Political Economy by J.C.L. Simonde de Sismondi (1815)

Chapter 5. Of Money

Wealth incessantly circulates from producers to consumers, by means of money. All kinds of exchange are accomplished under this form, whether the means of producing wealth are transmitted from one proprietor to another, or when land or movable capital changes its owner, or when labour is sold, or when the object destined to be consumed reaches the hands that are to use it. Money facilitates all these exchanges; it occurs among the different contractors as a thing which all desire, and by means of which every one may find what he immediately requires; as a thing, moreover, submitted to invariable calculation, and by means of which all other values may be appreciated, this alone being their scale.

Money performs several functions at once: it is the sign of all other values; it is their pledge and also their measure. As a sign, money represents every other kind of wealth; by transmitting it from hand to hand we transmit a right to all other values. It is not money itself which the day-labourer requires; but food, clothing, lodging, of which it is the sign. It is not for money that the manufacturer wishes to exchange his produce, but for raw materials, that he may again begin to work; and for objects of consumption, that he may begin to enjoy. It is not money which the capitalist lends the merchant to profit by; it is all that the merchant will purchase with this money immediately afterwards; for so long as the merchant keeps it in the original shape, he can draw no advantage from it, and his capital will not begin its course of production till the money is out of his hands. By an abuse of language, which has caused much error and confusion, the words money and capital have become almost synonymous: money indeed represents all other capital, but it is itself the capital of no man; it is always barren by nature, and wealth does not begin to increase, till after money has left the hands of its possessor.

Money is not only the sign of wealth, it is also the pledge of it. It not only represents wealth, it contains the worth of it. Like wealth, it has been produced by a labour which it wholly compensates. In work and advances of all sorts employed in extracting it from the mine, it has cost a value equal to what it passes for in the world. It furnishes to trade a commodity which is expensive; because purchased like every other, it is the sole kind of wealth which is not increased by circulation, or dissipated by enjoyment. It issues, still without alteration from the hands of him who employs it usefully, and of him who squanders it upon his pleasures. But the high price at which society acquires money, though at first view it appears an inconvenience, is precisely what gives it the merit of being an imperishable pledge for its possessors. As its value was not given by arbitrary convention, arbitrary convention cannot take its value away. It may be more or less sought after according as it occurs more or less abundantly in the market; but its price can never deviate very far from what would be required to extract an equal quantity from the mine.

Money, in the last place, is a common measure of values. Before the invention of money, it must have been very difficult to compare the value of a bag of corn with that of a yard of cloth. Dress was equally necessary with food; but the processes by which men procured them, seemed scarcely susceptible of being compared. Money has furnished a common and invariable unity to which every thing can be referred. Nations, who are not acquainted with the use of metals, have, nevertheless, so felt the advantages of this common measure that they have formed an ideal unity, to which they refer every kind of value.

The important part which money performs in political economy, and the various properties by which it animates exchanges, and protects and serves to measure them, explain the illusion which has misled, not only the vulgar, but even the greater part of statesmen, and exhibited this commodity in their eyes as the efficient cause of labour, and the creator of all wealth. It is essential for us, however, to pause here, that we may both display those errors in a clear point of view, and firmly demonstrate the principles which follow. In the epoch of civilization, at which we are arrived, no labour can be accomplished without a capital to set it in motion; but this capital, though almost constantly represented by money, is yet quite a different thing. An increase of the national capital is the most powerful encouragement to labour; but an increase in the circulating medium has not of necessity the same effect. Capitals co-operate powerfully in the annual reproduction of wealth, giving rise to an annual revenue; but money continues barren, and gives rise to no revenue. Indeed, the competition between those capitals, which are offered to accomplish the annual labour of the nation, forms the basis for the interest of money; but the greater or less abundance of the circulating medium, has no influence in the fixing of this interest.

