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The Credit Theory of Money By A. Mitchell Innes From The Banking Law Journal, Vol. 31 (1914), ec.!"#n., $#%es 1&1'1(). *+ditor,s -ote. . /o m0ch h#s 1een 2ritten on the s013ect of 4money4 th#t # scientific 5riter li6e Mr. Innes is often mis0nderstood. M#ny economists #nd colle%e 7rofessors h#8e differed 2ith the st#tements m#de in his first 7#7er, 10t it seems th#t none 2ere #1le to dis7ro8e his 7osition. Follo2in% this n0m1er there 2ill #77e#r # sym7osi0m of criticisms #nd re7lies to the first 7#7er, #nd 2e cordi#lly in8ite criticisms #nd re7lic# to this his second 7#7er.9 The #rticle 2hich #77e#red in the M#y, 1913, n0m1er of this ":;<-A= 0nder the title 45h#t is Money>4 2#s # s0mm#ry e?7osition of the Credit Theory of money, #s o77osed to the Met#llic Theory 2hich h#s hitherto 1een held 1y ne#rly #ll histori#ns #nd h#s formed the 1#sis of the te#chin% of 7r#ctic#lly #ll economists on the s013ect of money. ;7 to the time of Ad#m /mith, not only 2#s money identified 2ith the 7recio0s met#ls, 10t it 2#s 7o70l#rly held th#t they formed the only re#l 2e#lth@ #nd tho0%h it m0st not 1e tho0%ht th#t the 7o70l#r del0sion 2#s held 1y #ll serio0s thin6ers, still, to Ad#m /mith 1elon%s the credit of h#8in% fin#lly #nd for #ll time est#1lished the 7rinci7le th#t 2e#lth does not reside in 7recio0s met#ls. B0t 2hen it c#me to the A0estion of the n#t0re of money, Ad#m /mith,s 8ision f#iled him, #s the contr#dictory n#t0re of his st#tements #ttests. It co0ld not h#8e 1een other2ise. +8en to'd#y #cc0r#te inform#tion #s to the historic#l f#cts concernin% money is none too #ccessi1leB in the d#y of Ad#m /mith, the m#teri#l on 2hich to fo0nd # correct theory of money 2#s not #8#il#1le, e8en h#d he 7ossessed the 6no2led%e 2ith 2hich to 0se it. /te0#rt 7ercei8ed th#t the monet#ry 0nit 2#s not necess#rily identified 2ith coin#%e, M0n re#liCed th#t %old #nd sil8er 2ere not the 1#sis of forei%n tr#de, Bois%0ille1ert h#d 1oldly #sserted th#t 7#7er f0lfilled #ll the f0nctions 2hich 2ere 7erformed 1y sil8er. B0t #7#rt from # fe2 h#lf'formed ide#s s0ch #s these, there 2#s nothin% 2hich co0ld %0ide Ad#m /mith in the #ttem7t to sol8e the 7ro1lems of his 7#rt of his InA0iry, #nd, h#8in% con8inced himself of the tr0th of his m#in contention th#t 2e#lth 2#s not %old #nd sil8er, he 2#s f#ced 2ith t2o #ltern#ti8es. +ither money 2#s not %old #nd sil8er, or it 2#s not 2e#lth, #nd he ine8it#1ly chose the l#tter #ltern#ti8e. Derein, ho2e8er, Ad#m /mith c#me into conflict not 2ith # 7o70l#r del0sion 10t 2ith the re#lities of life #s le#rnt from the 0ni8ers#l e?7erience of m#n6ind. If money is not 2e#lth, in the common #cce7t#tion of the 2ord #s me#nin% th#t mysterio0s 470rch#sin% 7o2er4 2hich #lone constit0tes re#l riches, then the 2hole of h0m#n commerce is 1#sed on # f#ll#cy. /mith,s definition of money #s 1ein%, not 2e#lth, 10t the 42heel 2hich circ0l#tes 2e#lth,4 does not e?7l#in the f#cts 2hich 2e see #ro0nd 0s, the stri8in% #fter money, the desire to #cc0m0l#te money. If money 2ere 10t # 2heel, 2hy sho0ld 2e try to #cc0m0l#te 2heels. 5hy sho0ld # million 2heels 1e of more 0se th#n one, or, if 2e #re to re%#rd money #s #ll one 2heel, 2hy sho0ld # h0%e 2heel ser8e 1etter th#n # sm#ll one, or #t #ny r#te # moder#te one. The #n#lo%y is f#lse. M0ch h#s 1een 2ritten since the d#ys of Ad#m /mith on the s013ect of money, #nd m0ch 0sef0l in8esti%#tion h#s 1een m#de, 10t 2e still hold to the old ide# th#t %old #nd sil8er #re the only re#l money #nd th#t #ll other forms of money #re mere s01stit0tes. The necess#ry res0lt of this f0nd#ment#l error is th#t the 0tmost conf0sion 7re8#ils in this 1r#nch of the science of 7olitic#l economy, #s #ny one 2ill see 2ho c#res to t#6e the tro01le to com7#re the ch#7ters on 45e#lth,4 4Money,4 4C#7it#l,4 4Interest,4 4Income4 in the 2or6s of reco%niCed #0thorities since Ad#m /mith. There is h#rdly # 7oint on 2hich #ny t2o #%reed. Do2 com7lete the di8orce is 1et2een the e?7erience of d#ily life #nd the te#chin% of the economists c#n 1est 1e seen 1y re#din%, for e?#m7le, M#rsh#ll,s ch#7ter on c#7it#l, 2ith its com7lic#ted di8isions into n#tion#l c#7it#l, soci#l c#7it#l, 7erson#l c#7it#l, etc. +8ery 1#n6er #nd e8ery commerci#l m#n 6no2s th#t there is only one 6ind of c#7it#l, #nd th#t is money. +8ery commerci#l #nd fin#nci#l tr#ns#ction is 1#sed on the tr0th of this 7ro7osition, e8ery 1#l#nce sheet is m#de o0t in

this 2ell'est#1lished f#ct. And yet e8ery economist 1#ses his te#chin% on the hy7othesis th#t c#7it#l is not money. It is only 2hen 2e 0nderst#nd #nd #cce7t the credit theory, th#t 2e see ho2 7erfectly science h#rmoniCes 2ith the 6no2n f#cts of e8eryd#y life. /hortly. The Credit Theory is thisB th#t # s#le #nd 70rch#se is the e?ch#n%e of # commodity for credit. From this m#in theory s7rin%s the s01'theory th#t the 8#l0e of credit or money does not de7end on the 8#l0e of #ny met#l or met#ls, 10t on the ri%ht 2hich the creditor #cA0ires to 47#yment,4 th#t is to s#y, to s#tisf#ction for the credit, #nd on the o1li%#tion of the de1tor to 47#y4 his de1t #nd con8ersely on the ri%ht of the de1tor to rele#se himself from his de1t 1y the tender of #n eA0i8#lent de1t o2ed 1y the creditor, #nd the o1li%#tion of the creditor to #cce7t this tender in s#tisf#ction of his credit.E /0ch is the f0nd#ment#l theory, 10t in 7r#ctice it is not necess#ry for # de1tor to #cA0ire credits on the s#me 7ersons to 2hom he is de1tor. 5e #re #ll 1oth 10yers #nd sellers, so th#t 2e #re #ll #t the s#me time 1oth de1tors #nd creditors of e#ch other, #nd 1y the 2onderf0lly efficient m#chinery of the 1#n6s to 2hich 2e sell o0r credits, #nd 2hich th0s 1ecome the cle#rin% ho0ses of commerce, the de1ts #nd credits of the 2hole comm0nity #re centr#liCed #nd set of #%#inst e#ch other. In 7r#ctice, therefore, #ny %ood credit 2ill 7#y #ny de1t. A%#in in theory 2e cre#te # de1t e8ery time 2e 10y #nd #cA0ire # credit e8ery time 2e sell, 10t in 7r#ctice this theory is #lso modified, #t le#st in #d8#nced commerci#l comm0nities. 5hen 2e #re s0ccessf0l in 10siness, 2e #cc0m0l#te credits on # 1#n6er #nd 2e c#n then 10y 2itho0t cre#tin% ne2 de1ts, 1y merely tr#nsferrin% to o0r sellers # 7#rt of o0r #cc0m0l#ted credits. :r #%#in, if 2e h#8e no #cc0m0l#ted credits #t the moment 2e 2ish to m#6e # 70rch#se, 2e c#n, inste#d of 1ecomin% the de1tors of the 7erson from 2hom 2e 10y, #rr#n%e 2ith o0r 1#n6er to 41orro24 # credit on his 1oo6s, #nd c#n tr#nsfer this 1orro2ed credit to o0r seller, on 0ndert#6in% to h#nd o8er to the 1#n6er the s#me #mo0nt of credit (#nd somethin% o8er) 2hich 2e #cA0ire 2hen 2e, in o0r t0rn, 1ecome sellers. Then #%#in, the %o8ernment, the %re#test 10yer of commodities #nd ser8ices in the l#nd, iss0es in 7#yment of its 70rch#sesF 8#st A0#ntities of sm#ll to6ens 2hich #re c#lled coins or notes, #nd 2hich #re redeem#1le 1y the mech#nism of t#?#tion, #nd these credits on the %o8ernment 2e c#n 0se in the 7#yment of sm#ll 70rch#ses in 7reference to %i8in% credits on o0rsel8es or tr#nsferrin% those on o0r 1#n6ers. /o n0mero0s h#8e these %o8ernment to6ens 1ecome in the l#st fe2 cent0ries #nd so 0ni8ers#l their 0se e8eryd#y life . f#r e?ceedin% th#t of #ny other s7ecies of money . th#t 2e h#8e come to #ssoci#te them more es7eci#lly 2ith the 2ord 4money.4 B0t they h#8e no more cl#im to the title th#n #ny other to6ens or #c6no2led%ements of de1t. +8ery merch#nt 2ho 7#ys for # 70rch#se 2ith his 1ill, #nd e8ery 1#n6er 2ho iss0es his notes or #0thoriCes dr#fts on the Tre#s0ry, or 2hich 70ts its st#m7 on # 7iece of met#l or # sheet of 7#7er, #nd of #ll the f#lse ide#s c0rrent on the s013ect of money none is more h#rmf0l th#n th#t 2hich #ttri10tes to the %o8ernment the s7eci#l f0nction of mono7oliCin% the iss0es of money. If 1#n6s co0ld not iss0e money, they co0ld not c#rry on their 10siness, #nd 2hen the %o8ernment 70ts o1st#cles in the 2#y of the iss0e of cert#in forms of money, one of the res0lts is to force the 701lic to #cc0stom itself to other #nd 7erh#7s less con8enient forms. As c#n 1e cle#rly 7ro8ed 1y c#ref0l st0dy of history, # doll#r or # 7o0nd or #ny other monet#ry 0nit is not # fi?ed thin% of 6no2n siCe #nd 2ei%ht, #nd of #scert#ined 8#l0e, nor did %o8ernment money #l2#ys hold the 7re'eminent 7osition 2hich it to'd#y en3oys in most co0ntries . not 1y #ny me#ns. In Fr#nce not so lon% #%o, not only 2ere there m#ny different monet#ry 0nits, #ll c#lled 1y the s#me n#me of li8re, 10t these li8res . or s0ch of them #s 2ere 0sed 1y the %o8ernment . 2ere #%#in often cl#ssified into forte monn#ie #nd f#i1le monn#ie, the %o8ernment money 1ein% f#i1le. This distinction im7lied th#t the %o8ernment money 2#s of less 8#l0e th#n 1#n6 money, or, in technic#l l#n%0#%e, 2#s de7reci#ted in terms of 1#n6 money, so th#t the 1#n6ers ref0sed, in s7ite of the le%#l

