4. Explanations and Limitations of this Principle.
The proposition which we have laid down respecting the dependence of
general prices upon the quantity of money in circulation must be
understood as applying only to a state of things in which money—that is,
gold or silver—is the exclusive instrument of exchange, and actually
passes from hand to hand at every purchase, credit in any of its shapes
being unknown. When credit comes into play as a means of purchasing,
distinct from money in hand, we shall hereafter find that the connection
between prices and the amount of the circulating medium is much less
direct and intimate, and that such connection as does exist no longer
admits of so simple a mode of expression. That an increase of the quantity
of money raises prices, and a diminution lowers them, is the most
elementary proposition in the theory of currency, and without it we should
have no key to any of the others. In any state of things, however, except
the simple and primitive one which we have supposed, the proposition is
only true, other things being the same.
It is habitually assumed that whenever there is a greater amount of money
in the country, or in existence, a rise of prices must necessarily follow.
But this is by no means an inevitable consequence. In no commodity is it
the quantity in existence, but the quantity offered for sale, that
determines the value. Whatever may be the quantity of money in the
country, only that part of it will affect prices which goes into the
market of commodities, and is there actually exchanged against goods.
Whatever increases the amount of this portion of the money in the country
tends to raise prices.
This statement needs modification, since the change in the amounts
of specie in the bank reserves, particularly of England and the
United States, determines the amount of credit and purchasing
power granted, and so affects prices in that way; but prices are
affected not by this specie being actually exchanged against
goods.
It frequently happens that money to a considerable amount is brought into
the country, is there actually invested as capital, and again flows out,
without having ever once acted upon the markets of commodities, but only
upon the market of securities, or, as it is commonly though improperly
called, the money market.
A foreigner landing in the country with a treasure might very probably
prefer to invest his fortune at interest; which we shall suppose him to do
in the most obvious way by becoming a competitor for a portion of the
stock, railway debentures, mercantile bills, mortgages, etc., which are at
all times in the hands of the public. By doing this he would raise the
prices of those different securities, or in other words would lower the
rate of interest; and since this would disturb the relation previously
existing between the rate of interest on capital in the country itself and
that in foreign countries, it would probably induce some of those who had
floating capital seeking employment to send it abroad for foreign
investment, rather than buy securities at home at the advanced price. As
much money might thus go out as had previously come in, while the prices
of commodities would have shown no trace of its temporary presence. This
is a case highly deserving of attention; and it is a fact now beginning to
be recognized that the passage of the precious metals from country to
country is determined much more than was formerly supposed by the state of
the loan market in different countries, and much less by the state of
prices.
If there be, at any time, an increase in the number of money transactions,
a thing continually liable to happen from differences in the activity of
speculation, and even in the time of year (since certain kinds of business
are transacted only at particular seasons), an increase of the currency
which is only proportional to this increase of transactions, and is of no
longer duration, has no tendency to raise prices.
For example, bankers in Eastern cities each year send in the
autumn to the West, as the crops are gathered, very large sums of
money, to settle transactions in the buying and selling of grain,
wool, etc., but it again flows back to the great centers of
business in a short time, in payment of purchases from Eastern
merchants.
Chapter VI. Of The Value Of Money, As Dependent On Cost Of Production.
§ 1. The value of Money, in a state of Freedom, conforms to the value of
the Bullion contained in it.
But money, no more than commodities in general, has its value definitely
determined by demand and supply. The ultimate regulator of its value is
Cost of Production.
We are supposing, of course, that things are left to themselves.
Governments have not always left things to themselves. It was, until
lately, the policy of all governments to interdict the exportation and the
melting of money; while, by encouraging the exportation and impeding the
importation of other things, they endeavored to have a stream of money
constantly flowing in. By this course they gratified two prejudices: they
drew, or thought that they drew, more money into the country, which they
believed to be tantamount to more wealth; and they gave, or thought that
they gave, to all producers and dealers, high prices, which, though no
real advantage, people are always inclined to suppose to be one.
We are, however, to suppose a state, not of artificial regulation, but of
freedom. In that state, and assuming no charge to be made for coinage, the
value of money will conform to the value of the bullion of which it is
made. A pound-weight of gold or silver in coin, and the same weight in an
ingot, will precisely exchange for one another. On the supposition of
freedom, the metal can not be worth more in the state of bullion than of
coin; for as it can be melted without any loss of time, and with hardly
any expense, this would of course be done until the quantity in
circulation was so much diminished as to equalize its value with that of
the same weight in bullion. It may be thought, however, that the coin,
though it can not be of less, may be, and being a manufactured article
will naturally be, of greater value than the bullion contained in it, on
the same principle on which linen cloth is of more value than an equal
weight of linen yarn. This would be true, were it not that Government, in
this country and in some others, coins money gratis for any one who
furnishes the metal. If Government, however, throws the expense of
coinage, as is reasonable, upon the holder, by making a charge to cover
the expense (which is done by giving back rather less in coin than has
been received in bullion, and is called levying a seigniorage), the coin
will rise, to the extent of the seigniorage, above the value of the
bullion. If the mint kept back one per cent, to pay the expense of
coinage, it would be against the interest of the holders of bullion to
have it coined, until the coin was more valuable than the bullion by at
least that fraction. The coin, therefore, would be kept one per cent
higher in value, which could only be by keeping it one per cent less in
quantity, than if its coinage were gratuitous.