Painful experience has shown all the inhabitants of Europe what a dearth was, and a period of general penury among a civilized people. At these mournful epochs, every one has heard it a hundred times observed, that it was not corn or food which was wanting, but money. Indeed, vast magazines of corn have often remained full till the next harvest; those provisions, if proportionably shared among the people, would have almost always been sufficient for their support; but the poor, having no money to offer, were not able to buy them; they could not, in exchange for their labour, obtain money, or at least enough of it, to subsist. Money was wanting, natural wealth superabundant. What phenomenon could appear more proper to confirm the universal prejudice which looks for wealth in money, not in consumable capital?

But the money, which is wanting in a time of scarcity, is the wage offered to the workman to make him labour. the wage, by means of which, he would have purchased a subsistence. The workmen never labour, except when some of those who have accumulated capitals, or in other words, the fruit of preceding labours, can profit from those capitals, by furnishing, on one hand, the raw material, on the other, a subsistence for the artisan. Labour cannot be carried on so as to produce any material fruit, any fruit capable of becoming wealth, without raw materials on which to operate; the workman cannot labour without food to support him; and, therefore, every kind of labour is impossible without a capital previously existing in objects of consumption, to furnish his materials and his wages; and, if the workman himself lay out these advances, it is because he combines for this little object, the two characters of capitalist and artisan.

As the workman requires a capitalist, so the capitalist requires workmen; because his capital will be unproductive if it continue idle; and the revenue which he expects and has to live upon springs from the labour which he causes to be executed. Hence, whenever he is occupied in a productive enterprise, he employs all his capital in causing labour, and leaves no part of it in idleness. If he is a cloth-maker, and has devoted ten thousand pounds to his manufacture, he does not stop till his ten thousand pounds are done, and he no longer has new sums to employ in the operation. If it be then asked why he stops, he will answer, like the workman, that money is wanting, that money does not circulate.

It is not, however, money which is then wanting any more than in the former case; it is consumption, or the consumer's revenue. On commencing his manufacture, the capitalist studied to adjust it to the demand; and he reckoned that as soon as his cloths should be ready, they would be purchased by consumers, whose money, the sign of their revenue, would replace his capital, and become the sign of subsistence to new workmen, to whom he would pay new wages. It is not money which the consumer is in want of, but revenue. Some have had inferior harvests this year; some have gained a smaller interest on their capitals, a smaller share on the annual re-production of the fruits of industry; others, who have no income but what arises from their labour, have not found employment; or else the whole three classes are not poorer than they were, but the manufacturer had imagined them to be richer, and regulated his production according to an income which does not exist.

Income, of which we have seen all the different sources in the second chapter, is a material and consumable thing; it springs from labour; it is destined for enjoyment; it is exactly of the same nature with the advances in wages and raw material laid out by the manufacturer; and money is but the sign and the measure of it. The capital it should replace is also composed of material objects, destined for consumption, and incessantly renewed. Money serves but to represent it, and always forms the smallest part of each merchant's funds. We have supposed the cloth-maker to possess 100,000 l.; but, it half this sum is employed in fixed capitals, it will be sufficient, if his sale amount weekly to 1200 l. to give him, in the shape of interest and profit, 20 per cent. on his circulating capital, and to allow 1000 l weekly, in money, to maintain an annual production of 60,000 l.; so that he never possesses in cash more than the fiftieth part of his circulating capital.

An increase of the national capitals is the most powerful encouragement of labour; either because this augmentation presupposes an augmentation of income, and, consequently, of means of consumption; or because these capitals, not being profitable to their proprietor, except as they are employed, each capitalist incessantly endeavours to create new production by their means. In distributing them to his workmen, he gives to those workmen revenue which enables them to purchase and consume the preceding year's production; and he sees those capitals return increased by the revenue, which he is to expect from them in the following year's production. But though he distributes and afterwards recovers them, by means of the circulating medium, which serves for all exchanges, it is not the circulating medium which forms the essential requisite in his operation. The same cloth-maker, labouring each year on an equal quantity, sends 2400 pieces of cloth to the market, which have been valued at 60,000 l. or 25 l. a piece. He exchanges 400 pieces for such objects of consumption as are needed to supply the wants, the enjoyments, the luxuries of himself and family. He exchanges 2000 pieces for the raw materials, and the labour which, within the year, are to re-produce an equal quantity; and thus next year, and every following year, he will have, as before, 2400 pieces to exchange on the same conditions. His capital, equally with his revenue, is actually in cloths, not in money; and the perpetual result of his commerce is to exchange cloth against cloth.