tender l#2s, to #cce7t # li8re of credit on the %o8ernment #s #n eA0i8#lent of # li8re of credit on # 1#n6. The 6in%s #nd their co0ncillors 2ere often 70CCled 1y this 7henomenon, #nd the conseA0ences 2hich flo2ed from it. Time #nd #%#in they iss0ed money 2hich they cert#inly 1elie8ed to 1e 4forte,4 #nd decl#red to 1e so 1y l#2, #nd yet soon #fter, they h#d to #8o2 th#t in some mysterio0s m#nner, it h#d 4de8en0 f#i1le,4 1ecome 2e#6. 5ith the #77#rent e?ce7tion of +n%l#nd, 2here the de7reci#tion of %o8ernment money, tho0%h consider#1le, 2#s f#r less th#n on the continent, # simil#r sit0#tion 2#s %ener#l thro0%ho0t +0ro7e@ in co0ntries in 2hich there 2#s # domin#nt 1#n6, li6e Amsterd#m, D#m10r% #nd Venice, the hi%her st#nd#rd 1ein% 6no2n #s 41#n6 money,4 #nd the lo2er st#nd#rd #s 4c0rrent money.4 :0t of this sit0#tion rose #nother interestin% #nd im7ort#nt 7henomenonB ' 2hile the 2holes#le tr#de, 2hich de#lt 2ith the 1#n6ers follo2ed the 1#n6 st#nd#rd, the ret#il tr#de 2hich de#lt l#r%ely thro0%h the medi0m of the %o8ernment coins, n#t0r#lly follo2ed more or less closely the %o8ernment st#nd#rdE #nd 7rices rose #s the st#nd#rd fell in 8#l0e. In the Germ#n /t#tes, 2here there 2ere liter#lly h0ndreds of monet#ry st#nd#rds, #ll c#lled the s#me n#me of M#r6F the history of money is 7#rtic0l#rly in8ol8ed, #nd the f#ct th#t the ret#il tr#de #l2#ys follo2ed # lo2er st#nd#rd th#n did the 2holes#le tr#de in the s#me 7l#ce, h#s led histori#ns to 1elie8e th#t the l#tter 0sed #s their st#nd#rd # M#r6 2ei%ht of 70re sil8er, 2hile the ret#il tr#de 0sed the M#r6 2ei%ht of the de1#sed sil8er 0sed in the coins. B0t this ide# c#n 1e concl0si8ely sho2n to 1e erroneo0s, #nd the 4m#r6 of 7fenni%sil1er4 did not refer to the 2ei%ht of the coins, 10t to the A0#ntity of 7fenni%'coins (the only coins 6no2n in Germ#ny d0rin% the %re#ter 7#rt of the middle #%es) reA0ired to m#6e 07 the money m#r6. As m#y 2ell 1e im#%ined, m0ch conf0sion 0s0#lly 7re8#iled in money m#tters, #nd the e?treme diffic0lty of settlin% in 2h#t st#nd#rd de1ts sho0ld 1e 7#id #nd contr#cts, es7eci#lly #s re%#rds rents sho0ld 1e f0lfilled, often c#0sed serio0s discontent. To remedy this the 6in%s of Fr#nce #ttem7ted, 7ro1#1ly 2ith little s0ccess, to introd0ce 1y le%isl#tion cert#in r0les #s to the st#nd#rd 2hich sho0ld 1e #77lied to the 8#rio0s c#ses 2hich mi%ht #rise. 5e, 2ho #re #cc0stomed to the 7i7in% times of 7e#ce #nd to lon% 7eriods of 7ros7erity #nd %o8ernment st#1ility h#rdly re#liCe ho2 0nst#1le # thin% #ny %i8en monet#ry 0nit m#y 1e. 5hen 2e in the ;nited /t#tes he#r of # f#ll in the 8#l0e of the 7#7er of some 1#n6 or the money of some forei%n %o8ernment #nd see it A0oted #t # disco0nt in terms of the doll#r, 2e #re #cc0stomed to thin6 of the doll#r #s #n in8#ri#1le 0nit #nd of the de7reci#ted money #s 1ein% somethin% 2hich h#s de7#rted in 8#l0e from o0r in8#ri#1le st#nd#rd. B0t 2hen 2e t#6e the tro01le to st0dy history 2e find th#t the doll#r of the Americ#n Go8ernment #nd the 7o0nd of the +n%lish Go8ernment h#8e 1y no me#ns #l2#ys 1een the st#1le thin%s 2e no2 im#%in% them to 1e. The +n%lish 7o0nd 2#s in 0se in #ll the Americ#n colonies, #nd yet the 7o0nd of e#ch differed from th#t of the mother co0ntry. In the e#rly d#ys of the Americ#n ;nion, the different offici#l monies differed from the st#nd#rd in 0se in 10siness #nd 2ere #t # he#8y disco0nt in terms of the l#tter. The notion th#t 2e #ll h#8e to'd#y th#t the %o8ernment coin is the one #nd only doll#r #nd th#t #ll other forms of money #re 7romises to 7#y th#t doll#r is no lon%er ten#1le in the f#ce of the cle#r historic#l e8idence to the contr#ry. A %o8ernment doll#r is # 7romise to 47#y,4 # 7romise to 4s#tisfy,4 # 7romise to 4redeem,4 30st #s #ll other money is. All forms of money #re identic#l in their n#t0re. It is h#rd to %et the 701lic to re#liCe this f0nction#l 7rinci7le, 2itho0t # tr0e 0nderst#ndin% of 2hich it is im7ossi1le to %r#s7 #ny of the 7henomen# of money. D#rd, too, is it to re#liCe th#t in Americ# to' d#y, there #re in #ny %i8en 7l#ce m#ny different doll#rs in 0se, for the f#ct is not so #77#rent in o0r d#ys #s it 2#s in former times. =et 0s s077ose th#t I t#6e to my 1#n6er in, s#y, -e2 :rle#ns, # n0m1er of si%ht dr#fts of the s#me nomin#l 8#l0e, one on the /01'Tre#s0ry, one on #nother 2ell' 6no2n 1#n6 in the city, one on #n o1sc0re tr#desm#n in the s010r1s, one on # 2ell'6no2n 1#n6 in -e2 Hor6, #nd one on # re70t#1le merch#nt in Chic#%o. For the dr#ft on the /01'Tre#s0ry #nd for th#t on the 1#n6 in the city, my 1#n6er 2ill 7ro1#1ly %i8e me # credit for e?#ctly the nomin#l 8#l0e, 10t the others 2ill #ll 1e e?ch#n%ed #t different 7rices. For the dr#ft on the -e2 Hor6 1#n6 I mi%ht

%et more th#n the st#ted #mo0nt, for th#t of the -e2 Hor6E merch#nt, I sho0ld 7ro1#1ly %et less, 2hile for th#t one on the o1sc0re tr#desm#n, my 1#n6er 2o0ld 7ro1#1ly %i8e nothin% 2itho0t my endorsement, #nd e8en then I sho0ld recei8e less th#n the nomin#l #mo0nt. All these doc0ments re7resent different doll#rs of de1t, 2hich the 1#n6er 10ys for 2h#te8er he thin6s they m#y 1e 2orth to him. The 1#n6er 2hose doll#rs 2e 10y, estim#tes #ll these other doll#rs in terms of his o2n. The doll#r of # first cl#ss 1#n6er is the hi%hest st#nd#rd of credit th#t c#n 1e o1t#ined %ener#lly s7e#6in%, tho0%h the st#nd#rd of # first cl#ss 1#n6er in # city li6e =ondon or -e2 Hor6 m#y 1e 2orth to # 7ro8inci#l 1#n6er some2h#t more th#n his o2n money. The doll#r of %o8ernment money in Americ# is eA0#l to th#t of 1#n6 money, 1ec#0se of the confidence 2hich 2e h#8e come to h#8e in %o8ernment credit, #nd it 0s0#lly r#n6s in #ny %i8en city sli%htly hi%her th#n does the money of # 1#n6er o0tside the city, not #t #ll 1ec#0se it re7resents %old, 10t merely 1ec#0se the fin#nci#l o7er#tions of the %o8ernment #re so e?tensi8e th#t %o8ernment money is reA0ired e8ery2here for the disch#r%e of t#?es or other o1li%#tions to the %o8ernment. +8ery1ody 2ho inc0rs # de1t iss0es his o2n doll#r, 2hich m#y or m#y not 1e identic#l 2ith the doll#r of #ny one else,s money. It is # little diffic0lt to re#liCe this c0rio0s f#ct, 1ec#0se in 7r#ctice the only doll#rs 2hich circ0l#te #re %o8ernment doll#rs #nd 1#n6 doll#rs #nd, #s 1oth re7resent the hi%hest #nd most con8enient form of credit, their rel#ti8e 8#l0e is m0ch the s#me, tho0%h not #l2#ys identic#l. This #77#rent st#1ility of %o8ernment money in o0r d#y o1sc0res the 7henomenon 2hich 2#s f#mili#r to o0r foref#thers. The one essenti#l condition to the st#1ility of #ll money 1y 2homsoe8er iss0ed is, #s I e?7l#ined in the former #rticle, th#t it sho0ld 1e redeem#1le #t the 7ro7er time, not in 7ieces of met#l, 10t in credit. A credit redeems # de1t #nd nothin% else does, 0nless in 8irt0e of # s7eci#l st#t0te or # 7#rtic0l#r contr#ct. The m#in o1st#cle to the #do7tion of # tr0er 8ie2 of the n#t0re of money is the diffic0lty of 7ers0#din% the 701lic th#t 4thin%s #re not the 2#y they seem,4 th#t 2h#t #77e#rs to 1e the sim7le #nd o18io0s e?7l#n#tion of e8ery'd#y 7henomenon is incom7#ti1le 2ith #scert#in#1le, demonstr#1le f#cts . to m#6e the 701lic re#liCe, #s it 2ere, th#t 2hile they 1elie8e themsel8es to 1e 2#tchin% the s0n,s 7ro%ress ro0nd the e#rth, they #re re#lly 2#tchin% the 7ro%ress of the e#rth ro0nd the s0n. It is h#rd to dis1elie8e the e8idence of o0r senses. 