Wicksteed on the Value of Paper Money

P. H. Wicksteed has a strong claim to having been the greatest amateur economist in the history of our subject.  By profession, he was a Unitarian minister, theologian, classicist, medievalist, perhaps the foremost Dante scholar of his time, translator of the Inferno, who was inspired to the study of economics and later mathematics by his reading of Henry George which led him to study William Stanley Jevons’s Theory of Political Economy.  Wicksteed’s claim to having been the greatest economist in the history of our subject is somewhat weaker, but only somewhat.  Wicksteed was the first economic imperialist, the first economist to take seriously the notion that economic theory in the form of marginal utility analysis could explain supposedly non-economic behavior, providing a coherent statement of the idea that all rational goal-oriented action could be anlayzed using economic theory, thereby giving a very different interpretation to the term “homo economicus” from the way it had previously been understood.  In that sense, Wicksteed anticipated the ideas of both Ludwig von Mises and Gary Becker.

What is less well known is that Wicksteed discovered and stated the Coase Theorem, or at least the key lemma required to prove the Coase Theorem 46 years before Coase first published the theorem in his 1959 article on the Federal Communications Commission.  Wicksteed’s anticipation of the Coase Theorem appeared in a celebrated essay “The Scope and Method of Political Economy in the Light of the “Marginal” Theory of Value and Distribution.”  The proposition that Wicksteed proved is well known:  that there is no supply curve.

But what about the “supply curve” that usually figures as a determinant of price, co-ordinate with the demand curve?  I will say it boldly and baldly:  There is no such thing.

What does this have to do with the Coase Theorem?  Read on.

For it will be found on a careful analysis that the construction of a diagram of intersecting demand and “supply” curves always involves, but never reveals, a definite assumption as to the amount of the total supply possessed by the supposed buyers and sellers taken together as a single homogenous body,and that if this total is changed the emerging price changes too; whereas a change in its initial distribution (if the collective curve is unaffected, while the component or intersecting curves change) will have no effect on the market, or equilibrating price itself, which will come out exactly the same.  Naturally, for neither the one curve nor the one quantity which determine the price has been changed.

There you  have the Coase Theorem: a competitive equilibrium is independent of the initial allocation (given, as Wicksteed implicitly assumed, zero transactions costs).  What Coase added was the insight that what is being traded when people engage in exchange is not physical commodities but rights to those commodities, so that the our conception of the process of exchange should be expanded to include the exchange of rights to engage in certain kinds of action, say, the emission of smoke or other nuisances.

All this is by way of introduction to the following lengthy excerpt from Book II, Chapter 7 of Wicksteed’s magnum opus, The Common Sense of Political Economy in which Wicksteed analyzed the role of the government in conferring value on so-called fiat money.  Although Wicksteed was through and through a neo-classical economist, he provided the most elegant and comprehensive statement of the theory, nowadays generally associated with Modern Monetary Theorists and usually traced back to Georg Friedrich Knapp’s State Theory of Money.  Nick Rowe mentioned Wicksteed in a post yesterday as the source for the theory that acceptability as payment for taxes is what allows fiat money to have value, but didn’t provide a source.  Although the quotation is rather long, it is such a powerful piece of analysis that I thought that it deserves to be quoted in full.

