(1873) The Theory of Inflation: A Critical Examination of a Ruinous Popular Fallacy

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The Theory of Inflation By '^nrey

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UNIVERSITY OFCALIFORNI

AT LOS ANGELES

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THE THEORY OF INFLATION.

A

Ruinous Popular Fallacy.

Critical Exarnimition of a

Telegraph

Reprinted from the Philadelphia Evening

To

the

Editor of

More

tliaii

the

Evening Telegraph

a century

ago David

Hume

:

November

of

8,

1873.

—

published

liis

Esmy on

Honey,

which consists of a succession of brilliant but disjointed thoughts, part truths, i)art fallacies, so intermingled, and so plainly inconsistent one with anotiier, that the reader

author be a believer

in

decreasing volume of

at times at a loss to

is

know whether

the

the advantages of a constant, an increasing, or a

money

However,

any community or country.

in

the so-called principles, the assumed-to-be truths of the contractionist are derived from tliis very source, which is the real and original fountain-

head of

this contractionist's

i)ut little

the main

monetary philosophy.

even to-day to offer us which it is

This philosophy has

not drawn from Hume, and

is

in

but the carrying out to its logical conclusion of a single

one of his leading propositions. Senator Sherman, for instance, deeply imbued with this one doctrine, hiis in its

an

official

paper committed himself

consequences, and from him

([uences go.

in

a report of the Senate Finance

January, 1S73, said that "the

e.xercise of

full

all

and the

between deblur and creditor at least

fnturoy now see how

all

so

its

the property increase

Ijy

in

real value or

10 per cent, on

jtcrformed in

of

Commit-

such a i)ower would

i)roperty in the United States

undouljtedly ulVect the nominal value of to the fc.xlent of at least 10 ]ier cent.,

liCt us

manner to it and what extent these conse-

in the fullest

learn to

In reference to the reissue of the so-called " reserve" of

$44,000,000, Mr. Sherman, t;;e,

we may

all

burden as

contracts to be

^ this

would work

in

the United Stales in

10 percent would add to

more extraordinary assumption

well

Ite

actiwil

practice.

The

value

1870 was $:;0,000,000,000, it $;{,

000,000, 000.

Can any

imagined, than that $44,000,000

of currency should have the power to add to the value oC the existing

2 property of this country

own volume ? From wlint

000,000, 000, or over sixty

$;5,

ohservntiou of fnets, nnd

reasoning, ean this conehision he assumi)tion of

any and

Hume,

that

Why,

the ))riees of

proportion between commodilies and money" further, by the easy step that

we

this country,

solely

This

other property.

in

exact proportion.

with but $750,000,000 of currency

It will not

is

not

do to

tell

harmony,

and

—a

is,

as

it

statical,

and

circu-

the

were, but an inert,

but not dynamical

own simple

its

single length or ponderosity, acts as an inflexible, unyielding deter-

ns that

tell

it

a new

office, is to

if this

new

mass of the commodities

total

circulates,

and

tlius

circulates at a given

and

in, it

places,

in all

hang

then, will the contractionist

that

no

and among velocity.

all

peoples,

is

of asserting of

money

that

it

acts with equal force?

One

or the

equally opposed to experience as well as

sense.

But, further, with his inflexilde

commodities and money," the

effect

disciple of

of

the " proportion between

Hume

is

forced into the addi-

tional and necessary logical position of maintaining that in

money

There can be no

Ui)on which horn of the dilemma

— that

power always and everywhere

amount

But even

life-giving property, or that, while possessing such power,

other he must take, and each

common

a country.

must be on the necessary condi-

and constant rate of

possible escape from this necessity.