If the consumption of cloth is increased, if by this means his trade, in place of comprehending 2400 pieces annually, comprehends 3000, more labour will, no doubt, be ordered by him, and executed by his workmen; but if the money alone is increased, and not the consumption or the income which determines it, labour and production cannot increase. Let us take separately each one of his customers, as he calls them. There is not one of them who does nor levy a greater or a smaller portion of his income in kind, but all may arrange matters so as to receive the whole of it in money. They are not, however, more rich on this account; they will not be at more expense; they will not buy more cloth from him, and this trade will experience no kind of augmentation. What happens to individuals may equally happen to nations. The revenue of a country or the sum total of profits arising from the different kinds of labour, amounted, we shall say, last year, and this year, to fifty millions; but last year the country levied all its profit in goods, in merchandise destined for its consumption; this year, from some mercantile circumstance, some arrangement of exchanges, it has levied the fourth, the third part, in money imported through the frontiers. It is neither richer nor poorer, for this alteration; its consumption will, as formerly, be fifty millions; and with regard to the money imported, apparently its industry required this money, otherwise it will be again exported. To increase the circulating medium of a country, without increasing its capital, without increasing its revenue, without increasing its consumption is to do nothing for its prosperity, nothing for the encouragement of labour.

Since no labour can be accomplished without a capital to set it in motion; since no re-production of wealth can take place without raw materials for the work, and subsistence for the workmen, it follows that the furnisher of those wages and materials has taken the most intimate share in the re-production; he is, in a great degree, the author of its profits, and has the most evident right to participate in them. But he who lends a capital lends nothing else but those wages and raw materials represented by money. He lends a thing eminently productive, or rather the only one which is productive; for since all wealth proceeds from labour, and all labour is put in motion by its wage, he lends labour itself, or the first cause of production in all kinds of wealth. Hence, whenever an odious sense has been attached to the word usury, meaning by it any kind of interest paid for the use of a sum of money, under pretext that as money produced no fruit, there could be no lawful share of profit where there was no profit; in this case, an absurd distinction has been formed. There was just as much reason to prohibit the renting of land, or the wages of labour, because without a capital to put land and labour in exercise, both would remain unfruitful.

Theologians, however, were right in saying that gold and silver were barren by nature: they are barren so long as kept in their own shape; they cease to be barren, the instant they become the sign of another kind of wealth, which is emphatically productive. Theologians, if they determined to abide by the single principle on which their prohibition was founded, should have been contented with declaring usury criminal, every time the lender obliged the borrower to keep the deposit in its primary form, locked up in a strong box, from the moment of borrowing to that of payment. For it is quite certain that money, whilst locked up, produces no fruit; and neither borrower, nor lender can get good of it except by parting with it.

But, if money is of itself barren; it produces no fruit but in so far as it is the sign of other values, then it is evident that no good can be done by multiplying the sign and not the thing. It is true, if you multiply the sign in a single country, you give this country the means of commanding the thing, provided that thing be found in any, country. but when you multiply the sign in all countries at once, you do nothing for any. At present, there exists such a proportion between the sign and the thing, that a pound sterling is worth a bag of corn; but if, by the stroke of a magic rod, you should instantly double all the money in the world, since every thing to be obtained in exchange would continue the same, two pounds in place of one would be required to represent a bag of corn. The quantity of corn consumed by a workman, in food, would not be altered, consequently his wage must be doubled. With twice as many guineas, exactly the same work would be done, and nothing would be changed but names and numbers.