If we now turn to paper currencies, again, we shall remodel the statement thus: It is not true that a government can confer on pieces of paper, or other intrinsically worthless articles, the collective power of doing the business of the country, but it can within certain limits confer a defined power of doing business on certain pieces of printed paper. For the government, as general guardian of contracts and of property, has the power to enforce or to decline to enforce any contracts, and as guardian of the rights of property it can determine whose property anything shall be. It is possible, then, for a Government at any time to say: “There are in this country a number of persons under legal obligation to pay fixed rents for premises, fixed interest on capital, fixed salaries for services, over such periods as their several contracts cover. There are also a number of persons under definite obligations to pay such and such gold, at such and such dates, once for all. Now we, the Government, can, if we like, issue stamped papers bearing various face denominations of one, ten, a hundred, etc., units of gold currency, and we can decree that any one who possesses himself of such papers, to the face value of his debts, and hands them over to his creditor shall be held to have discharged his debt, and we will henceforth defend his property against his late creditor and declare that he has, in the eye of the law, paid the sum of gold which he owed.” It is obvious that these pieces of paper will thereby acquire definite values to all persons who are under obligation to discharge debts or to pay salaries or rents or other sums due under contract; for to command one of these pieces of paper will be, for certain of their purposes, exactly equivalent to commanding a sovereign. As these persons constitute a large and easily accessible portion of the community, there will at first be no difficulty whatever in circulating the notes, for those who have no direct use for them themselves will know that there are plenty of people who have, and a certain number of these certificates can, in this way, be floated. Each will be able to transact business to the same extent as a piece of gold of its face value. But as the contracts gradually expire and the debts are gradually discharged, the original force that gave currency to the Government’s paper will become exhausted. At first the holder of such a bond will from time to time come across men who will say: “Oh, yes, I was just looking out for paper in order to discharge my debt or pay my rent”; and if there were the smallest tendency to depreciation, competition would instantly rise amongst these persons who would be glad to get, at any reduction whatever, these things which their creditors would be compelled to receive at full value. If people chose to go on making fresh contracts and giving fresh credit, without specifying that the payment should be in gold, and thus went on perpetually bringing themselves under legal obligation to receive paper in full payment, the process might go on for a certain time, by its own impetus, but there would be nothing to compel any one to enter into such a contract; and if at any time, for any reason, there were a slight preference for making contracts in gold, so that there was a dearth of people of whom it could be definitely asserted that for their own immediate purposes, independent of the general understanding, the paper was worth the gold, there would obviously be no firm basis for the structure, and every one would become nervous and would want to make some allowance for the risk of not finding any one who would take the paper at or near the face value.


The Government has, however, a further resource. It has the means of maintaining a perpetual recurrence of persons thus desiring money at its face value, for the Government itself has more or less defined powers of taking the possessions of its subjects for public purposes, that is to say, enforcing them to contribute thereto by paying taxes. Ultimately it requires food, clothing, shelter, and a certain amount of amusement and indulgence for its soldiers and all its officials; and it requires fire-arms, ammunition, and the like. And in proportion to its advance in civilization it may have other and humaner purposes to fulfil. Now, as long as gold has any application in the arts and sciences it exchanges at a certain rate with other commodities, just as oxen exchange at a certain rate against potatoes, pig-iron, or the privilege of listening, in a certain kind of seat, to a prima donna at a concert. The Government, then, levying taxes upon the community, may say: “I shall take from you, in proportion to your resources, as a tribute to public expenses, the value of so much gold. You may pay it to me in actual metallic gold or you may pay it to me in anything which I choose to accept in lieu of the gold. If you do not give it me I shall take it from you, in gold or any other such articles as I can find, and which would serve my purpose, to the value of the gold. But if you can give me a piece of paper, of my own issue, to the face value of the gold that I am entitled to claim of you, I will accept that in payment.” Now, as these demands of the Government are recurrent, there will always be a set of persons to whom the Government paper stamped with a unit weight of gold is actually equivalent to that weight of gold itself, because it will secure immunity from requisitions to the exact extent to which the gold would secure it. This gives to the piece of paper an actual power of doing the work that gold to its face value could do, in the way of effecting exchanges; and therefore the Government will find that the persons of whom it has made purchases, or whom it has to pay for their services, will not only be obliged to accept the paper in lieu of payments already due, and which it chooses to say that these papers discharge, but will also be willing to enter into fresh bargains with it, to supply services or to surrender things for the paper, exactly as if it were gold; as long as it is easy to find persons who, being themselves under obligation to the Government, actually find the Government promise to relinquish their claim for gold as valuable as the gold itself. The persons who pay taxes constitute a very large portion of the community and the taxes they have to pay form a very appreciable fraction of their total expenditure, and consequently a very large number of easily accessible persons actually value the paper as much as the gold up to a certain determined point, the point, to wit, of their obligations to the Government. Thus it is that a limited demand for paper, at its face value in gold, constitutes a permanent market, and furnishes a basis on which a certain amount of other transactions will be entered into. The Government, in fact, is in a position very analogous to that of an issuing bank. An issuing bank promises to pay gold to any one who presents its notes, and to a certain extent that promise performs the functions of the gold itself, and a certain volume of notes can be floated as long as the credit of the bank is good. Because bank promises to pay are found to be convenient, as a means of conducting exchanges. After this number has been floated the notes begin to be presented at the bank, and presently it has to redeem its promises as quickly as it issues them. The limit then has been reached and the operation cannot be repeated. After this people will decline to accept the promises of the bank in lieu of the money, or, which is the same thing, they will instantly present the promise and require its fulfillment. The amount of notes in circulation may be maintained, but it cannot be increased. The issuing Government does not, without qualification, say that it will pay gold to any one who presents the note, but, in accepting its own notes instead of gold, it says, in effect, that it will give gold for its own notes to any of its own debtors; and as long as there is a sufficient body of these debtors to vivify the circulating fluid the Government can get its promises accepted at par. Any Government which, even for a short time, insists on paying in paper and receiving in gold, that is to say, any Government that does not honour its own issue when presented by its debtors, will find that its subjects decline to enter into voluntary contracts with it except on the gold basis; and if its paper still retains any value whatever, it will only be because of an expectation of a different state of things hereafter that gives a certain speculative value to the promise. In fact a Government which refuses to take its own money at par has no vivifying sources to rely on except the very disreputable and rapidly exhausted one of proclaiming to debtors, and persons under contract to pay periodic sums, that they need not do so if they hold a certificate of immunity from the Government. Such immunity will be purchased at a price determined, like all other market prices, by the stock available (qualified by the anticipations of the stock likely to be available presently) and the nature of the services it can render. The power, then, of Governments to make their issues do exchange work depends on their power to make a note of a certain face value do a definite amount of exchange work; and this they can effect by giving it a definite primary value to certain persons, and then keeping the issue within the corresponding limits. It does not consist in an anomalous, and, in fact, inconceivable, power of enabling an indefinite issue to perform a definite work, and arriving at the value of each individual unit by a division sum.


