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Sunday, November 18, 2012

Metals and Money, and especially of Gold and Silver

Gold and silver were highly valued before they were used as money. They hold many advantages over other goods such as durability, divisibility, transportability, and homogeneity. These are the reasons which led gold, silver, and copper to be chosen as money, not “fancy” or common consent. When princes debase money or issue imaginary money, they hurt the economy.

AS LAND PRODUCES MORE OR LESS GRAIN, according to its fertility and the labor expended on it, so do the mines of iron, lead, tin, gold, silver, etc., produce more or less of these metals, according to the richness of the mines and the quantity and quality of the labor expended upon them, in digging, draining, smelting, refining, etc. Work in silver mines is expensive because of the mortality it causes, and rarely does one last more than five or six years in this work.
The real or intrinsic value of metals is, like everything else, proportional to the land and labor that enter into their production. The outlay on the land for this production is considerable only so far as the owner of the mine can obtain a profit from the work of the miners when the veins are unusually rich. The land needed for the subsistence of the miners and workers, that is the mining labor, is the principal expense and often the downfall of the owner.
The market value of metals, as with other commodities and merchandise, is sometimes above, sometimes below, the intrinsic value, and varies with their abundance or scarcity, according to demand.
If the property owners, and the lower classes in a state who imitate them, rejected the use of tin and copper, wrongly supposing that they are injurious to health, and if they all used dishes and utensils of earthenware, these metals would be at a very low price in the markets, and the work that was carried on to extract them from the mine would be discontinued. But as these metals are found useful, and are employed in everyday life, they will always have a market value corresponding to their abundance or scarcity, and the demand for them. These metals will always be mined in order to replace what is lost by daily use.
Iron is not only useful for daily life, but may be said to be, in a certain way, necessary. And if the [native] Americans, who did not make use of iron before the discovery of their continent, had found mines and had known how to use it, there is little doubt that they would have labored to produce it whatever the cost.
Gold and silver are capable of serving not only the same purpose as tin and copper, but also most of the purposes of lead and iron. They have this further advantage over other metals in that they are not consumed by fire and are so durable that they may be considered permanent. It is not surprising, therefore, that the men who found the other metals useful, valued gold and silver even before they were used in exchange. The Romans prized them from the time of the foundation of Rome and yet only used them as money five hundred years later. Perhaps all other nations did the same and only adopted these metals as money long after using them for other purposes. However, we find from the oldest historians that from time immemorial, gold and silver were used as money in Egypt and Asia, and we learn in the Book of Genesis that silver monies were made in the time of Abraham.
Let us assume that silver was first found in a mine of Mount Niphates58 in Mesopotamia.59 It is natural to think that one or more property owners, finding this metal to be beautiful and useful, were the first to use it, and willingly encouraged the miner or entrepreneur to extract more of it from the mine, giving him, in return for his work and that of his assistants, as much of the production of the land as they needed for their maintenance. This metal became more and more highly valued in Mesopotamia because as the large landowners bought ewers60 made of silver, the lower classes, according to their means or savings, would buy silver cups. The entrepreneur of the mine, seeing a constant demand for his goods, certainly placed a value proportional to its quality or weight against the other commodities or merchandise which he took in exchange. While everybody looked on this metal as a precious and durable object and strove to own a few pieces of it, the entrepreneur, who alone could supply it, was in a position to demand in exchange an arbitrary quantity of other commodities and merchandise.61
Assume now that on the other side of the Tigris River, and therefore outside Mesopotamia, a new silver mine is discovered, of which the veins are exceptionally richer and larger than those of Mount Niphates, and that the working of this new mine, which was easily drained, required less labor than that of the first.
The entrepreneur of this new mine was naturally in a position to supply silver much cheaper than the entrepreneur of Mount Niphates. The people of Mesopotamia, who wished to have pieces and objects of silver, would find it more advantageous to export their merchandise and give it to the entrepreneur of the new mine in exchange for silver, rather than obtaining it from the original entrepreneur. The first mine owner, finding a smaller demand, would of necessity reduce his price; but the new entrepreneur lowering his price in proportion would obligate the first mine owner to stop his output. Then the price of silver, in exchange for other commodities and merchandise would necessarily be fixed by the price at the new mine. Silver would then cost less to the people beyond the Tigris than to those of Mesopotamia, who had to bear the cost of transporting their commodities and merchandise far away to obtain silver.
