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BIMETALLISM
L-
BIMETALLISM
A SUMMARY AND EXAMINATION OF THE
ARGUMENTS FOR AND AGAINST A
BIMETALLIC SYSTEM OF
CURRENCY
MAJOR LEONAED DARWIN
LONDON
JOHN MURRAY, ALBEMARLE STREET
1897
n^
LOKDOK :
PEIKTED By WILLIAM CLOWES AND SONS, LIMITED,
STAMFORD STREET AND CHARING CKC68.
\JRWERS1TY OF SOUTHERN CAUfQRUlA LlBR^RY
PREFACE.
My thanks are due to Mr. Alfred Marshall,
Professor of Political Economy in the
University of Cambridge, and to Mr. H. S.
Foxwell, Professor of Political Economy at
University College, London, for the very
kind way in which they have answered my
inquiries on the subjects here discussed ;
also to Mr. W. E. Darwin, Major- General
T. Eraser, and Dr. R. H. Mill for kindly
assisting me in the revision of the proofs.
October, 1897.
DIAGRAM SHOWING THE RELATIVE VALUES OF
GOLD AND SILVER BETWEEN 1687 AND 1895.
33 to
32 „
31 „
30 „
29 „
28 „
27 „
26 „
25 „
24 „
23 „
22 „
21 „
20 „ 1
19 „
18 „
17 „ 1
1700
1725 1750 1775 1800 1825 1850 1875
13 „ 1
189
Note. — The curved line shows the ratio in the market. The
straight hne shows approximately the legal ratio in France,
without reference to seigniorage ; it has not been found possible
to plot this line between 1689 and 1726. The French legal
ratio is shown because it was the last to be abolished ; the legal
ratio adopted by other nations in the eighteenth century fre-
quently differed from the French ratio. The information from
which this table was compiled was taken, almost without
exception, from the Report of the Director of the Mint of the
United States, and from Shaw's " History of Currency." The
ordinates are logarithms of the ratios ; that is to say, that the
ratio of 32 to 1 is as 'much above the ratio of 16 to 1 as the
ratio of 16 to 1 would be above the ratio of 8 to 1.
CONTENTS.
THE BIMETALLIC THEORY.
CHAPTER PAGE
I. Can the Katio be maintained? ... ... 3
II. The Theory of the Maintenance of the Ratio 11
III. Aims and Objects of Bimetallists ... ... 35
THE CHOICE OF A RATIO.
IV. The Choice of a Ratio ... ... ... 47
V. The Main Object of adopting a Low Ratio is
TO RAISE Prices ... ... ... ... 61
VI. Free Coinage of Silver in the United States 80
VII. Arguments in favour op a Low Ratio ... 87
VIII. Arguments against the Low Ratio ... ... 99
IX. Conclusions as to the Choice of a Ratio ... 106
BIMETALLISM VERSUS MONOMETALLISM.
X. Prices will be steadier under a Bimetallic
Ststem ... ... ... ... ... 119
XI. Advantages of a Steady Rate of Exchange
with Silveb-using Countries ... ... 127
XII. Disadvantages of Bimetallism — Dangers re-
sulting from a Breakdown of the System... 134
XIII. Other Objections to Bimetallism ... ... 143
Vlll
CONTENTS.
RISING AND FALLING PRICES.
CHAPTER PAGE
XIV. Arguments based on the Becent Fall in Pbices 157
XV. Would Prices have fallen less eapidly had
Bimetallism been maintained? ... ... 164
XVI. Credit, and the Quantitative Theory of Prices 180
XVII. The Effect on Production of appreciating and
depreciating Standards ... ... ... 204
XVIII. The Effect on Distribution of appreciating
AND depreciating STANDARDS ... ... 229
XIX. Has the Recent Fall in Prices been too rapid ? 258
XX. Conclusion of the Argument based on the
Recent Fall in Prices ... ... ... 271
FOREIGN TRADE.
XXI. The Opinions of Bimetallists as to the Effects
OF International Trade ... ... ... 283
XXII. The Influence of Trade with a Country having
A different Standard of Value ... ... 299
CONCLUSION.
XXIII. Recapitulation and Conclusions
Appendix ...
.827
339
THE BIMETALLIC THEOKY.
BIMETALLISM.
CHAPTER I.
CAN THE RATIO BE MAINTAINED ?
The members of the Gold and Silver Commission, All ques-
in the first page of their Eeport, declared that from gon^cted
the commencement of their inquiry they were " pro- with
foundly impressed with the extreme complexity of ar^yery
the questions submitted for " their consideration.^ diflBcult to
^ , master.
1 1 the dimculty of mastering these currency problems
was so keenly felt by this exceptionally able body
of commissioners, no one ought to expect to be able
to understand the subject without careful study.
There are some inquirers who apparently hope to be
in a position after a few hours' work to form a definite
opinion as to whether a bimetallic system ought or
ought not to be adopted ; but if any reader should
open these pages in that spirit, I hope he will close
* Gold and Silver Commission. Final Report of tlie Royal
Commission appointed to inquire into the recent changes in the
relative values of the precious metals, 1888, p. 1.
THE BIMETALLIC THEORY.
[Ch. I.
What is
attempted
in this
Tolume is
to give a
summary of
the argu-
ments on
both sides ;
whilst the
ground-
work of
facts will
not be
discussed
at great
length.
them again without reading another line. I myself
have found the path of inquiiy so strewn with
difficulties, many of them apparently insurmount-
able, that I cannot pretend to point out a royal road
to a quick and certain decision. At the best, all I
can hope to do is to give an outline of the main
arguments which ought to be weighed by those who
desire to form an independent judgment.
There are two methods of bringing such an essay
as this within moderate dimensions ; the one is to
sketch lightly, or omit, all but the main argu-
ments, relying rather on the assertion of the con-
clusions arrived at by the author ; the other is,
whilst endeavouring to state fairly all the main
arguments on both sides, to condense them very
greatly. The former of these methods, no doubt, has
its advantages, but the latter plan has been adopted
here, although it naturally makes the task of reading
these pages more severe. When I approached this
subject with an open mind a few years ago, I felt
the want of such a summary and examination of
the arguments for and against a bimetallic system,
and I hope, therefore, that my labours may be of
some use to others under similar circumstances.
The true or alleged recent depression in trade,
the variation in the relative value of the precious
metals during the last twenty years, and the causes
to which these occurrences are due, are questions
which have occupied much of the attention of
bimetallists. These subjects will not be discussed
at any great length, for it is rather with the
Ch. I.] DEFINITION OF BIMETALLISM. 5
principles which should be present in the minds of
those who are desirous of considering the facts for
themselves that I shall attempt to deal.
The word " bimetallism " ^ is now well understood, Definition
but, as it is a somewhat misleading phrase, it may i^^!™
be as well to commence by clearly stating what is
the meaning here attached to it. The adoption of
bimetallism in this country would entail such an
alteration in the law as would permit any one who
now owes a certain weight of coined gold — a certain
number of pounds sterling — to discharge that debt,
either by paying the said weight of coined gold, or
by paying a proportionately larger weight of coined
silver, the ratio between the two weights being
enacted once for all on the establishment of the
system. Or, to put the matter more generally, bi-
metallism means any currency system which would
establish a right on the part of the debtor to dis-
charge his liabilities at his option in either of the
two metals at a ratio fixed by law. A system of
bimetallism in which the option was given to the
creditor as to the metal in which the payment might
be made would be impracticable, because (amongst
other reasons) giving that option to the creditor
instead of to the debtor, would necessitate all debtors,
' The symmetallic system is not discussed in this volume, for,
though probably theoretically preferable to bimetallism, it does
not appear to me to come within the region of practical
politics. This system, which was proposed by Professor Alfred
Marshall, would enable the Government to issue certificates, each
certificate representing a sum of gold and a sum of silver, the
ratio between the two being fixed internationally.
6 THE BIMETALLIC THEORY. [Ch. I.
including banks, keeping nearly twice as much
coin in hand as they do now — one reserve of silver
and the other of gold — if they were always to be in a
position to meet their liabilities with the same degree
of certainty as at present. It is a necessary part of
the bimetallic system that the leading commercial
nations of the world should adopt it, fixing on the
same ratio, and that they should allow their mints
to be open, without restrictions as to quantity, to all
who desire to have either metal coined. The term
" bimetallism," as thus defined, gives no indication
as to what the ratio may be.
The The objection most commonly urged in the press,
obiectiou ^^^ ^^ conversation, against the adoption of bi-
to bimetal- metallism is that it is impossible to alter by law the
lisra is that , „ , • i i t ^ -i
the ratio value 01 any material, because value depends on
cannot be inherent qualities outside the scope of legislative
maintameu. ^ . r o
power.^ In considering the efficacy of bimetallic laws,
many of us may think it wisest to base our opinions
largely on the authority of others more capable of
judging than ourselves, and, if that be the case, we
1 This is in part due to a confusion between two meanings of
the word " value." " The word ' value,' " says Adam Smith, " has
two different meanings, and sometimes expresses the utility of
some particiilar object, and sometimes the power of purchasing
other goods which the possession of that object conveys. The
one may be called value in use, the other value in exchange."
In the place of " value in use " we now speak of " utility," while
instead of " value in exchange " we often say " exchange value "
or simply " value." " Value " by itself always means value
in exchange. (Marshall's "Principles of Economics," p. 8.)
The *' money value " of a sum in currency merely indicates the
number of units — pounds or dollars — which it contains.
Ch. L] RELATIVE VALUE. 7
cannot do better than consult the Report of the Gold
and Silver Commission, the members of which
originally consisted of an equal number of mono-
metallists and bimetallists. They unanimously re- Authorities
ported that they were "irresistibly led to the Jj^^^J^^
conclusion that the operation of " the bimetallic that value
system of the Latin Union, which existed in full altered by
force until 1878, had "exerted a material influence l'^^^^"'
quoted.
upon the relative value of the two metals." ^ This
statement, if accepted as final, completely destroys
the idea that it is impossible to alter the relative
values of the metals by law; and the only out-
standing question is whether the forces which are
admitted to have existed in the past, would in
the future be sufficiently powerful, if international,
bimetallism were adopted, to maintain the selected
ratio between the value of gold and silver coins
with sufficient accuracy to enable them both to cir-
culate in the currency at the same time and place.
Of course the bimetallist members of the Commis-
sion declared that this was possible, and even the
monometallists admitted " that in any conditions
fairly to be contemplated in the future, ... a
stable ratio might be maintained if" the United
Kingdom, Germany, the United States, and the
Latin Union "were to accept and strictly adhere
to " bimetallism at a ratio approximating to that
now obtaining in the market.'-^ Sir John Lubbock
and Mr. Birch, however, though signing the Report,
expressed their grave doubts as to this paragraph,
1 Final Report, pp. 58, 59. * Ibid., p. 85.
8 THE BIMETALLIC THEOEY. [Ch. I.
but did not "deny that such a combination might
for a considerable time be able to maintain the
ratio adopted." ^ In fact, as ten out of the twelve
commissioners considered that the ratio might be
maintained, the two remaining members only doubt-
fully dissenting, the majority of the most powerful
jury that has ever sat on this question may be said
to have given their verdict in favour of the practica-
bility of bimetallism in this respect.
Historical The commissioners arrived at the above con-
fer and" elusions " as well from a priori reasoning as from
against the. the experience of the last half century." As for
belief that , . . , „ , , , i i i
bimetallic historical proois, a diagram has already been given
effective'' showing the relative value of the metals in the
when in open market for about two centuries, which helps to
illustrate the points at issue. Bimetallic laws were
in force in various parts of Europe during the
whole of the period included in the table up till
the year 1873 ; in that year, France, and the other
countries composing the Latin Union, commenced
the abandonment of their bimetallic system ; and
after the completion of that movement, Europe and
America passed into a period of pure monometallism
for the first time in history. Coincidently with this
change, or nearly so, there began the most extra-
ordinary fall in the gold price of silver, and bimetal-
lists declare that this fall was due to the untying
of the legal bonds which held the two metals
together. Against this view, monometallists argue
that the fall began a year or two before the legal
' Final Report, p. 93.
Ch. l] historical proofs. 9
changes of 1873, and that the bimetallic tie in
reality broke down under the excessive strain of
natural forces. Bimetallists reply that there is
every reason to believe that as great or greater
strains had been successfully resisted in the past ; ^
and that the small fall which occurred before 1873
is accounted for, both by the apprehensions which
were felt as to the anticipated changes in the law,
and also by the monetary troubles in France, the
chief bimetallic nation, which made her influence
on the relative value of the metals less effective.
Monometallists also call attention to the fact that
the ratio was not accurately maintained in the past
by the bimetallic laws, and that there is, therefore,
no reason to believe it would be maintained in
the future. To this contention bimetallists reply
that these ancient bimetallic laws were of a very
imperfect kind, and that the countries adopting
them did not constitute a wide enough area to
make them thoroughly effective ; they also point
out that tables and diagrams always indicate the
relative value of gold and silver bullion in the
market, and not the ratio of the value of the coined
metals, which is the really important matter; and
that from various causes coin and bullion may
differ in value, to a limited extent, one from the
other. In countries where there is a charge made
at the mint for coining, it will be seen, in a later
chapter, that the value of bullion may be either
* See tables in the Appendix showing the relative production
of the precious metals.
10 THE BIMETALLIC THEOBY. [Ch. I.
higher or lower than the value of same weight of
pure metal in coins.^ Even in England, the value
of gold bullion and the value of gold in sovereigns
is not always identical; because the purchaser of
bullion is sometimes willing to pay a small " agio "
to the vendor for the trouble of collecting and
melting down the sovereigns, and for the loss on
account of their being light in weight. Moreover,
the prices in the English and German markets form
an uncertain guide as to the ratio of the value even
of bullion in France, because the cost of transporta-
tion of the metals make it possible for a permanent
difference between the ratios in different places to
be maintained. These considerations show that it
is, at all events, quite possible that the relative
value of silver and gold bullion before 1873 might
have varied slightly in France, and still more in
England, without there having been any correspond-
ing variation in the relative values of the Latin
Union coins ; and bimetallists assert that this was
actually the case. In my opinion, the bimetallists
have the best of the argument in this historical
controversy, the details of which cannot be given
here at length.
1 See p. 136.
Ch. II.] THE MAINTENANCE OF THE RATIO. 11
CHAPTER 11.
THE THEORY OF THE MAINTENANCE OF THE RATIO.
Before discussing the arguments which have led The
economists to the conclusion that a suitable ratio thrvalue
between the metals can be maintained, some idea ^^ money
must be given of the theory of the value of be con-
money. '"^''•^•
It will in the first place be convenient to consider Under
the case of a country under purely hypothetical t-^^con".
conditions. liCt us assume that it is quite isolated ditions, the
from all surroundings ; that it has an inconvertible incon-
note currency ; that these notes form the only vertible
kind of money in existence; and that no com- would vary
mercial transactions are made without money ag^^ej/
passing — neither barter taking place, nor credit quantity ;
being given. vSuch conditions, no doubt, give woukUan-
a tone of unreality to the discussion, but it is ?ccord-
only by completely separating any one cause
from all other causes that we can hope to study
its particular effects. What, under these supposed
conditions, would determine the value of these
inconvertible paper notes? The use of such a
currency would be to facilitate the exchange of
12 THE BIMETALLIC THEORY. [Ch. IL
commodities, and, as these pieces of paper would be
practically of no value in themselves, their value
as notes would depend entirely on their usefulness
for that purpose. There would exist, therefore, in
this hypothetical country, a certain definite number
of notes in circulation, and this currency would
be used as the only and exclusive medium of ex-
change. A certain number of money transactions
would be taking place at one time, and, for each
one of these transactions, a certain amount of the
note issue would be used; a definite proportion
of the whole currency would be utilized in each
transaction. If large additions were suddenly made
to the currency, some notes might lie idle for a
time; but, generally speaking, the owners of the
notes would all desire to utilize their possessions ;
and this they could only do, under the assumed con-
ditions, by discharging their liabilities with them,
and by thus passing them into general circulation.
Thus the whole of the notes in the country would
be in use in facilitating the exchange of com-
modities in this manner ; and it is, therefore,
evident, assuming other things to remain the same,
that if the total issue of notes is increased, the
number of notes utilized in each transaction must
increase also. If, for example, the number or money
value of the notes in circulation were doubled,
other things remaining the same, the number
or money value of the notes used in the trans-
action of each bargain must be doubled also ;
in other words, prices would be doubled, or the
Ch. II.] THE QUANTITATIVE THEORY. 13
value of the notes, as measured in commodities,
would be halved. Thus, in such a primitive isolated
country, it is evident that the value of the notes
would vary inversely with the quantity or total
money value of the notes in circulation; the
greater the quantity, the less would be their value,
and the higher would be prices as measured by
them. This is known as the " quantitative theory This pro-
of prices." It is a theory which is now generally Position is
held by economists to indicate an important prin- as the
ciple, but one which must be accepted with modi- tative° ^'
lications when applied to a metallic currency theory of
circulating under modern conditions. No doubt,
in the complex condition of existing commercial The quan-
methods, a great many diflferent circumstances have tiieory^is
an influence on prices ; but the quantitative theory pot strictly
•11 . . 1 • i 1 11 applicable
still remains true m the main ; tor we shall see no to modem
reason to doubt that, under all circumstances, an conditions ;
increase of the currency will tend to raise the
general level of prices, though the rise may not be
in direct proportion to that increase.
As an argument to show that the quantitative because,
theory is not applicable to the existing con- ^^ incr^'se
dition of things, it may be said that an increase in the
of currency will in itself produce an increase of does cause
business — an increase in the number of commercial '^^ ^I
mediate
transactions — and that the amount of money needed increase of
for each transaction will not, therefore, increase in ^^^^^^ •
proportion to the increase of notes or coin. This
is no doubt true. But an increase in the currency
will only cause an increase in business by raising
14 THE BIMETALLIC THEORY. [Cu. IL
prices ; and this, therefore, affords no argument for
denying that a rise will take place ; it only shows
that the rise will not be in proportion to the incre-
though the ment of the currency. Moreover, when discussing
effe"s may ^^® ^^^^^ ^^ bimetallism on prices, it will be sho^vn
still follow that it is highly probable that such means of in-
flating trade produce no permanent results; that
a rise in prices will give an immediate stimulus to
commerce by easing the burden of indebtedness,
but that in the long run the quantity of com-
modities exchanged will be independent of the
number, weight, or name of the "counters" used
in making that exchange. If we imagine that the
owners of all the money in the world woke up one
morning to find all their money doubled, and to
find that, at the same time, all debts and all prices
had been doubled also, then things might go on
exactly as before ; and this new commercial equili-
brium, with doubled prices, is the state of things
which doubling the currency would probably slowly
tend to produce. If this be the case, the fact that
business increases with an increase of the currency
does not prove that the quantitative theory of
prices is not accurately true as far as the ultimate
effects of changes in the volume of the currency are
concerned,
fpijg^. The effect of credit on prices is a much more
c'^io'ion debatable subject, the discussion of which had
postponed better be postponed. When this question is ap-
to^hapter proached it will be seen that the immense increase
in the use of credit instruments, such as cheques.
Ch.Ii.] metallic value. 15
etc., does affect the quantitative theory more than
any other circumstance ; but that there is no
reason to doubt the general conclusion that there
is an intimate relationship between the volume
of the currency and the general level of prices.
And this view, as far as inconvertible notes is con-
cerned, is greatly strengthened by historical facts.
Whenever the issue of such notes has been largely
increased, their value has fallen, and prices, as
measured by this currency, have risen ; the tremen-
dous depreciation in the value of the French assignats
in 1794-95, corresponding with each new issue, being
the most familiar example of such a change.
In considering the application of the quantitative With a
theory to the case of a metallic currency, it is ^gncy
natural to urge that the value of the sovereign prices
depends on the value of the gold in the sovereign, said to
and not on the number of sovereigns in circulation. *^?F°<i
o either ou
At this stage it is merely necessary to remark that the
the difference between the two views is largely a lil^ch-ciLla-
question of words. For example, when the pro- tion ov on
tllG VflluC
duction of gold is increasing, more metal will flow of the
•into the market ; and, as with any other commodity, ^^t^l.^o
. "^ ^ the coins.
this will tend to lower its value as an article of
merchandise. As the value of a sovereign is equal
to the value of the gold contained in the coin, it
is evident that, in these circumstances, the value
of the sovereign will fall also; and that prices as
measured by sovereigns will rise. But when the
production of gold is increasing, more of that metal
will also flow into the gold currencies of the world ;
16
THE BIMETALLIC THEORY.
[Ch. II.
The
bimetallic
problem
now to be
discussed.
If free
coinage
and the
melting
down of
coins were
stopped,
metal coins
would
and, as we have seen, an increase of the currency is,
according to the quantitative theory of prices,
normally accompanied by a rise in prices. The
question of prices with a metallic currency can, in
fact, always be studied, as in the above example,
either with reference to the value of the metal in
the standard coin, or with reference to the number
of standard coins in circulation ; and it will be
found that, by whichever of these two ways we
approach the subject, we shall alwayg arrive at the
same result.
After these preliminary observations on the gene-
rally accepted views as to the value of money, it
is now possible to pass on to the bimetallic problem.
Eeverting for a moment to the consideration of an
inconvertible note currency, it will be universally
admitted that prices will be the same whether the
issue consists of a thousand one-pound notes or of
a hundred ten-pound notes; prices will, in fact,
vary with the total money value of the notes in
circulation. It will also be readily admitted that
no amount of additional issue of, say, ten-pound
notes would alter the relative value of ten-pound
and one-pound notes; though it would affect the
actual value of both.
Passing on to the consideration of a metallic
currency, it should first be noted that if restric-
tions are placed at the mint on the coinage of
the metals, theni the value of the coins will not, as
a rule, be the same as the value of the metal in
them. Thus in India, where the mints are now
Ch. II.] THE BIMETALLIC THEORY. 17
closed to the coinage of silver, the rupee is worth obtain a
more than the silver it contains. If the old laws the same
against the melting down of coins could have been ^*y ^,.1°,"
/. 1 , • 1 1 •/. . conTertible
eniorced, there is no doubt, if enough coins were notes ;
issued, that the value of the currency could in
like manner have been kept below the value of
the metal in it. Thus, if both the melting down
or export of coins and the free coinage of bullion
were stopped, a monometallic currency would be,
in respect to its value, in the same position as a
currency of inconvertible notes ; decrease or increase
the quantity, and we can raise or lower the value
of the coins to any extent either above or below
their metallic value; that is, above or below the
value of the metal in the coin, if sold in the
market as an article of merchandise.