5e see # l#2 2hich est#1lishes in the ;nited /t#tes # 4st#nd#rd doll#r4 of # definite 2ei%ht of %old of # cert#in fineness@ 2e see # l#2 m#6in% the #cce7t#nce of these coins in 7#yment of de1t o1li%#tory on the creditor . # l#2 2hich is cheerf0lly o1eyed 2itho0t A0estion@ 2e see #ll commerci#l tr#ns#ctions c#rried on in doll#rs@ #nd fin#lly 2e e8ery2here see coins (or eA0i8#lent notes) c#lled doll#rs or m0lti7les or fr#ctions thereof, 1y me#ns of 2hich inn0mer#1le 70rch#ses #re m#de #nd de1ts settled. /eein% #ll these thin%s, 2h#t more n#t0r#l th#n to 1elie8e th#t, 2hen the =#2 decl#red # cert#in coin to 1e the /t#nd#rd oll#r, it re#lly 1ec#me soB th#t 2hen 2e 7rono0nce the 2ord 4doll#r4 2e refer to # st#nd#rd coin, th#t 2hen 2e do o0r commerci#l tr#ns#ctions 2e do them, theoretic#lly #t le#st, in these coins 2ith 2hich 2e #re so f#mili#r. 5h#t more o18io0s th#t 2hen 2e %i8e or t#6e # 47romise to 7#y4 so m#ny doll#rs, 2e me#n there1y # 7romise to 7#y %olden coins or their eA0i8#lent. /0ddenly 2e #re told th#t o0r cherished 1eliefs #re erroneo0s, th#t the =#2 h#s no 7o2er to cre#te # st#nd#rd doll#r, th#t, 2hen 2e 10y #nd sell, the st#nd#rd 2hich 2e 0se is not # 7iece of %old, 10t somethin% #1str#ct #nd int#n%i1le, th#t 2hen 2e 47romise to 7#y4 2e do not 0ndert#6e to 7#y %old coins, 10t th#t 2e merely 0ndert#6e to c#ncel o0r de1t 1y #n eA0i8#lent credit e?7ressed in terms of o0r #1str#ct, int#n%i1le st#nd#rd@ th#t # %o8ernment coin is # 47romise to 7#y,4 30st li6e # 7ri8#te 1ill or note. 5h#t 2onder if the te#cher of the no8el doctrine is 8ie2 2ith s0s7icion> 5h#t 2onder if the 701lic ref0ses to 1e #t once con8inced th#t the e#rth re8ol8es #ro0nd the s0n> /o it is, ho2e8er. The eye h#s ne8er seen, nor the h#nd to0ched # doll#r. All th#t 2e c#n to0ch or see is # 7romise to 7#y or s#tisfy # de1t d0e for #n #mo0nt c#lled # doll#r. Th#t 2hich 2e h#ndle m#y 1e c#lled # doll#r certific#te or # doll#r note or # doll#r coin@ it m#y 1e#r 2ords 7romisin% to 7#y # doll#r or 7romisin% to e?ch#n%e it for # doll#r coin of %old or sil8er, or it m#y merely 1e#r the

2ord doll#r, or, in the c#se of the +n%lish so8erei%n, 2orth # 7o0nd, it m#y 1e#r no inscri7tion #t #ll, 10t merely # 6in%,s he#d. 5h#t is st#m7ed on the f#ce of # coin or 7rinted on the f#ce of # note m#tters not #t #ll@ 2h#t does m#tter, #nd this is the only thin% th#t m#tters isB 5h#t is the o1li%#tion 2hich the iss0er of th#t coin or note re#lly 0ndert#6es, #nd is he #1le to f0lfill th#t 7romise, 2h#te8er it m#y 1e> The theory of #n #1str#ct st#nd#rd is not so e?tr#ordin#ry #s it first #77e#rs, #nd it 7resents no diffic0lty to those scientific men 2ith 2hom I h#8e disc0ssed the theory. All o0r me#s0res #re the s#me. -o one h#s e8er seen on o0nce or # foot or #n ho0r. A foot is the dist#nce 1et2een t2o fi?ed 7oints, 10t neither the dist#nce nor the 7oints h#8e # cor7ore#l e?istence. 5e di8ide, #s it 2ere, infinite dist#nce or s7#ce into #r1itr#ry 7#rts, #nd de8ise more or less #cc0r#te im7lements for me#s0rin% s0ch 7#rts 2hen #77lied to thin%s h#8in% # cor7ore#l e?istence. 5ei%ht is the force of %r#8ity #s demonstr#ted 2ith reference to the o13ects #ro0nd 0s, #nd 2e me#s0re it 1y com7#rin% the effect of this force on #ny %i8en o13ects 2ith th#t e?erted on #nother 6no2n o13ect. B0t #t 1est, this me#s0re is 10t #n #77ro?im#tion, 1ec#0se the force is not e?erted e8ery2here eA0#lly. :0r me#s0re of time is # thin% to 2hich no concrete st#nd#rd c#n 1e #77lied, #nd #n ho0r c#n ne8er 1e rec6oned 2ith 7erfect #cc0r#cy. In co0ntries 2here sol#r time is 0sed, the ho0r is the t2enty' fo0rth 7#rt of the time rec6oned from s0nset to s0nset, #nd the st#nd#rd is therefore of the ro0%hest. B0t 1ec#0se the 7eo7le 2ho c#lc0l#te th0s li8e in co0ntries 2here the difference 1et2een the len%th of # d#y in s0mmer #nd in 2inter is not so %re#t #s it is f0rther north, they feel no incon8enience from this in#cc0r#cy, #nd indeed they do not seem to 1e #2#re of it . so stron% is the force of h#1it. Credit #nd de1t #re #1str#ct ide#s, #nd 2e co0ld not, if 2e 2o0ld, me#s0re them 1y the st#nd#rd of #ny t#n%i1le thin%. 5e di8ide, #s it 2ere, infinite credit #nd de1t into #r1itr#ry 7#rts c#lled # doll#r or # 7o0nd, #nd lon% h#1it m#6es 0s thin6 of these me#s0res #s somethin% fi?ed #nd #cc0r#te@ 2here#s, #s # m#tter of f#ct, they #re 7ec0li#rly li#1le to fl0ct0#tion. -o2 there,s only one test to 2hich monet#ry theories c#n 1e s013ected, #nd 2hich they m0st 7#ss, #nd th#t is the test of history. -othin% 10t history c#n confirm the #cc0r#cy of o0r re#sonin%, #nd if o0r theory c#nnot st#nd the test of history, then there is no tr0th in it. It is no 0se to #77e#l to the e8idence of o0r senses, it is 0seless to cite l#2s in s077ort of # theory. A l#2 is not # scientific tr0th. The l#2 m#y #ssert th#t # cert#in 7iece of met#l is # st#nd#rd doll#r, 10t th#t does not m#6e it so. The l#2 mi%ht #ssert th#t the s0n re8ol8ed #ro0nd the e#rth, 10t th#t 2o0ld not infl0ence the forces of n#t0re. =i6e c#0ses 7rod0ce li6e effects, #nd if %o8ernments h#d 1een #1le to cre#te st#nd#rd coins h#8in% # fi?ed 8#l0e in terms of the monet#ry 0nit, the monet#ry history of the 2orld m0st h#8e 1een different from 2h#t it h#s 1een. 5hile modern histori#ns de7lore the 2ic6edness of medie8#l mon#rchs 2ho 1ro0%ht #ll sorts of e8ils on their 7eo7le 1y their 0n7rinci7led de1#sements of the coin#%e, the 6in%s themsel8es, 2ho sho0ld h#8e 1een 7retty %ood 30d%es, #ttri10ted their misfort0nes to the 2ic6edness of their s013ects, im7elled 1y l0st of %#in to cli7 #nd file the coins, #nd to force the 7recio0s met#ls #1o8e their offici#l, or #s the roy#l doc0ments s#id, their 47ro7er 8#l0e4 . #nd to cli7 the coins, #nd to offer or t#6e the coins #t #ny 10t their offici#l 8#l0e 2ere crimes for 2hich se8ere 7en#lties 2ere en#cted. B0t e8en 2hen 2e h#8e %r#s7ed this tr0th there rem#in o1sc0rities 2hich in the 7resent st#te of o0r 6no2led%e c#nnot 1e entirely elimin#ted. 5h#t is # monet#ry 0nit> 5h#t is # doll#r> 5e do not 6no2. All 2e do 6no2 for cert#inI#nd I 2ish to reiter#te #nd em7h#siCe the f#ct th#t on this 7oint the e8idence 2hich in these #rticles I h#8e only 1een #1le 1riefly to indic#te, is cle#r #nd concl0si8eI#ll, 1 s#y, th#t 2e, do 6no2 is th#t the doll#r is # me#s0re of the 8#l0e of #ll commodities, 10t is not itself # commodity, nor c#n it 1e em1odied in #ny commodity. It is

int#n%i1le, imm#teri#l, #1str#ct. It is # me#s0re in terms of credit #nd de1t. ;nder norm#l circ0mst#nces, it #77e#rs to h#8e the 7o2er of m#int#inin% its #cc0r#cy #s # me#s0re o8er lon% 7eriods. ;nder other circ0mst#nces it loses this 7o2er 2ith %re#t r#7idity. It is e#sily de7reci#ted 1y e?cessi8e inde1tedness, #nd once this de7reci#tion h#s 1ecome confirmed, it seems e?ceedin%ly diffic0lt #nd 7erh#7s im7ossi1le for it to re%#in its 7re8io0s 7osition. The de7reci#tion (or 7#rt of it) #77e#rs to 1e 7erm#nently #cA0ired@ tho0%h there is # difference in this res7ect 1et2een de7reci#tion in terms of forei%n money #nd # de7reci#tion of the 70rch#sin% 7rice of the credit 0nit in its o2n co0ntry. B0t 2hile the monet#ry 0nit m#y de7reci#te, it ne8er seems to #77reci#te. A %ener#l rise of 7rices #t times r#7id #nd #t times slo2 is the common fe#t0re of #ll fin#nci#l history@ #nd 2hile # r#7id rise m#y 1e follo2ed 1y # f#ll, the f#ll seems to 1e nothin% more th#n # ret0rn to # st#te of eA0ili1ri0m. I do01t 2hether there #re #ny inst#nces of # f#ll to # 7rice lo2er th#n th#t 2hich 7re8#iled 1efore the rise, #nd #nythin% #77ro#chin% # 7ersistent f#ll in 7rices, denotin% # contin0o0s rise of the 8#l0e of money, #77e#rs to 1e 0n6no2n. Th#t 2hich m#int#ins the ste#diness of the monet#ry 0nit (in so f#r #s it is ste#dy) #77e#rs, to 1e 2h#t Ad#m /mith c#lls the 4hi%%lin% of the m#r6et,4 the t0% of 2#r 2hich is const#ntly %oin% on 1et2een 10yers #nd sellers, the former to 7#y #s little of the 7recio0s thin% #s 7ossi1le, the l#tter to #cA0ire #s m0ch #s 7ossi1le. ;nder 7erfectly norm#l conditions, th#t is to s#y 2hen commerce is c#rried on 2itho0t #ny 8iolent dist0r1#nces, from 2h#te8er c#0se, these t2o forces #re 7ro1#1ly 2ell'1#l#nced, their stren%th is eA0#l, #nd neither c#n o1t#in #ny m#teri#l #d8#nt#%e o8er the other. In the A0iet secl0sion of those 7e#cef0l co0ntries 2hich 70rs0e the e8en tenor of their 2#y 0ninfl0enced 1y the 2#rs or the m#teri#l de8elo7ment of more stren0o0s l#nds, 7rices seem