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Alfred Russel Wallace : Alfred Wallace : A. R. Wallace :
Russel Wallace : Alfred Russell Wallace (sic)

Paper Money as a Standard of Value
(S557: 1898)

Editor Charles H. Smith's Note: Printed in the Academy of 31 December 1898. Wallace's observations, later noted by the leading American economist Irving Fisher, turned out to be a significant precursor to twentieth century discussions on currency stabilization theory. Fisher went so far as to dedicate one of his books (Stablizing the Dollar) to Wallace. Original pagination indicated within double brackets. To link directly to this page, connect with: http://people.wku.edu/charles.smith/wallace/S557.htm

    [[p. 549]] The proposition embodied in this heading will seem to most persons to be an absurdity; but I hope to be able to show from the statements and admissions of orthodox authorities that paper money, under proper regulations, would be the most permanent, and therefore the best, possible standard of value. I presume that the late Prof. W. Stanley Jevons was a trustworthy authority on the subject; and in his volume on Money and the Mechanism of Exchange he gives some important facts and principles bearing upon this question, and these I shall take as the basis of my argument.

    1. He shows that gold has undergone great changes of value during the last hundred years, as determined from the average prices of fifty or a hundred of the chief necessaries of life. The difference amounted to a fall of 46 per cent. from 1789 to 1809; while from 1809 to 1849 it rose 145 per cent. Since 1849 it fell about 20 or 25 per cent.; while in the last twenty or thirty years all the authorities declare that it has risen considerably.

    2. Having thus shown that gold does not even approximate to a permanent standard of value--though I believe the alleged fluctuations are enormously exaggerated, for reasons which it would take too long to give here--he goes on to explain the various proposals which have been made to obviate the evils of such fluctuations by means of a "Tabular Standard of Value." A Government official--who might be called the Registrar of Prices--would collect the market prices of the list of commodities fixed upon to determine the value of money, and would publish the result monthly or quarterly, and the value of money so determined would be used to regulate all payments of debts, salaries, &c. "Thus, suppose a debt of £100 was incurred on July 1, 1875, and was to be paid July 1, 1878, and the Registrar's table showed that in that interval gold had fallen in value six per cent., then the creditor would claim to be paid an increase of six per cent., while, if there had been a rise in the value of gold then the debtor would have a right to pay proportionally less than the amount nominally due."

    He says there are only two difficulties--the determination of the commodities chosen to fix the standard value, and the complexity introduced into the relations of debtors and creditors. The latter is, no doubt, a real objection, but it does not arise (as I shall presently show) when paper money alone is used. Neither is there any real difficulty in the former. What is needed is to take a representative selection of all the necessaries of life. These may be roughly classed as food, clothing, houses, fuel, and literature. For the first we might take meat, bread, potatoes, sugar, tea, butter, and beer; for houses timber, bricks, iron, glass, lime, cement, slates, and building land--and so on under the other headings. But the most important consideration is, that each item be taken in the proportion in which it is consumed in the country. This was seen by the original proposer of this method--Joseph Lowe, in 1822--but has been neglected by some modern writers. It would, therefore, be necessary, first to estimate the total quantities of each item consumed in the kingdom in a year, and then, representing the smallest quantity by one or ten, to give all the others their due proportions. The prices of these several commodities being ascertained on the average of a number of years to be fixed upon, a table would be formed, giving the money-value of the due proportion of each of the commodities. Then, by adding up these values, we should have a sum total which would represent with considerable accuracy the average cost of all the chief necessaries of life in the proportions in which they are consumed by the whole community. In order that money may retain the same purchasing power, and thus constitute a real standard of value, this same amount of money must always purchase the same amounts of all these commodities. This can never be the case with gold or silver money, or with the two combined, but I will now show that paper-money may be so regulated as to have always the same purchasing-power.

    Prof. Jevons states the chief objections to inconvertible paper-money as follows:

    1. The great temptations which it offers to over-issue and consequent depreciation.

    2. The impossibility of varying its amount in accordance with the requirements of trade.

    The first of these objections does not arise when the whole purpose of adopting a paper-currency is to secure a permanent standard of value. The second objection must have been stated without due consideration, since nothing is more simple than to produce this "variation of amount"; and when the variation is such as to keep average prices steady, that steadiness will exist because the quantity issued is in accordance with the requirements of trade. This objection, which is stated at length under the heading "Want of Elasticity of Paper Money" (p. 237), is really [[p. 550]] completely answered by the method of the tabular "Standard of Value" (p. 329), but the two things are not brought together.

    In order to show how Prof. Jevon's "impossibility" may be easily overcome, let us suppose the transition period to have been passed over: all gold coin being called in or having ceased to be a legal tender, and the paper-currency issued to the same amount. The Registrar of Prices, having determined that during the preceding year the purchasing power of this money is two or three per cent. greater than that of the standard as determined by his table of average values, and having had experience of the effect produced by a given increase or diminution of the currency, instructs the Mint to issue fresh money at a given rate per week. This money is sent to the Treasury and is at once brought into circulation by being paid away in salaries, wages, purchase of materials, &c., in the various Government departments. There is thus no difficulty whatever in increasing the amount of the currency and thus diminishing its purchasing power. The Registrar of Prices carefully watches the effect upon the markets week by week, and month by month, and when he sees that the standard is very nearly attained he instructs the Mint to stop further issues. On the other hand, when prices are rising, owing to there being rather more money in circulation than is necessary, instructions are sent to the Treasury to cancel a certain amount of the money paid in for taxes, stamps, &c., till the balance is restored. But this will very seldom, perhaps never, be necessary. The continuous increase of the population requires a constant increase in the currency, while another constant renewal is required to make good the losses by fire, water, and other accidents. And as the amount required to keep average prices steady would be so carefully watched, the mere stoppage of the normal issues would in most cases suffice to bring back average prices when they showed any tendency to rise above the standard amount.

    The total gain to the country of such a currency would be very great. All the additions required to keep up with increase of population and to make good losses would be clear gain, and would probably amount to a considerable annual revenue; while during the transition from gold to paper an enormous amount of coin would be accumulated by the Treasury which might be kept as a reserve against foreign war expenses, or might be supplied to merchants as bullion of guaranteed quality for foreign payments. Silver and bronze coins for wages and small transactions might be continued in use, as they are both customary and convenient, but their actual value in metal might be reduced, thus giving a larger profit to the Government on their issue than there is now.

    A convenient form for the £1 and £5 notes would probably be very thin tough cards of the size of railway tickets, and of different colours. They would thus be very portable and easily distinguishable. They would be the legal tender of the country, and would always purchase, on the average, the same quantities of the chief necessaries of life. They would thus constitute a permanent standard of value--the ideal perfection of money; and would have the additional advantage of being a steady source of revenue to the country.

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