If these supposed restrictions on free coinage and ^ bimetallic
melting down of coin were effectively maintained, would then
it is evident that, with a bimetallic currency, the Q^ii^'^^f
value of the coins would be determined in the same different
manner as with a monometallic system ; the value tionTbei^n'o
of the metal itself would have nothing to do with printed
the matter ; the value of the whole currency would
vary with the total money value of both metals
in circulation ; notes of a lower denomination being,
as it were, printed on silver, and those of a higher
denomination being printed on gold, according to
some legalized ratio. With inconvertible notes it
has been seen that no additional issues of notes of
one donomination will alter the relative value of the
different notes ; and, in the same way, under these
c
18 THE BIMETALLIC THEORY. [Ch. II.
conditions, no amount of additional coinage of one
metal would alter the relative value of gold and
silver coins. If it were enacted that twenty shillings
were to be worth a sovereign, the issue of additional
shillings would alter the value of both shillings
and of sovereigns, but not the relative value of the
two; and, under such hypothetical conditions, the
and the bimetallic ratio thus enacted would be maintained
would be ^i*^ mathematical precision, at all events in all
maintained, transactions where shillings and sovereigns could
be used with equal convenience.
If free In this discussion it has been assumed that the
metals could not be freely taken to the mint. Free
coinage
were
mitted, and coinage is, however, the essence of bimetallism. Let
the metals ^ '
per-
a, ai
,„„ jietaL . f n 1 T 1 .1
were not it, therefore, be assumed, as the next step m the
arts^ the*^^^ argument, that the metals can be freely coined or
parity melted down, but that, in the hypothetical country
he un- under consideration, they are not used for any other
affected, purpose whatever than for legal tender coinage.
Under these conditions it is true that both the
relative and the actual quantity of the two metals
would depend on the output from the mines ; whereas
the relative and the actual quantity of inconvertible
notes of different denominations, whether printed
on paper or on metal, would depend on the caprice
of the Government; but the reasons which settle
the quantity of notes or coins in circulation cannot
affect the laws which determine their value when
once they are in circulation. Thus an increase in
the coinage of either of the two metals would, with-
out doubt, increase the total money value of the
Ch.ii.] the bimetallic theory. 19
metals in circulation, and would thus raise prices ;
but this addition to the currency would not tend
to alter the ratio fixed by law between the two
kinds of coins. How could it do so? If, for
example, an increase in the output of silver from
the mines took place, and if, to assume an impos-
sibility, the ratio between gold and uncoined silver
changed, so that the value of uncoined silver was
less than the value of silver in coins, the owners
of uncoined silver would at once have their metal
coined; and, when coined, it would immediately
acquire for the only use it could be put to under
the assumed conditions — that is, as coin for paying
debts — its full relative value as compared with gold.
On the other hand, we cannot conceive gold rising
in value as a metal above its value as a coin ; for
such a rise in value could only result from a demand
for it for some other use ; and we have assumed no
other use to exist. Thus, on the supposition that
the metals are used for no other purpose than for
legal tender, it seems that the bimetallic ratio will
be maintained with equal certainty whether the
right of free coinage exists or not.
It now remains to be seen how the question is But the
affected by the other uses to which the precious t^e o*ther
metals are put, and this is the real point at issue, uses of the
The importance of this subject is not fully recog- the rear
nized till it is known that only about half the total P?^°* ^^
stock of gold or silver is used for currency purposes.
In the first place it should be noted that, even
under the hypothetical conditions just discussed,
20 THE BIMETALLIC THEORY. [Ch. II.
the ratio between the value of the metals might
be so fixed, by bimetallic legislation, that in the
case of one or other of them, it would no longer
be profitable to work the mines ; then that metal
would, through wear and tear, gradually disappear
from circulation, and monometallism would in the
end be established in spite of bimetallic laws. In
considering the adoption of a bimetallic system in
the future, the actual cessation of the production
of either gold or silver is a contingency which need
not be considered, because the use of the precious
metals in the arts would always create a demand
for them, whatever the legal ratio might be. The
output of both metals will, of course, continue
under all possible currency conditions.
Definition In order to understand the effect on prices of
ratio^^^"^'^^ *^® use of the precious metals in the arts, it
is best to begin by imagining a condition of affairs
when neither silver nor gold is used for currency
purposes. It is evident, if this were the case, that
the demand for these metals in the arts would
establish a fluctuating ratio of value between
them, varying with every alteration of their use
in the arts, and with every change in their re-
lative output from the mines; and this ratio we
may, for want of a better term, call the "natural
If, in a ratio." If, under such hypothetical conditions, a
TrithoSa l>iiiietallic system of currency was introduced, and
currency, a if the ratio adopted was this " natural " ratio, a
system at proportion of both metals would be withdrawn from
ratio°wCTe^*^® arts in order to be converted into coins, and
Ch. II.] USE OF METALS IN THE ARTS. 21
this new demand would raise the value of both adopted,
metals in the market as compared with other com- ^oni^ rise
modities ; and, as long as the value of the tivo metals equally "»
•^ , ^ '' value, and
rose equally, the natural ratio, which we assume to the ratio
have been sanctioned by law, would, of course, ^^j^_ ^
remain as the ratio between the value or price of the tailed ;
metals as bought or sold in the market. But the
question at issue is whether, under these circum-
stances, the metals would rise equally in value. Let
it be imagined that they did not do so ; let it be
supposed, for example, that after a while the coinage
of gold bullion, and the consequent diminution in
the amount of that metal available for use in the
arts, did raise its value in the market more quickly
than the rise in value of silver from similar causes.
Under the bimetallic system supposed to be esta-
blished, the ratio of the weight of a gold dollar — if
that were the name of the coin in use — to the weight
of a silver dollar would be the bimetallic ratio fixed
by law ; and as long as the ratio of the value of the
metals in the market remained the same as this
bimetallic ratio — as long, that is, as the two metals
rose equally in value — the amount of commodities
which could be obtained in exchange for a gold
dollar's weight of gold would be the same as the
amount which could be obtained in exchange for
a silver dollar's weight of silver. Whilst this con-
dition of things lasted, the owners of gold or of
silver bullion, if they had debts to pay, payable in
legal tender, could each with equal advantage get
their metal coined, and thus obtain the coins with
22 THE BIMETALLIC THEORY. [Cn. II.
which to discharge their liabilities. But as soon
as gold began to rise in value more quickly than
silver, more commodities could be obtained in
exchange for the gold dollar's weight of gold than
for the silver dollar's weight of silver ; and, con-
sequently, the gold dollar's weight of gold could be
exchanged directly or indirectly for more silver
than that contained in the silver dollar. Under
these circumstances, the debtor owning gold would
sell or exchange his metal in the market for silver,
and thus obtain a greater number of legal tender
coins than if he had got his gold coined at the mint ;
no more gold would, therefore, be coined for the
purpose of discharging liabilities ; the rise in the
value of that metal, due to the decrease of bullion
in the market, would cease ; and this state of things
would continue until the rise in the value of silver,
due to the continued demand for that metal for
coinage purposes, again established the natural ratio
as the ratio between the two in the market. The
disturbance in the ratio could thus only be of a
temporary character ; and, generally speaking, both
metals would rise equally in value, and the ratio in
the market would continue to be the same as the
ratio established by law.
but if, Continuing the consideration of the introduction
conditions ^^ bimetallism into a country where the precious
an extreme metals had not previously been used for coinage
ratio were ., , , . . .,
adopted, purposes, it can be seen, by reasonmg similar to
Sl"*^ that used in the last paragraph, that if the legalized
wonldbe ratio differed somewhat from the natural ratio, or
Oh. IL] FAILURE OF BIMETALLISM. 23
that originally ruling the market, then there would coined,
be an obvious tendency at first to take one metal carrency
rather than the other to the mint ; to take what "^^^^ ^^
mono-
may be called the cheaper metal, or the metal for metallic.
a given value of which the greatest number or
money value of coins could be obtained. The value
in the market of only one of the two metals would
thus at first be raised, and in this manner the ratio
in the market would be altered until it became the
same as the ratio fixed by law. When this equality
was established, both metals would be taken to the
mint indifferently. It is, of course, obvious that the
more the legalized ratio differed from the natural
ratio, the longer would last this process of adjust-
ment; and, if the two ratios differed sufficiently,
the demand for coins would be satisfied by the
coinage of one of the metals only before any of the
other was attracted to the mint. When, with such an
extreme ratio, the normal condition of things was
reached, and the mints ceased to increase the
currency, then no further alteration in the ratio
in the market would take place ; the ratio in the
market would never become the same as the ratio
enacted by law ; and the currency would continue
to consist wholly of one metal. Bimetallic laws
would have been passed, but a monometallic system
would have been established.
This discussion of the result of planting a bi- The ratio
metallic system on new soil makes it clear that, market is
when we find a bimetallic system being success- ^^ ^^^
fully maintained, we cannot assume that the ratio unreliable
24
THE BIMETALLIC THEORY.
[Ch. II.
guide as to
what may
be the
natural
ratio.
The
conclusion
arrived at
is that
the parity
will oe
maintained
if the ratio
is properly
selected.
in the market or the legalized ratio — they will be
identical — is the same as the natural ratio, or the
ratio which would have existed if the metals had
not been in demand for currency purposes. If, on
the other hand, the systems in existence are mono-
metallic, and especially if they create a greater
demand for one metal than for the other, the ratio
in the market will also, in this case, differ more or
less considerably from the natural ratio. Under
all circumstances, the ratio in the market and the
natural ratio may differ widely, one from the other,
but unfortunately the ratio in the market is almost
our only guide as to what the natural ratio may be.
Putting aside, at last, all hypothesis as to existing
monetary conditions, if a bimetallic system were now
established legalizing the natural ratio, as long
as that natural ratio remained unaltered — as long,
that is, as the conditions of supply and of demand
for the metals for use in the arts remained the same
— we can see, by reasoning analogous to that just
given, that this legalized ratio would be maintained
as the ratio in the market, and that both metals
would continue to circulate freely in the currency.
Similarly, if the legalized ratio differed sufficiently
from the natural ratio, either in the first instance
or eventually, it can be seen that the whole of one
of the two metals would be driven out of circula-
tion, and a monometallic system would in reality
be established ; but that the more nearly the two
ratios coincided in the first instance, the less likely
would such a result be to occur. When it is
Ch.II.] cost op production. 25
remembered that the gold coinage of the world
(including reserves) is over £800,000,000 in money
value, it would appear to be out of the question, if
the ratio adopted approximated to the natural ratio,
that all this metal should be driven out of the
currency and used up in the arts. Some gold
would remain in circulation as legal tender, and
that gold, for the ordinary purposes of paying
debts, could only be used at the ratio fixed by law.
It has been asserted that the relative cost of the ^t^ent
production of the two metals is bound ultimately to the
to regulate their relative value, and that, £is the |j°°g ^^^
cost of production will not be affected by any that the
bimetallic legislation, and as that cost is certain cost of
to vary from time to time, it follows that corre- ^™^*'^'°°
spending changes in the ratio of the value of the the ratio
two metals must inevitably take place in spite of ^hiT^^
bimetallic laws. No doubt if two mines were situated only true
near together, one producing nothing but gold and sense.
the other nothing but silver, and if both were only
just paying their working expenses, then the ratio
of the prime cost of production of an equaV weight
of metal in the two cases would closely coincide
with the legal bimetallic ratio as long as that ratio
was maintained in the market ; for if a pound of
silver only produced just enough silver coins to pay
for the cost of producing that pound of silver, and if
a pound of gold only produced just enough gold
coins to pay for the cost of producing that pound of
gold, then the ratio of the cost of production would
be the ratio of the value of a pound weight of silver
26 THE BIMETALLIC THEOEY. [Ch. II.
coins to a pound weight of gold coins — that is, the
bimetallic ratio. If it could be assumed that the
number of mines could be indefinitely multiplied,
then it would be true that their number would
increase until the rate of profit in the least profitable
mines would be reduced to the minimum required
to attract capital to the industry ; and this rate of
profit would be the same for silver and for gold
mines. If it could also be assumed that all mines
were worked under similar conditions, then it would
also be true that capital would flow into the mining
industry until the mines were all only just paying
their working expenses and making this minimum
profit. If these assumptions were true, then the
foregoing arguments prove that the ratio of the
values of the two metals would always be tending
to coincide closely with the ratio of the cost of
production. But neither of them is true. The
mine fields are not of unlimited extent. And,
what is more important, there are great variations
in the cost of production in different localities, and
in different mines in the same locality. Putting
aside recent ventures, worked as a speculation, it
may however be said, with some approach to truth,
that in the least profitable mines regularly worked
(where no valuable by-products are produced to
help to maintain the profits) the ratio of the cost
of production would be the same as the legal ratio.
If some process were discovered, after the adoption of
bimetallism, which considerably cheapened the cost
of production of one only of the metals, the result
Ch.Ii.] a flood of silver. 27
would be that some new mines of that metal would
be opened, and that some of the least profitable
mines of the other metal would be closed ; and that
this process would go on until, in time, the prime
cost of production in the least profitable similarly
situated mines would again roughly approximate
to the bimetallic ratio.
There are some authorities, no doubt, who think The
that the output of silver will increase with great ^^^^ ^3^***°*
rapidity, even under existing conditions, and that flood of
silvfr PVPTi
the increase will be still more marked if the value at the
of silver is maintained or increased by means ofP^?^^°*
T)ncc 8 re
bimetallic legislation. Of course, if the output of notjustified
silver did increase beyond a certain point, all gold "^ '^^ '
coinage would be driven out of circulation in
bimetallic countries. Such an excessive production
would be due either to the opening of new silver
fields, or to a further diminution in the cost of
production, or to both causes. As to the possible
influence of the development of new silver fields, it
is no doubt true that great variations in production
have resulted in past times from this cause ; for the
best available records indicate that during the last
four centuries the weight of silver annually pro-
duced has been sometimes over fifty, and sometimes
under five times the weight of the output of gold.^
What has happened in the past will probably
happen again in the future; but in the past the
excessive relative output of the one metal has
always gradually subsided, together with the
* See tables in Appendix.
28 THE BIMETALLIC THEOEY. [Ch. II.
apprehensions which it caused. According to what
appears to have been the opinion of the majority
of American experts, there were in 1887 " certainly
no threatenings of a sudden or serious increase in
the annual production of either " metal, and,
although the events of the last few years were
not then foreseen, the broad facts on which their
conclusions were based may still justify their state-
ments as far as the more distant future is concerned.^
Comparing the production in the year 1895 with
that in any year since 1885, it appears that the
output of gold has increased somewhat more rapidly
than that of silver. In these circumstances there
are no sufficient grounds for confidently asserting
which metal will increase in value, relatively to the
other, during the next few years, granted the con-
tinuance of existing monetary arrangements.
Turning to the other possible cause of a great
increase in output, it is almost impossible to
predict the effect of any future diminution in the
cost of production. Of course, if any new method
was discovered which was only applicable to one
of the precious metals, it would affect the ratio
of production; but as regards all the expenses
connected with winning the ore or rock — a con-
siderable fraction of the prime cost — any new
mechanical improvements will affect the cost of
production of both metals, and will not, in all
1 See Report by Mr. Newberry (whose words are quoted) and
by other experts, at pp. 414-433, Reports from the Consuls of
the U. S., vol. 24, 1887.
ch.il] a flood op silver. 29
probability, seriously alter the ratio of output. As
to the immediate future, it may, perhaps, be said
that there is no reason to anticipate any great
variation in the relative value from this cause.
Thus far, the ratio of production has been dis- but it is
cussed on the assumption that no great alteration foretell
in the demand for the metals for coinage purposes whatwould
will take place. If the value of silver were raised effect on
by bimetallic legislation, this would be a circum- P™duction
•' . . of raising
stance tending to increase the production of that the value
metal more or less considerably ; for there are said bimetaiUc^
to be " large quantities of low-grade silver ore legislation.
which are constantly seeking a sale at the smelting
works, but in vain, because the price of silver now
leaves no margin to the owner of the ore after
smelting charges have been deducted."^ But it
is extremely difficult to foretell to what extent the
silver industry would be stimulated by any proposed
legislation; paying mines are now, in most cases,
being worked to their utmost, and we do not know
what percentage of all the mines now in work pro-
duce these low-grade ores, or what new mines are •
likely to be opened under such circumstances.
My own impression is that some of the bimetallic
proposals now before the public would lead to a
» Reports from the Consuls of the U. S., vol. 24, 1887, p. 420.
It should be noted that the ratio may also change through the
lowering of the value of gold ; and that that would not tend to
increase the output of silver. This is important, if, as I believe,
the value of gold would fall more than the value of silver would
rise in consequence of any bimetallic legislation.
80 THE BIMETALLIC THEORY. [Ch. II.
great outburst of silver production, which would
gradually subside, at all events if the production
is measured by its ratio to the production of gold.
When discussing the choice of the bimetallic ratio
it will, however, be seen that the probability of
gold being driven out of circulation by this
" avalanche " of silver depends on the ratio adopted,
and this point may, therefore, be dismissed for the
present.
Thus it Thus it appears, if these conclusions are correct,
concluded *^** *^® value of the precious metals is influenced
that the by their use in the arts, by their use as money, and
bimetallic .^ n ^ • i* i ^ ^ i t
ratio will by the cost of their production ; but that the legal
govern the g^^j^ between the two will nevertheless be main-
bullion
market tained as the ratio in the market as long as both
^tal"k^ continue to circulate as legal tender — as long as
driven out neither metal is driven out of circulation. If this
tion; is not clear already, let it be supposed, for the
purposes of argument, that one of the metals, say,
silver, continues to depreciate as compared with
gold in spite of the passing of bimetallic legis-
lation, and that gold goes to a premium. Why,
under these circumstances, should any one use
gold for the payment of debts, or for making
purchases, when he could obtain more value for his
metal by selling it in the open market ? Gold coins
would be melted down and sold, and this process
would reduce the price of gold bullion by throwing
and mono- more of that metal on the market : this cheapening:
metallists r o
should process would be so rapid that an equilibrium would
indicate immediately be re-established ; the two metals would
Ch. II.] A BIMETALLIC UNION. 31
continue to circulate in the currency at the legal what they
ratio, and this legal ratio would again govern the ^^^^^
bullion market. In fact, in the opinion of bi- happen to
metallists, this process, or something equivalent to coinage
it, would take place so quickly that no depreciation ?;^^° ^*
^ T. ./ r disappears
of either metal could in reality be observable in the from the
market. If silver continued to be produced in '^'"^^'^''y'
increasingly large quantities, the expulsion of gold
from the currency would no doubt go on until the
whole of that metal was driven out of circulation,
and until silver was exclusively used for monetary
purposes; then the process by which the ratio in
the market had previously been adjusted so as to
make it coincide with the ratio fixed by law would
cease to operate ; then, and not till then, the ratio
in the market would differ from the legal ratio, and
the currency would cease to be bimetallic. One or
other of the metals must be entirely or almost
entirely driven out of circulation before the bi-
metallic system can fail, and monometallists ought,
if they still predict the continued depreciation of
silver under bimetallism, to tell us what is going
to happen to the £800,000,000 of gold coins now
in existence. Until they do so, they have not
made out their case against the practicability of
bimetallism.
To account for the disappearance of one of the The
metals from the currency, monometallists have argued Uniou, it
that gold will flow in sufficient quantities to drain ^^ *"'?'
^ . , . must in-
the bimetallic countries of their gold currency into elude a
those countries which do not join the Bimetallic ^^ ^ "^^
32
THE BIMETALLIC THEORY.
[Ch. II.
to be
eflEective.
It is
suggested
that gold
may be
hoarded ;
and that
gold may
Be driven
to a pre-
mium by
being used
as currency
Union, and thus to force that metal to a premium.
Silver-using countries would, in this respect, be a
greater source of danger than gold-using countries ;
because, by partially substituting gold for silver in
their coinage, they could absorb vast quantities of
gold. This might also be, in my opinion, a real
danger to bimetallism, and in order to guard
against it, it is most desirable that the Bimetallic
Union should comprise India and Japan as well
as the other countries previously mentioned.
China would, in those circumstances, remain as the
solitary great silver-using commercial nation, to
which gold might be attracted; but as China is
conservative and barbaric, and as she has no gold
currency at present, this is but a remote contingency,
which the influence of Japan might overcome if it
ever occurred.
Monometallists have also asserted that gold would
be withdrawn from circulation on the establishment
of bimetallism, and that it would be hoarded in the
expectation of its going to a premium at the break-
down of the system. We shall have to return to
this point later on, when it will be seen that this
is a true source of danger to the maintenance of
a bimetallic system, if the ratio adopted differs
widely from the ratio now governing the market.^
As another reason for anticipating the failure of
any bimetallic system, it is suggested by mono-
metallists that gold might be used as a kind of
separate currency, independent of the laws of legal
1 See p. 101.
Ch. II.] CONTEACTING OUT. 33
tender, independent of the silver currency, and at a indepen-
premium compared with it. The fear of payments the law^
being made in silver would often, it is said, make °* ^^S^
financiers negotiate loans in gold by weight, and but the
not in currency ; contracts would be made in the of "t^ese^^*^
same way ; and the use of gold in such bargains dangers to
would be sufficient to maintain that metal at a ligm
premium compared with silver. It will be shown depends on
in a subsequent discussion that, if a suitable ratio adopted,
is selected, no rational reason can be given for avoid-
ing the use of the ordinary legal tender, and that
this danger may then be neglected. This, however,
is a point to which bimetallists have not devoted
sufficient attention, for either the objection is
groundless, under all circumstances, or legislation
prohibiting " contracting-out " of the usual currency
arrangements would appear to be a necessary part of
the proposed international agreements, at all events
in the case of the adoption of an unsuitable ratio.
In order to prohibit such contracting out, it would
be necessary to enact as to future contracts (except
such as deal with metal used for non-monetary pur-
poses), that where the word " gold " occurs, the word
" silver " may be read in its place, with an appro-
priate alteration in the weights specified. An inter-
ference with the freedom of contract is no doubt an
objectionable feature in any scheme, to be avoided
•if possible ; but the difficulty of drafting clear and
suitable legislation which would be acceptable as
part of the international agreements, forms, in my
opinion, a far stronger objection to such a proposal.