to m#int#in # rem#r6#1le re%0l#rity for lon% 7eriods. The most interestin% 7r#ctic#l #77lic#tion of the credit theory of money 2ill, I thin6, 1e fo0nd in the consider#tion of the rel#tion 1et2een the c0rrency system 6no2n #s the %old st#nd#rd #nd the rise of 7rices. /e8er#l economists of the 7resent d#y feel th#t s0ch # rel#tion e?ists, #nd e?7l#in it on the theory of the de7reci#tion of the 8#l0e of %old o2in% to the o7er#tion of the l#2 of s077ly #nd dem#nd, # l#2, ho2e8er, 2hich c#n h#rdly 1e re%#rded #s #77lic#1le to the c#se. 5e 6no2 ho2 it 2or6s in ordin#ry commerce. If the 7rod0ction of # commodity incre#ses #t # r#te %re#ter th#n the dem#nd, de#lers, findin% their stoc6 1ecomin% 0nd0ly l#r%e, lo2er the 7rice in order to find # m#r6et for the s0r7l0s. The lo2erin% of the 7rice is # conscio0s #ct. -ot so, ho2e8er, in the c#se of %old, the 7rice of 2hich, estim#ted in money, is in8#ri#1le@ #nd 2e m0st see6 #nother re#son. It 2ill, I thin6, 1e fo0nd in the theory here #d8#nced th#t the 8#l0e of # credit on #ny de1tor de7ends on #n eA0#tion 1et2een the #mo0nt of de1t immedi#tely 7#y#1le 1y the de1tor credit #nd the #mo0nt of credits 2hich he h#s immedi#tely #8#il#1le for the c#ncell#tion of his de1ts. 5hene8er 2e see in # co0ntry si%ns of # contin0o0s f#ll in the 8#l0e of the credit 0nit, 2e sh#ll, if 2e loo6 c#ref0lly, find th#t it is d0e to e?cessi8e inde1tedness. 5e h#8e seen in the Middle A%es ho2 7rices rose o2in% to the f#il0re of consec0ti8e %o8ernments thro0%ho0t +0ro7e, to o1ser8e the l#2 of the eA0#tion of de1ts #nd credits. The 8#l0e of the money 0nit fell o2in% to the const#nt e?cess of %o8ernment inde1tedness o8er the credits th#t co0ld 1e sA0eeCed 1y t#?#tion o0t of # 7eo7le im7o8erished 1y the r#8#%es of 2#r #nd the 7l#%0es #nd f#mines #nd m0rr#ins 2hich #fflicted them. If I #m not mist#6en, 2e sh#ll find #t the 7resent d#y # 7recisely simil#r res0lt of f#r different c#0ses. 5e sh#ll find, 7#rtly #s # res0lt of o0r c0rrency systems, n#tions, %o8ernments, 1#n6ers, #ll com1inin% to inc0r immedi#te li#1ilities %re#tly in e?cess of the, credits #8#il#1le to meet them. 5e im#%ine th#t, 1y m#int#inin% %old #t # fi?ed 7rice, 2e #re 6ee7in% 07 the 8#l0e of o0r monet#ry 0nit, 2hile, in f#ct, 2e #re doin% 30st the contr#ry. The lon%er 2e m#int#in %old #t its 7resent 7rice,

2hile the met#l contin0es to 1e #s 7lentif0l #s it no2 is, the more 2e de7reci#te o0r money. =et me try to m#6e this cle#r. In the 7re8io0s #rticle I e?7l#ined the n#t0re of # coin or certific#te #nd ho2 they #cA0ired their 8#l0e 1y t#?#tion. It is essenti#l to h#8e th#t e?7l#n#tion cle#rly in mind if 2h#t follo2s is to 1e intelli%i1le. To 1e%in 2ith it 2ill 1e 2ell to #m7lify th#t e?7l#n#tion, #nd to 7resent the 7ro1lem in # r#ther different #s7ect. 5e #re #cc0stomed to consider the iss0e of money #s # 7recio0s 1lessin%, #nd t#?#tion #s # 10rden 2hich is #7t to 1ecome 2ell ni%h intoler#1le. B0t this is the re8erse of the tr0th. It is the iss0e of money 2hich is the 10rden #nd the t#?#tion 2hich is the 1lessin%. +8ery time # coin or certific#te is iss0ed # solemn o1li%#tion is l#id on the 7eo7le of the co0ntry. A credit on the 701lic tre#s0ry is o7ened, # 701lic de1t inc0rred. It is tr0e th#t # coin does not 70r7ort to con8ey #n o1li%#tion, there is no l#2 2hich im7oses #n o1li%#tion, #nd the f#ct is not %ener#lly reco%niCed. It is ne8ertheless the sim7le tr0th. A credit, it c#nnot 1e too often or too em7h#tic#lly st#ted, is # ri%ht to 4s#tisf#ction.4 This ri%ht de7ends on no st#t0te, 10t on common or c0stom#ry l#2. It is inherent in the 8ery n#t0re of credit thro0%ho0t the 2orld. It is credit. The 7#rties c#n, of co0rse, #%ree 1et2een themsel8es #s to the form 2hich th#t s#tisf#ction sh#ll t#6e, 10t there is one form 2hich reA0ires no ne%oti#tion or #%reement, the ri%ht of the holder of the credit (the creditor) to h#nd 1#c6 to the iss0er of the de1t (the de1tor) the l#tter,s #c6no2led%ement or o1li%#tion, 2hen the former in his t0rn 1ecomes de1tor #nd the l#tter creditor, #nd th0s to c#ncel the t2o de1ts #nd the t2o credits. A is de1tor to B #nd %i8es his o1li%#tion or #c6no2led%ement of de1t. /hortly #fter2#rds, B 1ecomes de1tor to A #nd h#nds 1#c6 the #c6no2led%ement. The de1t of A to B #nd of B to A, the credit of B on A #nd th#t of A on B #re there1y c#ncelled. -othin% else 10t # credit %i8es this common l#2 ri%ht, #nd conseA0ently e8ery doc0ment or instr0ment, in 2h#te8er form or of 2h#te8er m#teri#l, 2hich %i8es this ri%ht of c#ncellin% # de1t 1y ret0rnin% it to the iss0er is # credit doc0ment, #n #c6no2led%ement of de1t, #n 4instr0ment of credit.4 -o2 # %o8ernment coin (#nd therefore #lso # %o8ernment note or certific#te 2hich re7resents # coin) confers this ri%ht on the holder, #nd there is no other essenti#lly necess#ry ri%ht 2hich is #tt#ched to it. The holder of # coin or certific#te h#s the #1sol0te ri%ht to 7#y #ny de1t d0e to the %o8ernment 1y tenderin% th#t coin or certific#te, #nd it is this ri%ht #nd nothin% else 2hich %i8es them their 8#l0e. It is imm#teri#l 2hether or not the ri%ht is con8eyed 1y st#t0te, or e8en 2hether there m#y 1e # st#t0te l#2 definin% the n#t0re of # coin or certific#te other2ise. =e%#l definitions c#nnot #lter the f0nd#ment#l n#t0re of # fin#nci#l tr#ns#ction. It m#tters not #t #ll 2h#t o13ect the %o8ernment h#s in 8ie2 in iss0in% their to6ens, 2hether its o13ect is to 7#y for # ser8ice rendered or to s077ly the 4medi0m of e?ch#n%e.4 5h#t the %o8ernment thin6s it is doin% 2hen it %i8es coins in e?ch#n%e for 10llion, or 2h#t n#me the l#2 %i8es to the o7er#tionI#ll this is of no conseA0ence. 5h#t is of conseA0ence is the res0lt of 2h#t they #re doin%, #nd this, #s I h#8e s#id, is th#t 2ith e8ery coin iss0ed # 10rden or ch#r%e or o1li%#tion or de1t is l#id on the comm0nity in f#8or of cert#in indi8id0#ls, #nd it c#n only 1e 2i7ed o0t 1y t#?#tion. 5hene8er # t#? is im7osed, e#ch t#?7#yer 1ecomes res7onsi1le for the redem7tion of # sm#ll 7#rt of the de1t 2hich the %o8ernment h#s contr#cted 1y its iss0es of money, 2hether coins, certific#tes, notes, dr#fts on the tre#s0ry, or 1y 2h#te8er n#me this money is c#lled. De h#s to #cA0ire his 7ortion of the de1t from some holder of # coin or certific#te or other form of %o8ernment money, mid 7resent it to the Tre#s0ry in liA0id#tion of his le%#l de1t. De h#s to redeem or c#ncel th#t 7ortion of the de1t. As # m#tter of f#ct most of the %o8ernment money finds its 2#y to the 1#n6s, #nd 2e 7#y o0r t#? 1y # cheA0e on o0r 1#n6er, 2ho h#nds o8er to the tre#s0ry the coins or notes or certific#tes in e?ch#n%e for the cheA0e #nd de1its o0r #cco0nt. This, thenIthe redem7tion of %o8ernment de1t 1y t#?#tionIis the 1#sic l#2 of coin#%e #nd of #ny iss0e of %o8ernment 4money 4in 2h#te8er form. It h#s l#in for%otten for cent0ries, #nd inste#d of it

2e h#8e de8elo7ed the notion th#t someho2 the met#llic ch#r#cter of the coin is the re#lly im7ort#nt thin% 2here#s in f#ct it h#s no direct im7ort#nce. 5e h#8e %ro2n so #cc0stomed to 7#yin% t#?es or #ny other de1t 2ith coins, th#t 2e h#8e come to consider it #s # sort of n#t0r#l ri%ht to do so. 5e h#8e come to consider coins #s 4money 47#r e?cellence, #nd the m#tter of 2hich they #re com7osed #s in some mysterio0s 2#y the em1odiment of 2e#lth. The more coins there #re in circ0l#tion, the more 4money4 there is, #nd therefore the richer 2e #re. The f#ct, ho2e8er, is th#t the more %o8ernment, money there is in circ0l#tion, the 7oorer 2e #re. :f #ll the 7rinci7les 2hich 2e m#y le#rn from the credit theory, none is more im7ort#nt th#n this, #nd 0ntil 2e h#8e thoro0%hly di%ested it 2e #re not in # 7osition to en#ct so0nd c0rrency l#2s. :ne m#y im#%ine the critics s#yin%B 4There m#y1e somethin% in 2h#t yo0 s#y. It is r#ther c0rio0s th#t the %o8ernment sho0ld t#6e %old coins in 7#yment of # de1t #nd sho0ld not 0ndert#6e to #cce7t #ny other commodity. $erh#7s, #s yo0 s#y, the st#m7in% of the coin does %i8e it # s7eci#l ch#r#cter, 7erh#7s the iss0e of # coin m#y 1e re%#rded #s the cre#tion of #n o1li%#tion, ho2e8er contr#ry the theory m#y 1e to 2h#t I h#8e hitherto 1een t#0%ht. /till, I c#nnot #lto%ether see thin%s in yo0r 2#y. In #ny c#se, 