Commodity Tickets and Price Tickets
from Legal Foundations of Capitalism
In this extract from Legal Foundations of Capitalism, J. R. Commons sketches the importance gained, within the business community, by the "money markets" (besides the commodities and labor markets). For Commons "the two kinds of business on the commodity markets and the money markets correspond to two ways of getting rich or making a profit in business." The copresence of these two kinds of business, with two different logic and way of acting, is, for Commons, the source of recurrent cycles of expansion and contraction, prosperity and depression, boom and bust. This is a very interesting view that should be taken into account when examining past and present economic crises.
This remarkable innovation of negotiability, which took an entire century for its accomplishment from the first decision on bills of exchange in 1603 to the parliamentary reversal of Lord Chief Justice Holt in 1704, while it established modern capitalism, yet introduced the most disturbing confusion between primitive notions of physical commodities and the new notion of a promise acting like a commodity. Stock-jobbing frenzies for the first time seized upon the minds of Englishmen in 1792 [see : Macaulay, T. B., History of England. 4:256. (1856)], the Mississippi Bubble and the South Sea Bubble overwhelmed France in 1716 and England in 1718, and a recurring cycle of inflation and contraction, prosperity and depression set in for two hundred-years so regularly that learned men ascribed it to the sun, to Venus, to human nature, to human depravity, until, in more recent times, it is seen to be the workings of the clever invention of negotiability of promises. What negotiability actually introduced was the phenomena of two opposite markets, two opposite classes of legal claims to commodities or services, and two opposing concepts of value. The two markets are the commodity markets and the money markets; the two classes of legal claims may be contrasted as commodity tickets and price tickets, and the two concepts of value are the real value assigned to commodities or labor and the nominal value expressed in price.
Every productive enterprise carries on these two lines of business, the business of buying, storing, enlarging and selling quantities of real value or real wealth in the form of commodities and labor, and the business of creating, buying, selling, offsetting and cancelling promises to pay the nominal value or price of that real value or real wealth. The former kind of business is carried on at factories, retail and wholesale stores, railroads, theatres, warehouses, produce exchanges, farms and estate markets, where people deliver commodities or labor power and transfer the titles to them. Every factory is a kind of warehouse in which raw material and labor are “deposited” to reappear in a few weeks or months as a finished product. Every wholesale or retail store is a warehouse where finished goods and the labor of salesmen are bought and stored to be sold in a few days or weeks. So with every farm, every railroad, every workshop, every theater, and so on. These are the commodity markets and labor markets of the country, and the operations there going on constitute that process which we have named a going plant with its producing organization, creating the real values and real wealth of the country.
But the business of creating, buying, selling, offsetting and cancelling the promises to pay the prices which are negotiated on the commodity markets is conducted at commercial banks which are the money markets of the country. The “going business” of any concern connects its commodity market and its money market, for it is the business on the commodity markets, of buying and selling, hiring and hiring out, renting and leasing, and the business on the money market of borrowing and lending, discounting and depositing promises to pay the prices of commodities in lawful money within 24 hours to 90 days.
Historically the legal transition is the transition from bailments, which are commodity tickets, to debts, which are price tickets. The Bank of Amsterdam and the Goldsmiths of London began their “banking” business as warehouses for the storage of gold and silver and the issue of warehouse certificates to depositors for the amount of the commodity, gold or silver, which they had stored. The survival of that warehouse business is seen in the American gold and silver “certificates.” Latterly, finding that all of this commodity in storage was not called for at anyone moment, they violated their pledge of storage, loaned their depositors' money to other people at a profit, and issued their commodity tickets in excess of the quantity of commodity on hand. This violation of a pledge, if practiced by an ordinary warehouseman, would constitute an unlawful conversion of bailment, since, in such a case, the deposited commodity, such as wheat or gold, is not the property of the warehouseman to loan or sell to others, but is the property of the depositor. In order that this unlawful practice of the goldsmiths might become lawful, it was necessary for the courts to substitute a sale of gold to the banker for a deposit of gold by the customer, and to substitute a debt of the banker to the customer for a bailment of the customer to the warehouse. The warehouseman now became the owner of the commodity instead of a bailee, and the former owner became a creditor, owning a bank note, instead of a depositor owning the commodity. This was the unlawful “invention of the goldsmiths in Lombard street who had a mind to make a law” different from the common law, that stirred the wrath of Chief Justice Holt and required an act of parliament to overrule him.