D
34 THE BIMETALLIC THEORY. [Ch. II.
When, if ever, bimetallism comes within the region
of practical politics, it would be advisable to con-
sider if some such legislation of a temporary nature
could be adopted ; for the tendency to contract un-
reasonably out of any new arrangements is always
felt most strongly at first. If, however, after a few
years, bimetallism proved to be so distasteful to
the commercial community that it could not stand
without the aid of permanent legislation of this
character, then perhaps the sooner it fell the better.
The verdict If none of these methods of escape for gold are
whole sufficiently serious to be a source of real danger,
favourable then it is difficult to see how bimetallism can break
to bimetal-
lists as down as long as the international agreements are
^^. ^ maintained ; for as long as gold remains in circula-
tenance of tion as legal tender, it can only be used at the ratio
the ratio. ^ n , f ^
fixed by law.
Thus, whether the appeal is made to the best
available authorities, or to historic facts, or to
theoretical arguments, the verdict as to the main-
tenance of jproperly selected legal ratio is, I think,
on the whole, favourable to the bimetallists.
Ch.iil] aims of BIMETALLISTS. 35
CHAPTEE III.
AIMS AND OBJECTS OF BIMETALLISTS.
If it is agreed that a suitable ratio of value between Theobjects
the metals can be maintained with sufficient ac-J^igm™enN
curacy for practical purposes, it is next necessary to steady
TinPGS 9.11(1
to consider what are the objects which bimetallists (2) to' raise
hope to obtain by their proposed reforms. Here fitter is^^^
we meet with our first difficulty, for on this point often said
there is far too much ambiguity in bimetallic inevitable
literature. It may, however, be broadly stated that F^^^^* ^*
bimetallists desire one or both of the following lism, but
objected- X:S,or
(1) To make prices more steady by lessening the which the
fluctuations in the value of money, and to minimize demanded,
the troubles due to the fluctuations in foreign
exchanges.
(2) To raise the price of commodities generally,
including the price of silver.
Bimetallists claim that, by creating a feeling of
confidence as to the future, their monetary system
would stimulate commerce — an object desired by
all — and that it would thus raise prices. Putting
aside, for the present, such indirect results, and
36 THE BIMETALLIC THEORY. [Ch. IIL
considering only the direct and immediate rise in
prices which, it is generally anticipated, would result
from the introduction of a bimetallic system whether
the volume of trade were increased or not, it will no
doubt be urged by some currency reformers that
they do not demand this reform with the definite
object of producing any such effect. It would be,
they will say, merely a result, probably a beneficial
result, which would necessarily accompany bimetal-
lism ; an inevitable by-product, as it were, for which
they are not responsible. This is, I believe, a
common and a serious error, which has arisen from
not clearly distinguishing between the different
objects aimed at by bimetallists, and from not dis-
cussing them separately.
This is To point out the nature of the error of those who
The'effect ^^S^^ ^^ *^i^ manner, it is first of all necessary to
of bimetal- show that bimetallism, even if successfully adopted,
ratio of need not be accompanied by any direct and im-
isjto 1 mediate rise in general prices. The discussion of
would be , . -n 1 1 /. .1
to increase this subject Will be greatly facilitated by taking
!oLt",\! actual figures for consideration, both as to the pro-
rcncy ill ^-^ x^
gold-using posed legal ratio, and as to an assumed ratio in the
and thus ' market at the time the system is being introduced.
to raise As to the proposed legal ratio, the one most
therein; frequently mentioned is 15 J to 1; that is to say,
if that ratio were adopted, 15J ozs. of silver coins
would have the same money value as one ounce
of gold coins.^ What would have been the effect
1 This is not strictly accurate, because the coins are not made
of pure gold and silver.
Gh. TIL] A RISE IN GOLD PRICES. 37
of enacting this ratio in 1893, for example, when
24^ ozs. of silver could have been exchanged for
one ounce of gold in the open market? At that
time, with the ratio in the market at 24J to 1, one
ounce of pure silver could have been sold for about
3s. Qd. But if a change in the law had been made
which permitted the owner of the ounce of silver
to have had it coined at a legal ratio of 15^ to 1, it
is evident that it could then have been converted
into more currency than that for which it could pre-
viously have been sold in the market ; in fact, taking
the proportion of 15^^ to 24J, it will readily be seen
that, instead of the 38. 6d., he would receive from
the mint the sum of about 5s. 6d. for every ounce
of silver he took there. It is, therefore, perfectly
clear that this change in the law would increase
the value of silver for coinage purposes, and that
the owners of that metal, instead of selling it
in the market, would take it to the mint. The
amount of silver for sale in the market would be
reduced, and its price and value would, therefore,
rise. But the silver thus taken from the arts,
etc., would be added to the coinage, and thus the
total currency in circulation would be increased;
and, according to the quantitative theory of prices,
an increased currency is normally accompanied
by a rise in prices. A rise in prices is, of
course, equivalent to a fall in the value of the
thing by means of which the price is estimated;
a rise in prices in gold -using countries means,
therefore, that the value of the gold currency is
38 THE BIMETALLIC THEORY. [Ch. III.
lowered. But the increase of silver coins would be
no reason why gold, as an article of merchandise,
should fall in value ; and there would at first, there-
fore, be a tendency for gold in the currency to fall
in value as compared with gold in bullion. This
difference in value would, however, be rapidly cor-
rected both because gold from the mines would be
taken to the best market — the bullion market —
instead of being taken to the mint, and because
gold coins would be melted down as long as gold
was more valuable in the form of bullion ; and these
additional supplies thrown on the market, would
lower the value of gold bullion j^ari passu with the
fall in the value of the gold currency. In short,
more silver would be coined, and the metal thus
used would diminish the supply in the market,
thus raising its value; and gold would be taken
from the mines and from the currency, and thrown
on the market, thus reducing its value as bullion.
These two processes would go on till the ratio
between the value of gold and silver in the market
coincided with the ratio established by law; and
the fall in the value of gold would indicate the
rise in prices in gold-using countries,
and to Thus far, we have been considering the effect of
thrcur- *^^ adoption of bimetallism at a ratio of 15^ to 1
rencyin in gold-using countries like England; but in the
countries," case of silver-using countries, the results would be
fowe? rices ^^^^ different. Silver, we have seen, would tend
therein. to rise in value ; and therefore it is evident, con-
sidering the value of the metal in the coinage, that
Ch. III.] A FALL IN SILVER PRICES. 39
prices measured in silver coins — silver prices — would
fall. This result can also be arrived at in a more
elaborate way by looking at the question from the
point of view of the quantitative theory of prices.
In India, for example, every one had the right in
1893^ to take silver to the mint, and to have it coined
into rupees ; the introduction of a bimetallic system
would have created no additional inducement to
coin that metal, for a given weight of silver would
produce the same number of rupees before and after
the change ; no more silver would, therefore, have
been coined in consequence of bimetallic laws.
And as to gold, which was a mere article of
merchandise in the East, the owner of an ounce
of that metal could have sold it in the market
at that time, when the ratio in the market was
24^ to 1, for about 70 rupees; but if he had
taken it to the mint, after the establishment of
bimetallism at 15^ to 1, he could only have had
it converted into coins of the money value of
45 rupees. Thus no gold would be taken to the
mint, and the currency would not be increased by
the exceptional coinage of either metal ; in fact,
the introduction of bimetallism at that ratio, would
have produced no direct effect whatever in India.
There are, however, important indirect influences
to be considered. As far as has thus been seen,
the establishment of the legal ratio would have
had no influence on the price of gold in India, and
it would, therefore, have remained at its old ratio,
1 This is tme only of the early part of the year.
40 THE BIMETALLIC THEORY. [Ch. III.
compared with silver — at a ratio of 1 to 24^. But
on the supposition that the bimetallic system had
been successfully established, it has been seen that
the value of silver would have risen in gold-using
countries until the legal ratio of 15^ to 1 was
established in that market. When this had taken
place, it would have been a profitable business to
have melted down Indian silver currency ; to have
taken the metal to England to be coined ; and, in
exchange, to have brought back to the East the
melted-down English gold coins, in order to satisfy
the demand for that metal ; and this influx of gold
into India would have lowered its value there. This
exchange of coin would be a profitable business, and
it would go on until the ratio became the same in the
two countries ; until, in fact, the legalized ratio of
15^ to 1 had been established in the Eastern market
also. Now, if gold coins were taken from England,
and if they were replaced, as in this instance, by the
same nominal value of silver coins, the total money
value of the coinage in England would remain
unaltered by the exchange, and no direct effect
would be produced on English prices. But in
India the gold brought into the country would be
absorbed into the arts until the ratio was adjusted ;
nothing would have been added to the currency,
and silver — the melted down rupees — would have
been subtracted from it ; the volume of currency in
circulation would, therefore, be lessened ; and prices
would have a tendency to fall.^
' This tendency of silver to flow out of the Indian cim-ency
Ch.iii.] a high ratio. 41
Thus far the result of this discussion has been
to indicate the probability that the introduction of
the ISi^ to 1 ratio, at a period when the ratio in
the market was 24^ to 1, would have raised prices
in gold-using countries, and would have lowered
them in silver-using countries. But the effect of
the adoption of other ratios must be considered.
To have introduced a bimetallic system at a ratio
of 40 to 1, would have involved just about the same
departure from the then existing condition of things
as that just contemplated ; ^ it would, no doubt,
have been a change in the opposite direction, but
a change quite as conceivable for the purposes of
discussion.
If, on this new supposition — the adoption of a But if a
40 to 1 ratio, when the ratio in the market was ratloThan
24^ to 1 — we retrace the arguments just given *|^at ruling
in support of the view that bimetallism will raise were
prices in England, and lower them in silver-using ^'^ppt^d,
countries, we shall find that every one of them is would be
J XT' 1 J.1 ^ i> lowered iu
reversed. Jb or example, the owner oi one ounce oi goid-usin^
countries
should not be forgotten by those bimetallists who are so keenly and raised
advocating the opening of the Indian mints. No doubt the in silver-
opening of the mints would help to raise the value of silver nountries
until the value of the silver in the monopoly inipee was equal to
the value of the monopoly rupee itself; but directly silver rose
above that point, tlie opening of the mints would give no further
assistance towards the establishment of the legal ratio, for then
the tendency would be for silver to flow out of the Indian
currency. An undertaking not to open the mint to gold, except
at the adopted bimetallic ratio, would be a far more important
concession to the demands of bimetallists.
1 1 to 15| : 1 to 24^ : : 1 to 24^ : l to 39.
42 THE BIMETALLIC THEOKY. [Ch.III.
gold could have sold it in India in 1893 for about
70 rupees ; but had bimetallism at a 40 to 1 ratio
been then in force, he would have been able to have
taken it to the mint, and to have had it coined into
coins of the value of about 115 rupees ; his gold
under this bimetallic system would have become
far more valuable for coinage purposes. Gold
would, therefore, have been taken from the arts
and from hoards to the mints in the East; the
currency would have increased there, and, other con-
ditions remaining the same, prices would have risen.
In gold-using countries, on the other hand, there
would have been no reason why, in consequence of
this reform, more silver bullion should have been
converted into coins ; and similar reasons to those
above given would indicate the probability that
gold would leave gold-using countries, thus dimi-
nishing the currency, and lowering prices.
Thus bi- Thus, it is possible to introduce either a system
metallism ^f bimetallism which will make prices fall, or one
may not . . ■"■ .
have the which will make them rise ; and those who desire
^^e that prices should rise in gold-using countries
prices, and must advocate, not only bimetallism in general, but
ratio must «- special form of it — a bimetallism, namely, in
^^ted^ which the ratio is 15^ to 1, or, at all events, a ratio
that end nearer that ratio than the ratio now ruling the
IS esire . jjjQ^j.]jg^ -^q qj^q would have been likely to advocate
bimetallism at a ratio of 40 to 1 at a time when the
ratio in the market was only 24^ to 1. Extreme
suppositions are, however, often useful in discussions,
and in this instance they make it clear that there
Ch.iil] importance op the ratio. 43
must be some ratio which would not tend to
have any such immediate influences on prices as
those above described, either in one direction or the
other. What that ratio would be for various reasons
we cannot accurately foretell ; but, if we adopt the
ratio in the market for the time being as the bi-
metallic ratio, it would seem probable, as far as
these considerations are concerned, that the volume
of the currency would be little affected by the
change, and that the introduction of bimetallism
would cause but little rise or fall in general prices.
Some of the above arguments may be objected Tims the
to by monometallists ; for, it is true, they are too theratio
brief to present the whole case, and also that some ^^^ \^^^
• 1 1 1 11 I 1 • o be settled
assumptions have undoubtedly been made m favour before
of the views of bimetallists. But, for the moment, JhTrelatne
all that it is necessary to prove is that those bi- merits
metallists who advocate bimetallism at the ratio metallisin
of 15^ to 1, on the ground that it can and will ^^^ ^j:
raise prices in gold-using countries, cannot deny
that it would be equally possible to depress prices
by selecting a ratio suitable for that purpose. Bi-
metallism and the immediate raising of prices have,
therefore, no necessary connection one with the
other.
Thus we have two distinct questions to consider —
(1) Would the introduction of bimetallism be a
beneficial currency reform ?
(2) If it is to be introduced, ought we to adopt
such a ratio as would tend to raise prices ?
The above is, no doubt, the natural order in which
44 THE BIMETALLIC THEOKY. [Ch. III.
these questions occur to the inquirer; but sound
conclusions may perhaps be more easily reached if
we attack the problem another way, and ask our-
selves in the first instance —
(1) Assuming that bimetallism is preferable to
monometallism, can we lay down any principles
with regard to the ratio ?
(2) And, secondly, which would be best, the
existing monometallic monetary systems, or an
international bimetallic system with a ratio selected
in accordance with the principles laid down in the
answer to the first question ?
The reason why this is a better method of
approaching the subject is that many of the argu-
ments brought forward for or against bimetallism
only apply in reality to one form of the system.
In considering any reform, it is clearly necessary
to decide as to what are the objects we hope to
attain before settling how we shall endeavour to
attain them ; the choice of the ratio will, however,
depend in great measure on whether it is or is
not desirable to raise prices by means of currency
reforms ; and the proposed division of the subject
will, in effect, be nearly equivalent to the discussion
of the second object, the raising of prices, before
the discussion of the first, the steadying of prices.
After concluding this first inquiry as to the ratio,
those who accept my conclusions will be able to
dismiss altogether many of the ordinary arguments,
when, in the second inquiry, the broad question of
adoption or rejection of the bimetallic system is
being considered.
THE CHOICE OF A EATIO.
Ch.iv.] the choice op a ratio. 47
CHAPTER IV.
THE CHOICE OF A RATIO.
The first question, therefore, to be discussed is the The choice
ratio, and here practically the choice lies between the ^^e^ke?
extremes of 15^ to 1 — a ratio which existed for many ratio and
years in France — on the one hand, and, on the other 151 to i as
hand, a ratio closely approximating to the ratio extremes.
governing the market at the time of the introduction
of the system. It may here be noted with regard to
the latter form of bimetallism, that it would, no
doubt, be necessary to take into consideration any
speculative operations tending to alter the relative
value of the precious metals with a view to the
coming change, and to see that the selection of the
ratio was not influenced by any such proceedings.
At the present time the ratio in the market is Definition
somewhere about 35 to 1, and this ratio would be ?, j^^*^ '
popularly described as being " higher " than the and
old Latin Union ratio of 15^ to 1. The term " low ratio.
ratio" will, therefore, be used to denote the ratio
of 15J^ to 1, or some close approximation to that
ratio ; whilst " market - ratio " bimetallism will
signify the system if the ratio adopted is the
48 THE CHOICE OF A RATIO. [Ch. TV
same as, or nearly the same as the ratio in the
market at the time of the introduction of the re-
form. The phrase "low ratio" is selected for
want of a better, for it is attended with some in-
conveniences. If the idea attached to it is carried
out, we must say that the ratio has been " rising "
since 1873, though the change which has taken
place is usually associated with the idea of a fall in
the price of silver. It is, however, equally true that
the price of gold, as measured in silver or in rupees,
has been rising, and when a low ratio is mentioned,
the idea of a low value or silver price of gold should
be brought to our minds. The expression " market
ratio" may perhaps give the idea that the legal
ratio is to be a shifting one, varying with every
subsequent variation of the ratio in the market.
This, however, is not intended to be the case. The
legal ratio would be fixed once for all, and, if the
system were a success, there would be no further
variation in the ratio in the market. Market-ratio
bimetallism would, in fact, be intended to stereotype
the ratio which ruled the market at the time of its
introduction.
Therela- These, then, are the two extreme ratios which
of low- must be discussed. Of course, some ratio between
ratio and the two might be adopted as a compromise, but, by
ratio bi- considering the extremes, we shall best be able to
JT^^S judge of the tenacity with which we should adhere
considered, to any couclusions arrived at. What then are the
relative advantages, disadvantages, and risks of
these two forms of bimetallism? It may be best
Gh. IV.] WEIGHT OF SILVER COINS. 49
to begin by discussing tlie arguments to which
least weight should be attached.
A low ratio, as compared with a higher ratio, has TheRieater
been advocated on the ground of convenience, and g^fr cohis
it is true that the sovereign in silver would weigh is an
twice as much, if the ratio adopted were 31 to 1, to the^*"*
as it would if it were only 15i to 1. But it must "i^rket
be remembered, as already pointed out, that under compared
the low-ratio system the value of the sovereign j"^^ j.*^j^ .
would fall ; that the sovereign would purchase less ;
and that the money value of the money which we
should have to carry about in gold-using countries
for the general purposes of life would be greater than
at present, or than under the market-ratio system.
The greater convenience of low-ratio bi-metallism
is, therefore, partly fictitious, though the argument
is true in a great degree. It is, moreover, to be but the use
observed that the annoyance due to the increased and token
weight of silver coins under a market-ratio system coins would
might be mitigated by a more extensive use ofthismcou-
paper currency ; and that it is doubtful if there would lenience ;
be any necessity for increasing the weight of the
coins in circulation, for they might well remain mere
tokens as at present ; whilst the full weight silver
reserves might lie in the banks' till wanted for the
purposes of international trade. But in discussing
the question of convenience another very important
point must be considered. A decrease in the value
of gold, and an increase in the value of silver due
to a low- ratio system, are certain, as already pointed
out, to be followed by an increase of the silver
E
50 THE CHOICE OF A KATIO. [Ch. IV.
currency, and a diminished supply of gold coins,
and the Now, as this diminution in the gold coinage would
ratio would he attended with more or less inconvenience in
keep more countries where gold is habitually used as currency,
circulation, it would seem on the whole, as far as convenience
is concerned, that the balance of argument is, if
anything, against the low-ratio system, if we look
at the question from an English point of view. If
the market ratio were adopted, there is little reason
to suppose that any material alteration in the pro-
portion of the metals used in coinage would occur
on the introduction of bimetallism.
If, under The Controversy about the weight of silver coins
ratio'^ ^ '^^> however, likely to be much less severe than that
system, concerning their present money value. France, to
to recoin take the case of one of the nations most affected,
^t^'^^^id^' ^*^ * large amount of silver five-franc pieces in
decrease reserve and in circulation, which have now a money
money^ '"^ value of about £84,000,000— that is, taking twenty-
Talue ; five francs as being equivalent to a sovereign.^ But
silver has fallen greatly in value since the silver
in twenty-five francs was equal in value to the gold
in a sovereign — that is, since the ratio of 15^ to 1
ruled the market ; and these five-franc pieces do not
therefore now contain silver of the above value. If
the silver coinage of France were melted down in
order to be recoined under a market-ratio bimetallic
system — let us say at a ratio of 35 to 1, which is
^ " Colloquy on Cun-ency," p. 33. In addition to this, there
are silver coins of lower denominations, coined at a somewhat
different ratio.
Ch. IV.] TOKEN COINS. 51
Dot very far from the existing ratio — the metal
obtained from these pieces would, therefore, only
produce coins to the value of about £37,000,000.
Thus the coinage of France, for the purposes of
internal trade, would be reduced in money value
by £47,000,000 ; and it is generally said that
France would, under the assumed circumstances,
lose that sum by the proposed currency reform.
But this is a very unfair way of stating the case, but she
for, in a sense, France would lose nothing by the ^^e^.°°*
establishment of market-ratio bimetallism. For poverished
the purposes of external trade, her silver coinage is H other^
now worth less than half its money value, because it nations ;
can only be exported as metal ; after the establish-
ment of market-ratio bimetallism, it would also be
exported at its metallic value, and that metallic
value would not be altered by the adoption of
such a system. Thus France, in comparison with
other nations, would be relatively neither richer nor
poorer in consequence of the change. It is said,
however, that she would be put to a considerable
expense, if a market-ratio system were adopted, on
account of the necessity of increasing the weight of
her silver coinage, so as to make its metallic value
the same as its money value. But this expendi- and such
ture would not be necessary if it were found to ^ould^^^
be possible, after the establishment of bimetallism, fobably
..,.., be un-
to maintain the existing silver coinage at its pre- necessary,
sent money value. If notes of convenient money
value were given by the State in exchange for
bullion, and if this bullion were kept in the banks
52 THE CHOICE OF A KATIO. [Ch. IV.
as a deposit against these notes, then the State
might, as at present, reserve to itself the monopoly
of coining the current silver pieces, and might
retain the whole of the existing silver coinage in
circulation at its present token value. The risk
of false coinage is often urged as an objection to
such a proposal ; but that risk exists at present, and
it would not be increased by. any such reform.
If, however, any inconvenience or difficulty were
experienced in retaining the existing token coinage
in circulation or reserve, it cannot be denied that
the cost of the recoinage might be greatly lessened
by not recoining the whole of it at its full metallic
value — by, in fact, retaining some token coinage
in circulation. Moreover, if there is any objection
to the present system, and if France had to incur
some expenditure on recoinage, then she would at
all events obtain the advantage of removing these
defects attaching to her present monetary condition.
In short, if market-ratio bimetallism were adopted,
France would not be impoverished relatively to
other nations, and she might, at the worst, find
herself under the necessity of incurring a more
or less considerable expenditure on recoinage, with
the compensating advantage that her currency
would be placed on a sounder footing than at
present.
