but to the unsound credit-system on which almost all business is carried on, so that the money the dealer is receiving every day from his customers has to be saved to meet bills periodically falling due. Were there double the amount of money in circulation, the man who carries on his business by credit, and in competition with wealthier and larger dealers, will always be short of money.
People are deceived by the terms "money market," "dear money," "cheap money," &c.; but these terms have no application to the quantity of money in circulation, but solely to the amount of interest charged for loans on personal security and of discounts on bills; and this depends on the general stability of trade, which again is dependent on politics, on the prospects of war, on the amount of speculation, and other similar causes, but has nothing whatever to do either with the quantity of money in circulation, or the amount of wealth and credit in the country. Often, indeed usually, when money is said to be "dear," any amount of money can be had at very low interest on good security, or for sound enterprises.
It must not be supposed that I think our system of money and finance is a good one; quite the reverse. But I maintain that the imperfection of the system does not directly affect workers or producers. The whole amount of gold and silver in our current coin is so much loss to the country, and a sound system of credit-notes might well take its place, but this would make practically no difference to producers. Whether a man receives 40s. for his week's labour or a credit-note for the same amount, it is the same to him, if the two sovereigns and the credit-note are alike in purchasing power. If it is said that, by means of co-operative stores and credit-notes, he will be able to purchase more for the same nominal amount than if he is paid in money, that has not been proved. With co-operative stores in full working order which would receive his produce at fair wholesale prices and sell him goods at fair retail prices, he would no doubt obtain a considerable advantage; but the advantage would be due to the co-operation, and the small margin of difference between wholesale and retail prices not at all, or if at all, in an infinitesimal degree, to the use of notes instead of money. That the amount saved by not using metallic money would be very small, if perceptible, can be shown in two ways. (1) For a long time, at all events, the stores must have a considerable money capital to buy the various goods not produced by the co-operators. (2) The amount of the money required as permanent cash capital would be very small compared with the whole business done, because every day and hour, on the average, more money would be received for sales than would be paid out for purchases, and thus a very small permanent cash balance would suffice to guard against the purchases in any one day or week exceeding the sales; and this sum, as compared with the total amount of the sales in the year, would be quite insignificant.
It appears, then, that the supply of coined money is always such as to satisfy the demand, acting automatically by the agency of the Bank of England and the Mint. There is, therefore, never any scarcity of the circulating medium. For the same reason, monopoly of it is impossible, since the first attempts at a monopoly would lead to increased coinage, and the monopolists would then have to export their hoarded gold or turn it into bullion at a loss.
It is also clear that the actual amount of money in circulation, though absolutely large, is, relatively, exceedingly small, when compared with the amount of work it does. Every sovereign probably buys a hundred pounds' worth of goods in a year, and the very same sovereign may go on buying for fifty, or even a hundred, years, so that although the total amount of coin in circulation is enormous, yet it is a very small fraction as compared with the exchanges it facilitates before it is worn out or replaced, and thus the saving effected by the universal use of credit notes might probably not average a shilling a year to each worker. I think I have now shown that there is, as a fact, no monopoly, no artificial scarcity, no restriction, no hocussing of the circulating medium as it affects the workers; while for traders and merchants on a large scale the supply of banknotes, cheques, bills of exchange, &c., &c., is unlimited. In the case of this form of money it is undue inflation, never restriction, that produces evil results.
The use of metallic money as a standard is also disadvantageous on account of fluctuations in the intrinsic value of gold or silver as compared with other commodities; but these fluctuations are certainly not great or rapid in the case of gold, and do not therefore affect the workers, because any changes arising from this cause will affect both wages and prices in the same way. The only real and important evil of our financial system is due, as stated in my former letter [[S552--Ed.]], to the existence and continual increase of interest-bearing funds, bonds, and shares, which not only encourages that form of gambling termed financial operations, but enables the surplus savings of each year to be permanently invested, and thus increases year by year the number of persons who are able to live in idleness upon the labour of the productive workers, and therefore to their injury and impoverishment. It is for this reason that the continuous increase of our commerce and our wealth is, and must necessarily be, accompanied by a corresponding increase of poverty and starvation. This I have demonstrated by indisputable facts in my recent work "The Wonderful Century," and it is the one thing above all others that should be continually brought before the public, till it at last penetrates the thick armour of optimism with which the middle and upper classes, and especially politicians and the literary, artistic, and scientific cliques, protect themselves against the contemplation of the terrible realities and heartrending miseries which are the necessary results of our barbaric competitive system.
