Tales in Political Economy/Chapter 3
III.
Isle Pleasant.
Some years after the last chapter was written I had some letters from Captain Adam, dated from Isle Pleasant, the name that had been given to the settlement. He had carried out his plan of returning to the island, taking with him a steam-engine, some spinning-jennies, and looms for weaving, besides a large collection of books, cutlery, and other articles. He was accompanied by two engineers, and by six Lancashire factory women. Captain Adam was very confident that the latter would be able to produce a cloth from the plantain fibre very superior to any that had been made with the rough machinery and unskilled labour of the first inhabitants of Isle Pleasant; and he also was very certain that the engineers would be very valuable additions to the community. On arriving at the island he found that great progress had been made in a variety of ways during his absence. The most striking change that had been made was the introduction of the use of money. As the way in which it had been introduced was rather curious, it shall be described.
The Pleasant people, as they liked to call themselves, had long been grumbling at the inconvenience of carrying out a great number of exchanges by means of barter; the man who had a basket of plantains to dispose of, and who wished to obtain in exchange a knitted jersey, would find perhaps that Mrs. Collins, the woman who was the best hand at making these jerseys, had more plantains already in stock than she expected to want for the next four months, and that although she would be quite willing to give a jersey in exchange for an ironing-board and a washtub, she would not give anything at all for an unnecessary addition to her stock of plantains. Now, if they used money, this inconvenience would be completely avoided; the man who had the plantains would sell them for money to whoever happened to want them; he would go with the money in his hand to Mrs. Collins, and buy the jersey that he wished for; and she could then go with this same money to the carpenter, and buy her ironing-board and washtub. There was a great deal of talk about the inconvenience of having no money to make purchases with, and two or three suggestions were made to adopt some natural product of the island as money, and make all exchanges by of means this product. The plan was even tried of using cocoa-nuts for money; they were not at all plentiful in the island; to procure them required a considerable amount of exertion, as they grew in distant places, and they were very generally valued for their own sakes, as the milk they contained was very refreshing, and the nut itself was wholesome and nutritious. They had, therefore, the two necessary elements of value, i.e. they were useful in themselves, and there was some difficulty in obtaining them; and every substance used as money must have these qualities, for it is obvious that people will not exchange away products which have cost them labour and self-denial to obtain in return a substance which can be obtained without effort, or which serves no useful purpose. But, although the cocoa-nuts possessed one quality, "intrinsic value," which made it possible to use them as money for the purpose of carrying on all exchanges, in two other qualities which should characterize the substance used as money they were found wanting, to a degree that soon led to the abandonment of the idea that they could be used as money. In the first place, although they had considerable intrinsic value, this value varied very much from time to time. Their value in use was pretty constant, but the difficulty of obtaining them varied exceedingly: at one time, nearly all the cocoa-nuts fit for use would be consumed; those remaining on the trees would be unripe, then the value of the few that were fit for use would rise immensely. At another time, a hurricane would blow down a dozen of the trees, and their fruit could then be picked up with much less labour than when it was necessary to climb to the top of the trees to get them. This would cause the value of the nuts rapidly to decline for a time, when, perhaps, some other accident would again make their value as rapidly rise. These variations in value led to very unpleasant consequences; for instance, Collins, perhaps, would want to buy a bedstead of the carpenter, and agree to give him a certain number of cocoa-nuts for it when it was finished. It took a month to finish, and during that time cocoa-nuts, instead of being plentiful and easy to obtain, had become very scarce, owing to the trees having been attacked by monkeys, who had carried off two-thirds of the nuts. Collins, therefore, found at the end of the month that it was very difficult for him to carry out his part of the bargain, and that he could only obtain the cocoa-nuts with which he had