Indeed, this division sum is impossible in any case to make; for the proposed divisor is arrived at by multiplying the number of units in the face value of the issue by the rate at which, on an average, they circulate. Now the Government can undoubtedly regulate the amount of the issue, but it cannot regulate the average rate at which the units will circulate. Nor indeed can it rely on the dividend, namely the amount of business which the circulating medium shall perform, remaining constant. For it is a matter of convenience how much of the business of a country shall be carried on by the aid of a circulating medium and how much without it; and as a matter of fact, at periods when there is a dearth of small change in a country a great amount of retail business is conducted on account, and balances are more often settled in kind. Thus business which would ordinarily have been carried on by the circulating medium is carried on without it, because of its rarity. In Italy, for instance, when coppers were rare the exchange value of a copper did not rise because a smaller number had to do a greater amount of work, but each unit did as much business as it could, and the rest of the business was done without them. Again, the history of paper money abounds in instances of sudden changes, within the country itself, in the value of paper money, caused by reports unfavourable to the Government’s credit. The value of the currency was lowered in these cases by a doubt as to whether the Government would be permanently stable and would be in a position to honour its drafts, that is to say, whether, this day three months, the persons who have the power to take my goods for public purposes will accept a draft of the present Government in lieu of payment. It is not easy to see how, on the theory of the quantity law, such a report could affect very rapidly the magnitudes on which the value of a note is supposed to depend, viz. the quantity of business to be transacted and the amount of the currency. Nor is it easy to see why we should suppose that the frequency with which the notes pass from hand to hand is independently fixed. On the other hand, the quantity of business done by the notes, as distinct from the quantity of business done altogether, and the rapidity of the circulation of the notes may obviously be affected by sinister rumours. Two of the quantities, then, supposed to determine the value of the unit of circulation are themselves liable to be determined by it.

Finally, I’ll just mention that in the Wealth of Nations Adam Smith off-handedly mentioned acceptability in payment of taxes as a condition for inconvertible money not to be worthless.  So the lineage of the idea, despite its somewhat disreputable and unorthodox associations, is really quite impeccable.

13 Responses to “Wicksteed on the Value of Paper Money”

  1. 1 Mike Sproul April 25, 2012 at 9:45 pm

    “Adam Smith off-handedly mentioned acceptability in payment of taxes as a condition for inconvertible money not to be worthless.”

    Acceptability at what rate? Does the government declare that it will accept one of its paper dollars in lieu of 1 oz of silver due in taxes? In that case, the money IS convertible.