Yet the names “deposit” and “depositor” were retained in banking practice in order not to break with that conservative materialism of the human mind which insists on tangible evidence, although the depositor had changed from owner of a thing to creditor of the bank. This retention of the primitive materialism was convenient under the practice of bank checks, although the depositor now deposits not a commodity but his own or his customer's promise to pay, and the bank, through the device of negotiability, becomes, not the warehouseman, but the owner of that promise. “Money” now becomes, not a corporeal property, gold or silver, but bank credit, having the two legal qualities of incorporeal property, the demand-promise of the banker, and intangible property, the exchange-value of that promise on the markets. And this kind of money becomes elastic since its volume changes with the prices that business men agree to pay for commodities. Thus the transition is accomplished from a commodity ticket, or bailment, calling for a specific corporeal property, gold or silver, to a price-ticket, or bank credit, calling for any commodity at its then exchange-value.
The commodity ticket is, in effect, a title of ownership of corporeal property, the-price-ticket is a negotiable promise. The significance of commodity tickets is originally that of corporeal property, the ownership of physical things, even real estate, whose ownership does not pass by physical delivery, but by recording the ticket which is the title of ownership. So with all commodities, that is, chattels. I hand you physically a bushel of potatoes, but I do not pass the title to you unless there goes with it an evidence which the law acknowledges as transfer of ownership. Thus all titles of ownership are commodity tickets authorized by government, being evidences of ownership regardless of changes in the value of the thing owned.
These titles of ownership slip over into that huge class of bailments, wherein something of a personal nature is delivered to another to be held but not owned and to be returned to self or delivered to third parties, the evidence being recorded on such tickets as warehouse receipts, dock warrants, bills of lading and those original deposits of the Bank of Amsterdam and the goldsmiths of London, or even not recorded, as in the case of goods hired or left for repair.
Bailments, which are promises to deliver things, shift into what may broadly be designated futures, which are promises to deliver the values of things – as when an iron manufacturer promises to deliver a quantity of iron or its value, or when a banker promises to deliver gold or its equivalent checking account, which is, in reality only an account set off against other debtors of that or other banks. But it has therefore the great value of liquidating debts.
These specific futures slide into speculative futures, to which the name “futures” is usually attached, where either party, not having the thing itself, expects to buy or borrow it on the market or to deliver the then market price as of the date of delivery, or at least the “margin” between the agreed and the then market price.
But commodity tickets themselves finally comprehend even the entire range of incorporeal and intangible properties as well as corporeal property, since, with the device of negotiability, stocks, bonds, debentures, warrants, bills of lading and so on have been rendered as nearly like money as possible, and may be passed readily from hand to hand along with their titles of ownership.
There remains, however, in all these transactions, the distinguishing character of commodity tickets, whether they be claims to real estate, chattels, bailed goods, futures, or even all incorporeal and intangible properties, namely, that the commodity ticket changes in value exactly as the value of the thing itself to which the ticket lays title. But it is different with the price-ticket, money. Money is power to obtain in exchange, not a specific thing, but power to obtain anything at the then price of anything. A warehouse receipt calls for a given number of bushels of wheat stored in an elevator; but a price-ticket calls for any number of bushels of wheat at the then price of wheat. If the wheat rises in price the price-ticket obtains a smaller number of bushels; if the wheat falls in price the price-ticket obtains a larger number of bushels.
Hence it is that, although the two kinds of business of every concern on the commodity markets and the money market are inseparable, yet they are likely to move off remarkably in different directions with very different social effects.
The warehouse deals in commodities regardless of changes in their prices; the bank deals in prices irrespective of changes in the quantity of commodities. The commodity ticket calls for 1,000 tons of pig iron regardless of whether or not its price changes from $20,000 to $40,000. But the price-ticket calls for a price of, say, $20,000, regardless of whether the price afterwards will purchase 1,000 tons or only 500 tons.