to make his payment by twice the amount of labour and trouble that they had cost a month before; he therefore had in reality to give twice as much for his bedstead as he had agreed to do when the bargain was struck. But besides the inconvenience arising from their frequent variations in value, the cocoa-nuts were extremely unsuited to be used as money in another respect. Suppose that a cocoa-nut represents the value of a shilling, and Mrs. Collins is going out to make purchases of her different neighbours. She wants several yards of plantain cloth, some books for her children, some reels of plantain thread, a strong wooden-box, a set of tea-cups and some mugs (I forgot to say that the Pleasant people had set up a very good pottery), and some pots and pans from the smith. Altogether her purchases come to the value of 5l. To pay this sum she would have to take with her 100 cocoa-nuts. Fancy a lady going out to pay her bills with a bag of 100 cocoa-nuts on her back! The bulk of cocoa-nuts in proportion to their value was so great that it formed the strongest possible objection to their use as the universal medium of exchange; but their unsuitability was made evident in another way
If Mrs. Collins sent her little girl to buy one reel of thread, price 1d., she would have to give 1⁄12th part of a cocoa-nut in exchange for it. Now every part of a cocoa-nut has some value, and as the value of every part, except the shell, gets less from the time the shell is opened, it was very difficult to use the nuts to make small payments. If a cocoa-nut were divided into twelve equally valuable parts, every one of these, except the shell, would be less valuable a day after it was opened than when first it was divided, because the pieces exposed to the air would become first dry and chippy, and then positively bad. All these inconveniences were so great, that the Pleasanters determined they would go on with their old plan of making their exchanges by barter, until they could find some substance which would be more suitable to use as money than the cocoa-nuts. About this time fortune was once more their friend. One day a young lad, who was a splendid swimmer, was diving on a side of the island where the coast was steep and rocky, when he discovered a large chest, which had apparently been long under water, firmly fixed between two rocks. He tried to move it, but without success; he then told his discovery to several other boys, who were as good swimmers as himself, and they went together with a strong rope, which they managed to pass round the chest, and while those above pulled at the rope, those who were in the water did their best to get it out of the nook where it was so firmly wedged in; but all their efforts were unsuccessful, and they were obliged to return home without their prize. On reaching the settlement, they told their friends what they had been doing, and on the next day a party of about five-and-twenty men and boys started off, armed with ropes, crowbars, and axes; for they were determined that, if they could not bring the chest ashore, they would break it up, and bring its contents, whatever they were, to dry land. They agreed that the contents should, if worth anything, be shared among the members of the party: the boy who first found the chest was to have a double share, and those who had been with him on the second day's expedition were to have a share and a half. After a great deal of hard work, in which those on shore gave a long pull, a strong pull, and a pull altogether, many times without result, whilst the divers shoved and pushed below, the chest suddenly lunged over, and as it moved the bottom fell out, and a bright stream of gold and silver money spread itself out on the rocks. Up went the divers to tell the news, each one carrying a handful of coin as a specimen of the spoil. Great was the joy of the whole party on hearing what had been found. Two of the number, who were chosen by general consent, because they were thoroughly good fellows who would be sure to see fair-play done to everyone, were made the guardians of the store; they took charge of it till every gold piece had been brought to land; and then they counted it, and divided it into the shares that had been previously agreed to. The coins were English, and there were some of nearly every description; altogether the amount brought to land came to 7,450l. There were twenty-five of the party, one of whom was to have two shares, and eight of whom were to have a share and a half; the whole sum was, therefore, divided into thirty equal lots of 248l. 6s. 8d. each. The boy who first discovered the chest took two of these shares, or 496l. 13s. 4d. The eight boys who worked with him on the second day, each took a share and a half, or 372l. 10s., and the sixteen who remained took one share each, of 248l. 6s. 8d.