In the United States there was no charge for seigniorage on gold
and silver to 1853, when one half of one per cent was charged as
interest on the delay if coin was immediately delivered on the
deposit of bullion; in 1873 it was reduced to one fifth of one per
cent; and in 1875, by a provision of the Resumption Act, it was
wholly abolished (the depositor, however, paying for the copper
alloy). For the trade-dollars, as was consistent with their being
only coined ingots and not legal money, a seigniorage was charged
equal simply to the expense of coinage, which was one and a
quarter per cent at Philadelphia, and one and a half per cent at
San Francisco on the tale value.
§ 2. —Which is determined by the cost of production.
The value of money, then, conforms permanently, and in a state of freedom
almost immediately, to the value of the metal of which it is made; with
the addition, or not, of the expenses of coinage, according as those
expenses are borne by the individual or by the state.
To the majority of civilized countries gold and silver are foreign
products: and the circumstances which govern the values of foreign
products present some questions which we are not yet ready to examine. For
the present, therefore, we must suppose the country which is the subject
of our inquiries to be supplied with gold and silver by its own mines [as
in the case of the United States], reserving for future consideration how
far our conclusions require modification to adapt them to the more usual
case.
Of the three classes into which commodities are divided—those absolutely
limited in supply, those which may be had in unlimited quantity at a given
cost of production, and those which may be had in unlimited quantity, but
at an increasing cost of production—the precious metals, being the produce
of mines, belong to the third class. Their natural value, therefore, is in
the long run proportional to their cost of production in the most
unfavorable existing circumstances, that is, at the worst mine which it is
necessary to work in order to obtain the required supply. A pound weight
of gold will, in the gold-producing countries, ultimately tend to exchange
for as much of every other commodity as is produced at a cost equal to its
own; meaning by its own cost the cost in labor and expense at the least
productive sources of supply which the then existing demand makes it
necessary to work. The average value of gold is made to conform to its
natural value in the same manner as the values of other things are made to
conform to their natural value. Suppose that it were selling above its
natural value; that is, above the value which is an equivalent for the
labor and expense of mining, and for the risks attending a branch of
industry in which nine out of ten experiments have usually been failures.
A part of the mass of floating capital which is on the lookout for
investment would take the direction of mining enterprise; the supply would
thus be increased, and the value would fall. If, on the contrary, it were
selling below its natural value, miners would not be obtaining the
ordinary profit; they would slacken their works; if the depreciation was
great, some of the inferior mines would perhaps stop working altogether:
and a falling off in the annual supply, preventing the annual wear and
tear from being completely compensated, would by degrees reduce the
quantity, and restore the value.
When examined more closely, the following are the details of the process:
If gold is above its natural or cost value—the coin, as we have seen,
conforming in its value to the bullion—money will be of high value, and
the prices of all things, labor included, will be low. These low prices
will lower the expenses of all producers; but, as their returns will also
be lowered, no advantage will be obtained by any producer, except the
producer of gold; whose returns from his mine, not depending on price,
will be the same as before, and, his expenses being less, he will obtain
extra profits, and will be stimulated to increase his production. _E
converso_, if the metal is below its natural value; since this is as much
as to say that prices are high, and the money expenses of all producers
unusually great; for this, however, all other producers will be
compensated by increased money returns; the miner alone will extract from
his mine no more metal than before, while his expenses will be greater:
his profits, therefore, being diminished or annihilated, he will diminish
his production, if not abandon his employment.
In this manner it is that the value of money is made to conform to the
cost of production of the metal of which it is made. It may be well,
however, to repeat (what has been said before) that the adjustment takes a
long time to effect, in the case of a commodity so generally desired and
at the same time so durable as the precious metals. Being so largely used,
not only as money but for plate and ornament, there is at all times a very
large quantity of these metals in existence: while they are so slowly worn
out that a comparatively small annual production is sufficient to keep up
the supply, and to make any addition to it which may be required by the
increase of goods to be circulated, or by the increased demand for gold
and silver articles by wealthy consumers. Even if this small annual supply
were stopped entirely, it would require many years to reduce the quantity
so much as to make any very material difference in prices. The quantity
may be increased much more rapidly than it can be diminished; but the
increase must be very great before it can make itself much felt over such
a mass of the precious metals as exists in the whole commercial world. And
hence the effects of all changes in the conditions of production of the
precious metals are at first, and continue to be for many years, questions
of quantity only, with little reference to cost of production. More
especially is this the case when, as at the present time, many new sources
of supply have been simultaneously opened, most of them practicable by
labor alone, without any capital in advance beyond a pickaxe and a week’s
food, and when the operations are as yet wholly experimental, the
comparative permanent productiveness of the different sources being
entirely unascertained.