Market- If, as some believe, the tide will soon turn, and
metallisra silver will rise in value as compared with gold,
would only it is evident that the metallic value of silver
eusTire
France currency will, by a natural process, rise slowly
Ch, IV.] TOKEN COINS. 53
towards its money value. If it be granted that against
market-ratio bimetallism is some day to be adopted, of afurO
it is evident that France, on the above assumption, fall in
would prefer the change to come later rather than '
sooner; for the lower the ratio at the time of the
adoption of such a system of bimetallism, the less
would be the diminution in money value of such
silver as had to be recoined; the more nearly
would the ratio at which it would be recoined
approach to the old ratio of 15^ to 1. But, on
the other hand, if silver is going to continue to
fall in gold price, the currency of France will
become more and more overvalued, and in time
serious difficulties would probably arise from this
cause. Thus, market-ratio bimetallism, whilst it
would prevent France from speculating for a rise
in silver, would insure her against the inconvenience
of a further fall ; it is, therefore, difficult to prove
that it would do her any harm as regards the value
of her silver coinage.
Thus far, we have been considering the eifect of bwt a loa-
the introduction of market-ratio bimetallism into ^?ould^be^"'
France. But if a low-ratio system were adopted, the ^ direct
case would be very different. The result of such France.
a reform would be to link the two metals together,
and to pull up the value of silver by pulling down
the value of gold. France would have the silver
in her currency brought up to its money value at
the expense of the gold stocks of the world.^ As
' It is, however, very questionable whether the French, as a
nation, would gain by low-ratio bimetallism to the extent here
54 THE CHOICE OF A RATIO. [Ch. IV.
France possesses a greater proportion of silver than
England, she would gain in comparison with Eng-
land. If we, in England, desired to bring up the
metal in our token coinage to its money value, no
one would argue for a moment that we should adopt
bimetallism for that sole purpose. If this were the
only question at issue, we should certainly prefer
to pay, out of the general taxation of the country,
for the additional silver necessary to increase the
weight of our coinage. Why, then, should we be
asked to make a pecuniary sacrifice to enable
France to bring about a currency reform in a
manner we ourselves should not adopt? It can,
at the best, only be urged that the appreciation of
silver token coins in all countries where they are
current, and the consequent immunity from the
risks of false coinage, would be one of the beneficial
by-products of low-ratio bimetallism ; which is but
a feeble reason in favour of England adopting that
system.
indicated. The amount to which her silver currency is over
valued — the £47,000,000— may be looked upon as a Government
credit issue. This credit would be extinguished by the introduc-
tion of this type of bimetallism. The result would be, I think,
that prices would tend to fall in France relatively to other
countries. This inequality would be rectified by the precious
metals flowing mto France, thus displacing other imports. Thus
France would suffer by exporting goods for which she would get
no goods in return, which were available for distribution — a clear
loss to France, and a clear gain to the other nations concerned
in the trafiBc. This is the way France, and the United States
also, would, I believe, in large measure pay for having their silver
coinage brought up to its full metallic value.
Ch. IV.] FOKEIGN INVESTMENTS. 55
France may, however, simply state that she
declines to agree to market-ratio bimetallism on
account of the expense believed to be involved. If
that were to be the case, it might be right, from
motives of expediency, to give way to a certain
extent on the question of the ratio. But France
cannot claim this concession on the grounds of
equity, and the amount of the concession must be
measured solely by the strength of our desire for
the establishment of bimetallism for other reasons.
Thus, in considering the question of the ratio Thus,
with reference to the money value of the exist- reference
ine; silver currencies, the balance of argument *^.*^^
. /« -n • coinage
IS in favour of 15J to 1 as far as France is con- only,
cerned, and in favour of the market ratio, if the ^^^^^
question is regarded from an English point of prefer the
view. But it is to be noted, though the subject En<iland
is not now under discussion, that as compared with themarket
monometallism, the only argument that can be
founded on these considerations against market-
ratio bimetallism is that it might possibly necessi-
tate a more or less heavy expenditure, in order to
bring up some of the existing token coinage to its
full metallic value.
If we are to view the matter from a national The low
standpoint, we must consider the way in which the lower the
lowering of the value of gold will affect foreign J^^^ ?^
remittances. Every year Great Britain receives on foreign
immense sums of gold, or the value of such sums cei^Ty
in goods, in payment of the interest on loans to England ;
foreign Governments, and on other investments out
56
THE CHOICE OP A EATIO.
[Ch. IV.
but it
would
lessen the
l)urclen of
indebted-
ness of
India, for
which
England
may be held
responsible.
of the United Kingdom. Lower the value of gold,
and we shall as a nation be proportionately poorer,
as far as this source of income is concerned. From
motives of self-interest we ought, on this ground,
to be opposed to low-ratio bimetallism, and to this
argument the only reply that can be made is, that
in great movements of this kind, we ought to sink
our national interests for the common good. This,
no doubt, would be the most high-minded policy to
adopt ; but each nation must consider its own well-
being first of all, and it could not even be sug-
gested that we should neglect the consideration of
any of our own interests, unless the case for this
reform on other grounds were proved up to the
hilt. Moreover, we can hardly be asked to abandon
the study of our own national gains and losses, and
only to consider the damage that might be done
to our neighbours by any proposed currency re-
form. If we are to dismiss the consideration of our
foreign loans, France and the United States must
give up any arguments founded on their over-valued
currencies.
There can be no doubt that if the introduction
of low-ratio bimetallism would injuriously affect
Great Britain as far as foreign debts are concerned,
it would in a similar way be a great benefit to the
Government of India. If the value of silver as com-
pared with gold were more than doubled, the burden
of indebtedness would be enormously decreased in
countries like India before 1893, where the taxes
are raised in silver, and the national debts paid in
Ch. IV.] NATIONAL DEBT OF INDIA. 57
gold. The eifect of the recent fall in the gold price
of silver has no doubt been to greatly increase the
strain on the resources of India due to her gold
debts. In all probability the financial troubles of
our great dependency would not have been so great
if the Indian Government had raised the money
they wanted by silver loans; the interest in that
case would have been higher, but the full burden of
the debt would have been apparent at once. The
cause of the higher rate of interest paid at present
for loans raised in silver, in comparison with those
raised in gold, is the fear that financiers always
have before them of a further depreciation in the
gold price of silver, and of the consequent fall in
the value of the fixed silver interest when paid
in English currency; and if this higher rate of
interest had been paid, the excess might fairly have
been regarded as an insurance against the fall in
the rupee. The Government, rightly or wrongly,
did not care to pay the insurance demanded, and
the loss now therefore falls on them. As the
British Government, representing the British people,
are the autocratic irresponsible rulers of India, a
plea may be urged that we, as a nation, are respon-
sible for this blunder, and that we, the gold-using
country, ought not therefore to object to having
our gold reduced in value in order to lessen the
burden of this gold debt on the people of India.
But if the case is clear enough to serve as the
foundation for such an argument as this, it is clear
enough to act as the basis for a demand for a
58 THE CHOICE OF A RATIO. [Ch. IV.
direct money subvention from us, especially as
such a subvention would be the cheapest way of
discharging this moral liability, if it be one. A
direct money payment to India would benefit that
country alone, whereas, by the bimetallic method
of settling the question, we should be incurring a
sacrifice for the benefit of many other silver-using
countries, for whose financial administration we are
in no way responsible. And, as far as her national
interests are concerned, England would, I believe,
be wise if she were to give this financial assistance
to India, rather than in any way to encourage low-
ratio bimetallism. But, looking at the question
from a more practical point of view, the Government
of India may well feel that it would be impossible
to extract any money from the English taxpayer
on such theoretical grounds as these; and they
may, therefore, desire to reduce the burden of
natural indebtedness by the introduction of low-
ratio bimetallism.^
But the It must not, however, be forgotten that there
appreci-" ^^'^^^ ^® compensating disadvantages to silver-using
ating cur- countries accompanying such a reform. It will be
r6ncv inust ■- •/ o
not be for- seen in the foUomng chapter, and in Chapter XVII.,
gotten. ^jjg^^ ^jjg effect of low-ratio bimetallism would pro-
bably be to raise the value of silver, and thus to
depress trade in silver-using countries. And, even
if the question is regarded from the point of view
of the Government rather than from that of the
1 A recent despatch proves that this is not the view of the
present Government of India.
Ch.iv.] a fall in silver prices. 59
people, the gain arising from the change in the
ratio will not be an unmixed one. If the value of
silver rises, there ought to be a corresponding
decrease of expenditure reckoned in silver currency.
Such a reduction would not, however, take place for
a very long time in certain articles of expenditure ;
as, for example, in the pay of the native army.
And whatever proportion of the national expendi-
ture remains constant in money value, that propor-
tion must increase in real value ; and the revenue
for such purposes must press more heavily on the
people, and be more diiRcult to collect. Thus, on
the whole, it may well be doubted whether India
would not be injured rather than benefited by the
adoption of any ratio approaching 15 J to 1.
Many of the foregoing arguments merely indicate The
the balance of certain advantages and disadvantages oHhe""
which would be experienced by different nations ^^^^^ ^^n-
on the introduction oi low-ratio as compared with settled by
market-ratio bimetallism. If these were the only '^'**i'?^''i
J considera-
points to be considered, it would be hopeless to tions like
endeavour to negotiate the necessary international
agreements. Strong arguments must be forth-
coming, in favour of one proposal or the other,
which are applicable to all nations, if either system
is to be brought within the range of practical politics.
It will be remembered that we divided the aims N'or does
of bimetallists under two separate headings, and that sideratiou
of these, the first was to make prices more steady, ?^ *^®.,.
Ill ... /. 1 instability
both by maintaining a constant rate of exchange of foreign
between countries using gold currencies and those ^^*^"*°s«^''
60 THE CHOICE OF A RATIO. [Ch. IV.
help to using silver currencies, and by lessening the fluctua-
^roblem^ tions in the value of money. We should first,
as either therefore, inquire which ratio would be most likely
cure" the ^o produce beneficial results in the way thus antici-
evils com- pated. What bimetallists hope to do is to tie the two
metals together, so as to destroy the influence which
the variations in the relative value of silver and gold
have on foreign exchanges, and in order that one
metal may act as a check on any oscillations in the
value of money due to causes afi'ecting the other
metal only. The variations in the rate of foreign
exchanges depend on several causes ; in so far as
the instability is caused by alterations in the balance
of international indebtedness, no permanent benefit
will be derived from any currency reform ; but in
so far as it is due to fluctuations in the relative
value of gold and silver, and the consequent varia-
tions in the rate of exchange of gold and silver
moneys, stability will be insured by any fixed ratio
of value being established between the metals ; and
it is of no consequence, as far as this consideration
is concerned, what that ratio may be. The dis-
cussion of the question as to which ratio is likely
to reduce the fluctuations in the value of money
to a minimum, may conveniently be postponed for
the present ; ^ but at a later stage it will be seen
that the arguments founded on such considerations,
whether valid or invalid, are, at all events, not likely
to form the basis of a popular demand for the one
system of bimetallism rather than for the other.
1 See p. 90.
Cu. v.] TO RAISE PRICES. 61
CHAPTER V.
THE MAIN OBJECT OF ADOPTING A LOW RATIO
IS TO RAISE PRICES.
If we are to find the real basis of the demand for The object
low-ratio bimetallism, we must pass on to discuss ratio^'j.
the second group of objects aimed at by bimetallists. petallism
The main desire of many of those who advocate prices.
this system of currency is, no doubt, to raise prices
in gold-using countries, and thus to stimulate trade,
especially the trade with countries having a silver
currency.
Would low-ratio bimetallism cause an immediate The low -
rise in prices? This is the first question that pfj^^y""^'^
naturally presents itself, and, on this point, it has raise prices,
already been shown that forces would be set at work reform
which would tend to briner about that result in gold- ^^"i^j.^ow
° . ° bediscussed
using countries. But other forces might also be on the
brought into play which would act in the opposite thatTt' ""
direction. For example, the fear of a sudden would do
■ SO
alteration in the value of money might cause great
commercial confusion, shaking credit, and bringing
down prices with a run ; though bimetallists think
that this danger might be avoided by making the
62 THE CHOICE OF A EATIO. [Ch. V.
change a gradual one. Whatever might be the
immediate results, I cannot doubt that prices would
rise eventually. But assuming, for the sake of
argument, that this is a mistaken assumption, and
that, as a fact, prices would not rise, then any
argument founded on the hope of their rising is
completely annihilated. If, on the other hand, we
assume that prices would rise, and if, arguing the
case on this assumption, we are driven to the con-
clusion that it is not desirable to raise prices
artificially in this way, we then destroy this argu-
ment in favour of low-ratio bimetallism, whatever
might, in reality, be its immediate effect on
prices.
The low Assumine;, then, that prices would be raised by
ratio can- , ° r. n • n. ^ 1 /
aotbe such a System oi bimetallism, what we have to
claimed as digcuss is the question whether it is desirable to
a ]ust com- . _ ^
pensation raise them in this manner. The case can be argued
fo^. the ^"^^ oil ^^^ grounds either of justice or of expediency.
injmy done To deal with the question of justice first, the case
falling for the low-ratio bimetallists may be stated thus.
pnces ; jf pnces have fallen owing to the increase in the
value of gold caused by the increased demand due
to legislative changes, " it follows that just so far as
debtors have been prejudiced by currency legislation
since 1873, to that extent and no more will they be
benefited by the adoption of bimetallism at the old
ratio of 15J to 1; and to that extent it may," it
is urged, " be said that an act of justice would be
done." 1 It is true, no doubt, that in 1873 France
1 " A BimetaUic Primer," H. C. Gibbs, p. 52.
I
Ch. v.] AN ACT OF JUSTICE. 63
and the other nations included in the Latin Union
commenced the abandonment of their bimetallic
system, with its free coinage of silver at a ratio of
15^ to 1, and also that there has been much im-
portant currency legislation on the Continent during
recent years, all tending to a lessened use of silver.
Reasons will be given later on for believing that
these changes, by increasing the demand for gold,
and thus raising its value, did influence prices ; but
it is a most startling doctrine that one party to a
contract made in England between Englishmen has
equitable grounds for demanding that his contract
shall be modified to the disadvantage of the other
party because of the effects of foreign legislation.
Yet, no doubt, the effect of contracts would be
modified if prices were raised by means of low-ratio
bimetallism ; for the value of money depends on
the commodities it will purchase, and raising prices
is equivalent to reducing debts ; the debtor, who
would find money more easily made, would gain,
and the creditor, whose money would purchase less,
would lose. But if we look more carefully into the
claim it becomes still more surprising. All that
can possibly be urged is that by now adopting a
low-ratio bimetallic system in Europe, we should
produce the same state of things which would have
existed if the Latin Union had never abandoned
bimetallism, and if England had adopted it some
twenty years ago ; in fact, the debtor, in a country
which has been strictly monometallic for nearly
a century, is demanding compensation for the
64 THE CHOICE OP A RATIO. [Ch. V.
for, inter fact that bimetallism was not adopted in England
ex^tim^'^^ at a particular epoch. Was ever such a plea urged
debtors before ? But even granting that such compensation
been in- Can justly be demanded by the debtor; granted
that fan *^^^' *^^* ^^ creditor has any right to demand that
the rise in prices between 1850 and 1873 shall
be taken into consideration ; what justification
can be given for the interference with debts which
either have recently changed hands, or have
been recently contracted? In the first case, the
person benefited will not, even on the bimetallic
hypothesis, be the person who has any claim for
compensation. And as to the recent debtor, he
will gain just as much as the debtor of twenty
years' standing by the introduction of low-ratio
bimetallism, though he will not have been in the
slightest degree injured by English or foreign
legislation ; in his case also there is, therefore, not
a shadow of justification for the demand for com-
pensation. Whenever one man is thus benefited,
another man must be injured, and, looking to all
these different possibilities, bimetallists must admit
that the number of creditors who would thus be
inequitably injured might exceed the number of
debtors whom they would consider to be justly
compensated. It does not seem possible, in fact,
to sustain this plea for low-ratio bimetallism.
In discussing the advocacy of low-ratio bimetal-
lism on the ground that it would be an act of
justice, we have tacitly admitted the bimetallic
contention that the recent appreciation of gold has
Ch. v.] the choice of a ratio. 65
resulted from currency legislation on the Continent.
No point has been more keenly discussed in this
controversy than the question whether the fall in
prices since 1873 has been due to causes primarily
affecting gold or to causes primarily affecting com-
modities. One of the commonest arguments in
favour of the belief that low-ratio bimetallism will
cause prices to rise is founded on the fact that
prices have fallen heavily since the abandonment
of bimetallism by the Latin Union ; if, however, it
could be proved (contrary to my belief) that this
recent fall in prices was in no way connected with
currency legislation, of course the expectation of
a rise of prices at the reintroduction of bimetallism
would be greatly lessened, and the plea for com-
pensation for the injury done by such legislation
would be entirely destroyed. We are here, how-
ever, assuming for the purposes of argument that
prices would, as a fact, rise, and this point need
not, therefore, now be discussed.
It is to be noted that the above arguments On the
only prove that the low ratio cannot be demanded bimetal-" '
on the ground of abstract justice ; they do not ^ism should
tend to show that this reform should be resisted sarily he
because of its unjust effects. Most reforms cause "PP?/^,^, °^
eqmtable
some suffering to individuals, and, although that grounds,
suffering should be duly weighed in considering
the advantages and disadvantages of any proposed
legislation, it must not be allowed to bar the way
to all progress. Reforms which will benefit com-
munities for all time must be judged on wide
F
66 THE CHOICE OP A RATIO. [Cn. V.
national grounds, without too sensitive a considera-
tion for personal hardships.
The In passing on to consider the demand for low-
mmt^ako ^^^^^ bimetallism on the grounds of expediency,
be discussed we need pay less heed to the causes which have
"•rounds of recently influenced prices, and we may confine our
expediency, attention to the effects of the proposed legislation ;
because the expediency of any action must be
judged entirely by its probable effects.
Assuming On the assumption that low-ratio bimetallism will
that prices n • i , j.i <« i <
will be lorce up prices, what we now, therefore, have to
raised by consider is whether it will also stimulate trade ; and,
the low
ratio, it is if SO, whether such stimulated trade will in reality
certain that ^® beneficial to the nation. This subject will be
trade will discussed at length in Chapter XVII. Here, per-
stimulated. haps, it will be sufficient to quote the statement of
Jevons, that the fall in value of gold due to the
Australian discoveries had " a most powerfully bene-
ficial effect." Such a fall " loosens the country, as
nothing else could, from its old bonds of debt and
habit. It throws increased rewards before all who
are making and acquiring wealth, somewhat at
the expense of those who are enjoying acquired
wealth. . . . All this is effected," if the fall comes
from new discoveries of gold, " without a breach of
national good faith, which nothing could compen-
sate." ^ The assumed effect of low-ratio bimetallism
would be in many respects similar to such a fall
in the value of gold, and it seems almost certain,
therefore, if prices are raised, that trade will
* " Investigations in Currency and Finance," pp. 96, 97.
Ch.v.] stimulated trade. 67
be stimulated. Eaising prices is the same thing
as lowering the value of the standard ; and lowering
the value of the standard must reduce the burden
of fixed debts payable in that standard, and thus
set free capital which can be used to promote further
production. The probability of these beneficial
results is, however, far from proving the wisdom
or expediency of introducing such a system.
The effect of lowering the ratio between the two Hut iu
metals must be considered with regard to silver, as ^^^^^1^1'
well as with regard to gold-using countries. Those countries
who advocate bimetallism from a cosmopolitan be loweml
point of view, must select their arguments very jg^j.g™gj
cunningly if, whilst proving that benefits are to be
expected from the assumed rise in prices at home,
they do not show that it is highly probable that
the same causes will result in a lowering of prices
in silver-using countries, to the injury of their
inhabitants. In the same way that lowering the
value of gold will ease the burden of fixed debts
at home, the effect of raising the value of silver
will be to increase the pressure of silver debts in
silver-using countries, thus throwing an increased
burden on those carrying on ordinary commercial
transactions. To raise prices, by means of low-ratio
bimetallism, would undoubtedly, in this respect,
be a benefit to the English manufacturer; but, if
it is necessarily accompanied by a lowering of silver
prices, would it not as certainly be a disadvantage
to those carrying on business in a silver-using
country ?
68 THE CHOICE OF A RATIO. [Ch. Y.
It is, how- It is, however, denied that the effect of bimetal-
nied'that lism would be to lower prices in silver-usmg
silver prices countries ; if, it is urered, prices in India did not
would fall. ..11 1
commence to rise in any marked manner at the
time when bimetallism was abandoned on the
Continent, there is no reason to suppose that they
would begin to fall at the re-establishment of that
system. There is some force in this argument.
There are reasons, I think, for believing that the
fall in prices in silver-using countries at the intro-
duction of low-ratio bimetallism would be less than
the rise in prices in gold-using countries. The
ratio would be adjusted by silver being taken from
the market for coinage purposes, thus raising its
value as an article of merchandise ; and by gold
being driven out of, or diverted from, the currency
into the market, thus lowering the value of that
metal. Now if the rise in the value of silver due
to the subtraction of a given value of that metal
from the market would be less than the fall in the
value of gold due to the same value of gold being
thrown on the market, then it follows that, in the
adjustment of the ratio, the fall in the value of
gold would be greater than the rise in the value
of silver ; and considering the glutted state of the
silver market, this would, I believe, probably be the
case. There is, therefore, some reason to believe
that the prices in silver-using countries would not
fall at the introduction of low-ratio bimetallism
as much as would at first sight appear probable.^
1 Probably the fall in the gold price of silver, which has
Ch.v.] silver-using countries. 69
But in considering the eifect of the change in the Silver-
ratio on our commerce with silver-using countries ^^^jes
(a subject to be discussed at greater length in if regarded
Chapters XXI. and XXII.) we must look on them woTild in
in two capacities — that is, both as rivals and as t^l '^^^ ,
^ , be injured
customers. As rivals, the more their commerce is by the low
injured, the better for us. If the value of silver ^^ ° '
does not rise when low-ratio bimetallism is being
introduced, it is true that there will be no reason
for an actual depression in trade in silver-using
countries. But, in that case, it is evident that the
value of gold must fall all the more in order to
bring about the necessary adjustment of the ratio ;
and trade in gold-using countries will be subject
to a proportionately greater stimulating influence.