When they returned to their companions, the rejoicing at the discovery that had been made was universal. The want of money for carrying on exchanges had long been felt, and the coin was therefore much more valued than it would have been if it had been found when the trade of the islanders with each other was so limited that it could be conducted by barter without inconvenience. It may perhaps be thought that the discovery of the gold and silver was of no benefit to the islanders in general, but only to those among them who were so fortunate as to be its actual finders. It soon, however, became evident that those who had found the money profited by their discovery exactly in proportion as they parted with it. It was of no service at all to them if they shut it up in a box or hid it in the earth; it was useful only when they parted with it to their companions for the meat, clothing, and other articles produced by them. By this natural process, brought about by the desire of those who had money to buy with it the result of the labour of others, and the desire of those who had no money to procure it by offering commodities or services for it, a general distribution of the gold and silver which had been found was in a few months made among the whole of the inhabitants of Isle Pleasant. At first, before this distribution was effected, and while the money was in the hands of a few, the price obtained for articles was exceedingly high. Some of the finders of the money were so foolish as to leave off working, and as they were obliged to obtain food and clothing by some means or other, large prices for these necessaries were extracted from them. A man who had done nothing to obtain a dinner for himself would give a sovereign to share in the meal prepared by his neighbour, rather than remain hungry when he had a bag full of gold. Gradually, however, as the money became more evenly distributed, the relative prices of things settled down into correspondence with their real value. Thus in the old days of barter, a pair of oars, which represented one day's work of the carpenter, would exchange for twice as much plantain bread as a wooden bowl which only cost the carpenter half a day's work; the value of the pair of oars was, therefore, twice that of the wooden bowl. And now that money was in general use, the price of the oars was double that of the bowl. What the scale of prices actually should be was controlled by three things: 1st, by the amount of money in circulation; 2dly, by the quantity of things that were bought and sold for money; and 3dly, by the number of times commodities were bought and sold before they were used. It is evident that the amount of money in circulation must have an influence on general prices. Suppose that the same number of people are receiving wages, that the same quantity of commodities are bought and sold the same number of times, and that the money used for paying wages and buying commodities is suddenly doubled, is it not evident that under these circumstances prices and wages would go up, or, in other words, that the purchasing power of money would go down? When the islanders tried to use cocoa-nuts for money, this fact was perfectly well understood. Anything that made cocoa-nuts more plentiful, lowered their value and their purchasing power; the average of general prices was controlled by the supply of the circulating medium. In the island the supply of money could not be increased; no more discoveries of chests of gold and silver were made. But the trade and commerce of the island steadily increased, more commodities were produced, and bought and sold; and as the trade of the community became more complex, these commodities were bought and sold a greater number of times before they were consumed. These circumstances caused a corresponding increase in the value of money, or, in other words, a corresponding decline in general prices. The number of uses for money was extended; the number of times each individual had occasion to employ money became greater; therefore the demand for money increased, but the supply remained fixed and stationary; it was thus inevitable that its exchange value should be increased. The trade of Isle Pleasant therefore presented the spectacle of steady growth, of a continual increase in wealth and prosperity, together with a correspondingly steady decline in general prices. This is no exceptional phenomenon. The same tendency for an increasing trade to produce a decline in prices exists in all countries, but it is counteracted by the circumstance that the supply of money and of the substitutes for money is capable of being increased in a degree corresponding, or even more than corresponding, with the increased use for money caused by commercial development. Thus in England the immense growth of trade since the repeal of the corn laws and the development of the railway system (1846—50), has been accompanied by a rise in general prices varying, according to different authorities, from 15 to 25 per cent. But this would not have been possible if it had not been that, owing to the great gold discoveries in Australia and California (in 1848—52), the annual yield of gold was suddenly increased from about 8,000,000l. to 27,000,000l.; and in one year (1856) it even rose to more than 32,000,000l. If the development of trade had taken place without any increase in the supply of gold, prices must very materially have declined; on the other hand, if trade had been stationary during this sudden multiplication of the annual production of gold, there must have been a very rapid rise in general prices. In Isle Pleasant, as we have seen, the supply of money was absolutely limited, and therefore each increase in the number of trading transactions caused the value of money to rise and prices to fall. Six months after the money was discovered, the islanders transacted a certain amount of buying and selling, a certain number of people were receiving wages, and for these purposes they used their 7,450l. Ten years afterwards twice as many people were receiving wages, three times as many commodities were produced and bought and sold. The amount of money used to carry on this great increase of trade was exactly the same, 7,450l. Hence it is evident that the amount of money used in each transaction must have declined, or, in other words, prices and wages must have gone down. At the same time population increased; so there were not merely a larger number of trading transactions to be performed with the same amount of money; there were also a larger number of people among whom this fixed amount of money was distributed. Not only therefore did less money change hands every time any particular purchase was made, but the aggregate of money possessed by each individual was, on the average, reduced; at the same time it must be remembered that this decline in prices, wages, and in property in money, was not merely accompanied by, but was caused by the growth of Isle Pleasant in real riches and prosperity.