For the facts in regard to the production of the precious metals,
see the investigation by Dr. Adolf Soetbeer,(230) from which Chart
IX has been taken. It is worthy of careful study. The figures in
each period, at the top of the respective spaces, give the average
annual production during those years. The last period has been
added by me from figures taken from the reports of the Director of
the United States Mint. Other accessible sources, for the
production of the precious metals, are the tables in the
appendices to the Report of the Committee to the House of Commons
on the “Depreciation of Silver” (1876); the French official
Proces-Verbaux of the International Monetary Conference of 1881,
which give Soetbeer’s figures to a later date than his publication
above mentioned; the various papers in the British parliamentary
documents; and the reports of the director of our mint. Since 1850
more gold has been produced than in the whole period preceding,
from 1492 to 1850. Previous to 1849 the annual average product of
gold, out of the total product of both gold and silver, was
thirty-six per cent; for the twenty-six years ending in 1875, it
has been seventy and one half per cent. The result has been a rise
in gold prices certainly down to 1862,(231) as shown by the
following chart. It will be observed how much higher the prices
rose during the depression after 1858 than it was during a period
of similar conditions after 1848. The result, it may be said, was
predicted by Chevalier.(232)
Chart IX.
_Chart showing the Production of the Precious Metals, according to Value,
from 1493 to 1879._
Years. Silver. Gold. Total.
1493-1520 $2,115,000 $4,045,500 $6,160,500
1521-1544 4,059,000 4,994,000 9,053,000
1545-1560 14,022,000 5,935,500 19,957,500
1561-1580 13,477,500 4,770,750 18,248,250
1581-1600 18,850,500 5,147,500 23,998,000
1601-1620 19,030,500 5,942,750 24,973,250
1621-1640 17,712,000 5,789,250 23,501,250
1641-1660 16,483,500 6,117,000 22,600,500
1661-1680 15,165,000 6,458,750 21,623,750
1681-1700 15,385,500 7,508,500 22,894,000
1701-1720 16,002,000 8,942,000 24,944,000
1721-1740 19,404,000 13,308,250 32,712,250
1741-1760 23,991,500 17,165,500 41,157,000
1761-1780 29,373,250 14,441,750 43,815,000
1781-1800 39,557,750 12,408,500 51,966,250
1801-1810 40,236,750 12,400,000 52,636,750
1811-1820 24,334,750 7,983,000 32,317,750
1821-1830 20,725,250 9,915,750 30,641,000
1831-1840 26,840,250 14,151,500 40,991,750
1841-1850 35,118,750 38,194,250 73,313,000
1851-1855 39,875,250 137,766,750 177,642,000
1856-1860 40,724,500 143,725,250 184,449,750
1861-1865 49,551,750 129,123,250 178,675,000
1866-1870 60,258,750 133,850,000 194,108,750
1871-1875 88,624,000 119,045,750 207,669,750
1876-1879 110,575,000 119,710,000 230,285,000
[Illustration: Rise of Average Gold Prices.]
Chart showing rise of average gold prices after the gold discoveries of
1849 to 1862.
The fall of prices from 1873 to 1879, owing to the commercial
panic in the former year, however, is regarded, somewhat unjustly,
in my opinion, as an evidence of an appreciation of gold. Mr.
Giffen’s paper in the “Statistical Journal,” vol. xlii, is the
basis on which Mr. Goschen founded an argument in the “Journal of
the Institute of Bankers” (London), May, 1883, and which attracted
considerable attention. On the other side, see Bourne,
“Statistical Journal,” vol. xlii. The claim that the value of gold
has risen seems particularly hasty, especially when we consider
that after the panics of 1857 and 1866 the value of money rose,
for reasons not affecting gold, respectively fifteen and
twenty-five per cent.
The very thing for which the precious metals are most recommended
for use as the materials of money—their _durability_—is also the
very thing which has, for all practical purposes, excepted them
from the law of cost of production, and caused their value to
depend practically upon the law of demand and supply. Their
durability is the reason of the vast accumulations in existence,
and this it is which makes the annual product very small in
relation to the whole existing supply, and so prevents its value
from conforming, except after a long term of years, to the cost of
production of the annual supply.
§ 3. This law, how related to the principle laid down in the preceding
chapter.