])0ssesses

in

has a new power, a new function,

change the very terms of the proposition.

factor be thus dragged

tion that at all times,

to

in

commodities and

mere yardstick or dead-weight, which by

miner of the value of the

To

for

money

I)ut in direct conflict v\'ilh

With it money mass, possessing what may be termed

qualities

we should look

us that this

to $30,000,000,000 of in

teachings of the school. lifeless

country, and then,

in tliat

to the dictum of the school,

and thereby gives value

lates,

any country, al

that country "l)y the

in

upon "the proportion between commodi-

is it tiiat

but $750,000,000.

lind

hy the gratuitous

in

$30,000,000,000 of commodities and other pro-

find

According

}ierty ?

its

any increase of money, witliout an increase

of commodities, must increase prices

But if i)rices depend ties and money," how

firsl

things

all

they so stand

at all times, are lixed as

limes

wlmt form mul nuiuuer of

1iy

iirriveil at ?

eij-Iil

no increased

the production of commodities, by the application of steam

and machinery; by the subjugation of new lands

to the control of

man,

or the improvement of the old ones; by the discoveries of science, or

by the arts of

civilization

;

by the increase of population or of

intelli-

gence; even be the results such as to give a yield of ten, twenty, or fifty fold, as compared with that of the past, ean add one dollar to the

•

4t

4 • • » «porl the theory of

inflation.

In the numljcr of persons in a country desiring to |)ossess, by purchase, commodities tho productions of their

403503

own countrymen, we have

— almost

nil

niicrrinj]^

country, for

mcssure of tlictlivcrsiGcation of cMiiploj'mcntR

{greater the diUcreiices the greater

tlu>

will be the intercourse

and the deniaiul

the

money question only

injr

societarylife into vij;orons

exhibited closely

is

niitl

for sueli eonunodities.

enters so far as that

money

The

the

liappy and a hnrmonious balance of forces

nii

In such a state

During the

War

we

two constituting a

exhibition of

entirely the reverse of the discords so confidently held

Hume.

is

through the

freely

veins and arteries of the healthy animal organism. ])rodi'iction,

function hero

pound weight, but

analogous to that of the blood that courses

have not alone consum})tion, but

J)ul hero

succeeds in cjuickcn-

and healthful action.

not that of the mere yiirdsiick or the

in tliat

the mure rapid

phenomena

the disciples

I)y

this balance was number of able-bodied men from production, and by the enormous demands of the government for subsistence, clothing, and the materials of war generally. From

of

greatly disturbed

l)y

late

of the Rebellion of a large

the abstraction

—

and from excessive taxation a nieiisure, in part, of the demands of the government for commodities prices rapidly advanced, and yet the schoolman could see nothing in these results but an evidence this cause

—

of the truth of his delusion

Having

—

inflation.

seen that prices cannot be governed by " the proportion be-

tween commodities and money," but that they are largely dependent

upou the quantities of commodities, the cost of reproduction, and the number of persons desiring to possess such conmiodities let us now inquire how the means at tht^ command of such persons towards such ;

possession affect prices and

how

far

it is

possible, by legislative enact-

ment, to keep those means from the possession and control of the people.

general and wide dissemination of wealth

The

exert a strong influence towards advancing prices far

as consumption

alone can do

it,

by increasing the body of con-

on the contrary, an equal amount of wealth concentrated

sumers

;

in the

hands of a few

-.vhile,

will exert less influence in that direction, for the

reason that while these favored ones liardly be able to

command

may

live in luxury, the

the mere necessaries of

aggregate of consumption be thus limited. well

illustrated, the first in the

However, even the

Britain. is

to

result in

let

interpose

us see

its fiat

how

life,

effect of

many may

and the great

These two conditions are

United States, and the

a conteracting one

does check any advance

Now

among a people must among such people so

last in

Great

a large measure of consumption

— production,

which may and often

in prices.

far

a State can, by legislative enactment, so

as to succeed

in

preventing

its

people from purchasing

—

—

and consuming, or holding for speculative ends, such coramodities as for this is i-eally the question before us, once they are bent on having theory that prices depend upon " the prothe of disposed have we that

—

})ortion

between commodities and money."

amples

shall be taken

century or more, trol of

men

from Great Britain.

in its financial

Our illustrations and exThat country has, for a

been completely under the con-

affairs,

Hume, and during

of the school of

the latter half of this

There, where

period she has maintained so-called specie payments. every eflort has been

ripened fruit of

and

it

it.

made to carry out the system, may we look for the In England all notes under £5 have been interdicted,

has only been by reason of her native pluck and energy that

Scotland has been enabled to obtain and retain them, after more than

one severe contest.