2h#te8er m#y 1e the effect of the st#m7in% of # coin, it does not #lter its 8#l0e in #ny 2#y. 5hen I 7resent yo0 2ith # so8erei%n or # J& 7iece, I re#lly 7#y my de1t to yo0, 1ec#0se I #m %i8in% yo0 somethin% th#t is intrinsic#lly 2orth th#t #mo0nt. Ho0 c#n melt it #nd sell it #%#in for the s#me #mo0nt, if yo0 2ish. 5h#t then is the 0se of m#6in% s0ch # 7oint of the o1li%#tion 2hich is 0ndert#6en 1y the iss0e of # coin>4 A simil#r criticism 2#s m#de in some2h#t different l#n%0#%e in # re8ie2 of my 7re8io0s #rticle. The #0thor 2rote #s follo2sB I 4Mr. Innes s#ys th#t modern %o8ernments h#8e cons7ired to r#ise the 7rice of %old, 10t in this he errs. -o le%isl#tion of the 7resent time fi?es the 7rice of %old or #ttem7ts to do so. +n%l#nd h#s en#cted th#t # cert#in 2ei%ht #nd fineness of %old sh#ll 1e c#lled # 7o0nd, the ;. /. th#t # cert#in 2ei%ht #nd fineness sh#ll 1e c#lled # doll#r. B0t # 7o0nd or doll#r #re mere #1str#ct n#mes #nd h#8e no connection or rel#tion 2ith 8#l0e of 7rice.E A li6e A0#ntity of %old 1y #ny other n#me 2ill h#8e the s#me 8#l0eI#s, for inst#nce, 10llion.4 -o2 let 0s see on 2hose side the error lies. If it 2ere tr0e, #s my critic s#ys, #nd #s m#ny economists hold, th#t, #ll the %o8ernments of the 2orld do is to en#ct th#t cert#in 2ei%ht of %old sh#ll 1e c#lled # 7o0nd or # doll#r, it is cert#in th#t s0ch # l#2 2o0ld 7rod0ce no effect on the m#r6et 7rice of %old. -o one 2o0ld 7#y #ny #ttention to so f0tile # l#2. B0t, #s I h#8e #lre#dy s#id, the %o8ernment in8ests # cert#in 2ei%ht of %old 2hen 1e#rin% the %o8ernment st#m7 2ith e?tr#ordin#ry 7o2er, th#t of settlin% de1t to the #mo0nt of # 7o0nd or # doll#r. This is # 8ery different thin% from merely c#llin% it 1y # cert#in n#me. As history ho2e8er concl0si8ely 7ro8es, e8en this 2o0ld not s0ffice to fi? the 7rice of %old in terms of the monet#ry 0nit if the %o8ernment confined itself to 10yin% only so m0ch %old #s 2#s reA0ired for the 70r7ose of the coin#%e. B0t the +n%lish %o8ernment h#s t#6en # f#r more im7ort#nt ste7 th#n this. It h#s done 2h#t medie8#l %o8ernments ne8er did@ it h#s 1o0nd the B#n6 of +n%l#nd (2hich is re#lly # %o8ernment de7#rtment of # r#ther 7ec0li#r 6ind) to 10y #ll %old offered to it #t the 0niform 7rice of K3 1L# 9d #n o0nce, #nd to sell it #%#in #t K3 1Ls 1M N d #n o0nce. In other 2ords, the 1#n6 is 1o0nd to %i8e for #n o0nce of %old # credit on its 1oo6s for K3 1Ls 9d, #nd to %i8e %old for credit, #t # sm#ll 7rofit of 1 N d #n o0nce. If this is not fi?in% the 7rice of %old, 2ords h#8e no me#nin%. The ;nited /t#tes %o8ernment #chie8es the s#me res0lt 1y # some2h#t different method. The Go8ernment of the ;nited /t#tes does not 7rofess to 10y %old. All it 7rofesses to do is to #cce7t it on de7osit, m#6e it into 1its c#lled st#nd#rd doll#rs, st#m7 them 2ith # %0#r#ntee of 2ei%ht #nd 70rity, #nd h#nd them 1#c6 to the o2ner, or, if he 2ishes it, he 2ill 1e %i8en # certific#te or certific#tes in 7l#ce of the %old. -o2 I #%#in 2ish to em7h#siCe the f#ct th#t it is not 2h#t the %o8ernment 7rofesses to do th#t m#tters, 10t 2h#t it #ct0#lly does. The f#ct th#t the l#2 re%#rds this tr#ns#ction #s # de7osit does not m#6e it so. The tr#ns#ction is not re#lly # de7osit, 10t # s#le #nd 70rch#se. In e?ch#n%e for e#ch o0nce of %old the o2ner recei8es in money. If the %old 2e,re merely t#6en on de7osit, or for the 70r7ose of st#m7in% it 2itho0t, %i8in%, to the o2ner of the st#m7ed

met#l, #ny s7eci#l ri%ht to 7#y his t#?es 2ith his %old, th#t is to s#y 2itho0t in8estin% the %old 2ith the ch#r#cter of #n o1li%#tion, 2itho0t m#6in% it into money, the tr#ns#ction 2o0ld 1e # de7osit, 10t not other2ise@ #nd the f#ct th#t the l#2 holds the tr#ns#ction to 1e # de7osit, merely sho2s th#t the le%isl#t0re #cted 0nder the infl0ence of erroneo0s 8ie2s on the s013ect of money. It co0ld h#rdly h#8e done other2ise, 1ec#0se the 2hole 2orld h#d for lon% 1een # sl#8e to the most #1s0rd notions on the s013ect, #nd indeed +n%l#nd 2Os one of the fe2 co0ntries in 2hich the 2ord sil8erE did not come to me#n money. By the se8enteenth cent0ry the ide# th#t %old #nd sil8er 2ere s013ect to the ordin#ry l#2s of 70rch#se #nd s#le h#d 1ecome, if not e?tinct, #t le#st so 1eclo0ded #s to 1e #s %ood #s de#d. Gold #nd sil8erE did not seem to 1e the o13ect of s#le #nd 70rch#se, 1ein% themsel8es, it 2#s s077osed, th#t for 2hich #ll commodities 2ere sold. It is only 1y 6ee7in% 1efore o0r mind,s eye # tr0er 8ie2 of the n#t0re of money #s ded0ced from 6no2n f#cts th#t 2e c#n re#liCe the re#l effect to the %o8ernment,s #ction. =et me %i8e #n ill0str#tion of the 7osition of # modern %o8ernment. 5hen # f#rmer dis7oses of his corn to # merch#nt in ret0rn for money, he is s#id to h#8e sold it. De m#y h#8e recei8ed 1#n6 notes, or # cheA0e or coin or the merch#nt,s 1ill or noteIit m#tters not 2hich. The tr#ns#ction is # tr0e s#le. -o2 let 0s s077ose th#t the f#rmer too6 the merch#nt,s note for the 8#l0e of the corn #nd th#t the l#tter, inste#d of sellin% the corn for his 7rofit, decl#red th#t it 2#s not his intention to 10y the corn, 10t merely to 6ee7 it on de7osit for the o2ner, #nd th#t he 2o0ld 6ee7 it till the o2ner or the holder of # 1ill 7resented it to 1e e?ch#n%ed for the corn #%#in. This sit0#tion of the merch#nt 2o0ld 1e 7recisely simil#r to th#t of the Go8ernment to'd#y 2ith res7ect to the 70rch#se of %old. The f#rmer 2o0ld de7osit the money 2ith his 1#n6er #nd 2o0ld %et # credit on the 1#n6er in e?ch#n%e for it. There, so f#r #s the f#rmer 2#s concerned, the m#tter 2o0ld end. The note 2o0ld e8ent0#lly find its 2#y to the merch#nt,s 1#n6er #nd 2o0ld 1e set off #%#inst his credit in the 1#n6 1oo6s. If he 2#s in # 8ery l#r%e 2#y of 10siness, li6e the %o8ernment, #nd %re#t A0#ntities of his notes 2ere on the m#r6et, there 2o0ld 1e no diffic0lty in %ettin% the corn in e?ch#n%e for # note if #ny one 2#nted it #t the 7rice #t 2hich the merch#nt h#d recei8ed it. If no one 2#nted it #t th#t 7rice, it 2o0ld rem#in on the merch#nt,s h#nds #nd he 2o0ld lose the 2hole 7rice 7#id. It does not in the le#st m#tter to the f#rmer 2h#t 8ie2 the merch#nt t#6es of the tr#ns#ction. De h#s dis7osed of his corn, #nd ne8er 2#nts to see it #%#in. De h#s %ot for it 2h#t he 2#nted, n#mely money, #nd th#t is #ll he c#res #1o0t. The s#me is tr0e 2ith reference to the rel#tions 1et2een the %o8ernment #nd the %old miners or %old de#lers. They dis7ose of their %old to the mint #nd in ret0rn they %et money, #nd th#t is #ll they c#re #1o0t. 5h#t the %o8ernment does 2ith the %old, or 2h#t 8ie2 they t#6e of the tr#ns#ction is imm#teri#l. -o2 if 2e c#n concei8e o0r merch#nt #ctin% #s the %o8ernment does, he mi%ht, inste#d of 6ee7in% the corn #nd iss0in% his notes or 1ill, se2 the corn into s#c6s of 8#rio0s siCes, 7rint on the s#c6s the #mo0nt of money he h#d 7#id for the corn cont#ined in them #nd then h#nd them 1#c6 to the f#rmer. These s#c6s 2o0ld then 1e money, #nd if s0ch #262#rd money co0ld 1e 0sed they 2o0ld circ0l#te 30st #s the notes 2o0ld #nd 30st #s o0r coins do. e1tors to the merch#nt 2o0ld h#8e the o7tion of h#ndin% them 1#c6 to him int#ct in 7#yment of their de1ts or, it they 2ished to do so, they co0ld 0se the corn, #nd the merch#nt,s o1li%#tion 2o0ld then 1e #0tom#tic#lly c#ncelled 1y their #ction. The only difference 1et2een the s#c6 of corn #nd the %old coin is one of con8enience, the one 1ein% l#r%e #nd 0n2ieldy, the other sm#ll #nd 7ort#1le. -o2 2h#t consider#tion 2o0ld infl0ence the holder of the s#c6 of corn in his decision ' 2hether to 0se the corn or 6ee7 the s#c6 int#ct #nd 7#y his de1t 2ith it> :18io0sly he 2o0ld 1e infl0enced 1y the m#r6et 8#l0e of the corn #s com7#red 2ith the #mo0nt of de1t 2hich co0ld 1e 7#id 2ith the o1li%#tion. If the m#r6et 7rice of corn 2ere s07erior to the #mo0nt of the de1t, it 2o0ld 1e #t once 0sed #s corn. If the m#r6et 7rice 2ere eA0#l to the de1t, 7#rt 2o0ld 1e 0sed #s corn #nd 7#rt 2o0ld, 7erh#7s, for # time, 1e 0sed in 7#yment of de1t@ 10t #ll 2o0ld 1efore lon% find its 2#y to the mill. If, ho2e8er, the #mo0nt of the de1t, #s 7rinted on the s#c6, 2ere s07erior to the m#r6et 8#l0e of the corn, then the s#c6 2o0ld 1e 6e7t int#ct #nd it 2o0ld 1e 0sed for 7#yin% de1t.

