The A B C of Finance

The Evil of a Depreciating Currency

LESSON X.

At this stage the reader may ask, What harm if the currency does depreciate? What difference whether it takes two or two dozen paper dollars to buy a pair of shoes, so long as they pass current? To answer this question fully would require me to write a large book. The history of mankind for the last two centuries is full of examples showing that a depreciating currency is the greatest source of injury to the business of a nation, being nothing less than a national calamity. A brief summary of the most obvious evils is all we now have time for.

1. People are constantly bargaining for the sale of their goods or their services in exchange for a certain number of dollars, to be paid them at some future time. Salaried men and laborers engage themselves by the day, the month, or the year. Economical people put money in the savings-bank, to be repaid, perhaps, at the end of many years. All these arrangements are made under the belief that the dollars you are going to receive will buy you, on the average, as many of the means of living as they will now. If you are to be paid in gold dollars, you may be morally certain that your expectations in this respect will be fulfilled, because the experience of mankind in all ages has shown that the purchasing power of gold is never subject to great and rapid fluctuations. But if you are to be paid in paper dollars, no man knows what they will buy. The laborer will find, week after week, that prices rise so fast, his wages will buy less and less for his family. If the policy is once adopted to issue all the paper dollars that may be required by commerce, it is not only possible, but highly probable, that thirty of them would not, twenty years hence, buy a decent meal. See scale of prices in Hayti, for example, where this policy has been adopted. What does the proposed paper money bond amount to? It will say that the United States will pay the bearer one hundred dollars. What does this mean, on the new plan? Simply this:

On demand the United States promises to print and stamp for the bearer one hundred paper dollars, and does hereby guarantee that the said papers shall be called dollars everywhere in this country.

If the United States also guaranteed that these dollars should buy some specified portion of the necessaries of life—forty pounds of flour, or eight pounds of beef, for example—the promise might amount to something. But when all reason and all experience show that the paper dollars will probably lose nearly all power of purchasing, who will agree to take them? Is it right for the Government to adopt a policy which will end in the bitter deception of all its citizens who do not know the difference between gold and paper dollars?

2. The second evil of depreciating paper is, that it necessarily enriches speculators at the expense of the rest of the community. The sharp speculator is no theorist. He knows exactly what the effect of depreciating paper is, and takes advantage of it. He buys goods on credit, and holds them until their prices rise, then sells them, and pays off his debt with a part of the proceeds, pocketing the balance as profits of the operation. Of course great business activity is thus produced. The manufacturer hires operatives at present prices, well knowing that the goods they produce will rise on his hands so as to yield him a handsome profit. The operatives receive their pay in depreciated dollars, and are the real sufferers.

3. The third evil is, that extravagance is fostered. Sudden fortunes are made by speculation, while no one really feels any poorer. The salaried man finds it hard to make both ends meet; but, as he gets his usual income, he must not complain of the high prices. Property of all kinds rising in price, property-holders are at first very much pleased. They do not clearly see that the rise is due to the fact that the dollars by which the value is estimated are worth less than before. They are much in the position of a man who, having a handful of gold dollars, should be furnished with a pair of spectacles which made every dollar look like an eagle, and who, therefore, thinks he has suddenly increased his wealth ten times. If he is a goodhearted man, he spends some of his surplus in giving a feast to all his friends, and this is done by so many that we have almost an era of extravagance. Of course the extravagance has to be bitterly paid for.

4. The fourth evil of depreciating currency is, that it aggravates the very evil which it is designed to prevent, not only by making the rate of interest high, but by making it almost impossible to borrow money on any terms whatever. This may seem paradoxical, but it is a fact well proved by the bitter experience of those unfortunate people who have been attracted by the song of the paper-money siren. There are two reasons for this effect. One is, that, owing to the enormous nominal prices to which all goods mount under a system of depreciated paper money, more money is required to transact the business of the country just in proportion as more is issued. When everything costs twice what it now does, you must take twice as much money in your pocket when you go on a journey or make a purchase; and you would, from this cause alone, find money just as scarce as before. If your wife wants two or three hundred dollars every time she goes shopping, you need a large pile of money. But the principal reason is, that the constant rise in prices stimulates borrowing for the purpose of speculation, as just explained. When a large number of people are anxious to borrow all the money that can be had, and willing to pay a high rate of interest for it, money to borrow must be scarce. When every one is anxious to buy, and wants to borrow all the money he can get to buy with, a competition must send up the rate of interest.

All this is little more than history in brief. If the reader requires further details, he must read the financial history of the French Revolution, of the American colonies, of our own Revolution, and of business and gold speculation during the early years of our civil war. Indeed, I can hardly conceive of a reasonable man reading these histories, and remaining a believer in irredeemable paper money, any more than I can conceive of his wanting to drive across a ricketty bridge after knowing that every heavy vehicle which ever tried to cross it had fallen through and been destroyed. As very few of my readers will have time to consult these histories, I shall try, in a subsequent lesson, to give an idea of what they are. To those who desire to inform themselves farther, I commend such books as Gouge’s “Short History of Paper Money and Banking in the United States,” Sumner’s “History of American Currency,” and the financial chapters of Thiers’s “History of the French Revolution.”

When reason and history unite in showing such serious evils as the result of depreciating currency, and no fruits but such as turn to bitter ashes in the mouth, what shall we say to those ignorant or visionary men who promise a millennium under a paper-money system, telling you that there shall be no more panics and no more scarcity of money?