It was pointed out that when the islanders attempted to make use of cocoa-nuts as money, great inconvenience was caused by their frequent and sudden variations in value. A man who had promised to pay a debt in a hundred cocoa-nuts in six months' time would perhaps find that, owing to the destruction of the nuts by monkeys, or to the discovery of an additional number of the trees, the difficulty of obtaining cocoa-nuts had become during the six months either much greater or much less than it was when he made his bargain; and in this way commercial transactions that extended over any lengthened period of time were liable to great uncertainty owing to the fluctuations in value of the substance used as money.
Inconvenience, similar in character, though not so great in degree, was now felt to attend the steady rise in the value of gold and silver in Isle Pleasant. If a man made an agreement to pay a certain sum of money, say 10l. a-year, for ten years as the rent of a house that had been built by one of his neighbours, it was quite certain that, owing to the gradual rise in value of gold, his rent would in reality increase each year; till at the end of the ten years the same amount of money would perhaps represent twice as much value in goods and labour as it did when the bargain was struck. In this way all bargains that extended over a period of months or years had something of a very speculative or even gambling character. People felt pretty sure prices and wages would go on declining, but they could not be certain how rapid the decline would be, nor how far it would go. A temporary check to production caused by some unforeseen misfortune might for a time prevent prices falling at all; or, on the other hand, some industrial discovery might give a fresh and unforeseen impetus to production, and the decline might be much greater and more rapid than could have been anticipated. It might be said that no real harm is done by the introduction of this uncertainty into the terms of all bargains; for whatever is lost by one party to the bargain is gained by the other. If John Smith promises to pay 20l. to Robert Williams at the end of twelve months, and if this 20l. is worth 10 per cent. more at the end of the year than either of them expected it would be when the bargain was made, John Smith is 10 per cent. poorer than he expected to be by his bargain; but Robert Williams is 10 per cent. richer, and therefore it may be said that on the whole no harm is done. It must however be remembered that when a bargain is made, both parties to it expect to gain by the transaction; if they did not they would have no motive for entering into the agreement. They not only both expect to gain, but if this expectation on either of their parts is disappointed, a blow is struck at the trade and prosperity of the community. The 10 per cent. lost by John Smith will probably take away all his profit or even convert it into a loss: it will be no consolation to him to know that Robert Williams has made 10 per cent. more profit than he expected. The burnt child dreads the fire; and after suffering this unexpected loss John Smith will be very timid in entering into bargains in future; and his loss will also produce a similar timidity in others; and as bargaining is a game which two must play at, a blow will thus be struck at the development of trade.
The disadvantage of the continual and rapid rise in value of gold and silver in Isle Pleasant, at length induced the inhabitants to use various substitutes for money which had an effect similar to that which would have been produced if additions had been made to the amount of coin in circulation: these substitutes for money tended to check the fall in prices and wages, and thus to make the value of money more uniform. The plan generally adopted was that of giving (when a purchase was made) a written promise to pay in money at the end of a certain time, instead of making the payment in cash at once. It may seem curious that these written promises to pay in gold and silver at the end of a short time could have had any effect as substitutes for money; since it may be thought that the payment in money was only temporarily deferred; but as a matter of fact these written promises to pay often had the effect of preventing the use of money in effecting exchanges altogether, and commodities in this way were exchanged for commodities without the transfer either of gold or silver, just as in the old days of barter. For example, Collins would buy of Cox, a plantain cloth weaver, 5l. worth of cloth, and would give him a written promise to pay him five sovereigns at the end of four weeks; before the four weeks are over Mrs. Collins has made a complete suit of clothes for Cox and each of his four children; for which service Cox gives her a written promise to pay her five sovereigns in a fortnight's time. Now if Mr. and Mrs. Collins cancel Cox's debt to them, Cox agrees to cancel Collins's debt to him; so the cloth and the suits of clothes exchange for one another without the transfer of any money on either side, just as they would have done in the time when all exchanges were made by barter. It sometimes happened, of course, that two people were indebted to each other, but not for exactly the same amount. Thus Cox may have promised to pay the carpenter 1l., while the carpenter may have promised to pay Cox 18s. In this case, the balance, 2s., will have to be paid in money by Cox to the carpenter; but nevertheless it must be remembered that an amount of buying has taken place amounting in all to 1l. 18s., and that it has been accomplished by the transfer of only 2s. in money, the rest of the exchange having been effected by barter. Sometimes it happened that of three or four people each was indebted, and each had a debt owing to him of equal value but not from the same person. Their position will perhaps be made clear by the accompanying figure. The arrows → show to whom each of the four is indebted:—
Each of these four men owes and is owed 5l. Cox owes Collins 5l., and is owed the same sum by the captain, and so on all round. Now these four men, by exchanging the written promises to pay which they have respectively made, can cancel all their debts without the exchange of one farthing of coin. Money's worth has already been exchanged between them, and each owes and is owed an exactly similar amount; if then they agree to cancel each other's debts the exchange is effected virtually by barter, and the only service which money gives to the transaction is that which it affords as a "measure of value." As a medium of exchange it is not used at all.