It 2o0ld th0s 1e e#sy to see from the n0m1er of s#c6s in circ0l#tion 2hether o0r merch#nt 2#s 10yin% corn #t or #1o8e its m#r6et 7rice. If he contin0ed 10yin%, #nd the s0c6s in circ0l#tion contin0ed to incre#se, it 2o0ld 1e # s0re si%n th#t they 2ere 2orth more #s money th#n they 2ere #s corn@ #nd 2hen the time c#me, #s it 2o0ld ine8it#1ly comeI1e lie ne8er so richI 2hen he 2o0ld no lon%er 1e #1le to 7ro8ide credits for the redem7tion of the s#c6s, their 8#l0e 2o0ld f#ll 1y the #mo0nt 2hich he h#il 7#id for the corn in e?cess of the 7rice #t 2hich the m#r6et co0ld #1sor1 it for cons0m7tion. This is one of the most im7ort#nt coroll#ries to the credit theory. A coin 2ill only rem#in in circ0l#tion for #ny len%th of time if its nomin#l 8#l0e e?ceeds the intrinsic 8#l0e of the met#l of 2hich it is com7osed, #nd this is tr0e not only theoretic#lly 10t historic#lly. Indeed, it is so self' e8ident th#t it mi%ht 1e recei8ed #s #?iom#tic, #nd 2o0ld 1e, h#d 2e not in8ol8ed o0rsel8es in # m#Ce of f#lse ide#s. To #77ly this coroll#ry to # co0ntry li6e Americ#, 2here little %old circ0l#tes #nd the 10l6 is held 1y the Tre#s0ry #%#inst certific#tes, it m#y 1e st#ted th0sB ' Gold c#nnot 1e held for #ny len%th of time #%#inst o0tst#ndin% certific#tes, 2itho0t 1ein% redeemed, 0nless the offici#l 7rice #t 2hich it is t#6en e?ceeds the m#r6et 8#l0e of the %old. Th0s st#ted, the 7rinci7le c#nnot 1e s01mitted to the test of history, 1ec#0se the ho#rdin% of %old thro0%h %o8ernment #ction is of modern %ro2th, #nd since the 7r#ctice h#s 1een #do7ted, the 7rice h#s 1een r0led 1y l#2, #nd 2e do not 6no2 2h#t the m#r6et 7rice is. B0t once 2e #cce7t the 7rinci7le (2hich c#n 1e 7ro8ed historic#lly 1eyond #ny re#son#1le do01t) th#t, the monet#ry 0nit is not # 2ei%ht of met#l, #nd th#t the 2ord 47rice4 #77lies eA0#lly to %old #s to #ny other commodity, it is o18io0s th#t %old #%#inst 2hich there #re o0tst#ndin% certific#tes co0ld no more 1e held, if reA0ired 1y the m#r6et, th#n c#n corn or 7i%'iron #%#inst 2hich there #re o0tst#ndin% 2#reho0se certific#tes. The 8ery e?7ression 4m#r6et 7rice4 me#ns the 7rice #t 2hich the 4m#r6et4 2ill #1sor1 the 2hole #8#il#1le s077ly@ #nd it is e8ident th#t if the m#r6et 2ere c#llin% for %old #t the c0rrent 7rice, the certific#tes 2o0ld soon 1e 7resented for redem7tion. There is #t 7resent stored in the ;nited /l#tes Tre#s0ry ne#rly # 1illion doll#rs, 2orth of %old held #%#inst o0tst#ndin% certific#tes, #nd the stoc6 is incre#sin% #t the r#te of #1o0t # h0ndred million doll#rs # ye#r. It is o18io0s th#t if the offici#l 7rice of %old, the 4mint 7rice4 #s it is c#lled, 2ere not hi%her th#n its m#r6et 8#l0e #s # commodity, s0ch # sit0#tion co0ld no more #rise th#n it co0ld 2ith #ny other commodity. It is 30st #s if the %o8ernment 1o0%ht #ll the e%%s in the co0ntry #t # %i8en 7rice #nd 6e7t them in cold stor#%e r#ther th#n sell them #t # lo2er 7rice. :f co0rse, # cert#in #mo0nt of the %old is 2ithdr#2n for cons0m7tion, 1ec#0se it c#nnot 1e 1o0%ht for less th#n the %o8ernment 7rice, 10t, if %old 2ere left to 1e %o8erned 1y the ordin#ry l#2s of commerce, there c#n 1e no A0estion 10t th#t the 7rice 2o0ld f#ll, to the %re#t loss of sh#reholders in %old mines #nd the %re#t 1enefit of the rest of h0m#nity. Dence I s#id in my l#st #rticle th#t the %o8ernments of the 2orld 2ere holdin% 07 %old #t # 7rohi1iti8e 7rice. If 2e 1elie8ed in e%%s #s 2e no2 1elie8e in %old, e%%s mi%ht no2 1e sellin% #t # doll#r # 7iece. They 2o0ld 7o0r into -e2 Hor6 1y the shi7lo#d from #ll 7#rts of the %lo1e. Their #rri8#l 2o0ld 1e h#iled 2ith deli%ht 1y the fin#nci#l 7#7ers, #nd the /ecret#ry of the Tre#s0ry, in his #nn0#l re7orts, 2o0ld e?7ress his s#tisf#ction #t this 8isi1le si%n of the so0nd fin#nci#l condition of the co0ntry. Visitors 2o0ld troo7 thro0%h the icy corridors of the %re#t %o8ernment 8#0lts 2here the 7recio0s o13ects 2ere stored, #nd 2o0ld %#Ce 2ith #dmir#tion on the 7rodi%io0s 2e#lth of the Tinted /t#les. C0st#rd 2o0ld 1e # delic#cy for the t#1les of the rich. -o2 let 0s ret0rn for # moment to o0r eccentric corn merch#nt, #nd see 2hether the 7ec0li#rity of his sit0#tion c#n thro2 #ny more li%ht on the fin#nci#l 7osition of the ;nited /t#tes. 5e sh#ll, I thin6, find th#t it thro2s # flood of li%ht on the 7ro1lem of the rise of 7rices, # 7ro1lem so %r#8e th#t no st#tesm#n of to'd#y c#n #fford to i%nore # theory 2hich e?7l#ins sim7ly #nd n#t0r#lly ho2 the 7henomenon #rises, #nd indic#tes the me#ns of #rrestin% its 7ro%ress. If o0r merch#nt 7ersisted in his sin%0l#r method of 10siness #nd 7#id # hi%her 7rice for the corn

th#n other merch#nts 2ere 2illin% to 7#y, corn 2o0ld 7o0r into his 2#reho0ses, #nd the m#r6et 2o0ld 1e flooded 2ith his 7#7er or 2ith s#c6s of corn 1e#rin% his o1li%#tion for the #mo0nt of the 70rch#se 7rice. Do2e8er rich he mi%ht 1e, his o1li%#tions 2o0ld soon e?ceed the #mo0nt of his credits@ the 1#n6ers 2o0ld ref0se to t#6e his 7#7er or his s#c6s #t their nomin#l 8#l0e, #nd they 2o0ld f#ll to # disco0nt. *+nd of 7#%e 1(49 In 8#in he 2o0ld 7rotest th#t his 1ills #nd s#c6s 2ere %ood, so lon% #s the s#c6s 2ere of f0ll 2ei%ht #nd th#t his 2#reho0ses cont#ined eno0%h corn to co8er the 1ills #t the 7rice #t 2hich he h#d 1o0%ht it. The 1#n6ers 2o0ld re7ly th#t the corn 2#s not s#l#1le #t his 7rice #nd th#t he m0st meet his o1li%#tions in credits, not in corn. If this is tr0e 2ith reference to o0r merch#nt, it m0st #lso 1e tr0e 2ith reference to %o8ernment iss0es. If the %o8ernment is re#lly 10yin% %old #t #n e?cessi8e 7rice, #nd if, in conseA0ence, it is iss0in% its o1li%#tions 2hich #re immedi#tely 7#y#1le in e?cess of its credits 2hich #re immedi#tely #8#il#1le, then, its o1li%#tions m0st 1e f#llin% in, 8#l0e. :2in% to the immense 7o2er of the %o8ernment, 7#rtly thro0%h its le%isl#ti8e 7o2er #nd 7#rtly thro0%h the enormo0s e?tent of its commerci#l #nd fin#nci#l tr#ns#ctions, it m#y 1e 7ossi1le more or less to conce#l the f#ct. B0t the f#ct m0st 1e there, if 2e c#n disco8er it. And the f#ct is there in the sh#7e of risin% 7rices. First let 0s see, 2hether the %o8ernment is iss0in% o1li%#tions in e?cess of its credits. From 2h#t I h#8e s#id in those t2o #rticles follo2s the im7ort#nt 7rinci7le th#t, # %o8ernment iss0e of money m0st 1e met 1y # corres7ondin% t#?. It is the t#? 2hich im7#rts to the o1li%#tion its 48#l0e.4 A doll#r of money is # doll#r, not 1ec#0se of the m#teri#l of 2hich is m#de, 10t 1ec#0se of the doll#r of t#? 2hich is im7osed to redeem it. B0t 2h#t do 2e see> The ;nited /t#tes %o8ernment iss0es its o1li%#tions 07 to #ny #mo0nt in e?ch#n%e for %old, 2itho0t the im7osition of #ny corres7ondin% t#?#tion@ #nd the res0lt is th#t there is #n enormo0s #nd const#ntly incre#sin% flo#tin% de1t, 2itho0t #ny 7ro8ision 2h#te8er 1ein% m#de for its e?tinction. It is tr0e th#t #ll the %o8ernment 7#7er money is con8erti1le into %old coin@ 10t redem7tion, of 7#7er iss0es in %old coin is not redem7tion, #t #ll, 10t merely the e?ch#n%e of one form of o1li%#tion, for #nother of #n identic#l n#t0re. This de1t #t 7resent #mo0nts to ne#rly three 1illion doll#rs, #nd, of co0rse incre#ses #s more #nd more %old is 1ro0%ht to the mint #nd ret0rned to the o2ners st#m7ed 2ith the %o8ernment o1li%#tion, or de7osited in the Tre#s0ry #%#inst certific#tes. :f this #mo0nt, #1o0t one'third is norm#lly in circ0l#tion. As re%#rds the coins #nd notes in circ0l#tion, the 701lic st#nds to the %o8ernment in 7recisely the s#me rel#tion #s does the holder of # 1#n6note to the 1#n6. The 701lic #re de7ositors 2ith the %o8ernment. B0t #s re%#rds the 10l6 of the coins #nd certific#tes, 2hich #re not norm#lly in circ0l#tionE the 701lic 2o0ld, if the %o8ernment 2ere in the s#me 7osition #s # commerci#l com7#ny or # 1#n6, cl#mor for 7#yment of the de1t, #nd if it 2ere not 7ro7erly 7#id, the de1tor 2o0ld 1e decl#red # 1#n6r07t. B0t 1ec#0se 2e do not re#liCe th#t the fin#nci#l needs of # %o8ernment do not differ from those of # 7ri8#te 7erson, #nd th#t 2e h#8e 30st #s m0ch ri%ht to 47#yment4 of # %old coin #s 2e h#8e to 4 7#yment 4 of # 1#n6note, it does not occ0r to 0s to m#6e #ny s0ch dem#nd on the %o8ernment, #nd the coins #nd certific#tes #cc0m0l#te 2ith the 1#n6s. /0ch 1ein% the sit0#tion, there c#n, if the Credit Theory is correct, 1e no A0estion 10t th#t the money of the Americ#n Go8ernment is de7reci#tin%. B0t it 2ill re#dily occ0r to those 2ho h#8e re#d so f#r th#t, if this is the c#se, 2e sho0ld find, in #ccord#nce 2ith the 7rinci7les here l#id do2n, th#t, there 2o0ld 1e to'd#y the s#me 7henomenon #s there 2#s in the middle #%es 2hen # simil#r sit0#tion #roseB ' n#mely t2o monet#ry st#nd#rds, the hi%her st#nd#rd 1ein% the 0nde7reci#ted st#nd#rd of the 1#n6s, #nd the other, 2ith the s#me n#me #s the former, 1ein% the de7reci#ted st#nd#rd of the %o8ernment. 5e mi%ht, in short, e?7ect to find t2o doll#rs, # 41#n6 doll#r4 #nd # 4c0rrent doll#r,4 #nd 2e 2o0ld then h#8e, 30st #s in the middle #%es, t2o 7rices for commodities, the 1#n6 7rice 1ein% 0sed 1y 2holes#le de#lers #nd the c0rrent, 7rice, 2hich 2o0ld 1e he st#nd#rd of the coin#%e, 1ein% 0sed for the ret#il tr#de. 5e sho0ld then 7ro1#1ly see the difference, 1et2een the t2o %r#d0#lly incre#sin%, #nd ret#il 7rices risin% 2hile 2holes#le 7rices in terms of the 1#n6 money rem#inin% more or less st#tion#ry.

