trend of prices is likely to be. Hence it is virtually impossible to adjust one's savings to the changing needs of the situation. Security against the vicissitudes of existence thus becomes more uncertain; and the risks of life are substantially increased. Since the real return from fixed investments is a diminishing one during periods of rising prices, it is preferable at such a time to invest in stocks rather than bonds. The reason for this is that the income from stocks is not fixed and is likely to increase as prices rise. Since the monetary value of the investment rises with the price level, the original investment does not shrink as it does in the case of bonds. While men of affairs may well take advantage of this factor, knowledge of it affords small comfort to those who are most adversely affected by a changing price level, namely, dependents with small knowledge of business and of the character of specific shares of stock. The risks involved in purchasing stocks, together with the inability, in most cases, to distribute the risks adequately by a variety of investments, generally necessitates those dependent upon an income from investments to purchase bonds rather than stocks. During a period of falling prices results opposite to those portrayed above tend to work out. Salaries are usually not reduced as prices fall, and the real income of the salaried man therefore increases. While wages fall, they do not as a rule decline as rapidly as prices; and the laboring class would accordingly also find its standard of living improved were it not for the fact that a period of falling prices is usually a period of dull times, during which the employer endeavors to minimize his losses by reducing the number of men on the pay-roll. It is therefore commonly urged that labor always gets the short end of things. QUESTIONS FOR DISCUSSION 1. Why was the function of money as a standard of deferred payments of comparatively late development? Is it a result or a cause of industrial progress? 2. Does the same commodity usually serve both as a pecuniary unit or common denominator of values, and as a standard of deferred payments? Is this necessarily the case? 3. What is the difference between value and price? 4. What is the value of the dollar unit? 5. What is meant by the mint price of gold? What is the mint price of standard gold? 6. What is meant by the level of prices? How is it determined? 7. To what various uses may an index number of relative prices be put? 8. What factors govern the value of gold as a commodity? 9. Have we ever reached the ideal in the matter of a standard for deferred payments? of a pecuniary unit? 10. Why should a fluctuating standard of deferred payments have deterred "saving" in Rome? Why should it have deterred capitalistic enterprise in general? II. Why did the fluctuating standard of paper currency at the time of the French Revolution result in wild speculation? 12. During the period of depreciated greenback currency in the United States, do you think the wholesale merchant was justified in requiring cash payments or very short-time credit terms? 13. Was the system of cash discounts that was developed fair to the buyer? to the seller? 14. Does a fluctuating standard interfere more with short- or with long-term credit operations? Why? 15. Why should European investors have sold American securities in the early nineties, when it was thought the United States might resort to a silver standard? 16. Would the conditions that existed in the early nineties have deterred you from making long-time loans? 17. "A debt for $1,000 that 1,000 bushels would have paid ten years ago now requires the farmer to give up 2,000 bushels of wheat, in exchange for these dollars, with which to pay the same debt. The debts now in existence are principally old debts or renewed or funded debts, or new debts contracted to pay old debts, or debts which the people have been forced to contract by reason of the continued decline of prices. The owners of products must now give up twice as much property to pay the taxes as in 1873" (open letter to President Cleveland, April, 1894; distributed among farmers in a pamphlet). Discuss. 18. To your way of thinking, was it the moral duty of the debtors to stand by their contracts? Suppose prices had risen, would the debtors have advocated a contraction of the currency? 19. "I object to the silver standard being adopted in lieu of the existing standard, because it will defraud all creditors out of one-half of the value of their debts. Every debt contracted since January 1, 1879, was contracted on the gold standard. The debtor honestly owes the value of 23. 22 grains of gold for every dollar promised, and the creditor is honestly entitled to receive it" (open letter in 1896 to Texas Democrats by Hon. Roger Q. Mills). Discuss. 20. Would not the men in the creditor class have had different views if they had been debtors? 21. Was the opposition to "cheap money" in New England due to superior honesty and morality, or to self-interest ? 