    Or does the government declare that it will accept a dollar in lieu of a dollar’s worth of taxes, without ever pegging the dollar to some commodity? In that case we have an indeterminate price level.

    The simple resolution of all this is that the governments assets (taxes receivable) back the government’s liabilities (e.g., paper money) in exactly the same way that my assets back my liabilities. Saying that assets “create a demand” for liabilities is a mis-application of normal supply/demand principles.

  2. 2 Nick Rowe April 26, 2012 at 3:49 am

    David: thanks very much for posting this. I have updated my post to link here.

    In Wicksteed’s analysis, he is assuming that gold is already being used as a medium of exchange, when paper money is introduced. That is a bit different from standard chartalist accounts, I think, in which the government can introduce a paper money de novo.

    He also assumes, without real argument, that paper money will circulate alongside gold as a medium of exchange. It is not obvious to me why it should do so. It is equally possible that all the paper should immediately be returned to the government in payment of taxes so that the outstanding stock is negligible.

    If I were Wicksteed, at this point I would bring in Gresham’s Law. The government will accept either gold or paper, at par in payment of taxes. But only gold works for industrial uses. So gold will first be hoarded, and then withdrawn into industrial uses, leaving only paper as the circulating medium.

    Bottom line: the fact that people can pay taxes in paper creates a flow demand for paper, but to create a stock demand you need to assume that paper is used as a medium of exchange.

    When Wicksteed says: “Thus it is that a limited demand for paper, at its face value in gold, constitutes a permanent market, and furnishes a basis on which a certain amount of other transactions will be entered into.”

    He is sliding from a flow demand for paper (the “limited demand”) to a stock demand (“permanent market”). Why doesn’t the paper flow instantly from those who sold goods to the government, to those who pay taxes to the government, and gold get used for all other exchanges? How much gold can paper displace as circulating medium?

    But yes, Wicksteed is a very good economist.

  3. 3 Tas von Gleichen April 26, 2012 at 7:26 am

    I don’t know what to make out of this. Paper Money in essence has no intrinsic value. It is worthless in comparison to hard assets.

  4. 4 Benjamin Cole April 26, 2012 at 9:50 am

    I enjoyed this post—paper money has bed-rock value as it has to be accepted by its own issuer (the government) as payment for taxes. Thus, anybody else will accept it.

    Paper money also has bed-rock value as long as people recognize it is a medium of exchange. If paper money becomes a store of value, however, your economy will implode. People will hoard, which will increase its value further, even as hoarding causes recessions—setting into motion a dangerous downward cycle, one that evidently last for generations (see japan).

    I invite Tas von Gleichen to send to me all of his worthless paper money, if currently accepted as a medium of exchange in the United States.

    In other words, send to me all of your worthless greenbacks. I will take them by the bushelful, send me railroad cars laden with the worthless money.

  5. 5 JP Koning April 26, 2012 at 11:18 am

    I’ve read Smith pretty carefully on this. The offhanded comment comes after he talks about money that is no longer instantly convertible but redeemable at some future point in time. He uses as his example Scottish notes for which the option clause has been invoked and US colonial paper which is only redeemable after a few years.

    Given deferred redemption, “such a paper money would, no doubt fall more or less below the value of gold and silver, according as the difficulty or uncertainty of obtaining payment was supposed to be greater or less, or the greater or less distance of time at which payment was exigible.”

    The point being that Smith thought such money was valued according to its discounted probability of being redeemed at par.

    Smith then brings up the point about taxes.

    “The paper of each colony being received in the payment of the provincial taxes, for the full value for which it had been issued, it necessarily derived from this use some additional value, over and above what it would have had, from the real or supposed distance of the term of its final discharge and redemption.”

    Thus acceptability in payment of taxes added a liquidity premium to colonial paper. But it didn’t give that paper its original value. I read Smith as providing a chartal theory of the liquidity premium, and not an explanation for a positive value of fiat money.

  6. 6 Mathew Forstater January 4, 2017 at 5:30 pm

    Hi, you might be interested in this 2005 paper that includes the Adam Smith and Wicksteed quotes, as well as a number of others (see especially the J. S. Mill) demonstrating an understanding of “tax-driven money.”:
    a version was originally issued as a working paper in 2004. all the best, mat

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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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