B0t 2e see nothin% of #ll this. :n the contr#ry, there is #77#rently no s7eci#l de7reci#tion of the %o8ernment money, 10t # %r#d0#l rise of 7rices, # rise 2hich, if it im7lies the de7reci#tion of #ny money, im7lies e8idently the de7reci#tion of #ll money, 1y 2homsoe8er iss0ed@ #nd there is nothin% in the credit theory, if considered 1y itself, 2hich 2o0ld le#d the st0dent to thin6 th#t # %ener#l f#ll in the 8#l0e of 1#n6 money or merch#nts, money 2o0ld follo2 #n e?cessi8e inde1tedness on the 7#rt of the %o8ernment. Ass0min% then, th#t the rise of 7rices does indic#te # %ener#l de7reci#tion of money, #n e?7l#n#tion 2hich is #cce7ted 1y most 2riters, #nd #ss0min% th#t, so f#r #s the %o8ernment money is concerned, the de7reci#tion is s#tisf#ctorily e?7l#ined 1y the credit theory@ to 2h#t #re 2e to #ttri10te the f#ct th#t this de7reci#tion is not confined to %o8ernment money, 10t is sh#red 1y #ll the money of the co0ntry. It m0st 1e #t once #dmitted th#t m0ch diffic0lty s0rro0nds this A0estion. The 2or6in%s of the forces of commerce th#t control 7rices h#8e #l2#ys 1een o1sc0re, #nd #re not less so th#n they formerly 2ere ' 7ro1#1ly, indeed, more so. The %re#t ccom1in#tions 2hich #re s0ch 7o2erf0l f#ctors in the re%0l#tion of 7rices in Americ#, #nd the %re#t s7ec0l#ti8e fin#nci#l interests 2hose o7er#tions #ffect the 7rod0ce m#r6ets, do not let the 701lic into their secrets, if they h#8e #ny. Tho0%h 2e m#y t#l6 8#%0ely #1o0t the rise of the cost of 7rod0ction, incre#se of homo cons0m7tion, t#riffs, tr0sts, etc. the f#ct seems to 1e th#t 2e h#8e 8ery little #cc0r#te 6no2led%e of ho2 # rise of 7rice of #ny 7#rtic0l#r #rticle st#rts, #nd 0ntil 2e c#n %et e?#ct concrete inform#tion co8erin% in min0te det#il # %re#t n0m1er of tr#ns#ctions 1oth l#r%e #nd sm#ll, 2e sh#ll rem#in # %ood de#l in the d#r6 #s re%#rds the forces 1ehind the 8ise of 7rices, 2h#te8er theory 2e clin% to. D#8in% m#de these 7ref#tory rem#r6s, I no2 7roceed to %i8e 2h#t seem to me co%ent re#sons for 1elie8in% th#t # de7reci#tion of %o8ernment money, #s distinct from 1#n6 money, m0st, 0nder 7resent circ0mst#nces, 1e follo2ed 1y # %ener#l de7reci#tion of #ll money thro0%ho0t the co0ntry, th#t is to s#y, # %ener#l rise of 7rices, #nd not 1y # mere rise of 7rices in terms of %o8ernment money, 7rices in terms of 1#n6 money rem#inin% st#tion#ry. Thro0%ho0t history there seems to h#8e 1een # %ener#l tendency for 1#n6 money to follo2 the do2n2#rd co0rse of %o8ernment money sooner or l#ter, #nd the diffic0lty of dr#2in% # sh#r7 line 1et2een the t2o 2o0ld necess#rily 1e %re#ter no2 th#n formerly, 1oth o2in% to the f#ct th#t the de7reci#tion of %o8ernment money in o0r d#y is more %r#d0#l #nd therefore more insidio0s th#n it formerly 2#s, #nd 1ec#0se the enormo0s A0#ntity of %o8ernment money on the m#r6et m#6es it # m0ch more domin#nt f#ctor in tr#de th#n it 2#s in the middle #%es. There #re #t 7resent #s I h#8e 30st s#id, ne#rly three 1illion doll#rs of %o8ernment money in the ;nited /t#tes, #nd the #ddition of # h0ndred million # ye#r, tho0%h # l#r%e #mo0nt in itself, is less th#n fo0r 7er cent, of the 2hole. Moreo8er, 2hile the 4m0t#tions4 in old d#ys too6 7l#ce in # sin%le d#y, 2hen the coins mi%ht 1e red0ced 1y #s m0ch #s fifty 7er cent, in # sin%le edict, the infl#tion of the %o8ernment, money #t the 7resent time t#6es 7l#ce %r#d0#lly d#y 1y d#y, #s the %old is 1ro0%ht to the mint. Th0s 2e do not re#liCe th#t # de7reci#tion is %oin% on. A%#in in old d#ys the fin#nci#l str#its of the %o8ernments 2ere 2ell 6no2n to the 1#n6ers #nd merch#nts, 2ho 6ne2 too th#t e8ery iss0e of to6ens 2o0ld 1efore lon% 1e follo2ed 1y #n #r1itr#ry red0ction of their 8#l0e. ;nder these circ0mst#nces no 1#n6er in his senses 2o0ld t#6e them #t their f0ll nomin#l 8#l0e, #nd it 2#s e#sy to dr#2 # sh#r7 distinction 1et2een %o8ernment money #nd 1#n6 money. To'd#y, ho2e8er, 2e #re not #2#re th#t there is #nythin% 2ron% 2ith o0r c0rrency. :n the contr#ry, 2e h#8e f0ll confidence in it, #nd 1elie8e o0r system to 1e the only so0nd #nd 7erfect one, #nd there is th0s no %ro0nd for discrimin#tin% #%#inst %o8ernment iss0es. 5e #re not #2#re th#t %o8ernment money is %o8ernment de1t, #nd so f#r from o0r le%isl#tors re#liCin% th#t the iss0e of #ddition#l money is #n incre#se of #n #lre#dy infl#ted flo#tin% de1t, Con%ress, 1y the ne2 Feder#l <eser8e Act, 7ro7oses to iss0e # l#r%e A0#ntity of fresh o1li%#tions, in the 1elief th#t so lon% #s they #re redeem#1le in %old coin, there is nothin% to fe#r. B0t 1y f#r the most im7ort#nt f#ctor in the sit0#tion is the l#2 2hich 7ro8ides th#t 1#n6s sh#ll 6ee7

1& or PM or P& 7er cent, (#s the c#se m#y 1e) of their li#1ilities in %o8ernment c0rrency. The effect of this l#2 h#s 1een to s7re#d the ide# th#t the 1#n6s c#n 7ro7erly %o on lendin% to #ny #mo0nt, 7ro8ided th#t they 6ee7 this le%#l reser8e, #nd th0s the more the c0rrency is infl#ted, the %re#ter 1ecome the o1li%#tions of the 1#n6s. The, im7ort#nce of this consider#tion c#nnot 1e too e#rnestly im7ressed on the 701lic #ttention. The l#2 2hich 2#s 7res0m#1ly intended #s # limit#tion of the lendin% 7o2er of the 1#n6s h#s, thro0%h i%nor#nce of the 7rinci7les of so0nd money, #ct0#lly 1ecome the m#in c#0se of o8er'lendin%, the 7rime f#ctor in the rise of 7rices. +#ch ne2 infl#tion of the %o8ernment de1t ind0ces #n e?cess of 1#n6in% lo#ns fo0r or fi8e times #s %re#t #s the %o8ernment de1t cre#ted. Millions of doll#rs 2orth of this red0nd#nt c0rrency #re d#ily 0sed in the 7#yment of 1#n6 1#l#nces@ indeed millions of it #re 0sed for no other 70r7ose. They lie in the 8#0lts of the -e2 Hor6 Cle#rin% Do0se, #nd the ri%ht to them is tr#nsferred 1y certific#tes. These certific#tes 4font l# n#8ette4 #s the French s#y. They %o to #nd fro, 1#c62#rds #nd for2#rds from 1#n6 to 1#n6, 2e#8in% the #ir. The 7#yment of cle#rin% ho0se 1#l#nces in this 2#y co0ld not occ0r 0nless the c0rrency,, 2ere red0nd#ntB It is not re#lly 7#yment #t #ll, it is # 70rely fictitio0s o7er#tion, the s01stit0tion of # de1t d0e 1y the %o8ernment for # de1t d0e 1y # 1#n6. $#yment in8ol8es com7lete c#ncell#tion of t2o de1ts #nd t2o credits, #nd this c#ncell#tion is the only le%itim#te 2#y of 7#yin% cle#rin% ho0se de1ts. The e?istence, therefore, of # red0nd#nt c0rrency o7er#tes to infl#te 1#n6 lo#ns in t2o 2#ys, firstly, 1y ser8in% #s # 41#sis4 of lo#ns #nd secondly 1y ser8in% #s # me#ns of 7#yin% cle#rin% ho0se 1#l#nces. :8er ten million doll#rs h#8e 1een 7#id in one d#y 1y one 1#n6 1y # tr#nsfer of %o8ernment money in 7#yment of #n #d8erse cle#rin% ho0se 1#l#nce in -e2 Hor6. "0st #s the infl#tion of %o8ernment money le#ds to infl#tion of 1#n6 money, so, no do01t, the infl#tion of 1#n6 money le#ds to e?cessi8e inde1tedness of 7ri8#te de#lers, #s 1et2een e#ch other. The stre#m of de1t 2idens more #nd more #s it flo2s. Th#t s0ch # sit0#tion m0st 1rin% #1o0t # %ener#l decline in the 8#l0e of money, fe2 2ill 1e fo0nd to deny. B0t if 2e #re #s6ed to e?7l#in e?#ctly ho2 # %ener#l e?cess of de1ts #nd credits 7rod0ces this res0lt, 2e m0st #dmit th#t 2e c#nnot, e?7l#in. :r, #t le#st, it m0st 1e #dmitted 1y the 7resent 2riter th#t he c#nnot e?7l#in@ tho0%h others 2ith more insi%ht into the 7henomen# of commerce m#y 7ro1#1ly 1e #1le to s077ly his l#c6 of 6no2led%e. It is e#sy to see ho2 the 7rice of #ny 7#rtic0l#r commodity rises, 2hen the dem#nd e?ceeds the s077ly. It is e#sy to see ho2 the money of #ny 7#rtic0l#r co0ntry or 1#n6 m#y de7reci#te, if it is 6no2n to 1e in fin#nci#l diffic0lties o2in% to e?cessi8e inde1tedness. 