Walter Bagehot
A New Standard of Value
The Economist, November 20, 1875 reprinted in the Economic Journal, volume 2 (1892)
Professor Jevons, of Manchester -- so well know in the economical and
statistical world by his researches on coal -- has written an excellent treatise
on 'Money and the Mechanism of Exchange', which we strongly recommend to our
readers. It is extremely clear, brief without being dry, and contains a good
deal of very interesting information. And we may add that it is written in a
style of scientific modesty rare in currency books. Mr Jevons is perpetually
aware that the subject abounds in questions of nicety and difficulty, on which
he is quite ready to admit that he may be wrong. It would be a happy thing if
persons far less competent than Mr Jevons to write on the subject, but who
incessantly do so, could be brought to that admission.
On one point, however, we are at issue with Mr Jevons: he has far more hope from
economical science than we have. He thinks that it can point out to mankind a
far better theoretical standard of value than gold or silver, and believes that,
though it is encumbered with some difficulties, probably the new plan would on
the whole, when we got used to it, work better than our present one. But for
ourselves we much fear that political economy has no such boon to confer on
mankind, and that we must adhere to one or other of the precious metals as a
standard of value, like our forefathers. Mr Jevons shall explain his fundamental
idea in his own words.
'The question,' he says, 'thus arises whether the progress of economical and
statistical science might not enable us to devise some better standard of value.
We have seen (pp. 136-143) that the so-called double standard system of money
spreads the fluctuations of supply and demand of gold and silver over a larger
area, and maintains both metals more unchanged in value than they would
otherwise be. Can we not conceive a multiple legal tender, which would be still
less liable to variation? We estimate the value of one hundred pounds by the
quantities of corn, beef, potatoes, coal, timber, iron, tea, coffee, beer, and
other principal commodities, which it will purchase from time to time. Might we
not invent a legal tender note which should be convertible, not into any one
single commodity, but into an aggregate of small quantities of various
commodities, the quantity and quality of each being rigourously defined? Thus a
hundred pound note would give the owners a right to demand one quarter of good
wheat, one tone of ordinary merchant bar iron, one hundred pounds weight of
middling cotton, twenty pounds of sugar, five pounds of tea, and other articles
sufficient to make up the value. All these commodities will, of course,
fluctuate in their relative values, but if the holder of the note loses upon
some, he will in all probability gain upon the others, so that on average his
note will remain steady in purchasing power. Indeed, as the articles into which
it is convertible are those needed for continual consumption, the purchasing
power of the note must remain steady compared with that of gold or silver, which
metals are employed only for a few special purposes.'
And he goes on to explain that of course this kind of currency could not, in
practice, be used, as no one wishes to have all these miscellaneous things, or
could pass them away if he had them. But Mr Jevons does not think this objection
conclusive: he borrows from a nearly forgotten writer of fifty years ago --
named 'Lowe' -- an expedient which he thinks meets the difficulties
satisfactorily.
"Mr Lowe', we are told, 'treats, in a very enlightened manner, of the
fluctuations in the value of money, and proceeds to propound a scheme, probably
invented by him, for giving a steady value to money contracts. He proposes that
persons should be appointed to collect authentic information concerning the
prices at which the staple articles of household consumption were sold. In
regard to corn and sugar, authoritative returns were then, and have ever since
been, published in the London Gazette, and there seemed to be no difficulty in
extending a like system to other articles. Having regard to the comparative
quantities of commodities consumed in a household, he would then frame a table
of reference, showing in what degree a money contract must be varied so as to
make the purchasing power uniform. In principle, the scheme seems to be
perfectly sound; but Lowe did not attempt to work out the practical details, and
his plan involves needless difficulties. A very similar scheme was independently
proposed, about eleven years later, by Mr G. Poulett Scrope, the well-known
writer on geology and political economy. In a very able but now forgotten
pamphlet called 'An Examination of the Bank Charter Question, with an Inquiry
into the Nature of a Just Standard of Value." (London, 1833), Mr Scrope suggests
(p. 26) that a Standard might be formed by taking an average of the mass of
commodities which, even if not employed as the legal standard, might serve to
determine and correct the variations in the legal standard. The scheme was also
described in Mr Scrope's interesting book on the Principles of Political
Economy, published in the same year (p. 406), and in the second edition of the
same book called Political Economy for Plain People, issued two years ago (p.
308). The late Mr G.R. Porter, without referring to previous writers, gave the
same scheme in 1838 in the first edition of his well-known treatise on The
Progress of the Nation (Sections III and IV, page 235). He added a table showing
the average fluctuations of fifty commodities monthly during the years 1833 to
1836. Such schemes for a tabular or average standard of value appear to be
perfectly sound and highly valuable in a theoretical point of view, and the
principal difficulties are not of a serious character. To carry Lowe's and
Scrope's plans into effect, a permanent government commission would have to be
created, and endowed with a kind of judicial power. The officers of the
department would collect the current prices of commodities in all the principal
markets of the kingdom, and, by a well-defined system of calculation, would
compute from these data the average variations in the purchasing power of gold.
The decisions of this commission would be published monthly, and payments would
be adjusted in accordance with them. Thus suppose that a debt of one hundred
pounds was incurred upon the 1st of July, 1875, and was to paid back on the 1st
July 1878; if the commission had decided in June, 1878, that the value of gold
had fallen in the ratio of 106 to 100 in the intervening years, then the
creditor would claim an increase of 6 per cent in the nominal amount of the
debt. At first the use of this national tabular standard might be permissive, so
that it could be enforced only where the parties to the contract had inserted a
clause to that effect in their contract. After the practicability and utility of
the plan had become sufficiently demonstrated, it might be made compulsory, in
the sense that every money debt of, say, more than three months' standing, would
be varied according to the tabular standard, in the absence of an express
provision to the contrary.' And Mr Jevons rather boldly says that 'the
objections to this scheme are not considerable.'
But we confess they seem to us so many, and so important, that we hardly know
where to begin.
First -- it is wholly unfit for a nation which has a foreign trade. A foreigner
wants payment in a medium which he can use in his own country, and he wants to
be precisely sure how much of that medium he will receive. Since the civil war
the United States have been excessively inconvenienced by the want of such a
medium. A bill drawn on New York for 1,000 dollars would be paid in greenbacks,
but greenbacks are of no use out of America; to be of use elsewhere they must be
changed into gold or silver, and the rate at which they can be so changed is
uncertain. And the 'tabular standard' is radically faulty in the very same way.
No one could tell what a draft, say for £1,000 on London, would fetch; it might
be £1,060, or anything else. There would always be an uncertain percentage.
Since the Franco-German war London has become the exchange centre for Europe far
more than before, because the infinitesimally small premium on gold as compared
with Bank of France notes introduced an uncertain element. But al the business
so obtained we should lose, and much more, under the 'tabular standard'. London
would be unfit ...
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