Since, however, the value of money really conforms, like that of other
things, though more slowly, to its cost of production, some political
economists have objected altogether to the statement that the value of
money depends on its quantity combined with the rapidity of circulation,
which, they think, is assuming a law for money that does not exist for any
other commodity, when the truth is that it is governed by the very same
laws. To this we may answer, in the first place, that the statement in
question assumes no peculiar law. It is simply the law of demand and
supply, which is acknowledged to be applicable to all commodities, and
which, in the case of money, as of most other things, is controlled, but
not set aside, by the law of cost of production, since cost of production
would have no effect on value if it could have none on supply. But,
secondly, there really is, in one respect, a closer connection between the
value of money and its quantity than between the values of other things
and their quantity. The value of other things conforms to the changes in
the cost of production, without requiring, as a condition, that there
should be any actual alteration of the supply: the potential alteration is
sufficient; and, if there even be an actual alteration, it is but a
temporary one, except in so far as the altered value may make a difference
in the demand, and so require an increase or diminution of supply, as a
consequence, not a cause, of the alteration in value. Now, this is also
true of gold and silver, considered as articles of expenditure for
ornament and luxury; but it is not true of money. If the permanent cost of
production of gold were reduced one fourth, it might happen that there
would not be more of it bought for plate, gilding, or jewelry, than
before; and if so, though the value would fall, the quantity extracted
from the mines for these purposes would be no greater than previously. Not
so with the portion used as money: that portion could not fall in value
one fourth unless actually increased one fourth; for, at prices one fourth
higher, one fourth more money would be required to make the accustomed
purchases; and, if this were not forthcoming, some of the commodities
would be without purchasers, and prices could not be kept up. Alterations,
therefore, in the cost of production of the precious metals do not act
upon the value of money except just in proportion as they increase or
diminish its quantity; which can not be said of any other commodity. It
would, therefore, I conceive, be an error, both scientifically and
practically, to discard the proposition which asserts a connection between
the value of money and its quantity.
There are cases, however, in which the _potential_ change of the
precious metals affects their value as money in the same way that
it affects the value of other things. Such a case was the change
in the value of silver in 1876. The usual causes assigned for that
serious fall in value were the greatly increased production from
the mines of Nevada; the demonetization of silver by Germany; and
the decreased demand for export to India. It is true that the
exports of silver from England to India fell off from about
$32,000,000 in 1871-1872 to about $23,000,000 in 1874-1875; but
none of the increased Nevada silver was exported from the United
States to London, nor had Germany put more than $30,000,000 of her
silver on the market;(233) and yet the price of silver so fell
that the depreciation amounted to 20-¼ per cent as compared with
the average price between 1867 and 1872. The change in value,
however, took place without any corresponding change in the actual
quantity in circulation. The relation between prices and the
quantities of the precious metals is, therefore, not so exact,
certainly as regards silver, as Mr. Mill would have us believe;
and thus their values conform more nearly to the general law of
Demand and Supply in the same way that it affects things other
than money.
It is evident, however, that the cost of production, in the long run,
regulates the quantity; and that every country (temporary fluctuation
excepted) will possess, and have in circulation, just that quantity of
money which will perform all the exchanges required of it, consistently
with maintaining a value conformable to its cost of production. The prices
of things will, on the average, be such that money will exchange for its
own cost in all other goods: and, precisely because the quantity can not
be prevented from affecting the value, the quantity itself will (by a sort
of self-acting machinery) be kept at the amount consistent with that
standard of prices—at the amount necessary for performing, at those
prices, all the business required of it.
Chapter VII. Of A Double Standard And Subsidiary Coins.
§ 1. Objections to a Double Standard.
Though the qualities necessary to fit any commodity for being used as
money are rarely united in any considerable perfection, there are two
commodities which possess them in an eminent and nearly an equal
degree—the two precious metals, as they are called—gold and silver. Some
nations have accordingly attempted to compose their circulating medium of
these two metals indiscriminately.
There is an obvious convenience in making use of the more costly metal for
larger payments, and the cheaper one for smaller; and the only question
relates to the mode in which this can best be done. The mode most
frequently adopted has been to establish between the two metals a fixed
proportion [to decide by law, for example, that sixteen grains of silver
should be equivalent to one grain of gold]; and it being left free to
every one who has a [dollar] to pay, either to pay it in the one metal or
in the other.
If [their] natural or cost values always continued to bear the same ratio
to one another, the arrangement would be unobjectionable. This, however,
is far from being the fact. Gold and silver, though the least variable in
value of all commodities, are not invariable, and do not always vary
simultaneously. Silver, for example, was lowered in permanent value more
than gold by the discovery of the American mines; and those small
variations of value which take place occasionally do not affect both
metals alike. Suppose such a variation to take place—the value of the two
metals relatively to one another no longer agreeing with their rated
proportion—one or other of them will now be rated below its bullion value,
and there will be a profit to be made by melting it.