5e c#n see the m#chinery #t 2or6. B0t ho2 #re 2e to see the m#chinery 1y 2hich 7rices #re r#ised, o2in% to # %ener#l e?cess of de1ts #nd credits, 2here no one reco%niCes th#t s0ch #n e?cess e?ists, 2hen no one re#liCes th#t there is #ny c#0se for the de7reci#tion of money> I #m inclined to thin6 th#t the e?7l#n#tion m#y 1e fo0nd in the dist0r1#nce of the eA0ili1ri0m 1et2een 10yers #nd sellers to 2hich 1 h#8e #lre#dy referred. Money is e#sier to come 1y th#n it 2o0ld 1e 0nder ordin#ry circ0mst#nces, #nd, 2hile the 7o2er of the 10yer to o1t#in the hi%hest 7ossi1le 7rice for his %oods is not diminished, the desire of the 10yer to 7#y #s little #s 7ossi1le is lessened, his resist#nce is 2e#6ened, he loses in the t0% of 2#r. A %ener#l s7irit of e?tr#8#%#nce is en%endered, 2hich en#1les the seller to 2in #s #%#inst the 10yer. Money re#lly loses its 8#l0e in the eyes of the 10yer. De m0st h#8e 2h#t he 2#nts immedi#tely, 2hether the 7rice is hi%h or lo2. :n the other h#nd, the e?cessi8e e#se 2ith 2hich # c#7it#list c#n o1t#in credit, en#1les him to hold 07 commodities s7ec0l#ti8ely, for # hi%her 7rice. It 70ts # 7o2er into the h#nds of the s7ec0l#tor 2hich he 2o0ld not norm#lly h#8e. These, ho2e8er, #re mere s0%%estions on my 7#rt #nd I do not 7retend th#t they s077ly # com7letely s#tisf#ctory e?7l#n#tion of the mech#nism 1y 2hich 7rices #re r#ised. /ellers #re #lso 10yers, #nd

10yers #re #lso sellers, #nd it is 1y no me#ns cle#r 2hy # m#n, in his c#7#city #s seller sho0ld h#8e more 7o2er one 2#y th#n #s # 10yer he h#s in #nother. The 2hole s013ect, ho2e8er, of the mech#nism of # rise of 7rices is one 2hich merits # c#ref0l st0dy on the 7#rt of those 2ho h#8e # more intim#te 6no2led%e of the 2or6in%s of commerce th#n the 7resent 2riter c#n l#y cl#im to. Before closin% this 7#7er, it m#y 1e 0sef0l to s0mm#riCe the 7rinci7#l 7oints 2hich it h#s 1een the #im of the 2riter to 1rin% 1efore st0dents of this most interestin%1 #nd little 0nderstood 1r#nch of 7olitic#l economy. There is no s0ch thin% #s # medi0m of e?ch#n%e. A s#le #nd 70rch#se is the e?ch#n%e of # commodity for # credit. Credit #nd credit #lone is money. The monet#ry 0nit is #n #1str#ct st#nd#rd for the me#s0rement of credit #nd de1t. It is li#1le to fl0ct0#tion #nd only rem#ins st#1le if the l#2 of the eA0#tion of credits #nd de1ts is o1ser8ed. A credit c#ncels # de1t@ this is the 7rimiti8e l#2 of commerce. By s#le # credit is #cA0ired, 1y 70rch#se # de1t is cre#ted. $0rch#ses, therefore, #re 7#id for 1y s#les. The o13ect of commerce is the #cA0isition of credits. A 1#n6er is one 2ho centr#lises the de1ts of m#n6ind #nd c#ncels them #%#inst one #nother. B#n6s #re the cle#rin% ho0ses of commerce. A coin is #n instr0ment of credit or to6en of inde1tedness@ identic#l in its n#t0re 2ith # t#lly or 2ith #ny other form of money, 1y 2homsoe8er iss0ed. The iss0e of money is not #n e?cl0si8e 7ri8ile%e of %o8ernment, 10t merely one of its f0nctions, #s # %re#t 10yer of ser8ices #nd commodities. Money in one form or #nother is, in f#ct, iss0ed 1y 1#n6s, merch#nts, etc. The de7reci#tion of money in the middle #%es 2#s not d0e to the #r1itr#ry de1#sement of the 2ei%ht #nd fineness of the coins. :n the contr#ry, the %o8ernment of the middle #%es str0%%led #%#inst this de7reci#tion 2hich 2#s d0e to 2#rs, 7estilences #nd f#mines ' in short to e?cessi8e inde1tedness. ;ntil modern d#ys, there ne8er 2#s #ny fi?ed rel#tionshi7 1et2een the monet#ry 0nit #nd the coin#%e. The 7recio0s met#ls #re not # st#nd#rd of 8#l0e. The 8#l0e of credit does not de7end on the e?istence of %old 1ehind it, 10t on the sol8ency of the de1tor. e1ts d0e #t # cert#in moment c#n only 1e off'set #%#inst credits 2hich 1ecome #8#il#1le #t th#t moment. Go8ernment money is redeemed 1y t#?#tion. The %o8ernment st#m7 on # 7iece of %old ch#n%es the ch#r#cter of the %old from th#t of # mere commodity to th#t of # to6en of inde1tedness. The redem7tion of 7#7er money in %old coin is not redem7tion #t #ll, 10t merely the e?ch#n%e of one form of o1li%#tion for #nother of #n identic#l n#t0re. The 4reser8es of l#2f0l money4 in the 1#n6s h#8e no more im7ort#nce th#n #ny other 1#n6 #sset. =#2s of le%#l tender 7romote 7#nics. The %o8ernments of the 2orld h#8e cons7ired to%ether to m#6e # corner in %old #nd hold it 07 #t #n e?cessi8e 7rice.

The nomin#l 8#l0e of the doll#r coin e?ceeds the m#r6et 8#l0e of the %old of 2hich it is m#de. Coins c#n only rem#in in circ0l#tion for #ny len%th of time if their nomin#l 8#l0e e?ceeds their intrinsic 8#l0e. The iss0e of coins in e?ch#n%e for %old #t # fi?ed #nd e?cessi8e 7rice, 2itho0t 7ro8idin% t#?es for their redem7tion, c#0ses #n infl#tion of %o8ernment money, #nd th0s c#0ses #n e?cessi8e flo#tin% de1t #nd # de7reci#tion of %o8ernment money. =#r%e reser8es of 4l#2f0l money,, in the 1#n6s #re e8idence of #n infl#tion of the %o8ernment c0rrency. The infl#tion of %o8ernment money ind0ces # still %re#ter infl#tion of credit thro0%ho0t the co0ntry, #nd # conseA0ent %ener#l de7reci#tion of money. The de7reci#tion of money is the c#0se of risin% 7rices. '''' <e#ders #re 2#rned th#t it is essenti#l to 1e#r const#ntly in mind the definition of credit, #s l#id do2n in the first #rticle. Those 2ho #re not #cc0stomed to this liter#l 0se of the 2ord 4credit,4 m#y find it e#sier to s01stit0te in their minds the 2ord 4de1t.4 Both 2ords h#8e the s#me me#nin%, the one or other 1ein% 0sed, #ccordin% #s the sit0#tion is 1ein% disc0ssed from the 7oint of 8ie2 of the creditor or the de1tor. Th#t 2hich is # credit from the 7oint of 8ie2 of the creditor is # de1t from the 7oint of 8ie2 of the de1tor. Modern %o8ernments 0nfort0n#tely do not limit their iss0es of money to the 7#yment of 70rch#ses. B0t of this l#ter on. I do not 2ish to 1e 0nderstood #s s#yin% th#t the ret#il tr#de follo2ed the st#nd#rd of the coins, e?ce7t to the e?tent th#t they sh#red the f#te of the 6in%,s li8re. :2in% to the #10se of the system of 4m0t#tions4 #nd the #ttem7ted monet#ry reforms, it is 7ro1#1le th#t the coins often s0ffered not only the de7reci#tion of the 6in%,s li8re, 10t h#d their o2n inde7endent fl0ct0#tions. =i6e the li8re in Fr#nce, the m#r6 2#s 1oth # me#s0re of 2ei%ht #nd # monet#ry 0nit. B0t 2hile the li8re 2#s ne8er 0sed for the 2ei%hin% of the 7recio0s met#ls, the m#r6 2#s the 0nit of 2ei%ht for these met#ls, #nd this h#s c#0sed Germ#n histori#ns to conf0se the t2o. Do2 the s#me 2ord c#me in m#ny co0nties, tho0%h not in #ll, to 1e 0sed for t2o s0ch different 70r7oses, 2e do not 6no2. $ossi1ly it ori%in#lly only si%nified # 0nit of #ny 6ind. Another inst#nce of the 0se of the s#me 2ord for the t2o different 6inds of me#s0rement is the 2ord 4inch,4 # me#s0re of len%th, #nd the 2ord 4o0nce4 # me#s0re of 2ei%ht. Both these 2ords #re etymolo%ic#lly the s#me. ;.B.B /ho0ld 7ro1#1ly re#dB Chic#%o Goshen,s 4Theory of Forei%n +?ch#n%es4 m0st 1e incl0ded #mon% scientific tre#tises on credit. D#rtley 5ithers,s recent 2or6s, 4The Me#nin% of Money4 #nd 4Money Ch#n%in%4 #re 7r#ctic#l r#ther th#n scientific tre#tises. They #re indis7ens#1le to the st0dent. +8en 2hen the coins th#t once 2ere sil8er 2ere most de1#sed, they 2ere still re%#rded #s sil8er in theory, tho0%h not in 7r#ctice. The 8ie2s on the s013ect of %old 2ere, ho2e8er, r#ther mi?ed. :2in% to the %o8ernment 7olicy of mono7oliCin% the iss0e of money in sm#ll de' nomin#tions, the #mo0nt in circ0l#tion incre#ses l#r%ely #t cert#in se#sons of the ye#r.