Capitalists require their capital to be employed, that it may gain a revenue; and hence they offer it for a certain price, to such as wish to cause labour; workmen, on the other hand, and those who employ workmen, have need of capital for their labour; and, after reckoning up the profit expected from it, they offer a certain share of their advantage to capitalists. The necessities of money-lenders and of money-borrowers, come thus to a state of equilibrium in all markets; those classes of men agree upon a medium rate. The regulator of their bargain is always the quantity of labour required by consumers, compared with the quantity of capital, representing raw materials and wages, to be disposed of in executing this labour. If the want is great, and the means of labour small, the interest of money will be considerable; if, on the contrary, there is much capital in circulation, and little employment for it, interest will be very low. It must always be regulated by what is called the quantity of money offered in the market, because money is the sign of capital, though not capital itself. Far from being augmented by the magical increase of money above alluded to, capital would not even be increased by the arrival of money, in great abundance, at a particular place of trade, without losing any thing of its value in comparison with the things it purchases; and no change in the rate of interest would result from this circumstance.

Nearly all the circulating capital of each manufacturer and trader is successively presented to him under the shape of money, in its return from the buyer to the seller; but the part of his funds, which a merchant actually has in money, forms, in ordinary cases, but a small portion of the capital employed in his commerce; an infinitely greater portion being kept in its original state in his own warehouses, or in those of his debtors. On the other hand, it is almost always in the power of each merchant instantaneously to augment the quantity of money at his disposal, by selling his goods at a less profit, or by discounting the debts which are owed him. In this way, he has money when he pleases, without being richer; the money, far from adding to his capital, is purchased with it. If such operations are performed at one time by several merchants in the same town, that town purchases money from its neighbours; if by a great number of French, English, or German merchants, we say that France, England, or Germany purchases money. There will, in reality, be found much more in the markets to make payments with; guineas will be much more abundant; but there will be neither more nor fewer deposits offered to lend, and the rate of interest will not be any way affected by the change. Such as are acquainted with the movements of trading places, know well that guineas may abound in them while capitals are scarce, or guineas be scarce while capitals abound.

It is a gross error, then, to believe, that, in all cases, a considerable importation of the circulating medium will make the rate of interest fall, or an exportation make it rise. Money is a kind of wealth; and like any other kind of wealth, it forms part of the circulating capital. If the money imported is a gift, or a tribute; if it costs nothing to the nation, it will certainly augment its circulating capital, and must certainly contribute to lower the rate of interest on the spot; but the same sums paid to the nation in goods would equally contribute to that end. If, on the other hand, this money has been purchased with any other portion of the capital, in that case the sum total of the latter will remain the same, and the rate of interest will not be affected.

Upon these principles, it is easy to see how mines of silver and gold do not enrich a nation more than any other kind of industry. The precious metals drawn from the mine are goods purchased, like all other goods, at the price of labour and capital. The opening of the mine, the construction of its galleries, the establishment of refining furnaces, require large advances, independently of the labour by which the ore is drawn from the bowels of the earth. This labour, and its fruits, may be exactly paid by the metal produced, and the state will gain by the operation, as by any other manufacture. But, in general, the profits of mines are irregular. As the head prize in a lottery seduces gamesters, an unlooked for advantage encourages miners to continue their exertions, although the usual returns be inferior to those obtained by any other kind of industry; and nearly all of them are ruined, just like gamesters, because they were at first successful.

From these principles, we may also conclude, that the blame so frequently imputed to Frederic II and the Canton of Berne for having hoarded up and withdrawn from the country a large portion of the natural circulating medium, is without foundation. By saving a part of their expenses, they, of course, in some degree, diminished consumption and re-production; by preserving some millions in their coffers, they in some degree diminished the circulating capital: but the money locked up by them was soon replaced by other moneys which the country purchased; and, besides, the whole circulating medium of a nation is so small, compared with its whole circulating capital, that such a void can never be considered as a national misfortune, or counterbalance the immense advantage of possessing a fund ready, without new sacrifices, at the moment of want.

From confounding money with capital, has arisen the general mistake of attempting to increase the national capital by a fictitious capital, which, not having been created by an expensive labour, is not, like gold or silver, a pledge of the values it represents; and which, after having delighted nations with the illusions of wealth, has so frequently left them in ruin.