A Complete System of Paper Money
A gold currency is supposed to be necessary in order that we may have money which is a measure of value as well as a tool of exchange. It is, however, now admitted that gold is not a permanent and stable measure of value, though I believe it is much more nearly so than is generally supposed. Most of the money specialists believe that for many years past the value of gold has been rising, basing their conclusion on the continual reduction in price of most commodities. But it is evident that the price of goods may be greatly reduced by improved machinery and production on a larger scale, and it seems to me that in the case of most of our manufactured goods this cause alone is sufficient to have reduced prices much more than they have actually been reduced; and in that case gold will have diminished, not increased in value, as the enormously increased production during the last half-century would lead us to think it should have done.
The usual objection to paper money is that it will change in value according to the amount issued, as is well seen in all countries where the Governments have tried to raise funds by such over-issues. This is quite true; but it is this very property of paper money that makes it easy to keep its value stationary, and, therefore, renders it, when the issue is properly regulated, a better and more stable measure of value than gold, or than any single commodity whatever. How this stability can be attained, I will now endeavour to explain.
Stability, or equality of purchasing power at different times, can only be known by the same nominal amount of money--say, £100 or £1,000--being able to purchase the same quantities of all the chief necessaries of life on the average. Luxuries used by the few--ornaments, jewellery, works of art, &c.--may be left out of consideration. As necessaries of life, we may take the four great groups of food, clothing, houses, and fuel; and each of these may be represented by a limited number of the most important items, as bread, meat, potatoes, sugar, tea, and beer, to represent food; timber, iron, bricks, and glass for houses, or a larger number of items if thought advisable by experts. Having fixed upon the list of commodities--perhaps 50, perhaps 100, in all--which are considered to be amply sufficient as the basis of an estimate of the purchasing power of money, the next step will be to estimate the proportionate quantity of each consumed in the whole kingdom, or in some representative part of it, during a year. This is necessary in order to give to each its proper weight in the estimate; for if 100 tons of A and 1,000 tons of B are used per annum, it will lead to very erroneous conclusions if we were to use equal quantities of each in our estimate, and I believe that this very mistake has been made in the estimation leading to the conclusion that gold has for many years been appreciating in value. Having now got our typical list of commodities with the proportionate quantities of each, we next have to get the average price for a series of years--seven, ten, twenty, or whatever number may be fixed upon as the basis on which to calculate the standard purchasing power of our new national currency. All these facts can be got at with sufficient accuracy by means of agricultural and commercial statistics and market prices. When completed, a table will be constructed something in this form:
Proportions of standard products consumed, and their value on the average of seven years--1890-1896.
These proportions and prices are put down at a mere guess, but when obtained as accurately as possible for the whole of the 50 or more commodities chosen, we shall have, as a result, that these quantities of these commodities have, on the average of the last seven (or 10 or 20) years' cost a certain gross sum. Now, what I maintain is, that paper money (called credit-notes, or anything you like) can be so issued as, for any number of years, to continue to purchase the same quantities of this whole series of commodities for approximately the same nominal amount. Some of the items will, of course, rise in value from one year to another, and others will fall: but the paper currency will always, within very small limits of variation, purchase the same total amounts.