22. "If a free silver bill becomes a law, a veteran who now gets a pension worth to him $4.00 per month would receive actually $2.80, with the chance of its going down to an actual value of $2.40. An old soldier who is a total physical wreck gets $72.00 a month. If a free silver bill passed, while he would nominally get this sum, he would really get but $50.40. This coinage question should not be one of party politics. It rises above partisanship. The honor of the country is at stake. Its good faith not only to its living soldiers is brought into question, but if a so-called free coinage bill becomes law, the widows and orphans of the nation's dead will be robbed by the laws of the land they died to save. The law would work a monstrous wrong, for from the moment it goes upon the statute book it represents over $45,000,000 per year taken from the ex-soldiers, their widows, and their orphans" (Congressman Harter in a circular to all the Grand Army posts, 1892). Do you agree? 23. Upon what classes of the community do the evils of a depreciating standard fall most heavily? 24. If the value of the dollar falls 8 per cent in a year, how much net interest does a man receive who buys bonds yielding 5 per cent ? 25. What was the net return on a 4 per cent Liberty bond purchased in 1917? Was the investor indirectly paying the costs of the war? (See chart on.p. 31.) 26. Do investors usually take into account the shrinkage in the value of the standard? 27. If a man "discounts the future" at the rate of 5 per cent, would he invest at all when the dollar is shrinking rapidly? 28. Most educational and eleemosynary institutions receive a large portion of their income from investments in bonds. In a period of rising prices is it easy for them to increase salaries and thus offset the high cost of living? Is it easy for them to raise tuition sufficiently to offset at once the shrinkage in the real return from investments and to increase salaries? What is the way out? 29. An insurance company invests its premiums largely in bonds. What is the result during periods of rising prices? falling prices? 30. Do you imagine insurance companies, savings banks, etc., would shift investments to stocks during periods of rising prices? 31. What is meant, precisely, by the high cost of living? Does it mean hard times? for everybody? If prices were low, would everybody be happy? Were they in the early nineties? 32. Is there any means by which the salaried and wage-earning classes may escape the evils of rising prices? 33. If prices should recede in this after-the-war period, what classes will gain? what ones lose? 34. Indicate why a business man might dislike falling prices. 35. Why do farmers usually object to falling prices? 36. What is the attitude of labor toward falling prices? 37. Do you think it possible that we might have an anti-deflation movement at the present period if prices should decline? 38. Which do you prefer, the high cost of living or the evil of falling prices? 39. During the war did salaried people and those whose wages did not increase as fast as prices pay indirect taxation? Did such taxation help win the war? Is it a good form of taxation? REFERENCES FOR FURTHER READING Johnson, Joseph French: Money and Currency, chap. ii. Moulton, Harold G.: Principles of Money and Banking, Part I, Selection No. 7. Scott, William A.: Money and Banking, chaps. iii and iv. CHAPTER IV OTHER FUNCTIONS AND SERVICES OF MONEY I. MONEY AS A MEDIUM OF EXCHANGE "Money is a medium of exchange." This is the definition of money commonly found in the dictionaries; it is the essence of the layman's thought on the subject; and it is the function upon which most emphasis is usually laid by writers on monetary theory. Treatises on money, indeed, commonly begin with a statement of the inconvenience of barter, or direct exchange of one commodity for another, and then proceed to show the advantages of money as a medium for effecting exchanges. The inconvenience of effecting exchanges by means of barter is obviously very great. It is necessary for an individual who wishes to trade a commodity not only to find someone who has the precise commodity which he desires; he must also find someone who wishes the particular commodity that is offered in exchange. And even when two individuals, each having a commodity desired by the other, are brought together, it is still often impossible to effect an exchange, because the commodities may be of substantially different value. It is of interest to note that the unequal value of bartered commodities has given rise to the familiar practice of paying something "to boot." Money as a medium of exchange eliminates the inherent difficulties in barter. The seller disposes of his goods for money, and with the money purchases, at such times and in such quantities as he desires, the goods which he needs. This function of money as a medium of exchange really divides barter into three parts, as follows: "(1) selling goods for money, (2) keeping the money until other goods are needed, 1F. M. Taylor, Some Chapters on Money, pp. 14, 16. |