It will be more easy to follow the operation, by which so many states in our time have endeavoured to replace their money by paper, if we previously direct our attention to the manner in which one of the most ancient trading cities of France made a few crowns perform the functions of a considerable circulating medium. At Lyons, it was agreed upon in trade, that all payments should take place only at four fixed periods, quarterly. During the three days which the payments took up, all the accounts of the city were settled at once. Each, at the same period, had much to receive and much to pay. But, on the days immediately preceding the payments, all the merchants used to meet on the exchange, to make what they called viremens; in other words, to assign, one to another, such sums as would settle their accounts. A owed B, who owed C, who owed D, who owed E, himself indebted to A; and the five accounts were settled without any payment. If E was not indebted to A, it was agreed that A should pay E, and the other four were acquitted by a single payment. Every merchant bought but to sell again; received, therefore, but to pay; and if those assignments were extended to their utmost limits, one single sum of ten thousand pounds would probably settle all the transactions of a city, though these amounted to several millions.

But all mutual debts are not equal, and bankruptcies occasion difficulties, and sometimes errors in the assignments. The invention of banks has supplied this deficiency. The Bank of Amsterdam is a kind of open bar, where assignments may constantly be made. Every trader pays or receives, by a line which is written down in the bank's books, on the debtor or creditor side of his account, without any money being disbursed. Among merchants, who have all an open credit with the bank, the operation of the book-keeper supplies with the utmost ease that of cashier; and no difference of amount, or day of payment, prevents sums from being reciprocally balanced.

A bank like that of Amsterdam, however, is of use only to such as have a current account in it. Many traders may have no account; and few or none who are not traders ever have any, though called, as well as others, to pay and to receive. To extend the advantage of assignments also to the business of such persons, those note-banks were invented which have since become so common in all parts of Europe. Their notes are assignments on the bank, payable to the bearer on demand. Each, by combining several notes, may make his odd payments himself; and hence it is generally most convenient for him to transmit them to others, as he received them, without having drawn any money; and even though each may require payment at his pleasure, no one thinks of it, just because each feeling that he may do it any time, feels always that it will be soon enough afterwards.

Up to that period, banks had done nothing but simplify payments, and save the employment of money, and render circulation easy with a smaller sum than would otherwise have been required. But some one must profit by this saving. In arranging the assignments at Lyons, each profited according to his share in trade; each needed to have money in his coffers only four times yearly, for three days. He, of course, gained interest for the remaining 353 days; and as those assignments simplified all his operations, a smaller sum performed for him the office of a greater. When banks were established, it was they that profited by this saving of money. They received interest, not for the money really given by them, but for the money, which every bearer of notes had it in his power to demand from them, at a moment's notice. This interest of notes, reckoned equal to gold, was a pure advantage for bankers; since the money promised, far from being drawn, had not even remained at the bank, where it would have been barren. Bankers, reckoning on the confidence of the public, had caused it to labour, and recalled it for their payments only as they needed it.

It was by discount on such of the proceeds of trade as were payable at long dates, that banks pushed their notes into circulation. They required an interest for exchanging their paper against that of trade, because theirs was exigible at sight, though it was not really paid before the other. The discount required by the bank served to introduce the interest of money, and to regulate it in the place. Bankers, in virtue of their credit alone, seemed to have capitals of almost immense extent, to offer in the service of merchants. Credit soon appeared to have a creative power, and speculators, persuaded that by emitting a bank one, they added as much to the public wealth as by importing an equal sum of money, delivered their minds to dreams dangerous for themselves, and for the states that gave ear to them. They proposed the establishment of banks to multiply the funds of trade, to provide for the enterprises of agriculture, to set labour every where in motion, to increase the general capital; and redouble the activity of industry.

Governments, on their side, imagined that in banks they had found an open mine, from which they might draw at discretion. At each new season of need, they stuck new bank-notes. But they soon perceived, with astonishment, that notes were no longer received with the same confidence, and were speedily carried back to the bank for payment; and next, as their custom generally is, they substituted their authority for the nature of things. They refused payment on demand, but they ordered each citizen to receive as ready coin, those notes which had thus become paper money; and they authorised every debtor to pay his accounts with it.