The method just described of dispensing with the use of money by means of written promises to pay which are exchanged for and cancel each other, grew with the growing wealth and prosperity of Isle Pleasant; and thus an effectual check was put upon the tendency of prices to fall as a consequence of the increased number of exchanges which were caused by the progress of industry and manufactures. The more active trade was, the greater was the number of bills of exchange (or promises to pay) that were used to make purchases. Thus a virtual addition was made to the currency at the very time when it was most needed; and these additions to the currency ceased to exist as soon as trade became slack; that is, as soon as the need that had called them forth ceased to operate.
In England an immense amount of trade is carried on without the exchange of coin, by means of the various forms of credit, which are all, in one way or another, promises to pay. In the London clearing-house, the place where the cheques drawn on different banks are daily exchanged for each other, as much as 2,000,000,000l. worth of cheques are exchanged in the course of a single year, without the transfer of one penny of money: that is to say, that buying or selling to the amount of 2,000,000,000l. takes place in one year in England by means of cheques alone, without the transfer of any gold or silver coin whatever. This substitute for money has the same effect upon prices as if a large addition were made to the money in circulation. In the same way bills of exchange (which are promises to pay, at a certain date, made by one merchant to another), and bank-notes (which are promises to pay on demand made by the banker to the possessor of the note), form virtual additions to the currency; and if they were withdrawn or ceased to be used, one of two things would happen: either prices would decline, or an addition of gold and silver would have to be made to the currency, equal in exchange power to the forms of credit withdrawn from circulation.
The changes introduced into Isle Pleasant through the use of money and credit in carrying on exchanges were very important. Division of labour prevailed much more completely than before. The risk, in the days of barter, of not being able to get immediately the things that you wanted in exchange for the things you were willing to dispose of, was so great that people did not like to be entirely dependent for their supplies of food, for instance, on the labour of others. Hence, nearly everyone, no matter what his or her regular occupation was, devoted some time to the cultivation of food stuffs. But when the use of money became general this was no longer necessary; everybody sold the product of his or her industry for money, and could then use this money to buy the products of the labour of others. A man who had a pair of oars to dispose of and who wanted a coat, had no longer to search here and there for a man who had a coat to give and who wished to take the oars in exchange. He sold his oars to anyone who would buy them for money, and with this money he purchased the coat from anyone who had one to dispose of. As division of labour thus became more and more complete, shops were opened, so that everyone who wanted food, clothing, fishing-tackle, or any other commodity that was made by the inhabitants of the island, knew exactly where to go to buy it. In this way there was a great saving of time and trouble, and thus another addition was made to the industrial well-being of Isle Pleasant. For among the services which labour renders to production, must not be forgotten that of bringing commodities to the places where they are wanted, and to places where people who want them know where to find them. It is a great waste if a man, whose labour can in one day produce commodities worth 10s., is compelled to spend an hour every day in seeking about for people who will sell him what he wants for his daily food. The collection of different kinds of commodities in shops is a very real and considerable service to industry.
It may be imagined, then, how great a change Captain Adam found when he returned to Isle Pleasant. He left the islanders trading with each other under all the difficulties of the system of barter; he came back and found them buying and selling with money, using various forms of credit which acted as substitutes for money, and carrying on retail businesses in well-arranged shops. The changes that took place in their industrial system after Captain Adam's return will be described in the next chapter.