Suppose, for example, that gold rises in value relatively to silver, so
that the quantity of gold in a sovereign is now worth more than the
quantity of silver in twenty shillings. Two consequences will ensue. No
debtor will any longer find it his interest to pay in gold. He will always
pay in silver, because twenty shillings are a legal tender for a debt of
one pound, and he can procure silver convertible into twenty shillings for
less gold than that contained in a sovereign. The other consequence will
be that, unless a sovereign can be sold for more than twenty shillings,
all the sovereigns will be melted, since as bullion they will purchase a
greater number of shillings than they exchange for as coin. The converse
of all this would happen if silver, instead of gold, were the metal which
had risen in comparative value. A sovereign would not now be worth so much
as twenty shillings, and whoever had a pound to pay would prefer paying it
by a sovereign; while the silver coins would be collected for the purpose
of being melted, and sold as bullion for gold at their real value—that is,
above the legal valuation. The money of the community, therefore, would
never really consist of both metals, but of the one only which, at the
particular time, best suited the interest of debtors; and the standard of
the currency would be constantly liable to change from the one metal to
the other, at a loss, on each change, of the expense of coinage on the
metal which fell out of use.
This is the operation by which is carried into effect the law of
Sir Thomas Gresham (a merchant of the time of Elizabeth) to the
purport that “money of less value drives out money of more value,”
where both are legal payments among individuals. A celebrated
instance is that where the clipped coins of England were received
by the state on equal terms with new and perfect coin before 1695.
They hanged men and women, but they did not prevent the operation
of Gresham’s law and the disappearance of the perfect coins. When
the state refused the clipped coins at legal value, by no longer
receiving them in payment of taxes, the trouble ceased.(234)
Jevons gives a striking illustration of the same law: “At the time
of the treaty of 1858 between Great Britain, the United States,
and Japan, which partially opened up the last country to European
traders, a very curious system of currency existed in Japan. The
most valuable Japanese coin was the kobang, consisting of a thin
oval disk of gold about two inches long, and one and a quarter
inch wide, weighing two hundred grains, and ornamented in a very
primitive manner. It was passing current in the towns of Japan for
four silver itzebus, but was worth in English money about 18_s._
5_d._, whereas the silver itzebu was equal only to about 1_s._
4_d._ [four itzebus being worth in English money 5_s._ 4_d._]. The
earliest European traders enjoyed a rare opportunity for making
profit. By buying up the kobangs at the native rating they trebled
their money, until the natives, perceiving what was being done,
withdrew from circulation the remainder of the gold.”(235)
It appears, therefore, that the value of money is liable to more frequent
fluctuations when both metals are a legal tender at a fixed valuation than
when the exclusive standard of the currency is either gold or silver.
Instead of being only affected by variations in the cost of production of
one metal, it is subject to derangement from those of two. The particular
kind of variation to which a currency is rendered more liable by having
two legal standards is a fall of value, or what is commonly called a
depreciation, since practically that one of the two metals will always be
the standard of which the real has fallen below the rated value. If the
tendency of the metals be to rise in value, all payments will be made in
the one which has risen least; and, if to fall, then in that which has
fallen most.
While liable to “more frequent fluctuations,” prices do not follow
the _extreme_ fluctuations of both metals, as some suppose, and as
is shown by the following diagram.(236) A represents the line of
the value of gold, and B of silver, relatively to some third
commodity represented by the horizontal line. Superposing these
curves, C would show the line of _extreme_ variations, while since
prices would follow the metal which _falls_ in value, D would show
the actual course of variations. While the fluctuations are more
frequent in D, they are less extreme than in C.
[Illustration.]
Chart showing the line of prices under a double standard.
§ 2. The use of the two metals as money, and the management of Subsidiary
Coins.
The plan of a double standard is still occasionally brought forward by
here and there a writer or orator as a great improvement in currency.
It is probable that, with most of its adherents, its chief merit is its
tendency to a sort of depreciation, there being at all times abundance of
supporters for any mode, either open or covert, of lowering the standard.
[But] the advantage without the disadvantages of a double standard seems
to be best obtained by those nations with whom one only of the two metals
is a legal tender, but the other also is coined, and allowed to pass for
whatever value the market assigns to it.