The circulation of paper money became, in a short time, nothing less than a general bankruptcy. Notwithstanding all the orders of government, paper fell every day in its proportion to silver or to goods. The bearers of it, feeling that they had no pledge for the values, the sign of which they were always presenting, dreaded lest the paper should undergo a new deterioration in their hands, and made haste to get rid of it. Each lost and caused loss, each having no longer any common measure of value, became unable to distinguish the gain from the loss of his bargain, and always selling with advantage, he ended in ruin. During this time, coin disappeared, goods themselves were exported from the country, without giving any return; and the expedient, which promised to create immense wealth, produced nothing but ruin and confusion.

A fatal error had led to all these misfortunes. It was imagined that credit had the power of creating wealth; whilst, in fact, credit never creates any thing, but merely borrows with one hand to lend with the other, that wealth, which, to be of use, must have previously existed in the state. Paper money can be substituted only for the metallic money already in existence; it is the value of this which it borrows. The banker, who finds credit, acquires the power to dispose of a part of the currency equal to the paper he emits. If he in reality withdraw part of the currency from circulation, his paper will remain there; if he does not withdraw it, others will withdraw it for him, the instant it becomes superfluous. But, if this currency was not in circulation at the moment when his bank-notes were emitted, he could not borrow it. In that case, by giving forced circulation to his paper, he depreciates not only this paper, but all that was already in the hands of the public.

The money of a country has a determinate relation to the wealth of that country, and to the activity with which its wealth circulates. The same guineas serve, in the course of a year, for a great number of different bargains; yet still there is a necessary equation between the mass of values sold, and the sum of guineas which serves to pay them, multiplied by the rapidity of the circulation. If too many guineas exist in the country for the wants of the circulation, this is not a reason why the person holding them in his coffers should keep them longer than he has occasion so to do. All useless stagnation would be so much interest lost for him; and, therefore, he continues still to give them circulation, and some one is always at hand, who, not finding any profitable use to make of them in the country, takes them out of it. If exportation is forbidden, a greater mass of idle guineas will be kept within the country, till the loss of those unable to employ them be great enough to pay the risk of smuggling. If precautions are so well taken that exportation is entirely impossible, the whole money circulated in the country will fall in value till it be reduced to the equation which it cannot pass, that is, to the numerical value of all the sales and payments made within the year, divided by the rapidity of circulation.

In like manner, if the money of a country is not sufficient for its circulation, the country will purchase money in exchange for some one of the values it possesses, just as it would have purchased any other kind of goods. It is not the balance of trade which can make money enter or leave a country. This balance is completely illusory, for it is not true that nations settle their accounts with each other. On the contrary, indeed, it often happens that one is constantly a borrower, the other constantly a lender. And, the credit sales of the most commercial being renewed from year to year - before the first debt is extinguished, a second is already contracted, which is followed by a third; and though each is paid in its turn, the purchaser may nevertheless, perpetually remain debtor to his seller. Thus, sales on credit form a capital which may either increase, or be reimbursed in the inverse sense of other commercial speculations.

Abstracting all that concerns these credits, which modify more than three-fourths of its commercial speculations, the purchases of a nation would be exactly balanced by its sales; because it is as impossible for the one always to purchase, and find the source of a perpetual draining of money, unless it work at mines, as for the other to sell always, and find an employment for a perpetual importation of coined metal. Money is imported, and exported from one nation to another, not because it pays their accounts, but because the one having need of it, sells goods cheaper, till it has acquired enough; and, because the other, having more than enough for its circulation, buys dearer, or, gives a greater quantity of guineas for the same quantity of goods, till the equilibrium is reestablished.

But as the emission of any sum in bank notes, supplies the place of an equal sum of money, the latter is immediately withdrawn from circulation, and sold in foreign countries. So long as there remains any coin to be exported, credit may repeat its operation and create new bank notes; when there is no more coin to export, the paper money, will, of itself, diminishing in value, seek the proper equation; and to whatever nominal sum its fabrication may be carried, it will never sell, in the total amount, for any thing more than the pre-existing total amount of money which it replaces.

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