Thus the relative advantage to gold-using countries
in this competitive trade, which would accompany a
given change in the ratio, would be much the same
whether silver did or did not rise in value ; for it
is the relative inflation or depression of the trade
of the two countries which has to be considered.
Silver-using countries, if regarded as rivals in
trade, would, therefore, in any case be injured by
the adoption of low-ratio bimetallism. And bimetallic
members of Parliament, who remember with appre-
ciation Sir Henry Fowler's eloquent appeal to them
occurred since 1893, would be easily reversed by the reopening
of the Indian mints. But internal silver prices in China and
Mexico, the only large silver-using countries now remaining,
have probably not yet risen in comparison with gold prices in
proportion to this fall in the gold price of silver.
70 THE CHOICE OP A RATIO. [Ch. V.
to look upon themselves as members for India,
would, I imagine, feel very uncomfortable in voting
for any currency reform which would injure Indian
commerce by giving a stimulus to British competi-
tion, unless the plea of justice on which it was
demanded was based on very sure foundations,
but as Any stimulus to trade in gold-using countries
the^buik ^^^^ create fresh demands for imported goods, and
of their this demand will produce a corresponding though
are reasons much slighter stimulating eifect in silver-using
th^^fh^^ countries. This is, I believe, strictly true in so
injury far as silver-using countries are to be regarded, not
be very ° ^^ rivals, but as customers ; and that is certainly the
serious. more important aspect of this branch of international
trade. Granted that this is the case, silver-using
countries would have no cause of complaint, in this
respect, on account of the inflation of trade in gold-
using countries due to any fall in the value of gold.
As to the internal trade of silver-using countries, the
less silver prices are forced down by any currency
reform, the less their trade will be depressed,
and the less reason they will have to complain.
The reasons just given for disbelieving in a heavy
fall in silver prices at the introduction of low-ratio
bimetallism have therefore an important bearing
on this question. Then again, it is to be noted
that the depressing effect due to any fall in prices
which might take place would be in consequence
of the way in which both the burden of industrial
debts and the rate of real wages would increase at
such times (see Chap. XVII.). But in the less
Ch. v.] INDIAN INTERESTS. 71
civilized silver-using countries such influences as
these would have less eifect than under the complex
industrial systems of gold-using countries; and
silver-using countries would therefore suifer less
from a fall in prices than would appear probable
judging from the experience gained in gold-using
countries. All these circumstances mitigate the
injustice which it might be anticipated would be
done to silver-using countries by the introduction
of low-ratio bimetallism ; though they do not prove •
that no harmful effects would follow that reform.
As to India, she can no longer be regarded as India
belonging to the category of ordinary silver-using accept""
countries. By closing her mints to the free coinage market-
of silver, the value of the rupee has been forced up metalHsm,
above the value of the silver contained in that coin ; and this
' IS the
and these monopoly rupees may best be regarded strongest
as inconvertible notes printed on silver. It is a^com- ^^
evident, therefore, that when silver is rising in promise
value, it will not be till the value of the silver in question,
the rupee becomes equal to the value of the
monopoly rupee itself that the value of that coin
will tend to rise, or that prices measured in rupees
will tend to fall.^ A certain increase in the value
of silver would therefore do no harm to India.
Moreover, it would be very difficult for the Govern-
ment of India to adopt any bimetallic system which
did not raise the gold price of silver to the level
at which they have succeeded in maintaining the
gold price of the monopoly rupee. Their object in
I Assuming that a gold standard is not adopted.
72 THE CHOICE OF A RATIO. [Ch, V.
closing the mints has been to lessen the burden of
the gold debts of India ; and from that policy they
are not likely to recede. They cannot, therefore,
well accept market-ratio bimetallism, or indeed any
form of bimetallism which would lower the gold
price of the rupee ; for to do so would certainly in-
crease the amount of the silver revenue necessary
to meet the interest on the gold debts of India.
This consideration, taken in connection with the
facts mentioned in the preceding paragraph, appears
to me to afford the only strong argument in favour
of adopting a bimetallic system with a ratio some-
what lower than the ratio now ruling the market.
But, as previously stated, the balance of argument
as regards India is, I think, very strongly against
bimetallism with a ratio anywhere nearly approach-
ing the ratio of 15^ to 1 ; for, though the value of
her gold debts would thus be greatly reduced, yet
the depressing effect on silver prices of such a re-
form, and the increased difficulty of raising a given
revenue in silver, would more than counterbalance
any such advantage to India.
The rise Ketuming to the consideration of the case of gold-
iu ^oM- using countries, the most important fact to remember
using . is that probably little or no absolutely permanent
will pro- effect, and certainly no permanently active influence
duce no ^^ trade will be produced by the immediate rise in
permanent , ^ ^ , •' ,
beneficial prices due to the introduction of bimetallism at any
in uence. ^^ced ratio. The stimulus will become less and less
the more nearly we approach a position of stability
of prices; and, though it may hasten the progress
Ch. v.] temporary effects. 73
of commerce, it is not improbable that trade would
ultimately reach almost the same position without
such artificial means being used to force it on.
" Of course it cannot matter," as is admitted by
bimetallists, " whether prices are permanently high
or permanently low, for commodities are ex-
changed against commodities " ; ^ and, therefore,
though it might be a long time before prices
ceased to rise slowly in consequence of any
currency reform, and before all the other inci-
dents of production had adjusted themselves to the
new level of prices, yet, when they had done so,
the direct beneficial influence of the rise in prices
on trade would have ceased to be operative. This
argument applies with equal force to our foreign
as to our home trade. Low-ratio bimetallism has
been advocated, as we have seen, because it is
hoped that it will produce an opposite effect to
that resulting from the gradual fall in the gold
price of silver. But "it would appear to be ad-
mitted, by almost all witnesses " before the Gold
and Silver Commission, that when the adjustment
between the levels of prices in silver and gold-using
countries "has been completely carried out, the
conditions of international trade will be precisely
the same as before the divergence between the
values of the two currencies occurred."^ It is
probably true, however, that no change can take
* Address on Bimetallism to the London Institution. H. C.
Gibbs, May, 1895.
2 Gold and Silver Commission, p. 35.
74 THE CHOICE OF A EATIO. [Ch. V.
place without leaving some traces behind it; but
the relics of the inflation would in most cases be
insignificant. Thus, putting aside all the many
other causes affecting commerce, when the adjust-
ment of all the factors of trade after the intro-
duction of bimetallism had been completed, the
conditions of international and home trade would be
almost precisely the same as at present ; though it
is fair to admit that it would be a very long time
before this adjustment would be quite completed.
Bimetallists have, as a rule, advocated their pro-
posed system on the ground that it would increase
monetary stability, but here Ave see they are
demanding an unstable condition of things, with
the expectation that the adjustment of the in-
stability, so long as it continues, will have a bene-
ficial influence. " Stability should be the great
object of all proposals for monetary reform," ^ and
the nearer the ratio adopted is to the existing ratio,
the sooner must stability be reached.^
The But even if the first influence on trade of such
stimulus
may be ^ " A Bimetallic Piimer, H. C. Gibbs, p. 43.
iolloTOfed 2 It should, however, be noted that if the causes of the recent
"y '^. fall in prices have not yet produced thek full effects, it is
' evident the fall will continue even if we fix existing currency
conditions as far as possible — even if the market ratio is adopted.
This, therefore, gives a logical argument in favour of some
compromise on the question of the ratio. If our object is to
steady prices, and not to raise or lower them, we should adopt
the ratio which Avould tend to produce the existing actual level
of prices as its ultimate or normal effect ; and this ratio may
be presumed, on this assumption, to be somewhat lower than
the existing ratio,
Ch. v.] a reaction. 75
a rise in prices were beneficial, it is by no means
certain that the total effect would not be harmful.
If this artificial stimulant did produce exceptional
activity, a reaction would almost certainly follow,
and the evils of the depression might more than
counterbalance the good produced by the " over pro-
duction." Those who believe that this would be the
case must admit that it affords a strong argument in
favour of steady as against inflated prices. At all
events, the probability of a reaction must be taken as
a set-off against the advantages claimed for inflation.
Then again, we must ask whether a passing and the
stimulus to trade will benefit all classes. Putting on the
aside all those living on fixed incomes, who must wo^'^^"?
suffer from a rise in prices, and whose sufferings it doubtful.
is not now the fashion to consider, and looking only
to those who are working for their livings under
conditions which make a rise of income possible, it
is at first sight natural to suppose that they all must
gain by the change ; but this answer cannot be
given with certainty. If the production of luxuries
for the many is stationary, whilst the production of
luxuries for the few increases largely, we can, at all
events, imagine an increase of trade taking place
unaccompanied by any general increase of comfort,
or even accompanied by a decrease of comfort to the
many on account of the necessarily increased labour.
If the working classes are not to be injured, either
their wages must rise in proportion to the rise in
price of the commodities they buy, or else the
greater regularity of their work must augment tlieir
76 THE CHOICE OP A RATIO. [Ch. V.
total earnings sufficiently to compensate them both
for the extra work and for the lessened purchasing
power of each day's wage. Can either of these
results be predicted with any degree of certainty ?
In the case of a durable increase in the volume of
trade, it can hardly be doubted that a large pro-
portion of the increase of production would before
very long find its way to all classes. But when
the rise in prices is spasmodic, possibly creating a
harmful reaction, this result cannot be said even to
be probable. It is easy to see that the owners of
industrial concerns might be able to expend more
on luxuries out of their increased profits due to
higher prices ; but it is not clear that the un-
organized and casual labourers and employees, who
form the majority of the working classes, would
be able, before the reaction commenced, to force
their wages up so as to gain a proportionately in-
creased margin of expenditure. Moreover, strikes
frequently accompany the raising of wages, and on
this point it is interesting to note that Jevons stated
that " it is not unlikely that the great strikes which
occurred a few years ago were partly caused by the
depreciation of gold " due to the Australian gold
discoveries. We must not judge these questions
solely with reference to the total wealth acquired..
Even if we go so far as to admit, with Jevons,
that "the wealth created during such a period of
unwonted activity probably far overbalances any
loss Avhich follows," ^ we may also urge, as far as the
" Investigation in Currency and Finance," Jevons, p. 29,
Ch. v.] wages. 11
mass of the people is concerned, that the want and
suffering caused by even a moderate period of
depression is a heavy penalty to pay for the enjoy-
ments obtained by the often improvident expendi-
ture during seasons of inflation. Wages will keep
oscillating, but the social advancement of a nation
depends on the low tide rather than on the high tide
of the real value of the earnings of labour ; and we
must be satisfied that the net gain of wealth from
inflation, after deducting the " loss which follows,"
is sufficiently great to permeate even to the ranks of
unorganized labour before we can be certain that the
results experienced during the period of disturbance
will, on the whole, be beneficial. In Chapter XVIII.
the reasons for thinking that too great a rise in
prices is always objectionable will be discussed at
greater length. Here it is sufficient to remark that
it is by no means clear that a violent stimulus to
trade, such as that resulting from the introduction
of low-ratio bimetallism, would be a benefit to the
working classes.
Thus far reasons have been given for thinking Confidence
that it is not certain that the whole community ™^y ^®
•' shaken,
would be benefited by a temporary inflation of trade.^ and ob-
But, putting aside these doubts, we must remember artum&Qta
that the mere proof that beneficial results will flow endorsed.
from any act is not enough to prove its expediency.
There is many an individual whose removal from the
1 The word " temporary " is here aiid elsewhere used in a
sense opposite to that of " permanent " or " peipetual ; " and
not as indicating duration for a tihort time only.
78 THE CHOICE OF A KATIO. [Ch. V.
world would be an unquestionable and undoubted
benefit ; but that does not, even in such a case,
make murder expedient. Putting morality aside,
the practical objections to such a crime are that the
fear of a repetition of the deed creates a general
feeling of insecurity, and that a first offence in many
ways greatly facilitates a second, when the victim
may not be chosen on such sound principles.
Exactly the same type of arguments can be brought
against any currency reform, which is demanded on
the ground that it will benefit the general com-
munity at the expense of a minority. We cannot
be certain that the evils due to permanent appre-
liensions of further arbitrary changes in the effect of
contracts would not more than outweigh the benefits
due to any temporary inflation of trade. Then again,
if we once give way to the temptation to raise
prices artificially, we shall find it far harder to resist
similar movements in future. If we admit the force
of the arguments in favour of thus stimulating
commerce, we must also admit the validity of many
of the reasons which could be brought forward in
support of any proposals for tampering with the
coinage, or for the partial repudiation of national
debts ; and if a bimetallic system should ever be
introduced, we should have to admit nearly all the
pleas which might be urged in favour of a further
reduction in the ratio. We should thus find our
power of opposition to all these proposals greatly
weakened,
^tlimb ■'"^® ^^^^ ^^ fixity of the bimetallic ratio is, at all
Ch. v.] A CLIMBING RATIO. 79
events, no fancy danger, for we have already heard jug " ratio
of arguments being advanced in favour of " bi- logical
metallism on a climbing ratio," without any definite outcome of
1 • • 11 • 1 n 1 low-ratio
reason being given why the ratio should be pre- bimetal-
vented from climbing above any fixed limit. And ^'""
this climbing ratio — or falling ratio, as I should
prefer to call it — is a perfectly logical outcome of the
contentions of low-ratio bimetallists. They declare
that years of depression have been caused by a con-
tinually increasing divergence between the values
of the metals, and they want to reverse the opera-
tion ; but to make the ratio between silver and
gold give a sudden jump from that now ruling
the market to a ratio of 15J to 1, would in no
sense be a reversal of this process. If low-ratio
bimetallists intend to obtain a long period of
commercial activity to correspond to the long-drawn-
out depression, their policy should be to obtain,
under a climbing-ratio system, a period of instability
lasting as long as possible. Establish bimetallism
with the hope of inflating trade, and we shall never
feel that we have reached finality until, indeed, the
ratio is so low that gold is entirely driven out of
circulation, and we have practically obtained a silver
monometallic system. If we desire stability or
finality, we must at the outset resist any attempt to
adopt bimetallism with the view of raising prices.
80 THE CHOICE OF A EATIO. [Ch. VI.
CHAPTER VI.
FBEE COINAGE OF SILVER IN THE UNITED STATES.
If free BEFORE passing on to consider any further argu-
the ^.A. ments in favour of low-ratio bimetallism, it may be
established ^s well here briefly to allude to the monetary situa-
the panty . . . *^ *^
in the tion in the United States. In that country one of
would ** *^^ great political parties has adopted the free
simply be coinage of silver at a ratio of 16 to 1 as a plank of
bimetal- its platform. If it is thus intended to introduce
lism; Q^ low-ratio bimetallic system, all the arguments
brought forward in the two preceding chapters
against that proposal are applicable in this case.
But in these discussions it has been assumed that
the legalized ratio would coincide with the ratio
between the value of the metals in the market.
Would this be the case if the United States alone
were to commence the free coinage of silver at 16
to 1 ? Nothing is so rash as to prophesy on currency
questions, but it does seem probable that silver
would not rise in gold price to that extent. If such
legislation were ever passed in America, we may be
certain that a force would be established tending to
drive gold out of the United States ; and that any
Ch. VI.] THE UNITED STATES. 81
gold flowing to Europe would tend to increase the
gold currency in gold-using countries and thus to
raise gold prices, including the gold price of silver.
The gold leaving the American currency and
reserves would be replaced by silver, and the in-
creased demand for silver thus caused would tend
to raise its value and therefore its gold price.
Would these two movements raise the gold price of
silver until the ratio in the market became 16 to 1 ?
If the proposed legislation really produced that
result, and the ratio of 16 to 1 was maintained in
the market, then the United States would, in future,
play the same part that France and the Latin
Union played before 1873 ; that nation alone would
control the relative value of the two metals through-
out the world by its bimetallic laws. The advocates
of this policy declare that the United States is
certainly as able to do this now as France was able
to do it in the past. If this is really the case, then
the proposed American reform would simply be the
establishment of low-ratio bimetallism, and we must
judge it accordingly.
But on the whole it appears improbable that the but if that
action of the United States alone could have the the case,
desired effect on the relative values of the precious *^® ^f^^^
would be
metals. If it be a fact that France and the Latin silver
Union could have maintained the ratio of 15^ to 1 meteUism.
until the present day, then it is no doubt possible
that the United States might now be able to esta-
blish the ratio of 16 to 1 in the market ; but, even on
this assumption, we cannot say that this is more than
82 THE CHOICE OF A RATIO. [Ch. VI.
a possibility. Thirty years ago it was generally
believed that the parity of exchange between the
metals would always be approximately maintained,
and that belief was a force which may then have
helped to make the bimetallic laws more effective.
That force is now non-existent. Moreover, to sud-
denly alter the ratio from, say, 35 to 1 to 16 to 1
is a very different operation from preventing that
ratio from altering after it has once been established.
Many bimetallists consider that the Latin Union
alone could hardly have maintained the old ratio
approximately unaltered in face of the many forces
recently arrayed against silver ; and nearly all
European bimetallists think that it would be unwise
to attempt to introduce a bimetallic system without
an international agreement comprising many of the
principal commercial nations. Thus even keen bi-
metallists may logically anticipate that the value
of the American dollar would sink until it coincided
with the value of the silver metal in the coin, and
this without the gold price of silver rising until
the ratio became 16 to 1. If these anticipations
are correct, the parity in the market would not be
established ; gold would cease to circulate as legal
tender in the United States ; and the currency
would consist of one metal only. In fact, the
reform would not be bimetallism at all; it would
be silver monometallism, combined with a sudden
drop in the value of the standard coin.
If France were to join in this bimetallic move-
ment, no doubt the success of the enterprise would
Ch. VI.] THE UNITED STATES. 83
be more probable. But even in that case grave
doubts may well be entertained as to whether the
selected ratio could be maintained in the market in
the face of the probably greatly increased produc-
tion of silver.
It has been seen that bimetallic legislation would, This
in any case, produce a tendency for gold to depre- metaTlism '
ciate and for silver to appreciate. If the legalized ^ould
ratio were not established in the market, it would debts less
be because the depreciation of gold and the appre- j'^^/^^^^'*
ciation of silver were not sufficient to produce that than true
result ; that is to say, the value of gold would not lis^
be as much reduced as if a true international bi-
metallic system were successfully adopted. Thus,
with this nominal bimetallism, the diminution of
the value of debts payable in gold, including
much of the indebtedness to Europe, would be less
than under international bimetallism ; this, how-
ever, would be an unintentional result of the free-
coinage policy, and one for which the authors of
the scheme can take no credit. The great bulk
of the debts of a nation are, however, contracted
in legal tender, and are not payable in a definite
metal ; and it is to these obligations that the
American citizens should turn their main attention.
If the bimetallic ratio were not established in the
market, the value of silver would not rise so much
as if that result were obtained ; the fall in the value
of the dollar would be even greater than if a true
bimetallic system at 16 to 1 were successfully in-
troduced ; and, putting aside the results of the
84 THE CHOICE OF A KATIO. [Ch. VI.
commercial panic which such a reform would cer-
tainly produce, it would seem that prices would be
raised even higher than if the parity of the metals
was established and maintained. Thus those who
think it right to attempt to raise prices in this
manner have theoretical grounds for hoping to
achieve their ends even more effectively, as far
as internal debts are concerned, by this kind of
nominal bimetallism than by means of a currency
system which succeeded in maintaining the adopted
ratio in the market ; but to those who think such
methods should be condemned, this proposal will
appear doubly objectionable.
The plea It is true that the demand for the joint standard
metallism on the grounds of abstract justice is somewhat
on the stronger in the case of the United States than it is
^OTmd of '^ .
abstract With the United Kingdom, where bimetallism was
sOTiewhat abandoned in 1816. Had no changes in monetary
stronger laws been made in 1873 and in subsequent years,
of the the currency of the United States would now be
stt*^*^ bimetallic ; and, as regards all debts contracted
before that date, bimetallism would merely re-estab-
lish the legal conditions in force at the time at
which such debts were contracted. But, even in the
case of the United States, it is, I think, undoubtedly
true that the great majority of existing debts were
contracted since the abandonment of bimetallism ;
and that the number of creditors inequitably in-
jured would exceed the number of debtors who
could, adopting the bimetallic view of equity, be said
to be equitably compensated. With regard, also, to
Ch.vl] the united states. 85
debts contracted in the bimetallic times, previous
to 1873, it must be remembered that the majority
have changed hands in the interval, and that the
price paid was based on the belief that the Govern-
ment intended to maintain the existing condition of
things ; the purchasers would, therefore, be just as
much injured by a reduction in the value of the
dollar, and almost as inequitably, as if the debt had
been contracted recently.
Of course if on the establishment of low-ratio The tree-
bimetallism the ratio was not maintained, then the ^^^^^
dollar would cease to retain its present gold value, illustrates
But this does not very materially alter the case of low-"
from an equitable point of view ; because, if the ''^*fj|'-^'
United States could not now establish the parity
between the metals, it is most probable that, had
the old bimetallic laws remained in force, the dollar
would now have sunk to its value in silver. In that
case, also, it would therefore be true that the free
coinage of silver would, as far as a large number
of debts is concerned, merely be a return to the
conditions which would have existed if no change
in the monetary laws had been made ; and it makes
the matter little if any worse from the point of view
of abstract justice. But these considerations do
illustrate, and illustrate very forcibly, the dangers
of low-ratio bimetallism. For here we see that an
arbitrary reduction of internal debts to an unknown
amount, possibly rising to a maximum of nearly
fifty per cent., can be defended by much the same
arguments as those which must, I think, be used by
86 THE CHOICE OF A RATIO. [Ch. VI.
low-ratio bimetallists. And do not let us imagine
that in England we are free from such dangers ;
for here in past times we have heard " arguments
in favour of the change to a silver standard, which
are neither more nor less than pleas for deprecia-
tion, and consequently for debtors generally at
the expense of their creditors, in violation of the
broadest principles of justice and sound policy." ^
1 Tooke's " History of Prices," vol. iii. p. 215, 1840.
Ch. VII.] FOR THE LOW RATIO. 87
CHAPTER VII.
ARGUMENTS IN FAVOUR OF A LOW RATIO.