When this plan is adopted, it is naturally the more costly metal which is
left to be bought and sold as an article of commerce. But nations which,
like England, adopt the more costly of the two as their standard, resort
to a different expedient for retaining them both in circulation, namely
(1), to make silver a legal tender, but only for small payments. In
England no one can be compelled to receive silver in payment for a larger
amount than forty shillings. With this regulation there is necessarily
combined another, namely (2), that silver coin should be rated, in
comparison with gold, somewhat above its intrinsic value; that there
should not be, in twenty shillings, as much silver as is worth a
sovereign; for, if there were, a very slight turn of the market in its
favor would make it worth more than a sovereign, and it would be
profitable to melt the silver coin. The overvaluation of the silver coin
creates an inducement to buy silver and send it to the mint to be coined,
since it is given back at a higher value than properly belongs to it;
this, however, has been guarded against (3) by limiting the quantity of
the silver coinage, which is not left, like that of gold, to the
discretion of individuals, but is determined by the Government, and
restricted to the amount supposed to be required for small payments. The
only precaution necessary is, not to put so high a valuation upon the
silver as to hold out a strong temptation to private coining.
§ 3. The experience of the United States with a double standard from 1792
to 1883.
The experience of the United States with a double standard,
extending as it does from 1792 to 1873 without a break, and from
1878 to the present time, is a most valuable source of instruction
in regard to the practical working of bimetallism. While we have
nominally had a double standard, in reality we have either had one
alone, or been in a transition from one to the other standard; and
the history of our coinage strikingly illustrates the truth that
the natural values of the two metals, in spite of all legislation,
so vary relatively to each other that a constant ratio can not be
maintained for any length of time; and that “the poor money drives
out the good,” according to Gresham’s statement. For clearness,
the period may be divided, in accordance with the changes of
legislation, into four divisions:
I. 1792-1834. Transition from gold to silver.
II. 1834-1853. Transition from silver to gold.
III. 1853-1878. Single gold currency (except 1862-1879, the paper
period).
IV. 1878-1884. Transition from gold to silver.
I. With the establishment of the mint, Hamilton agreed upon the
use of both gold and silver in our money, at a ratio of 15 to 1:
that is, that the amount of pure silver in a dollar should be
fifteen times the weight of gold in a dollar. So, while the
various Spanish dollars then in circulation in the United States
seemed to contain on the average about 371-¼ grains of pure
silver, and since Hamilton believed the relative market value of
gold and silver to be about 1 to 15, he put 1/15 of 371-¼ grains,
or 24-¾ grains of pure gold, into the gold dollar. It was the best
possible example of the bimetallic system to be found, and the
mint ratio was intended to conform to the market ratio. If this
conformity could have been maintained, there would have been no
disturbance. But a cause was already in operation affecting the
supply of one of the metals—silver—wholly independent of
legislation, and without correspondingly affecting gold.
Two periods of production of silver, in which the production of
silver was great relatively to gold, stand out prominently in the
history of that metal. (1) One was the enormous yield from the
mines of the New World, continuing from 1545 to about 1640, and
(2) the only other period of great production at all comparable
with it (that is, as regards the production of silver relatively
to gold) was that lasting from 1780 to 1820, due to the richness
of the Mexican silver-mines. The first period of ninety-five years
was longer than the second, which was only forty years; yet while
about forty-seven times as much silver as gold was produced on an
average during the first period, the average annual amount of
silver produced relatively to gold was probably a little greater
from 1780 to 1820. The effect of the first period in lowering the
relation of silver to gold is well recognized in the history of
the precious metals (see Chart X for the fall in the value of
silver relatively to gold); that the effect of the second period
on the value of silver has not been greater than was actually
caused—it has not been small—is explicable only by the laws of the
value of money. If you let the same amount of water into a small
reservoir which you let into a large one, the level of the former
will be raised more than the level of the latter. The great
production of the first period was added to a very small existing
stock of silver; that of the second period was added to a stock
increased by the great previous production just mentioned. The
smallness of the annual product relatively to the total quantity
existing in the world requires some time, even for a production of
silver forty-seven times greater than the gold production, to take
its effect on the value of the total silver stock in existence.
The effect of this process was beginning to be felt soon after the
United States decided on a double standard. For this reason the
value of silver was declining about 1800, and, although the annual
silver product fell off seriously after 1820, the value of silver
continued to decline even after that time, because the increased
production, dating back to 1780, was just beginning to make itself
felt. Thus we have the phenomenon—which seems very difficult for
some persons to understand—of a falling off in the annual
production of silver, accompanied by a decrease in its value
relatively to gold.
This diminishing value of silver began to affect the coinage of
the United States as early as 1811, and by 1820 the disappearance
of gold was everywhere commented upon. The process by which this
result is produced is a simple one, and is adopted as soon as a
margin of profit is seen arising from a divergence between the
mint and market ratios. In 1820 the market ratio of gold to silver
was 1 to 15.7—that is, the amount of gold in a dollar (24-¾
grains) would exchange for 15.7 times as many grains of silver in
the market, in the form of bullion; while at the mint, in the form
of coin, it would exchange for only 15 times as many grains of
silver. A broker having 1,000 gold dollars could buy with them in
the market silver bullion enough (1,000 × 15.7 grains) to have
coined, when presented at the mint, 1,000 dollars in silver
pieces, and yet have left over as a profit by the operation 700
grains of silver. So long as this can be done, silver (the
cheapest money) will be presented at the mint, and gold (the
dearest money) will become an article of merchandise too valuable
to be used as money when the cheaper silver is legally as good.