A The

recent intelligent English writer on srold

and

silver in circulation in

finance

Great

Britain at

The

circulation of the

£70,000,000

$339,500,000

34,328,708

166,500,000

17,613,551

85.425,000

of England, Oct.

was

16, lb72.

The notes

Bunk

and banking estimates

United King-

in circulation in the

dom, other than those of the Bank of Kugwere as follows

hind, September, 1872,

:

England, £.o,057,'J10; Scotland, £5,313,560; Ireland, £7,242,081

$591,425,000

Total Tlere

we have

in less

pressly provided

l»y

than $000,000,000, the circulating medium ex-

government

the

But

circulating notes.

a

full

this

is

medium, with

it

its

measure of the imrcliasing jiower at the

of Great Britain

Has the Englishman

?

are the monetary instruments placed at

Ijcen

his

has yjermitted to issue capacity for vital work,

command content to

of the people feel

that here

disposal by his Parliament

and sovereign, and that with these alone and none others

By no means

own

for its people, either by its

coinage or through those institutions which

shall he

work

?

!

Palgrave, E^q

a recent able writer and slatisticinn,

in

a

paper read before the Slalistical Society of Ijondon, of which he

is

a

n.

11.

I.

,

member, declares

u|)on data admitted to

the British l)anks

amount

The same

writer, in his NoIch on JlrmHiif/,

of the sales of stamps for

average amount of low.s

:

l)e

l)ills

sound, that the deposits of

to £584,000,000, or nearly $2,900,000,000.

l)ills

in

from a very careful analysis

payable for a series of years, estimates the

existence at any one time

in

1870-71 as

fol-

— Inland or ilomostic

Foreign

bills

bills

drawn on

.

I'.nuliuul

.

,

£210.8r)0.n00

.

.

;{(), 700,(1(10

over $1,200,000,000

.C-2tl.f>50,000

we consider

then,

If,

transndions

in [)riviite

the extent to wliieh

we

rnn np by the nobility and



Bills of excliiinjre

riivate or other debts for which no

bills

are given

1,200,000,000 S.>,300,00(),000

$5,300,000,000 of purchasing power currency of the country

By

the aid of

l)ai)k

— almost

nine times the volume of the

wholly the result of the use of credit.

and clearing houses,

eliectks

this credit

system

is

maintained with the smallest possible allowance of bank notes and specie

— Mr.

Palcrave placing the l)ank reserve of

all

Great Britain as

low as four (4) per cent., $110,000,000, while the daily average clearings of the London Clearing House alone are nearly $100,000,000. deposits, almost wholly the creation of the banks, through the

The bank

loan of their credit, are, for trade,

The

and speculation, as

bills

all

purposes of buying for consumption,

ellicient

and as active as circulating

notes.

of exchange and private debt-charges lack the activity of cir-

culating notes and bank deposits, but are permanent and constant representatives of the

power of purchase,

a crisis comes to contract

until

their volumes. If these, then, be the results of repressive

home

of David Ilume, and

long reigned supreme,

in

monetary legislation

not entirely evident that

is it

in

the

the land in which his doctrines have so all

legislative at-

tempts to control the trading and speculation of an active, enterprising, intelligent,

and

free people, Ijy

of their circulating this

;

power

medium

Is

it

not even worse than

for does not such legislation, while depriving those people of the

to deal for cash, force

—at once the forerunner of crises feed?

what

imposing an arbitrary limit to the amount

are utterly futile?

like

them

to resort to the various forms of credit

financial crises

and the food on which those

But, further, does not this particular system look some-

injlation

run mad, and

commodities are not dearer

in

is

not the

Great Britain than

fact that in

under

it

all

every other country

world evidence conclusive against the soundness of the contrac-

in the

great theory

tioiiist's

Let any one results to

?