It has been urged in favour of the low, or the 15^ If the
to 1 ratio, that the total amount of silver now in currency
existence in the currencies of the world weighs 151 weighs
, 1 i 1 1 T • T 1 i l^i times
times as much as the total gold coinage, and that the gold
this, therefore, seems to be the natural ratio to adopt, ^y^ affords
This is often gravely brought forward as an argu- uo argu-
ment, without the slightest hint being given why the'isj'to i
there should be any connection between the ratio of ratio.
the weights and the ratio of the values of the metals.
As thus stated, the fact has no more argumentative
value than a bad pun. It might, no doubt, be
urged that the chance of one or other of the metals
being driven out of circulation by unforeseen cir-
cumstances would be reduced to a minimum if the
currency was equally divided between silver and
gold, the metals being measured by their value.
Now, if it be a fact that the existing silver coinage
weighs 15^ times the existing gold coinage, it is true
that, at the first introduction of bimetallism at a
15i to 1 ratio, the total value of the two metals in
circulation would be the same, and we should have
88 THE CHOICE OF A RATIO. [Ch. VII.
obtained this theoretical advantage. But such a
ratio would, as we have seen, raise the value of silver
as compared with other commodities, as well as in
comparison with gold ; this would have the double
effect of stimulating the silver-mining industry, and
of diminishing the demand for silver in the arts;
and for both reasons, the amount of silver in cir-
culation would be increased more or less rapidly.
Moreover, the amount of gold in circulation would
be diminished in similar ways; and the equality
of value of gold and silver in the currencies of the
world at first obtained would very soon be destroyed.
If any weight at all is to be attached to this argu-
ment, which is doubtful, it points to the adoption
of a ratio higher, but no one can say how much
higher, than 15^ to 1.^
The ratio It has also been urged that the fact of a ratio
should be between 15 to 1 and 16 to 1 having existed for so
mosUik 1 ^^'^y y^^rs, points to the conclusion that the safest
to survive,' course would be to go back to the old and well-
difficult* to tried ratio of 15^ to 1. But this is hardly a strong
select that argument in the mouth of a bimetallist; for the
ratio.
^ In a similar manner it might be argued that the maximum
stability would be obtained if the two streams of metals flowing
into the common reservoir were of equal volume ; that the value
of the total output of silver should be equal to the value of the
total output of gold. This would indicate a ratio of 19 to 1,
taking the relative output in 1893, 1894, and 1895 as a guide.
But this argument, in the same way, in reality only points to
some ratio an indefinite amount higher than the ratio of 19 to 1
as being theoretically the best ; for, with a ratio of 19 to 1, the
output of silver would increase.
Ch. VII.] CHANCE OF SURVIVAL. 89
continued existence, before 1873, of the low ratio
pointed, according to the bimetallic theory, to the
continued existence of laws legalizing a low ratio,
and not to any inherent qualities in the metals
themselves. The ratio to be aimed at is no doubt
the one most likely to maintain a large proportion
of both metals in circulation ; but it is extremely
difficult to ascertain what ratio would fulfil that
condition. Those who believe in a flood of silver
would select a high ratio to check that flood ; but
those who believe that the production of gold will
increase more rapidly than that of silver would
naturally endeavour to equalize the output by means
of a low ratio. It has been seen that if a bimetallic
system were being started in an isolated country
without a metallic currency, the natural ratio would
be the safest one to adopt. But what is the natural
ratio ? If all the gold and all the silver coin in the
world were demonetized, the natural ratio would
then in time be established in the market ; but
who would venture to predict what would be the
ultimate effect on the relative values of the metals
of such an event ? The gold coinage of the world
is now more valuable than the silver coinage, and
therefore it might be argued that gold would fall
in value more than silver if the whole, or even if
an equal proportional part, of the two metals were
demonetized ; that is to say, that the natural ratio
would be lower than the existing ratio. But, on the
other hand, the recent rise in the ratio, if due to
inherent causes, seems to point to natural forces
90 THE CHOICE OF A RATIO. [Ch. VII.
tending in the opposite direction. The choice of
the best ratio to adopt ought to be largely de-
pendent on the relative cost of production of the
two metals, and on this point we are badly in need
of more accurate information.
Thus far the balance of argument has been against
the adoption of the low ratio, but there are some
points in its favour which are well worthy of
consideration.
Thegreater In the first place it is urged that the lower the
sUyerpncl ^^^O' ^^^ ^^^^ perfectly will the currency fulfil its
is said to function as a standard of value. It is well known
theadop- that prices as measured by gold — gold prices —
hon of the jjj^yg \)qqj^ falling during the last twenty years ; and,
neglecting oscillations extending over periods of
less than five or six years, it also appears to be
almost certainly true that prices as measured by
silver — silver prices — have been comparatively
steady. From these facts it has been argued that
silver is inherently a better standard of value than
gold, and that the greater the weight given to
silver in the bimetallic marriage, the more stable
will prices be as measured by the joint standard.
The efiects of appreciating and depreciating
standards of value will be discussed at length in
Chapters XVII., XVIII., and XIX. ; but, assuming
for the present that the fall in gold prices has
been too rapid for the well-being of the com-
munity, this argument, no doubt, points to a low
ratio ; for to establish the ratio of 15 J to 1 would
undoubtedly encourage the production and coinage
Ch. VII.] STABILITY OP SILVER PRICES. 91
of silver, and discourage the production and coin-
age of gold. And if a larger proportion of silver in
the joint currency will produce a better standard of
value, this is a legitimate argument against adopting
the market ratio, and one which must be considered.
Bimetallists, as a rule, declare that the fall in If the fall
the gold price of silver has been due to the increased ^f gjiver^k^
use of gold and the diminished use of silver on the ^"e either
r^ . 1 . . -n 1 1 . *o bimetal-
Uontment, and on this point, as will be seen later lie legisla-
on, they are probably more or less justified in their to°°J.ieutjji
conclusions.^ But when they go on to state that conserva-
the influences which caused this fall in the gold above
price of silver have been influences which affected argument
111 .1 , 11 • • 11 • 18 unsound;
gold and not silver — that gold prices, m gold-usmg
countries, have been greatly influenced, and that
silver prices, in silver-using countries, hardly in-
fluenced at all by the demonetization of silver in
Europe and the United States, they do not support
their contentions with solid arguments. It would
appear far more probable that prices have been
affected everywhere by this currency legislation
tending to discourage the use of silver and to en-
courage the use of gold ; that, as a result of other
causes, there would have been a more or less con-
siderable fall in prices everywhere, if bimetallism
had been effectively maintained, both in silver-using
and gold-using countries; that the influence of
these alterations in the currencies of Europe and
America has been to increase this fall in prices in
gold-using countries, and to diminish or cancel it in
1 See Chapter XV.
92 THE CHOICE OF A RATIO. [Ch. VII.
the silver-using countries; and that the steadiness
of Indian prices before 1893 may, therefore, be said,
in a sense, to be due to the abandonment of bi-
metallism in Europe. Moreover, it has been
suggested that the greater stability of Eastern
prices is partly accounted for by the greater con-
servatism of the people; but, if so, it is evident
that to that extent it has nothing to do with the
standard value.^ And to whatever extent we admit
the superior steadiness of silver prices to have been
due, either to the abandonment of bimetallism in
Europe or to the less advanced methods of trade
in the East, to that extent do we destroy the argu-
ment that silver ought to be given extra weight
in the bimetallic marriage, because of its inherent
but if it is tendency to produce more stable prices. If, on the
to^n^erent other hand, the change in the relative value of the
causes, this precious metals has been largely due to causes other
to the than the lessened demand for silver and the in-
ratio'lf'no- creased demand for gold for monetary purposes —
nearer than in fact, that it has been largely due to qualities
ratio °to inherent in the metals themselves — then, no doubt,
the natural this argument in favour of silver is logical. But,
assuming that the divergence in the value of the
metals has been due to such inherent causes, then
it seems probable that the present ratio in the
market is nearer to the natural ratio than is the
' This explanation of the superior steadiness of silver prices
might account for it as far as short-period oscillations are con-
cerned ; that is, for the kind of steadiness which has not been
proved to exist.
Ch. VII.] FUTURE OUTPUT OF METAL. 93
ratio of 15^ to 1 ; and that by adopting the market
ratio we shall subject the bimetallic tie to a less
severe strain than if we re-establish the ratio of 15^
to 1, and thus reverse the natural process which,
according to this view, has been in operation since
1873. In fact, to whatever extent this contention
in favour of silver is not fallacious, to that extent
an argument pointing in the opposite direction — in
favour of the market ratio — has to be weighed in
the balance.
The arguments above discussed, as well as some These
other points which will be considered in this chapter, Sr"
are all founded on the monetary and mining ex- *^?* ^^^
i . exiting
periences of the last few years. As to the superior conditions
steadiness of silver prices, if we look to more ancient t/oS^ttc'
history, it would be difficult to prove which standard will con-
has varied most. And such records as are available which is im-
are not very apposite ; for, up till 1873 — that is, probable.
while any of the great Powers had bimetallic laws in
force — such oscillations in the relative value of the
two metals as did occur are but little guide as to
what would have happened if these imperfect bi-
metallic ties had not existed. Judging by the past
variations in output, it seems probable that each
metal, if it remains free, will at some future time,
near or distant, tend to appreciate, and at other
times tend to depreciate. If this is a true forecast,
all that bimetallists can hope to do is to tie the two
standards together, so that, when causes tending to
produce instability in the value of one metal only
are operative, the tendency of the joint standard to
94 THE CHOICE OF A RATIO. [Ch. VII.
vary in value will be mitigated by the weight of the
other metal. They can hardly hope to predict what
ratio will produce the most stable currency in the
long run.
The ratio Other and more weighty arguments in favour of
should be *^® -^^^ ratio Can, however, be brought forward, if it
the one be granted, as, I think, the discussions in these later
the greatest chapters will prove, that a change from stable prices
annual ^^ falling prices is more harmful than a chansre to
increment ° ■•^ _ _ °
of money, rising prices, and that (though this is more doubt-
doubtM ^^^) ^ currency with a permanent tendency to
what that appreciate is obiectionable. The coinage in circu-
ratio would ^^\ . , ,...,. , . ° ,
be. lation is always diminishing through wear and tear
and loss, and such a diminution of the currency
must be a force tending to raise prices. Then
again, the natural increase of the population must
be accompanied by an increase of money, or else,
other things remaining the same, the strain on the
currency will increase. An annual increment of
metallic money is therefore normally necessary to
prevent prices from tending to rise as a result of
these two causes ; and it would be better to err
on the side of too great an increment rather than
in the opposite direction, because a rise in prices,
though objectionable, is, generally speaking, not so
harmful as a fall in prices. Accepting these pre-
mises in so far as the efiect of the standard of value
in the future is concerned, the bimetallic ratio most
likely to produce the greatest proportional annual
increment of coinage is the one to be adopted. Mr.
Fox well says, that " the fundamental consideration
Ch. VII.] FUTURE OUTPUT OF METAL. 95
determining the choice of a ratio is the considera-
tion which ratio is most likely to give us such a
supply of money as will duly keep pace with the
requirements of advancing population and trade.
This is a matter which depends on estimates none
of which can be very exact. It seems clear that
the higher the gold price of silver the larger will
be the available supply of money." ^ And in another
place the same author tells us that " it is the
opinion of certain experts that a rise in the price
of silver in relation to gold would increase its
production. But it is very doubtful if any similar
effect on the supply of gold would result from an
alteration of the ratio in favour of gold." This
consideration, therefore, points to the adoption of
the low ratio. But if Lord Aldenham, another
great bimetallic authority, is right in saying (as
I understand him) that any prophecy as to the
probable increase of the output of silver on the
introduction of bimetallism " is in a great degree
guesswork," it would hardly appear that a very
forcible argument can be founded on this basis.^
No doubt, when capital has been invested in any
industrial concern, the undertaking is not readily
abandoned even when it ceases to be profitable ;
and it follows that, if the value of gold were
lowered and the value of silver raised by any
bimetallic legislation, we might expect that the
diminution in the output of gold, through the
' National Liberal Club : " Pol. Econ. Circle," vol. ii. p, 194.
- •' Colloquy on Currency," p. 73.
96 THE CHOICE OF A RATIO. [Ch. VII.
abandonment of expensively worked mines, would
be a slower process than the increase in the output
of silver through the opening of new mines. Low-
ratio bimetallism would, therefore, in the first in-
stance, be accompanied by an increased total output
of the metals ; this would result in an increase
in the currency, and it would be an additional
reason for anticipating an upward movement of
prices in gold-using countries. But, if the ratio
of 60 to 1 were adopted, similar results might be
expected to follow, except that the increase of pro-
duction would be in gold and not in silver ; and, in
this case, the additional production would act as a
check on the fall in prices in gold-using countries
which would follow such a form of bimetallism. In
fact, any departure from the ratio in the market
would tend in this way to increase the output of
the metals. But in any case the results would be
merely temporary ; for unprofitable mines would
be closed before very long, and the mining indus-
tries would gradually accommodate themselves to
the new relative values resulting from the introduc-
tion of bimetallism ; and, after the completion of
such an adjustment, I am unable to see why it is
thought that one ratio is likely to produce a greater
annual increment of metallic money rather than
another. But this, no doubt, is a question for ex-
perts, and one well worthy of consideration.^
* If I understand Prof, Foxwell's argument right, it is depen-
dent on the assumption that the gi-eater the weight that is given
to silver in the bimetallic tie, the less will be the tendenc}' for
Ch. VIL] THE CHOICE OF A RATIO. 97
In Chapter V. it was seen that the stimulus to The desire
trade, due to a rise in prices, on the introduction of continuous
low-ratio bimetallism is not a sufficient iustification Tallin.
/-w 1 1 1 1 • 1 prices 13
for adopting that system. On the other hand, it has not in-
just been admitted that we ought to adopt the ratio 5^^!^^^^,^"*
which is least likely to cause a continuous fall in objection
prices in the future. These two attitudes may at attempt to
first sight appear somewhat contradictory ; but they inflate
are not so, and the distinction between the two
views is important. If prices are raised through the
introduction of low-ratio bimetallism, the active
beneficial influence will die out in time, and the
advantages aimed at are for one generation at
most ; the comparatively sudden rise in prices which
would probably follow such a reform, would almost
certainly be followed by a reaction more or less
severe ; and, as there would be a temptation to
produce another rise in prices by a further altera-
tion in the ratio, the confidence in the maintenance
of the system when adopted would be shaken by the
very arguments used in favour of its adoption. But
to advocate the selection of a ratio — whatever that
ratio might be — which would be most likely to
permanently lessen the tendency to falling prices
is to seek advantages of a very different order. To
prevent prices from permanently declining would
the currency to appreciate, not only in the immediate future,
but also in pei-petuity. If this is true, does it not follow that
there will be perpetual tendency on the part of silver to fall in
value as compared with gold ? And if there is such a tendency,
bimetallism at a fixed ratio cannot last indefinitely.
H
98 THE CHOICE OF A RATIO. [Cu. VII.
probably produce permanent benefits ; it could not
tend to produce any reaction ; and the temptation
to a further alteration in the ratio would hardly
be stimulated by any arguments based on the en-
deavour to secure such advantages. If it is true
that, after the disturbances due to the reform had
subsided, low-ratio bimetallism would be more
likely than market-ratio bimetallism to prevent
prices from falling, then this is a point in its favour.
I do not myself think that much weight should be
attached to these pleas in favour of a low ratio, but
to say that they are worthy of being weighed in
the balance when selecting a ratio is not incon-
sistent with the attitude adopted in Chapter V.
The effect One other argument in favour of the low ratio
recoina^e remains to be considered. It was seen that the
of silver adoption of the market ratio might necessitate
market the recoiuago of a portion, large or small, of the
ratao to be existing silver-tokeu coinage, and that, when re-
coined, its nominal value would be diminished.
This would be equivalent to a contraction of the
currency, and it would, therefore, be a cause tending
to produce a further fall in prices — a result certainly
not to be desired. My own impression is that very
little recoinage would be necessary, and that the
consequent fall in prices would be very small.
These pleas In this chapter some reasons have been given for
ratio^re^^^ demanding a compromise on the question of the
not strong, ratio, which are worthy of consideration, although,
in my opinion, no great weight should be attached
to them.
Oh. VIII.] AGAINST THE LOW RATIO. 99
CHAPTER VIII.
ARGUMENTS AGAINST THE LOW RATIO.
In considering some of the dangers which would If the
attend a breakdown of a bimetallic system if once of low-ratio
established, we may fairly place the advocates bimetal-
of the low ratio on the horns of a dilemma. If 1 873 caused
trade has not been depressed during: the last twenty ^depression
^ _ o _ ■'in trade,
years, or if its depression has had nothing to do we should
with the abandonment of bimetallism on the Con- f^^gt a
tinent, then bimetallists themselves would be the recurrence
first to admit that their case for the re-establishment evil.
of the low ratio would be nearly destroyed. If, on
the other hand, we admit that more than twenty
years of distress have been due to the action of the
Latin Union in abandoning bimetallism, surely it is
obvious that we ought to jealously guard against
the chance of a recurrence of this trouble. But, if
we adopt the ratio of Ibi^ to 1, we are going to re-
produce, as far as possible, the monetary situation
which existed in 1873 ; we are going, in fact, to
place the world under financial conditions which
would, according to the views of bimetallists,
necessitate a breakdown of the system being
100 THE CHOICE OF A EATIO. [Ch. VIE.
followed by a long period of commercial depression.
This is a risk that must be considered, because,
since bimetallism is absolutely dependent on inter-
national agreements, bimetallists cannot assert with
certainty that it would last for ever. Bimetallists
admit, as already pointed out, that it is falling
prices, not low prices, which do the mischief ; if this
is so, it is evident that during all this period of
falling prices which we have just passed through,
forces have been at work tending to readjust the
burdens on industry, and that these forces have
already neutralized part of the evil effect of the fall
in prices. We have, so bimetallists would urge, paid
a heavy penalty for the folly of abandoning bi-
metallism ; but surely it would be equally an act of
folly to place ourselves in such a position that we
might have to undergo that punishment again
through no fault of our own. This is a strong argu-
ment against low-ratio bimetallism, but it is one
which cannot be urged against a bimetallic system
if the ratio adopted is that ruling the market when
it is introduced. If, in case of the continuance
of the existing monometallic system, there are
troubles in store for us which might be cured
or alleviated by market-ratio bimetallism, these
troubles would merely be postponed but not in-
creased by the adoption of that system for a limited
period ; the return to monometallism after such a
temporary bimetallic period would leave us where
we are now as far as the ratio is concerned, and
the troubles due to a further divergence in the
OH.Vm.] THE NATURAL RATIO. 101
values of the metals would have to be faced then
instead of now. Monometallists may attach little
importance to this argument, but bimetallists must,
I think, admit that it tells greatly in favour of the
market ratio.
Bimetallism once established, bimetallists would The
evidently look upon its abandonment as a great mis- of the
fortune, and the greater the probability of per- ^,^^^^^ ,-,
manency, the better, in their opinion, would be the and Silver
system. On these grounds also the low ratio must s-Q^^Jau
be condemned. The monometallic members of the ouly be
Gold and Silver Commission reported that a stable favour of
ratio miffht be maintained if the market ratio were *^,^ P^^^'^
° . . , bihty of
adopted, but their great authority cannot be quoted maintain -
in favour of the maintenance of the low ratio, a Jj^f^^gj
system which they considered " would be fraught ratio.
with serious danger." ^ It is, in fact, generally
admitted that bimetallism can only be maintained if
the ratio adopted does not differ too much from the
natural ratio of the values of the metals, and, from
this point of view, it would seem reasonable to sup-
pose that bimetallism had a better chance of survival
with a market ratio than with a ratio of 15^ to 1.
But the arguments in the last chapter show that
no very great weight can be attached to this conten-
tion, because there may be an ample margin of
safety whether we adopt the market or the low ratio,
and also because it is very doubtful which of the
two is in reality nearer to the natural ratio.
The chief danger of the low ratio will, probably, The low
1 Gold and Silver Commission, p. 85. induce
102 THE CHOICE OF A RATIO. [Ch. VIII.
govern- lie in the temptation to hoard gold which it will
hoM-dgold cause. The bimetallic members of the Gold and
rather than Silver Commission, whose authority ought not to be
this would lightly neglected, declared that " all inducement to
efenfnt accumulate gold would cease with a return to a
of in- stable ratio of value between " ^ the metals ; but they
^' may have forgotten that the whole world would not
have their implicit faith in the durability of the
system. We may well have doubts as to what would
happen in reality if a bimetallic system broke down,
but we can speculate with far greater certainty as to
anticipated effects of a breakdown whilst yet the
system remained unshaken ; and it can hardly be
denied that there would be a general expectation
that the abandonment of bimetallism would be
accompanied by return to gold monometallism in
those countries where that system now prevails
whilst doubts might be entertained as to whether
some of the existing silver-using countries would
not take the opportunity of adopting gold as their
single standard. Arguing from this belief, it would
be generally held that the abandonment of low-ratio
bimetallism would be followed by a rise in the ratio,
leading to a difference in value between the metals
as great or even greater than that which now exists.
The various governments would, in all probability,
believe that if they hoarded silver, they would find,
on the breakdown of the system, that the only way
they could avoid a loss on that metal would be to
convert it into token coinage at a very false ratio ;
1 Final Report of Gold and Silver Commission, p. 103.
Ch. VIII.] HOARDED GOLD. 103
and the memory of the present condition of the
French currency would be a warning to them not to
fall into the trap in which that nation has been
caught. But if gold were hoarded instead of silver,
the reserves thus accumulated would consist of the
metal which, it would be thought, would increase
rather than that which would decrease in value on
a return to a monometallic system. For this reason
it would be thought desirable that the currency
should be composed of gold rather than silver, and
to bring about that result, greater facilities would,
perhaps, be given for the coinage of gold rather
than for the coinage of silver ; and this might be
done in ways difficult to control by international
agreement. The fear that other nations were doing
these things would make every Government sus-
picious, and this, in itself, would be an element of
instability. If any one of the great Powers had
either hoarded a large amount of gold, or had in
any way attracted an unusual supply of that metal
within its dominions, its Government might be
tempted to adopt monometallism, in the hope that
this action would break up the Bimetallic Union
and destroy the bimetallic tie, and that this would
lead to an increase in the value of their gold
currency and reserves ; this would be especially
probable at the commencement of a war, when
one or other of the combatants might think they
could thus gain a distinct advantage over their
opponents. . Thus the belief that gold would
increase in value at any general abandonment of
104 THE CBOICE OF A RATIO. [Ch. VIIT-
bimetallism — a belief which almost certainly would
exist — would evidently be a cause of danger to a
low-ratio bimetallic system. Whereas, if the ratio
adopted was the one governing the market at the
time the system was introduced, it would be im-
possible for any one to predict, after the lapse of a
few years, which metal would go to a premium on
a return to monometallism ; there would, therefore,
be no inducement, as far as this consideration was
concerned, to hold one metal rather than the other
in reserve, and this possible cause of a breakdown
would be non-existent.