The best money, therefore, disappears from circulation, as it did
in the United States before 1820, owing to the fall in the value
of silver. It is to be said, that it has been seriously urged by
some writers that silver did not fall, but that gold rose, in
value, owing to the demand of England for resumption in 1819.(237)
Chronology kills this view; for the change in the value of silver
began too early to have been due to English measures, even if
conclusive reasons have not been given above why silver should
naturally have fallen in value.
[Illustration.]
Chart X. Chart showing the Changes in the Relative Values of Gold
and Silver from 1501 to 1880. From 1501 to 1680 a space is
allotted to each 20 years; from 1681 to 1871, to each 10 years;
from 1876 to 1880, to each year.
II. The change in the relative values of gold and silver finally
forced the United States to change their mint ratio in 1834. Two
courses were open to us: (1) either to increase the quantity of
silver in the dollar until the dollar of silver was intrinsically
worth the gold in the gold dollar; or (2) debase the gold
dollar-piece until it was reduced in value proportionate to the
depreciation of silver since 1792. The latter expedient, without
any seeming regard to the effect on contracts and the integrity of
our monetary standard, was adopted: 6.589 per cent was taken out
of the gold dollar, leaving it containing 23.22 grains of pure
gold; and as the silver dollar remained unchanged (371-¼ grains)
the mint ratio established was 1 to 15.988, or, as commonly
stated, 1 to 16. Did this correspond with the market ratio then
existing? No. Having seen the former steady fall in silver, and
believing that it would continue, Congress hoped to anticipate any
further fall by making the mint ratio of gold to silver a little
larger than the market ratio. This was done by establishing the
mint ratio of 1 to 15.988, while the market ratio in 1834 was 1 to
15.73. Here, again, appeared the difficulty arising from the
attempt to balance a ratio on a movable fulcrum. It will be seen
that the act of 1834 set at work forces for another change in the
coinage—forces of a similar kind, but working in exactly the
opposite direction to those previous to 1834. A dollar of gold
coin would now exchange for more grains of silver at the mint
(15.98) than it would in the form of bullion in the market
(15.73). Therefore it would be more profitable to put gold into
coin than exchange it as bullion. Gold was sent to the mint, while
silver began to be withdrawn from circulation, silver now being
more valuable as bullion than as coin. By 1840 a silver dollar was
worth 102 cents in gold.(238) This movement, which was displacing
silver with gold, received a surprising and unexpected impetus by
the gold discoveries of California and Australia in 1849, before
mentioned, and made gold less valuable relatively to silver, by
lowering the value of gold. Here, again, was another natural
cause, independent of legislation, and not to be foreseen,
altering the value of one of the precious metals, and in exactly
the opposite direction from that in the previous period, when
silver was lowered by the increase from the Mexican mines. In 1853
a silver dollar was worth 104 cents in gold (i.e., of a gold
dollar containing 23.22 grains); but, some years before, all
silver dollars had disappeared from use, and only gold was in
circulation. For a large part of this period we had in reality a
single standard of gold, the other metal not being able to stay in
the currency.
III. After our previous experience, the impossibility of retaining
both metals in the coinage together, on equal terms, now came to
be generally recognized, and was accepted by Congress in the
legislation of 1853. This act made no further changes intended to
adapt the mint to the market ratios, but remained satisfied with
the gold circulation. But hitherto no regard had been paid to the
principles on which a subsidiary coinage is based, as explained by
Mr. Mill in the last section (§ 2). The act of 1853, while
acquiescing in the single gold standard, had for its purpose the
readjustment of the subsidiary coins, which, together with silver
dollar-pieces, had all gone out of circulation. Before this, two
halves, four quarters, or ten dimes contained the same quantity of
pure silver as the dollar-piece (371-¼ grains); therefore, when it
became profitable to withdraw the dollar-pieces and substitute
gold, it gave exactly the same profit to withdraw two halves or
four quarters in silver. For this reason all the subsidiary silver
had gone out of circulation, and there was no “small change” in
the country. The legislation of 1853 rectified this error: (1) by
reducing the quantity of pure silver in a dollar’s worth of
subsidiary coin to 345.6 grains. By making so much less an amount
of silver equal to a dollar of small coins, it was more valuable
in that shape than as bullion, and there was no reason for melting
it, or withdrawing it (since even if gold and silver changed
considerably in their relative values, 345.6 grains of silver
could not easily rise sufficiently to become equal in value to a
gold dollar, when 371-¼ grains were worth only 104 cents of the
gold dollar); (2) this over-valuation of silver in subsidiary coin
would cause a great flow of silver to the mint, since silver would
be more valuable in subsidiary coin than as bullion; but this was
prevented by the provision (section 4 of the act of 1853) that the
amount or the small coinage should be limited according to the
discretion of the Secretary of the Treasury; and, (3) in order
that the overvalued small coinage might not be used for purposes
other than for effecting change, its legal-tender power was
restricted to payments not exceeding five dollars. This system, a
single gold standard for large, and silver for small, payments,
continued without question, and with great convenience, until the
days of the war, when paper money (1862-1879) drove out (by its
cheapness, again) both gold and silver. Paper was far cheaper than
the cheapest of the two metals.