It is easy to conceive that when several silver mines were found and the property owners had developed a taste for this metal, they were imitated by the other classes. The pieces and fragments of silver, even when not worked up, were sought after eagerly, because nothing was easier than to make such articles from them as were desired, according to their quantity and weight. As this metal was at least valued at what it cost to be produced, a few people who possessed some of it, finding themselves in need, could pawn it to borrow the things they wanted, and later even sell it outright. Hence there arose the custom of fixing its value in proportion to its quantity or weight in exchange for all products and merchandise. But as silver can be combined with iron, lead, tin, copper, etc., which are more common metals that are mined at less expense, the exchange of silver was subject to much fraud. This caused several kingdoms to establish mints in order to certify, by a public coinage, the true quantity of silver that each coin contains and to give to individuals, who bring bars or ingots of silver to the mint, the same quantity in coins bearing a stamp or certificate of the true quantity of silver they contain.
The costs of these certificates or coinage are sometimes paid by the public, or by the prince. It was the method followed in ancient times in Rome and today in England. Sometimes, those who take silver to be coined pay for minting, as is the custom in France.
Pure silver is hardly ever found in the mines. The ancients did not know the art of refining it to perfection. They always made their silver coins of fine silver, and yet, those which remain of the Greeks, Romans, Jews and Asians, are never perfectly pure. Today, we are more skilled: the secret for making pure silver has been discovered. However, the different methods of refining it are not part of my subject. Many authors have treated the subject, Mr. Boizard62 among others. I will only observe that there is a good deal of expense in refining silver and for this reason, an ounce of fine silver is generally preferred to two ounces which contain one half of copper or other alloy. It is expensive to separate the alloy and extract the ounce of pure silver which is in these two ounces, while by simple smelting, any other metal can be combined with silver in any proportion desired. When copper is sometimes used as an alloy to fine silver, it is only to render it more malleable and more suitable to make objects out of it. But in the valuation of all silver, the copper or alloy is reckoned at nothing, and only the amount of fine pure silver is considered. For this reason, an assay is always made to ascertain the amount of pure silver.
Assaying is merely refining a little piece of a bar of silver, for example, to find how much pure silver it contains and to judge the whole bar by this small sample. A small portion of the bar, twelve grains for example, is cut off and nicely weighed with scales that are so accurate, a thousandth part of a grain will sometimes turn the scale. Then the sample is refined by nitric acid or by fire, and the copper or alloy separated. When the silver is pure, it is weighed again in the same scale and if it then weighs eleven grains instead of twelve, the assayer says that the bar is eleven parts fine, i.e., it contains eleven parts of pure silver and one of copper or alloy. This will be more easily understood by those who have had the curiosity to see assays carried out. There is nothing mysterious about it. Gold is assayed in the same way, with the only difference being that the degrees of fineness of gold are divided into twenty-four parts called carats, since gold is more precious; and these carats are divided into thirty-two parts, while the degrees of fineness of silver are only divided into twelfths, called deniers,63 and these are each divided into twenty-four grains.
Usage has conferred upon gold and silver the term intrinsic value, to designate and signify the quantity of true gold or silver contained in a bar. However, in this essay, I have always used the term intrinsic value to signify the amount of land and labor that are entered into production, not having found any term more suitable to express my meaning. I mention this only to avoid misunderstanding. When the subject is not gold or silver, the term will always apply, without any confusion.64
We have seen that the metals such as gold, silver, iron, etc., serve several purposes and have a value proportional to the land and labor that enter into their production. In the second part of this essay, we will see that because of trade men had to use a common measure in order to find the proportion and the value of the commodities and merchandise they wished to exchange. The only question is what commodity or merchandise would be most suitable for this common measure, and whether it was necessity, rather than choice, which has given this preference to gold, silver and copper, which are generally in use today for this purpose.
Ordinary products like grain, wine, meat, etc., have a real value and serve the needs of life, but they are all perishable and difficult to transport, and therefore are hardly suitable to serve as a common measure.