A commodity ticket is good at a warehouse, a factory, a farm, because it is simply a title of ownership, a bill of lading, a warehouse receipt, a claim to a seat or standing room in a theater or street car, which calls for a given quantity of commodity or service. But a price-ticket is good at a bank because it is a check drawn on a “bank deposit” at one of the banks for a given price of that commodity or service. A valid commodity ticket is good on its specific commodity market. A properly authenticated price-ticket is good on any commodity market and any money market. A commodity ticket follows the specified commodity with every change of ownership, regardless of changes in its price. But a price-ticket petrifies the price of that commodity on a given day at the bank and then circulates that price around from bank to bank for 30 to 90 days, regardless of changes in the quantity of that commodity which that petrified price meanwhile will purchase.
It is here that the public purpose of that negotiable promise, a price-ticket, or bank deposit, may be discovered. The two kinds of business on the commodity markets and the money markets correspond to two ways of getting rich or making a profit in business. One is by increasing the quantity of products or reducing their cost without raising prices; the other is by getting higher prices without increasing the quantity of products. The first method is that of increasing the quantity of commodities with a stable level of prices; the second is that of marking up the level of prices without increasing the quantity of commodities. The first is an increase of output, the second is relatively a restriction of output. The first is the productive method of making a profit by increasing the welfare of the community. The second is a speculative method of making a profit by taking it out of other people whose prices are not moving up as fast and hence without furnishing to them a corresponding increase of real wealth.
The commercial banks themselves do not clearly distinguish this public point of view from this private point of view, for two reasons: they are interested in the solvency of borrowers and they are interested in their own reserves of lawful money, and not in the movement of the general level of prices. In other words, they have no common rule of public polity to guide them. A pig-iron producer is perhaps as good a risk for a bank deposit of $40,000 when the price of pig iron moves up from $20 to $40 a ton if his customer's prices for their products are also moving up, as when the quantity of .pig iron, which he sells, moves up from 1,000 tons to 2,000 tons at $20 per ton. In either case the bank can perhaps safely lend the producer $40,000 and thereby create “new credit,” which is equivalent to creating" new money."
But there is a great difference in the public consequences of the two methods of creating new money. The first method creates new money because prices are being marked up. The second creates it because real wealth is being enlarged. In the second case the bank guarantees the public, in effect, that the quantity of real wealth has been doubled. But in the first case the bank guarantees only that the price of that wealth has been doubled. This is because the marking up of nominal values, or prices, by the business community is accompanied by the marking up, on both sides of the bank's books, of approximately just that amount of increase in the total volume of bank loans and bank deposits, or price tickets. It is simply a marking up of promises by business men ratified by a marking up of promises by bankers.
This is the second reason for the banker's private point of view, namely, the ratio of his reserves of lawful money to the volume of checks which he has promised to pay on demand. Were it a matter of a barter economy or a metallic money economy, there would be little or no elasticity in the supply of the commodity which the producer furnishes. But the bank is not dealing in commodities, it is dealing in promises to pay lawful money. And the volume of its promises to pay on demand may be as great as the risks it is willing to take on the chance of having enough lawful money on hand to meet a run of outgoing checks presented by customers and other banks in excess of the run of incoming checks deposited by customers and drawn on other banks. If the two are about equal, then the bank merely offsets one promise on its books by other promises, and its total liabilities remain constant.
But if it has greatly increased its volume of demand promises by guaranteeing an increased volume of price-agreements between business men, then the volume of outgoing checks increases without a corresponding increase in the volume of incoming checks. And, since the volume of lawful money, constituting the reserves which it has promised to pay on demand, is like the volume of other commodities in that it cannot be increased merely by issuing more promises but must be increased only by buying or producing more commodities, then the ratio of lawful money to the volume of demand promises falls, the risks are increased, and 'the bank begins to withhold its issue of promises. From the bank's point of view, this is the process of inflation and deflation - inflation is the increase of deposits relative to bank reserves of lawful money, deflation is the decrease of deposits relative to bank reserves.
But from the public standpoint, inflation is a general rise of prices without a corresponding increase in the quantity of products, and deflation is a general fall of prices without a corresponding decrease in the quantity of products.
The reconciliation of the two points of view is to be accomplished by the adoption of a working rule stabilizing the general level of prices, such that price-tickets calling for nominal values, shall always call for as nearly as possible the same quantity of real values, and such that banks will not insure business men in making profits on the mere rise of prices to be followed by a general collapse, but will insure them in making profits on an increase in the quantities and a reduction in the costs of commodities to be followed by a general increase in public welfare.