[Illustration.]
Relative values of gold and silver, by months, in 1876.
The mere fact that the silver dollar-piece had not circulated
since even long before 1853 led the authorities to drop out the
provisions for the coinage of silver dollars and in 1873 remove it
from the list of legal coins (at the ratio of 1 to 15.98, the
obsolete ratio fixed as far back as 1834). This is what is known
as the “demonetization” of silver. It had no effect on the
circulation of silver dollars, since none were in use, and had not
been for more than twenty-five years. There had been no desire up
to this time to use silver, since it was more expensive than gold;
indeed, it is somewhat humiliating to our sense of national honor
to reflect that it was not until silver fell so surprisingly in
value (in 1876) that the agitation for its use in the coinage
arose. When a silver dollar was worth 104 cents, no one wanted it
as a means of liquidating debts; when it came to be worth 86
cents, it was capable of serving debtors even better than the then
appreciating greenbacks. Thus, while from 1853 (and even before)
we had legally two standards, of both gold and silver, but really
only one, that of gold, from 1873 to 1878 we had both legally and
really only one standard, that of gold.
It might be here added, that I have spoken of the silver dollar as
containing 371-¼ grains of pure silver. Of course, alloy is mixed
with the pure silver, sufficient, in 1792, to make the original
dollar weigh 416 grains in all, its “standard” weight. In 1837 the
amount of alloy was changed from 1/12 to 1/10 of the standard
weight, which (as the 371-¼ grains of pure silver were unchanged)
gave the total weight of the dollar as 412-½ grains, whence the
familiar name assigned to this piece. In 1873, moreover, the mint
was permitted to put its stamp and devices—to what was not money
at all, but a “coined ingot”—on 378 grains of pure silver (420
grains, standard), known as the “trade-dollar.” It was intended by
this means to make United States silver more serviceable in the
Asiatic trade. Oriental nations care almost exclusively for silver
in payments. The Mexican silver dollar contained 377-¼ grains of
pure silver; the Japanese yen, 374-4/10; and the United States
dollar, 371-¼. By making the “trade-dollar” slightly heavier than
any coin used in the Eastern world, it would give our silver a new
market; and the United States Government was simply asked to
certify to the fineness and weight by coining it, provided the
owners of silver paid the expenses of coinage. Inadvertently the
trade-dollar was included in the list of coins in the act of 1873
which were legal tender for payments of five dollars, but, when
this was discovered, it was repealed in 1876. So that the
trade-dollar was not a legal coin, in any sense (although it
contained more silver than the 412-½-grains dollar). They ceased
to be coined in 1878, to which time there had been made
$35,959,360.
IV. In February, 1878, an indiscreet and unreasonable movement
induced Congress to authorize the recoinage of the silver
dollar-piece at the obsolete ratio of 1834 (1 to 15.98), while the
market ratio was 1 to 17.87. So extraordinary a reversal of all
sound principles and such blindness to our previous experience
could be explained only by a desire to force this country to use a
silver coinage only, and had its origin with the owners of
silver-mines, aided by the desires of debtors for a cheap unit in
which to absolve themselves from their indebtedness. There was no
pretense of setting up a double standard about it; for it was
evident to the most ignorant that so great a disproportion between
the mint and market ratios must inevitably lead to the
disappearance of gold entirely. This would happen, if owners could
bring their silver freely, in any amounts, to the mint for coinage
(“Free Coinage”), and so exchange silver against gold coin for the
purpose of withdrawing gold, since gold would exchange for less as
coin than as bullion. This immediate result was prevented by a
provision in the law, which prevented the “free coinage” of
silver, and required the Government itself to buy silver and coin
at least $2,000,000 in silver each month. This retarded, but will
not ultimately prevent, the change from the present gold to a
single silver standard. At the rate of $24,000,000 a year, it is
only a question of time when the Treasury will be obliged to pay
out, for its regular disbursements on the public debt, silver in
such amounts as will drive gold out of circulation. In February,
1884, it was feared that this was already at hand, and was
practically reached in the August following. Unless a repeal of
the law is reached very soon, the uncomfortable spectacle will be seen of a gradual disarrangement of prices, and consequently of trade, arising from a change of the standard. |
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