The A B C of Finance

The 3.65-Bond Plan

LESSON VIII.

Some advocates of paper money have a more or less dim perception of the fact that a paper currency, to have real value, must be redeemable in something. At the same time they are conscious that paying out solid gold is a very disagreeable thing to be obliged to do. So they have a most ingenious plan for redeeming the currency in something vastly better than gold, and which will cost the Government nothing but the trouble of printing it. This something is to be Government bonds bearing interest at the rate of 3.65 per cent., both principal and interest being payable in the same paper, to redeem which the bonds are issued.

Now, I must say at the outset that if the principal and interest of these bonds were payable in gold, and if the rate of interest were so high that capitalists would be ready to invest in them—if, say, it were five, or even four and one-half, per cent—there would be nothing absurd in the plan. It would, indeed, be subject to the fatal objection that the currency of the whole country would be liable to suffer from any political crisis which might prevent the payment of interest on the bonds, but even then the currency would be in no worse predicament than it is now.

But when it is proposed that both principal and interest shall be payable in the very currency to redeem which the bonds are issued, it is very hard to approach the subject with due gravity. Look at it a moment. You have your pocketful of greenbacks, each promising to pay you so many dollars. You take them to the Treasury, and ask them to be paid. You receive in return a bond, promising
“United States will pay the bearer —— dollars, with interest at 3.65 per cent. per annum.” You go for your interest, and you receive greenbacks:
“United States will pay the bearer —— dollars.” You ask for your principal, and you receive the very same old formula. Nothing are you ever to get but paper stamped,
“United States will pay the bearer —— dollars.” You can only choose between promises with interest and promises without interest
ad infinitum, the interest, you must remember, being also payable in promises.

What real value could such currency and such bonds have? As we have already seen, the value of bonds and notes of every kind is measured by that of the money in which they are to be paid. A bond payable in pounds sterling is worth more than one payable in the same number of dollars, because the pound is worth more than the dollar. A bond payable in gold dollars is worth more than one payable in paper dollars, in the proportion that gold is worth more than paper. The bonds being payable in paper, we cannot tell the value of them until we know the value of the paper in which they are to be paid. But we find that the value of the paper depends entirely on that of the bonds, because the notes are payable in nothing but bonds. You can exchange notes for bonds, and
vice versa, as long as you please, but can never measure the value of either except by trying how much bread and meat it will buy in the market.

The principles on which this ingenious system of finance are based need not be confined to money; they can also be applied to navigation, so as to prevent shipwrecks. A ship’s anchor frequently fails to hold her in a storm, and she may thus be driven on a lee shore. Scores of vessels are wrecked in this way every year. The new plan of anchoring, which is open to the world, is this: dispense with all such uncertain things as anchors, and send your ships out in pairs. Then, whenever your two ships—the
Eagle and the
Ocean Wave—are in danger of being blown on a lee shore in a gale of wind, lash the
Eagle firmly to the
Ocean Wave, so that the wind can’t move her an inch. Then, lash the
Ocean Wave firmly to the
Eagle, so that she cannot move either. Then the two ships will bid defiance to the storm, and their crews will look on calmly as they see those unwise captains who trust in anchors drifting by them. You see the principles involved. The
Eagle is the greenback, the
Ocean Wave the bond. The greenback is based on the bond, as the
Eagle is lashed to the
Ocean Wave. The bond is based on the greenback, as the
Ocean Wave is lashed to the
Eagle. And thus we have in navigation, as in finance, a “subtle principle,” which will regulate the movement of finance and of ships “as accurately as the motion of the steam-engine is regulated by its governor.”

There is still another point of view from which it is worth while to look at this important question. We have already had occasion to mention the fact, which every one of intelligence knows, that the money of all the world exchanges exactly according to the weight of gold in it, and according to no other standard. The pound sterling, for instance, exchanges for about four dollars and eighty-five cents in gold, not because either Congress or the British Government ever agreed just what the relative value should be, but because there is as much gold in one pound as in four dollars and eighty-five cents. Our gold dollar, again, is worth four German marks, because it contains that many times the quantity of gold. But on the new system of finance we are to ignore the gold basis entirely, and our paper dollar is to have absolutely nothing in common with the gold dollar except the name. Does it seem to you that this paper dollar, which has nothing to do with gold, should be worth twenty-three grains of gold just because in former generations we used to put that much gold in a coin of the same name? You might as well think that if Congress would only stamp a piece of paper
“This a loaf of bread,” you could eat and digest it. The fact is, there is no more reason why it should buy twenty-three grains of gold in the markets of the world than ten grains or one grain. Its purchasing power might begin with fifteen or twenty grains, but it would be sure to sink from year to year to no one knows where.

Some may say, What difference does it make to me how much gold a dollar will buy? Let those who want gold pay the market-price for it. I answer that we are to consider not merely the quantity of gold which the paper dollar will buy, but the quantity of flour, beef, and shoes. Would you feel perfectly safe in binding yourself to give forty pounds of flour or three hours’ work, a year hence, to any one who would agree to give you in exchange a piece of paper stamped “One Dollar” by act of Congress? If you are prudent, you certainly would not.