Goods such as cloth, linen, leather, etc., are also perishable and cannot be subdivided without in some way changing their value for the service of men. Like raw produce, they cost a good deal to transport and they even are expensive to store. Consequently, they are unsuitable as a common measure.
Diamonds and other precious stones, even if they had no intrinsic value and were demanded only by taste, would be suitable for a common measure if they were not susceptible to imitation and if they could be divided without loss. With these defects, and that of being unserviceable in use, they cannot serve as a common measure.
Iron, which is always useful and fairly durable, would not serve badly in absence of anything better. It is consumed by fire, and is too bulky in large quantities. It was used from the time of Lycurgus [in Sparta] till the Peloponnesian War; but as its value was necessarily based intrinsically, or in proportion to the land and labor that entered into its production, a great quantity of it was needed for a small value. It is curious that they spoiled the quality of the iron coins with vinegar to make them unfit for other uses other than exchange.65 Thus, it could only serve the austere Spartans, and they themselves could not continue after they extended their interaction with other countries. To ruin the Spartans, one needed only to find rich iron mines, to make money like theirs, and use it to buy their commodities and merchandise, while they couldn’t get anything from abroad for their spoiled iron. At that time, they did not concern themselves with any foreign trade, but only with war.
Lead and tin have the same disadvantage of bulk as iron and are consumable by fire, but in case of necessity, they would not do badly for exchange if copper was not more suitable and durable.
Copper alone served as money to the Romans until 484 years after the founding of Rome, and in Sweden it is still used even for large payments. However, it is too bulky for very considerable payments, and the Swedes themselves prefer payment in gold or silver, rather than in copper.
In the American colonies, tobacco, sugar, and cocoa have been used as money, but these commodities are too bulky, perishable, and of unequal quality. Therefore, they are hardly suitable to serve as money or as a common measure of value.66
Gold and silver alone are of small volume, equal quality, easily transported, divisible without loss, convenient to keep, beautiful and brilliant articles are made from them, and they are almost eternally durable. Everyone who has used other articles for money returns to them as soon as they can get enough for exchange. It is only in the smallest purchases that gold and silver are unsuitable. Gold or even silver coins of the value of a liard or a denier67 would be too small to be handled easily. It is said that the Chinese, in small transactions, cut off little pieces with scissors from their plates of silver, and weigh the pieces. But since their trade with Europe, they have begun to use copper for such occasions.
It is then not surprising that all countries managed to use gold and silver as money or a common measure of value, and copper for small payments. Utility and need decided for them, and not taste or consent. Silver requires much labor and expensive labor for its production. Silver miners are highly paid because they rarely live more than five or six years at this work, which causes a high mortality. Therefore, a little silver coin corresponds to as much land and labor as a large copper coin.
Money, or the common measure of value, must correspond in fact and reality in terms of land and labor to the articles exchanged for it. Otherwise it would only have an imaginary value. For example, if a prince or a republic gave currency in the state to something that had no real and intrinsic value, not only would the other states refuse to accept it on that basis, but the inhabitants themselves would reject it when they perceived its lack of real value. When towards the end of the first Punic War, the Romans wished to give their copper coin, the “as,” which weighed two ounces, the same value as the “as” of one pound or twelve ounces had before, it could not long be maintained in exchange. The history of all times shows that when princes have debased their money, keeping it at the same nominal value, all raw commodities and merchandise have gone up in price in proportion to the debasement of the coinage.
Mr. Locke says that the consent of mankind has given its value to gold and silver. This cannot be doubted since absolute necessity had no share in it. It is the same consent that has given, and does give every day, a value to lace, linen, fine cloths, copper, and other metals. Man could subsist without any of these things, but it must not be concluded that they have only an imaginary value. They have a value proportional to the land and labor that enter into their production. Gold and silver, like other goods and food products, can only be produced at costs roughly proportional to the value set upon them, and whatever man produces by labor, this labor must provide his maintenance. It is the great principle that one hears every day from the mouths of the humble classes, who have no part in our speculations, and who live by their labor or their enterprise. “Everybody must live.”

Essay on Economic Theory, An

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