The low The anticipation of an increase in the value of
b'^^more^'^ gold as Compared with silver — that is, in the silver
likely than price of gold — at the breakdown of a low-ratio bi-
ratio to ^ metallic system, might also give rise to the practice
encourage of makiuff contracts in srold coins instead of lep:al
"contract- o & o
ingout." tender, in order to insure the creditor against any
loss in the event of such a breakdown. In these
circumstances, gold rather than silver would be held
in reserve by all debtors making such contracts, and,
if these negotiations were sufficiently numerous,
this separate use of gold might drive it to a premium
compared with silver. With the market-ratio system,
on the other hand, it has been seen that no one
could tell which metal would go to a premium at
the break down of the system, and the fear of such
a possibility would create no special inducement to
make contracts in either metal in place of legal
tender. It should be noted, however, that as more
than 99 per cent, of the monetary transactions in
Ch. VIII] CONTRACTING OUT. 105
England are in credit and not in coin, and that as
the credit instruments employed, under a bimetallic
system, would be based on silver and gold indif-
ferently, the separate use of gold would be attended
with considerable inconvenience. For this reason
separate contracts in gold would, I believe, be rare
under any bimetallic system.^ But the point of
the present argument is to show that if this is a
real danger to bimetallism, it is one which would
be comparatively little felt if the market ratio
were adopted.
^ About forty years ago, when the same scare prevailed about
gold that now prevails about silver, a certain great water-power
in Massachusetts was leased at a rent of so many pennyweights
of silver. The inconvenience of this plan prevented it being
common. See Cousular Reports, U.S.A., vol. 24, p. 401, 1887.
106
THE CHOICE OF A RATIO. [Ch. IX.
CHAPTEE IX.
CONCLUSIONS AS TO THE CHOICE OF A RATIO.
Summary
of the
relative
merits of
the dif-
ferent
ratios as
regards the
conflicting
interests of
separate
nationali-
ties.
Having discussed the merits and demerits of the
ratio of 15^ to 1, as compared with a ratio closely
approximating to that governing the market at the
time of the introduction of the bimetallic system,
it only remains to recapitulate the various arguments,
and to strike a balance between them. Reasons
have been given for believing that a low ratio would
in certain respects be advantageous to France, to
the United States, and to the Government of India,
and disadvantageous to England ; and that it would
be a cause tending to stimulate or inflate trade in
gold-using countries, and to depress it in those where
silver forms the standard. Here there is a balance
of conflicting interests, and no reasons can be given
why one nation or the other should give way, unless
it can be proved that by so doing the world at
large would be so much benefited, that each separate
nation would be indemnified for its individual losses.
What, then, are the advantages and disadvantages
of the low ratio, A^hich would be applicable to all
alike ? To answer this question, we find ourselves
I
Ch. IX.] SUMMARY. 107
involved in the controversy whether it is right and
expedient to attempt to stimulate trade by raising
gold prices.
In discussing this subject, it was first assumed,
for the purposes of argument, that there would be a
rise in prices in gold-using countries, if the ratio
of 15^ to 1 were adopted, and, on that assumption,
the relative advantages and disadvantages were
found to be as follows : —
For the 15^ to 1, or Low Ratio. — Such a form Summary
of bimetallism would, in all probability, produce °^ *^® ^
_ ' *■ . . arguments
an increased activity of all trade in gold-using tor the low
countries ; but, in reply, it is urged that this might the replies
be merely discounting future prosperity to a more thereto.
or less considerable extent ; for the depression,
which would be almost sure to follow the inflation,
must be taken as a set-oif against this advantage.
Though theoretical considerations point to the con-
clusion that low-ratio bimetallism would produce an
opposite effect in silver-using countries, it is never-
theless urged that such a view is proved by the ex-
perience of the past to be unsound; for, as there
has been no marked rise in silver prices since 1873,
we have no reason, it is said, to expect that there
would be a fall in prices at the re-establishment
of bimetallism ; and silver-using countries have,
therefore, no reason to oppose the change. To this
argument it is, however, replied that prices in
silver-using countries might have fallen had silver
not been demonetized; and that the fact — if fact
it be — that silver prices did not rise after the
108 THE CHOICE OF A EATIO. [Ch. IX.
demonetization of silver does not prove that they
would not fall if the demand for that metal for
coinage purposes were now to increase; though it
is true that there are reasons for believing that a
fall in prices would be less prejudicial in its results
in silver-using countries than in gold-using countries.
It is also vehemently urged that low-ratio bimetal-
lism, by stimulating our trade at home, would
benefit us in our competition with silver-using
countries ; but, if this would be the case, it cannot
be denied that the benefits thus gained by us would
be exactly measured by the injury done to the silver-
using countries.
Summary For the Market Ratio. — Market-ratio bimetallism
arguments ^^^ ^^ advocated without resorting to any argu-
forthe ments which are favourable either to the repudia-
ratio, and tion of debts, or to tampering with the coinage, or
thereto^^^^ to the issue of inconvertible paper money, or to a
further alteration of the bimetallic ratio ; whereas
our position in opposing any such disastrous pro-
posals would be weakened if any sanction were
given to those arguments in favour of the low ratio
which are likely to attract the popular vote. The
condition of our working classes appears to be
steadily improving, judging by pauperism returns ;
if a market ratio were adopted, no sudden change
would take place to interfere with this progress ;
whereas, under the low-ratio system, since wages
rise less quickly than prices, since strikes might
be brought about by the attempt to get wages
raised, and since much suifering might occur
Ch. IX.] SUMMARY. 109
during the reactionary period of depression, the
possibility that this temporary stimulus to trade
would in reality be an injury to the poor in gold-
using countries must be considered. Assuming,
as we have done all through this discussion, that
the bimetallic ratio can be maintained, the introduc-
tion of a market-ratio system would leave contracts
practically unchanged ; whereas a low-ratio system
would most materially alter the effect of existing
commercial bargains, thus tending to shake credit,
temporarily or permanently. The stimulus to trade
in gold-using countries due to a rise of prices would
die out in time, and low-ratio bimetallism would,
therefore, merely produce a temporary beneficial
effect in this way. But considerations of a permanent
character, which ought to have most weight, seem
to tell in favour of a market ratio ; for the low-ratio
system is more likely to break down ; and if it does
collapse, it will lead, if bimetallic arguments are
sound, to another long period of depression in gold-
using countries, which need not necessarily be the
case after a breakdown of the market-ratio system.
Thus, on the assumption that prices would rise on The
the adoption of the low ratio, the above considera- argument
tions seem to point, on the whole, strongly against i» ^
that system. Taking into consideration the panics the market
which might result from so great a change in the l^^^\
value of money, and from the consequent loss of some
commercial confidence, some authorities have ex- a^com-^ *"^
pressed great doubts whether a ratio of 15^ to 1 promise
would cause a rise in prices ; and it is evident that admitted.
110 THE CHOICE OF A RATIO. [Ch. IX.
if it did not do so, the whole of the arguments
founded on the anticipated inflation of trade would
be annihilated. I cannot myself doubt that prices
would rise eventually ; but, considering the great
harm that might be done before confidence was in
a measure restored, it seems to me that the balance
of argument is overwhelmingly in favour of the
market ratio, as compared with the ratio of 15^ to 1.
It is, however, necessary to draw a distinction between
the advocacy of the low ratio on the ground that
prices will be inflated at its introduction — a rise in
prices which will create no permanent beneficial
influence — and the advocacy of this ratio on the
ground that it is less likely than the market ratio
to produce a permanent tendency to falling prices.
The arguments in favour of the view that the low
ratio is more likely than the market ratio to ward
off the dangers of falling prices in the future do not
seem to be based on strong foundations ; but, if they
can be sustained, this merit must be fairly weighed
in the balance in selecting the ratio. We have been
considering the 15| to 1 and the market ratios as
the extremes between which the chosen ratio must
lie. An intermediate ratio might be adopted as a
compromise between the demands of those who
advocate these two types of bimetallism ; and the
difficulties which the Government of India would
experience in accepting bimetallism with a ratio
higher than, say, 25 to 1, on account of their
monopoly-rupee system, affords a strong argument
in favour of such a proposal. But, on the whole.
Cii. IX.] AGKICULTURE. Ill
the case against the low ratio is, in my opinion, so
strong that we ought to make but little compromise
with those who desire to make the reform of the
currency an engine for raising prices, unless the com-
promise is demanded on other grounds than the
desire for inflation.
Those who accept these conclusions will do so Agricul-
with deep regret if they have been considering the ^l^j.^^^ jg
bimetallic question with the sincere hope of finding due partly
a cure for the present depressed condition of agri- produc-
culture. It must, however, be recognized that the *^°°," '^^^
. ° partly to
benefits of bimetallism have often been grossly the fall
exaggerated. The true cause of the bulk of these pyjt^^l
agricultural troubles is not to be traced to any prices
system of currency, but to the fact that virgin soils H other^
under sunny skies have been brought, as it were, prices;
, , n • 1 1 troubles
to our very doors by means oi excessively cheap sea not to be
transit. It may be that more land has been brought Remedied
into cultivation than would be needed to supply metallism.
the ordinary wants of mankind if the whole of it
were worked so as to bring to the farmer the best
return for the capital invested ; if this is the case,
the only remedy for the trouble is that the surplus
land should go out of cultivation. Moreover, the
actual fall in prices is not the only point to be
considered. If the price of the produce of an in-
dustry either falls more or rises less than the average
price of commodities, then an increased burden must
be thrown on those carrying on that industry ; for
their produce will, in either case, exchange for so
much the less of the produce of other industries.
112 THE CHOICE OF A KATIO. [Ch. IX.
The fact that agricultural prices have fallen more
than average prices does not in the least indicate
that they would rise more than the average on
the introduction of bimetallism ; no such currency
reform would affect the relative prices of difterent
commodities ; and, as far as the depression in agri-
culture is due to a change in the relative value of
agricultural produce as compared with other com-
modities, no alleviation can be expected from the
joint standard.
A rise in As to the rise in prices to be anticipated as the
would result of low-ratio bimetallism, it is easy to over-
stimulate state the probable benefits. Even if the introduc-
all gold- tion of the joint standard with a low ratio would be
^^S . an advantage to agriculturists in England, it must
alike; and be remembered that it would also be a benefit to
tolmcul- farmers in all other gold-using countries, and
turists Englishmen would thus get no assistance in their
chiefly due competition with the United States or Canada. In
to the order to consider the effect on the home trade, and
lessening of
the burden to put the case clearly, let it be assumed that
debts^"^ general prices would rise 20 per cent, after the
introduction of low-ratio bimetallism. The total
income of the farmer would thus be raised 20 per
cent. But how about the outgoings ? We are told
that labour is to get its fair share of the spoils ;
wages, therefore, ought to rise 20 per cent, at once.
Will not the landlord want, or rather will not he be
able to obtain some advantage for himself from the
reform he is asked to advocate ? Of course he will,
and, taking the case of land on short leases, the rent
Ch. IX.] AGRICULTURE. 113
may rise 20 per cent. also. Then the price of every-
thing the farmer buys for his trade will rise 20 per
cent. — that is part of our assumption. In fact, all
his income will rise 20 per cent., and, taking the
case of a farmer who is not in debt, so will all, or
nearly all, his outgoings. But it may be said that
anyhow his margin of profit will have risen 20 per
cent. ; that is true, but everything that the farmer
wants to buy, as a private individual, will also have
risen 20 per cent. Where, then, is his advantage ?
It is all, or nearly all, gone. Farmers who are in
debt — that is, a large proportion of the whole body
of agriculturists — will no doubt gain, and so will
all manufacturers in similar circumstances ; because
the interest they have to pay on their loans
would remain as a fixed payment out of their in-
creased incomes, thus increasing their margin of
profit. But the farmer with a short lease, who is
not in debt, will only gain either on account of his
competition with silver-using countries ; or in so
far as the diiferent manufacturers he deals with,
by not raising their prices to the full 20 per cent.,
allow him, as it were, to share with them in the
increase in the profit they make because of the
increase of their business, and because of the reduc-
tion of the burden of their fixed payments ; or be-
cause taxes do not rise as much as prices ; ^ or because
the landlord does not raise his rent to the full amount.
1 These are, moreover, the only reasons which can, in my
opinion, be given in favour of the belief that land, now derelict,
could be cultivated at a profit after a general rise in prices.
I
114 THE CHOICE OF A RATIO. [Ch.IX.
It may be urged, in reply, that farmers would
gain, not directly, but by the indirect effect of the
general stimulus to all kinds of trade. Manufac-
turers instinctively feel that they will derive a benefit
from a general rise in prices ; but a rise in prices and
an increase in production are so intimately connected
in their minds that they hardly separate the two
movements. In the case of agriculturists, who can-
not, as a rule, increase their production, it is difficult
to see how a general rise of prices, due to inflated
commerce, can benefit them in any way, except in
the manner above indicated. The farmer on a long
lease will, no doubt, gain in the same way as the
farmer in debt, because his rent is temporarily a
fixed charge ; but, in that case, the unencumbered
landlord will gain nothing, and will suffer on
account of the general rise in prices. Though it is
true that the total agricultural debt of the gold-
using world amounts to an enormous sum, yet this
is not quite the glorious prospect which is so often
held out to agriculturists by bimetallic orators.
Real wages It may be said that the fallacy in the above
tofaU^n ^rguJ^^nt lies in the assumed movement in wages,
gold-using and that this false assumption hides one of the chief
and to rise ways in which our trade may be benefited by the
in silver- proposed reform. Possibly this is so. Wages in
using ij • .
countries, gold-usmg countries would very likely not rise as
quickly as prices ; but, if they did not do so, low-
ratio bimetallism would reduce the purchasing
powet of the labourer's earnings ; and this would
be exactly equivalent to a reduction in his wages.
Cu. IX.] WAGES. 115
As to silver-using countries, it has been seen that
bimetallism will cause a fall in silver prices ; and
if wages were stationary whilst silver prices fell, it
would, in the same way, be equivalent in effect to
an increase in wages. If this is the change which
is really anticipated, then the prospective benefits
of low-ratio bimetallism amount, if placed in a
naked form, to an expectation that by reducing
wages in gold-using countries and by raising them
in silver-using countries in a manner unperceived
by the working classes, not only will the profits of
our home trade be increased, but our manufacturers
will gain a distinct advantage over their silver-using
competitors. If this is one of the benefits of bi-
metallism, the point should, at all events, be made
clear to those most concerned — to the working
classes.
In concluding this part of the subject, I cannot The
help regretting the way in which bimetallists refrain Xe ratio ^
from showing their hands clearly on this vital ^^ ^ ^^\ .
„ , . T/« 1 • 11' 1 one,andDi-
matter of the ratio. It they intend obstinately to metallists
adhere to a low ratio, then we may be certain that co°^al""*
their real object is to force up prices. If that their views
is the case, I, for one, am prepared to meet them
as an open foe. But if they admit, with the
bimetallic members of the Gold and Silver Com-
mission,^ that the particular ratio to be adopted is
a matter of detail, if they agree with the view some-
times expressed by their leaders, that this ques-
tion of the ratio " is comparatively of very small
1 Final Report, p. 104.
116 THE CHOICE OF A RATIO. [Cii. IX.
importance,"^ they must allow that the raising of
prices is not one of their main objects. We may still,
then, hope that they will reconsider their position,
and be brought to see that this attempt either to
inflate trade by altering the effect of contracts, or
to benefit our own country at the expense of India,
would bring them in perilously close company with
those who would advocate measures which may
fairly be described as "breaches of national good
faith, which nothing could compensate." It is, how-
ever, to be feared that the strength of the bimetallic
movement lies in the desire to ease the burden of
debts, and thus stimulate commerce ; but, with the
hope that this is not the case, it may be worth
while to proceed to consider whether bimetallism at
a market ratio is or is not preferable to gold and
silver monometallism.
1 " A Bimetallic Primer," p. 53, H. C. Gibbs.
BIMETALLISM VERSUS MONO-
METALLISM.
Ch. X.] STABILITY OF PKICES. 119
CHAPTER X.
PRICES WILL BE STEADIER UNDER A BIMETALLIC
SYSTEM.
Thus far it has been assumed that bimetallism is By reject-
both a good and a practicable system, and the J^fi*^^ye*'^
question of the ratio has been debated on this may at
assumption ; the arguments discussed have all been pose of "
for or asrainst one form of bimetallism, and not for "^^'^y ,
• 1 1 1 rrn • argumenfs
or against the system as a whole. The question against bi-
whether market-ratio bimetallism is or is not pre- "^^t^^™-
ferable to monometallism remains to be considered ;
and those who agree with my conclusions on the
first point, may dismiss all the arguments against
bimetallism which are founded on its tendency to
artificially inflate trade, because, with the market
ratio, it will not have that effect. This disposes
at once of a large proportion of the objections
usually urged against this proposed currency reform,
because they are only applicable if a low ratio is
adopted.
It will be best to commence by considering the
merits of market -ratio bimetallism, and then to pass
to consider its demerits. As to its advantages, it is
120 BIMETALLISM V. MONOMETALLISM. [Ch. X.
urged that it will diminish such variations in prices
as are due to causes primarily affecting the precious
metals ; that it will remove great difficulties from
the path of the Government of India ; and that it
will greatly facilitate commerce between gold and
silver-using countries.
The With regard to the first of these alleged merits —
in prices t^e steadying effect of bimetallism — the arguments
would be QQ which this claim is based are of a somewhat
l6ss severe
under a speculative nature, though the claim is not generally
s^yS^^^ denied. Bimetallists hope to permanently fix the
relative value of the precious metals ; and if gold
and silver can be thus tied together, it appears
evident that any force, at present tending to cause
fluctuations in the value of only one of them, will
have a diminished effect when applied to the two
combined. The belief that this would be the case
rests, in the words of Mr. Foxwell, " upon the
general presumption that where you have two
sources of supply each equally likely to fluctuate
in quantity, the joint supply A\ould be more stable
than either of the separate sources. This is the
principle upon which you would go in choosing to
select for a water supply two sources rather than to
leave yourself dependent upon one, provided that
there was no reasonable presumption beforehand
that both sources of supply would follow exactly
the same variations." ^ If we look to the value of
the metals as articles of merchandise, the way in
1 Professor H. S. Foxwell's evidence before the Koyal
Commission on Agriculture of 1894, Q. 23838.
Ch.x.] stability of prices. 121
which the oscillations in prices would be checked
may be illustrated as follows : — A rise in prices
under bimetallism necessitates a fall in the value
of both the gold and the silver in currency. And
if silver coins fall in value, silver would flow out of
the currency into the market, thus causing a fall in
its value as an article of merchandise. Thus any
increase in the volume of the currency due to the
influx of gold would be partly compensated by a
decrease in the amount of silver in circulation;
whereas, under existing monometallic conditions,
no such compensating efiect is obtained. A given
disturbing influence would, therefore, produce less
disturbance in prices under bimetallism than under
monometallism. In fact, the variations from the
mean would be less, and, as it is to the extreme
limits reached by prices in their oscillations that
we should chiefly look in estimating the resulting
evils, this would be a great gain. As a single
example of this last truth, it will be readily con-
ceded that a manufactory might be closed altogether,
and hundreds of hands thrown out of work, by a
severe fall in prices ; whilst with a somewhat less
severe fall, the business might have struggled on ;
and that the relative suffering in the two cases
might be out of all proportion to the relative fall in
the prices. It can hardly be denied that separate
fluctuations do take place in the value of the two
metals ; for even those monometallists, who deny
that the fall in prices in England is largely due to
causes primarily affecting gold, have to search about
122 BIMETALLISM V. MONOMETALLISM. [Cn. X.
for independent causes aftecting the value of silver
in order to account for the alterations in its gold
price; both parties, in fact, consider that one or
other of the metals has recently varied in value
from causes not primarily affecting commodities.
And if we admit that the values of gold and silver
act, in some respects, as independent variables, and
if it is agreed that it is practicable to link them
together so that each may have an influence on
the value of currency after their marriage, it hardly
seems possible to deny that bimetallism would pro-
duce a certain steadying effect,
though the It would no doubt be most important if we could
prices since S^^ conclusive information as to the relative steadi-
1873 can- ness of prices before and after the abandonment
quoted in of bimetallism on the Continent. No one denies
that there has been a great fall in prices, and if
this fall has been due to forces previously con-
trolled by the bimetallic tie, it is probable that
we have not yet reached the normal condition of
things under the new currency arrangements. Of
course if this fall in prices has been harmful, and
if the forces producing this fall are still in opera-
tion, it is evidently most desirable that the restrain-
ing influence of the bimetallic laws should be again
brought into operation ; this point will, however, be
considered in connection with the discussion on the
increased use of gold in the future. Putting aside
the general downward trend of prices, and consider-
ing only relative unsteadiness or the minor oscilla-
tions, we find that there is little reliable information
favour of
this \-iew
Ch.x.] stability of prices. 123
to guide us. The time has been too short for such
comparisons ; and, moreover, so many other factors
have been at work that the separate results of these
changes in the condition of the currency cannot be
disentangled. It is, however, asserted that the tables
of index numbers of general prices do not tend to
support the view that prices have been more un-
steady under existing monometallic conditions. On
the other hand, the price of silver has not only been
falling, but has also become more unstable than in
the past ; and as far as that is an indication of the
movement of silver prices, it would seem to confirm
the theoretical conclusions as to the steadying effect
of bimetallism.