England

moment

a

for if

its

consider

what would be the

practical

people had permitted themselves to be limited

operations by the $600,000,000 of circulating medium furnished

in their

The prosecution

to them by or through their government.

of her im-

mense manufactures and foreign trade would be an utter impossibility, and it would be entirely out of her power to negotiate the large loans to foreigners, which are paid for by her exports of manufactured goods,

peTmonent carrying of xvliich loans is only possible by reason of this large volume of bank and other credits. Neverof theless, this system of credit, which has grown out of persistent, long continued, and vicious legislation in regard to money, is top-heavy and

and

the

the Biislence

essentially

unsound and dangerous, and

During the war of the

at all times.

of currency and our great business activity,

almost our entire government indebtedness, came, and with

it

to seek foreign

were more at

free

topple over at any and

liable to

rebellion, througli our

contraction of that currency, that

aid.

any previous period

in

in

our

it

became necessary

commenced our people

Before that contraction

from debt,

ample supply

we were enabled to carry and it was not until peace

proportion to the volume of business, than All this

history.'

alas

is,

!

now most

sadly

changed.

The

circulation of the

Bank

of France, October, 1873,

was nearly

$600,000,000, and although specie i)ayments have been suspended since Septemljer, 1870, gold and silver there circulate freely, the premium being but about ^ per cent., and there cannot be less than $700,000,000 The private deposits in the bank were of those metals in the country. less

than $4f),000,000, and business In

cash.

Germany

Let Congress, then, as once, and

forever,

is

at all times largely done for real

a very similar state of things exists.

any

in

duty bound, dismiss from

l)elief in

the fallacy which

Hume

its

thoughts at

has given to the

world, that prices are fixed " by the proportion between commodities and

money," and body, like

in the

in fixing

the

it is

in

the power of any legislative

our own, or the English, to put a limit to their business transactions.

"When once they will

sad delusion that

an arbitrary limit to the circulating medium of a people

l)e

shall

have so far cleared their mental jjcrceptions, they

prepared to give us a full supply of national jHiper money having

feature ofintercha/igeability {at the

ojition

ment bonds bearing a fixed raUi of interest. there

is

"u

of the holder)

subtle principle that will regulate the

and commerce

xcitit

govern-

In such interchangeability

movements of finance

as accurately as the motion of the btcum-enginc

is

rcgu-

8 Inted

I)}'

its

tlio diniijers

iiH'diuni

—

jjovonior," and incident td

protoct

tliiis

in iTtjard to llic re(piisite

can enable any

man

tlic

people mid the Stiite IVoin

arliili'inv enipiiic;il liniitins^

iill

or Ixxly of

vohiinc

men

oi'

to decide

we have

tinancial stability

tries,

of

all

/*r/07'/ jadfjjniont

npon and

^Vhen once wo are freed from the practice of such

lix

correctly.

einpiricisnt, then shall

and secnrity against those

liave so often visited (Jreat i>ritain

of the cirenhitin}i^

which, im a

terrible crises

which

and the United States, the two conn-

Christendoni, the most completely under the doininntion

the fallacies of iidhition, and of the power of

oi'

lejjislative l)odics to liunt

and control the business operations of a [teople. Then shall we have l>rosperity, hapi)iness, and real peace, and forever rid ourselves of that element

potent

in

in

our system which, by creating panics and

making

the rich richer

crises, is

HENRY CAREY PuiLADEU'iiu, November

7,

the most

and the poor poorer.

1873.

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