To do this, a Minister, or Commissioner of Currency, with a sufficient staff of clerks, will be appointed, whose duty it will be to have regular returns made of the market prices of the standard commodities week by week, and to have the averages calculated. If during any month or quarter these averages are seen to fall continuously, that is, everything becomes cheaper, he will advise the Treasury to issue more notes which they will bring into circulation (by using them to pay salaries and current expenses) till the fall is checked and the true average reached. When, on the other hand, the standard goods show a rise in price, it indicates that there is a slight surplus of the currency, which is to be checked by cancelling old notes as they come back to the Treasury. This process could be so nicely regulated that, practically, there would be no rise or fall of prices on the average, since either would be remedied before it could possibly be detected by the public.
Here, then, we should have a most useful and portable currency--which could be issued for any amounts in very thin but tough cards about the size of railway tickets, and of different colours for the different denominations--and which would be a stable measure of value as well as a convenient instrument of exchange. And it would have the great advantage of working almost automatically and preserving an unchanged purchasing power by the very act of supplying the demands of the community. And as, with an increasing population, more and more currency would be required, and as many small notes would be lost, burnt, or otherwise destroyed, this currency would be a constant source of revenue to the Government.
During the process of change from metal to paper the gold paid into the Treasury for taxes, duties, stamps, &c., would be accumulated, and form a reserve fund for pressing purchases from other countries in case of war. But the great point is, that by regulating the amount of notes issued in the way above described, this money would become a real measure of value, which gold can never be so long as its production is a matter of private speculation, and its cost, and consequent value in exchange, liable to indefinite variation.
Wallace's brief forays into monetary economics are a good illustration of the intellectual energy with which he approached any problem: analyse it, cut it down to its essentials, come up with a technical solution and, last but not least, advocate it. That Wallace was interested in monetary reform is not generally known. Yet his contribution to price index numbers was noticed long ago by the great twentieth monetary theorist Irving Fisher.
Fisher's book, Stabilising the Dollar (Macmillan, New York, 1920), was dedicated to "those who have anticipated me in proposing plans for stabilizing monetary units," Wallace meriting the heaviest type-face of the three named anticipators. A few years later he again recorded Wallace's contribution. "In 1898 another well-known Englishman, Alfred Russel Wallace, the naturalist, advocated the use of an index number in order to arrive at a stable currency, which, as he explained, could well be in the form of an inconvertible paper currency. In the opinion of this man of science, the index, representative of the necessaries of life, should include: 'Food, clothing, houses, fuel and literature'" (Fisher, Stable Money, Adelphi, New York, 1934, p. 47).
Wallace's contribution to the theory of index-numbers was essentially as just described by Fisher. After the table that was part of his 1898 illustrative example (given above in S556) he writes: "These proportions and prices are put down at a mere guess, but when obtained as accurately as possible for the whole of the 50 or more commodities chosen, we shall have, as a result, that these quantities of these commodities have, on the average of the last seven (or 10 or 20) years."
However, one would not expect Wallace to have made a mere technical contribution isolated from wider economic and social issues. So, was there a wider context? Indeed there was: index number calculation was just part (though an essential part) of Wallace's approach to monetary economics. This is how it fitted in.
Gold was not a satisfactory basis for a currency because it was both wasteful and unstable. His powerful attack on gold delivered during a Presidential Address to the Land Nationalisation Society (S380, 1885) foreshadowed Keynes's much later attack. It would be much better, argued Wallace, to adopt a wholly paper currency. However, a paper currency (with no gold or silver standard) was rejected by almost all economists and, indeed, by a Royal Commission. A fundamental objection was the possibility of over-issue: but Wallace was rather good at meeting objections.
Wallace believed that the target of monetary policy should be a stable price level. Having established a target (stable prices) and a measure (the weighted price index) the next component was institutional: an independent body (a Minister, or Commissioner of Currency, with a sufficient staff of clerks) should be set up with instructions to control the issue of paper money in such a way that a stable price target would be achieved.
Taken together, Wallace's proposals constituted a very clear programme which anticipated some of the key features of operating a credible paper currency--a price level target and an independent control mechanism. The modern reader might, until very recently, have concluded that Wallace's scheme was uncannily like the model whereby the central bank independently makes monetary adjustments so as to pursue a target rate of inflation.