But although it is impossible to prove from actual If bi-
figures that a bimetallic standard tends to be more ^^gg steady
stable than one based on a single metal, yet this P"?^^', ^*
truth is seldom denied by those who have studied edly affords
the subject, even if they are keen in the mono- ^g^^' .
metallic faith. And, if this is admitted, it must be favour of
held to be a point in favour of bimetallism ; for the ^^^^ ™'
rise and fall in prices, due to variations in the value
of the currency, must help to create periods of de-
pression and inflation, and to produce other evils
arising from alterations in the burden of indebted-
ness, which are in almost every way harmful to the
trade and to the well-being of the community ; and
these evils would thus be minimized by means of
bimetallism. It has, however, recently been demon-
strated by Professor Edgeworth that, according to
the Calculus of Probabilities, the steadying effect
124 BIMETALLISM F. MONOMETALLISM. [Ch. X.
of bimetallism may be expected to be relatively
small. Even if the variations in average prices
Avere solely due to changes in the conditions
primarily affecting the precious metals, according
to these calculations these variations would not be
very greatly reduced by the introduction of the
joint standard.^ But variations due to other im-
portant considerations, such as the state of credit,
are superimposed on these monetary variations in
prices ; and for this reason the comparative increase
of stability in prices due to bimetallism would, it
is said, be very small indeed. Whether Professor
Edgeworth's conclusions will be accepted in their
entirety by other economists remains to be seen.
But his examination of the subject should at all
events make us pause before attaching any very
great weight to this plea in favour of bimetallism.
^ In ordinary language, only in about the proportion of 10
to 7 {Journal of the Boyal Statistical Society, September, 1897).
Note. — It can, I think, be proved that the adoption of the joint
standard would increase the stability of prices for other reasons
besides the one given in the text, which has regard only to the
question of supply ; especially if the ultimate rather than the
immediate results of such a reform are under consideration.
Let us suppose the supply of both metals absolutely invariable.
We may look on this supply, in the case of each of the two
metals, as falling into two reservoirs, one representing the metal
in the arts, and the other the metal in the cmrencies. In each
case free coinage connects the two reservoirs together, so that
they must remain at the same level ; the level representing the
value of the metal. An effective bimetallic system would connect
Ch. X.] STABILITY OP PRICES. 125
the whole mass of silver with the whole mass of gold in a similar
way, and prevent any variations in relative value ; and this it
would do as effectively " when only one nation is bimetallic as
when the whole world adopts the system " (Dr. Irving Fisher,
Economic Journal, September, 1894, p, 536). If the size of
these reservoirs varies, the level of the liquid in them must vary
also ; and, in this way, the effect of variations in demand may be
represented. If the size of the reservoir changes through a
portion only of its retaining wall moving, then the larger the
surface of the reservoir, the less will be the change in level thus
produced. In this way the effect of such demands for currency
as that created by a single nation resuming specie payment will
be represented. And it follows that the greater the number of
nations adopting any particular standard, the greater will be
the stability of prices as measured by that standard. But there
is also another principle to be held in view. The average
demand for the metals for the arts throughout the world changes
very slowly, and the level of the liquid in the metal-in-the-arts
reservoir would rise or fall with great uniformity, if no other
changes were taking place ; whereas the level in the metal-in-the-
currencies reservoir may bo subject to great variations through
changes in monetary legislation, etc. "When the two reservoirs
are connected, the larger the surface of the more stable reser-
voir in comparison witli the more unstable reservoir, the less
will be the variations of level in the joint system. Hence it
follows that the greater the proportion of the standard commodity
employed in the arts, the steadier will be prices as measured by
that standard. If the gold standard were to be imiversally
adopted, instead of occupying a Umited area as at present, prices
would be more unstable because of the smaller proportion of
metal employed in the arts, and more stable because of the
greater number of nations adopting the same system ; the latter
influence, I believe, preponderating in the end. In considering
the stability of the joint standard, it must be remembered that,
according to the quantitative theory of prices, the total value of
the currencies of the world is not affected by variations in the
values of the metals composing them ; and that, at any given
moment, the size of the raetal-in-the-currencies reservoir may
126 BIMETALLISM V. MONOMETALLISM. [Ch. X.
be regarded as not varying with the system of currency in force.
Thus, in comparing bimetallism with universal monometallism,
the size of the reservoir of metal in the currencies will be the
same in the two cases ; whereas the res6rvoir of metals in the
arts will evidently be approximately twice as big with effective
bimetallism as it would be with universal gold monometallism.
Hence it follows that the joint standard, even if only partially
adopted, but effectively maintained, would immediately increase
the stability of prices as compared with a universal gold standard,
both because of the gi-eater proportion of metal in the arts, and
because of the greater volume of metal effected by any variations
in demand. This view of the matter does not appear to me to
have been sufficiently considered by Professor Edgeworth or
other economists.
Ch. XL] FOREIGN EXCHANGES. 127
CHAPTEK XI.
ADVANTAGES OF A STEADY RATE OF EXCHANGE
WITH SILVER-USING COUNTRIES.
Besides claiminc: the greater inherent stability of The dis-
cussion 01
the joint standard, bimetallists have also urged the indirect
that the general level of prices in gold-using tJ^^^^*!^
countries has been lowered, not only by causes silver-using
primarily affecting the value of gold, but also postponed
by the indirect influence of commerce with silver- to Chapters
• • 111- IT -11 1 XXI. and
using countries ; and that bimetallism will be a xxil.
cure for this evil. This raises the most difficult
point in the whole of this difficult controversy, and
one which it will be convenient to postpone until
after the discussion of the effect of rising and falling
prices on trade. It will, then, be seen that an altera-
tion in the value of silver, though it will produce
no ultimate effect on the level of gold prices, will
temporarily disturb trade in an injurious way ; and
that this is a trouble which would, of course, be
cured by tlie adoption of a common standard. The
bimetallic contention on this point appears there-
fore to be partly, though not wliolly, justified.
128 BIMETALLISM V. MONOMETALLISM. [Ch. XL
The When we pass on to consider the troubles which
experienced ^^^® arisen in India (especially before the closing
by silver- of the mints) and in other silver-using countries,
countries 8,8 a direct result of fluctuations in the rate of
^^^- ^ii" h exchange, we are luckily on less debatable ground.
India, on Here the evils are not denied, and all that is urged
Encrease ^^ ^^V^^ ^® *^** ^^^^ ^^^® ^^^^ greatly exaggerated,
in the and that resulting disadvantages have to be fairly
fixed debts weighed in considering any proposed change. The
are not appreciation of gold in comparison with silver, which
has recently taken place, means that the number of
rupees which have to be given in exchange for a
given amount of gold has been increasing. India
has contracted large debts, the interest on which is
payable in gold ; and, as the revenue is collected in
silver, this change in the relative value of the metals
has necessitated an increased sum being raised by
taxation in order to pay the increased amount of
silver representing the fixed gold interest on these
debts. An increase of taxation is objectionable in
any country, but it is especially objectionable in
India, where the poverty and the conservative
habits of the people make it almost impossible to
impose new taxes. Moreover, the movements in the
rate of exchange, whilst the mints were still open,
made it extremely difficult for the Government of
India to foretell, with any approach to accuracy,
the number of rupees which would be required in
any one year for the payment of this interest, for
the purchase of any stores in England, or for other
payments which had to be made in gold ; and the
CH.XI.] THE GOVERNMENT OF INDIA. 129
inconveniences due to inaccurate budget estimates
were, therefore, constantly felt. In the opinion
of the monometallic members of the Gold and
Silver Commission "there can be no doubt that
the uncertainty created by the want of a fixed
ratio, the apprehension of a further fall, and the
impossibility of determining to what point that
fall may reach, do make the task of the Govern-
ment of India a very difficult one, and constitute a
real and very serious evil ; " ^ whilst the bimetallic
members (amongst whom were to be found the only
Commissioners who had any personal experience of
India) declared that " the uncertainty attaching to
the future must be a matter of great embarrassment
to the Government " ; ^ whilst Sir L. Mallet alluded
to the " injurious, not to say disastrous effect of the
absence of a common standard between this country
and its greatest dependency."^ It is certain that
if bimetallism could be maintained as a permanency,
this difficulty would be completely removed for the
future ; here, therefore, we have an undoubted merit
of the proposed system as compared with silver
monometallism. It is true that the Government
of India, in order to diminish the burden of existing
debts, would have preferred, whilst the mints were
still open, to have adopted a ratio considerably
lower than the ratio governing the market; but
this preference is no argument against market-ratio
bimetallism as compared with monometallism ; for
they appeared to regard " the re-establishment of a
1 Final Keport, p. 63. '■^ Ibid., p. 98. -' Ibid., p. 121.
K
130 BIMETALLISM V. MONOMETALLISM. [Ch. XI.
fixity of ratio between gold and silver as of even
greater moment than the restoration of silver to its
former value as compared with gold." ^
lu cou- The difficulties above described were so keenly
Tihes? ^^^^ ^y *^^ Government of India that, in 1893, it was
troubles decided to close the mints to the free coinage of
adopteclThe silver, and to allow the public to purchase rupees
monopoly- yfH}^ gold at the rate of fifteen rupees to the sove-
system. reign, or one shilling and four pence the rupee. It
is thus intended, by creating an artificial scarcity
of rupees, to force up their value, and therefore,
probably, their gold price. The gold price of the
rupee will, however, be prevented from rising about
the point at which rupees can be purchased for
gold ; because, at that point, new metal will com-
mence to flow into the currency. And when the
gold price of the rupee is raised to this limit, a
stable rate of exchange between rupees and gold
may, therefore, be established. The price of the
rupee has not yet risen to the gold limit, and
this system — the system of monopoly rupees — has
not yet been long enough in existence to enable
us fairly to judge of its results. It is probable
that this reform will be successful in creating a
steady rate of exchange between monopoly rupees
and gold, and in lessening the anxiety of the
Government of India as to the future ; ^ but, whether
1 Final Report, p. G3.
2 It is certain that the closing of the mints will tend to slowly
raise the value of the rupee. But there are no gromids for
being ceilain that the napee will rise in value more quickly than
any particular article of merchandise, such as gold is in India.
Ch. XI.] MONOPOLY RUPEES. 131
it does so or not, it is evident that the rupee
will no longer be valued by the silver it contains ;
and also that the same disquieting influences
which, it is alleged, hampered the trade between
India and gold-using countries before the closing of
the mints, will, in future, be introduced into the
trade between India and ordinary silver-using
countries.^ If all the great commercial nations
were to adopt gold monometallism, the difficulties
arising from fluctuations in the rate of exchange,
in so far as they are due to currency causes, would,
no doubt, vanish. But, even with regard to India,
such a proposal is not certainly practicable; for,
according to Sir Kobert Griflfen, "the weight of
Indian expert opinion," as far as he could judge,
" as to the desirability and even the practicability
of a gold standard for India is entirely against "
the views of those who advocate that proposal.^
The difficulty of accomplishing such a reform
presumably lies both in the expense of creating
the necessary gold reserve, and in the danger of
discontent (also inherent to the present system)
because of the fact that the hoards of silver
accumulated by the natives would no longer be
convertible weight for weight into rupees. On the
merits of this controversy as to the future policy
The increasing use of gold by other nations may raise its value
with such rapidity as to render this method of introducing the
gold standard into India an impossibility.
^ Report of the Committee to inquire into the Indian Cur-
rency, 1893, p. 30.
'^ Times, September 25, 1897.
132 BIMETALLISM V. MONOMETALLISM. [Ch. XL
for India I do not pretend to judge ; but I have no
doubt that the monopoly-rupee system is thoroughly
unsound, and should only be tolerated as a tem-
porary arrangement.
Fluctua- The case of India is an exceptional one, but it
exchano-e ^^^^^^^^ ^® denied that fluctuations in the rate of
constitute exchange do cause an impediment to all commerce
doubted between gold and silver-using countries. The ratio,
burden on ^nd consequently the rate of exchange, has been
very unstable since 1873, and every transaction has
been subject to the risk of an alteration in the value
of the metal in which the payment had to be taken
or made.^ Under such conditions, commercial
transactions become more or less speculative, and,
though it is possible to insure against many of
the risks which are thus experienced, the price
paid for the insurance constitutes a true burden on
trade. Moreover, this same uncertainty as to future
rates of exchange discourages capitalists from in-
vesting their capital in countries where gold is not
the standard. English financiers, as already re-
marked, demand a higher rate of interest for a silver
than for a gold loan, as a compensation for the risk
of a further fall in the gold price of silver. The
higher rate of interest necessary to attract capital
into silver-using countries, no doubt, acts as a harm-
ful check on their development.
In reply to the arguments in favour of bimetallism
contained in this and the preceding chapter, it is
sometimes urged that fluctuations in the value of
1 Final Report of Gold and Silver Commission, p. 26.
Ch. XI.] FOREIGN EXCHANGES. 133
inconvertible paper currencies produce evils of the
same kind as those here described, but of even
greater magnitude ; and that these — the greater
evils — will be untouched by bimetallism. This may
or may not be true ; but the existence of one evil is
no argument against attempting to cure another.
If we turn from these theoretical considerations These
to the dry facts of commerce, it is true that it is yen^ences
difficult to show the evil effect of the harmful conld be
influences under discussion. It is true also that by bi-
experts, who alone probably can accurately estimate ™etallism.
the weight of these considerations, differ widely as
to the gravity of the dangers disclosed. But no one
denies that the alterations in the ratio constitute
an impediment to commerce, and all will admit, in
the words of the unanimous Keport of the Gold
and Silver Commissioners, that " everything which
hampers complete freedom of commercial inter-
course between two countries, or which imposes on
it any additional burden, is, undoubtedly, an evil to
be avoided or removed if possible. If, therefore, a
remedy could be devised to accomplish this end,
without involving the risk of other disadvantages,
there cannot be two opinions that it would be worth
while to apply such a remedy." ^ Either bimetal-
lism or universal monometallism would, without
doubt, effect a complete or almost complete cure,
and the question in each case is whether the remedy
is practicable, and whether its accompanying dis-
advantages do not outweigh its undoubted merits.
' Final Report, pp. 62, 94.
134 BIMETALLISM F. MONOMETALLISM. [Ch. XII.
CHAPTEE XII.
DISADVANTAGES OF BIMETALLISM — DANGERS RESULT-
ING FROM A BREAKDOWN OF THE SYSTEM.
The com-
monest
argument
against bi-
metallism
is that the
ratio can-
not be
main-
tained. In
Chapters I.
and II.
this view
was con-
troverted,
especially
as to
market-
ratio bi-
metallism.
What, then, are the objections to market-ratio
bimetallism ? The argument most commonly used
in conversation against this reform is that a fixed
ratio cannot be maintained ; that it is, and always
will be, impossible to alter the value of any material
by law, because value depends on inherent qualities
outside the scope of legislative power. This point
has already been discussed at considerable length in
Chapters I. and II., and it is not necessary to go over
the same ground again. It may, however, be as well
to recapitulate the arguments proving that the more
nearly the legal ratio adopted coincides with the
ratio in the market at the time of its adoption,
the greater is the probability of its being possible
to establish and maintain a bimetallic system. It
was seen in that discussion that the stability of a
bimetallic system depends on the fact that all, or
nearly all, either of the gold or of the silver must
disappear from circulation as full-weight legal
tender before the ratio in the market will differ
Cr. XII.] STABILITY OF BIMETALLISM. 135
from the legal ratio ; and it was shown that the
more nearly the ratio adopted coincides with the
" natural " ratio, the less likely is this to occur ; and
that the market ratio is the best, though an unre-
liable, indication as to what the " natural " ratio may
be. Market-ratio bimetallism would have little or
no effect on prices, and the precious metals would in
all probability, after its adoption, be no more or no
less valuable than at present ; there would, therefore,
be no reason to believe that either more or less of
them would be used in the arts than at present, and
there would be no tendency for either metal to be
withdrawn from circulation to any greater extent
than at present to supply such demands. The flow
of the metals from one country to another is deter-
mined by the difference of the ratio between their
values in the two places ; and as the establishment of
market-ratio bimetallism would produce no alteration
in the ratio anywhere, this reform would, therefore,
produce no tendency for gold to escape into those
countries which did not join the Bimetallic Union,
because no profit could be made by the traffic in
bullion. According to some authorities, gold would
be withdrawn from circulation and from the reserves
held against notes in order to be hoarded, Avith the
expectation that the bimetallic system would break
down and that gold would then go to a premium ;
in fact, it is suggested that there would be a vast
speculation for a rise in gold. Reasons were given
for believing that this might be the case if a low ratio
were adopted ; but that there would be little fear
136 BIMETALLISM F. MONOMETALLISM. [Oh. XII.
of such an occurrence with market-ratio bimetallism,
because no one could foretell which metal would
tend to go to a premium on the breakdown of the
system. With any ratio, moreover, this tendency to
speculate would grow less, the more the permanence
of the system became assured. These are the main
arguments in favour of the belief that a permanent
parity of exchange can be established if the ratio
adopted does not differ too widely from that ruling
the market.
Variations In this discussion, little was said about mint
re/tT- charges or seigniorage. It was shown how the ratio
value of in the market would always be the same as the ratio
silver^"^ fixed by law, because any difference between the two
bullion which might arise locally would be corrected either,
are possible iti ii- i i -x
if there on the onc hand, by metal being taken to the mint,
cha™^s* ^^' ^^ *^^ other, by coin being melted down to
little incon- Supply the demand in the market. But this argu-
would how- iiient assumed that the various governments would
ever, be ^yt only coin metal in unlimited quantities, but also
cfiiLSGu in
this way. that they would make no charge for so doing. If a
charge were demanded for minting, either to cover
the actual cost of the process or to be a source of
revenue to the State, then it is possible that the
ratio in the market might differ from the legal ratio
to an extent proportional to that charge ; for, assum-
ing a difference between the legal and the market
ratios to exist, if coins of the undervalued metal were
melted down, and exchanged in the market for the
other metal in bullion, and if this bullion were then
taken to the mint to be coined, a net profit on the
Oh. Xir.] MINT CHARGES. 137
transaction would only be made if the legal ratio
differed so widely from the ratio in the market
that the gross profit on the transaction was more
than sufficient to pay the mint charges. Thus, with
a seigniorage system, the ratio in the market might
not accurately coincide with the fixed legal ratio*
and might, therefore, vary within certain fixed
limits. But if it did not pay to melt do^vn under-
valued metal in this way, it would remain in
circulation, and it would continue to circulate at
the legal ratio. As it is the ratio between the
value of the coins that we desire to fix, and as this
would not therefore be affected by mint charges or
seigniorage, there is no reason to think that these
slight variations in the ratio in the market would
cause any inconvenience as far as internal trade is
concerned. It is, however, conceivable that slight
variations in the rate of foreign exchanges might
be caused in this way.
Monometallists often urge that history proves the The ebb
falsity of the theories of bimetallists ; but the study metairin"
of Shaw's "History of Currency," and of other pa^t tinges
works written in support of that view, leads me to countries
exactly the opposite conclusion. All that is proved, J^^^ ^1^:
in my opinion, is that without international agree- metallic
ments there was in past times a perpetual ebb and ^tumen"**
flow of the precious metals between countries with against in-
different legal ratios, and that this led to constant bimetal-
changes in those legal ratios in order to endea- ^™-
vour to stop this movement. The experiment of
legalizing the same ratio in all countries was never
138 BIMETALLISM F. MONOMETALLISM. [Cxi. XII.
tried. It is true that there were, on this account, fre-
quent alterations in the legal ratio, but it is equally
true, I believe, that in the history of two and a
half, if not of six centuries, there is no example on
record of any change in ratio so great or so sudden
as that which has occurred during the last twenty
years — that is, since the repeal of the last bimetallic
laws. This can only be accounted for by the fact
that the old imperfect bimetallic laws, though they
differed in different countries, and though they
did encourage an interchanging movement of the
precious metals, nevertheless did tend to maintain
the mean ratio adopted as the ratio between the
metals in the open market. If that be so, the period
before 1873 is no guide as to the extent and amount
of the changes in the relative value of gold and
silver which we may expect in the future in the
absence of bimetallic legislation.
The chief As long, therefore, as there is no way in which
bimetal-^ the £800,000,000 of gold in currency can be other-
lism is the wise absorbed, we may predict with confidence that
breaking i-iiT n • in
of inter- a bimetallic system at a market ratio would not
national jjj-eak dowQ, granted the continuance of the inter-
ments, national agreements. Of course the most probable
is small danger is that these treaties would be broken or
with a neglected by some of the contracting parties, thus
ratio creating a reservoir large enough to receive all
system. ^j^g g^j^j circulating in the remaining bimetallic
countries. But the gold in the faithful bimetallic
countries would only tend to flow out of those coun-
tries if a change in the ratio took place in the
Ch. Xir] FAILURE OF BIMETALLISM. 139
deserting countries — if, that is, a difference were
established between the ratio in the two areas ; and
the more nearly the legal ratio adopted coincided
with the ratio in the market — or the smaller the
change of ratio brought about by the establishment
of the system — the less likely would it be that
there should be any change at its abandonment.
Thus, with market-ratio bimetallism, desertions
from the Bimetallic Union need not necessarily
cause the system to fail generally ; and it is, more-
over, difficult to see what should tempt any nation
to disregard their obligations if that ratio were
adopted.
Not only must the probability of a failure of The evils
bimetallism be discussed, but the probable damage on^the'^^"
caused by such an event, should it occur, must form breakdown
. . 1 1 • i~i • ^^ niarket-
a material element in our calculations. Certain ratio bi-
arguments in support of the view that a breakdown J^^*^brno
of a low-ratio system would be followed by years greater
of trade depression, the force of which bimetallists produce/''
can hardly deny, have already been discussed : but ^y tlie
, same torces
no suggestion has yet been made as to any dangers under
which would result from the abandonment of market- ™°f *',',.
metallism.
ratio bimetallism. If we look to the teaching of
history, we shall see that when the Latin Union
forsook bimetallism in favour of their present
standard, no sudden panic or collapse occurred, and
the alteration in ratio, which subsequently took
place, was a gradual process. If market-ratio bi-
metallism were now introduced, there is no reason
to believe, judging from this example, that any
140 BIMETALLISM F. MONOMETALLISM. [On. XII.
immediate consequences of a serious nature would
accompany its breakdown ; nor, it will be seen, can
we predict that the evils due to any subsequent
slow alteration in the ratio after such a break-
down would be any more harmful than the troubles
which the fates have in store for us from similar
causes if we maintain the existing currency systems,
Monometallists frequently urge that there has been
no trade depression during the last twenty years;
or, if they admit its existence, they declare that
it has had nothing to do with currency causes ;
if they adopt either of these attitudes they cannot
point to the past as a proof that any evil results
whatever will follow the rupture of a Bimetallic
Union; in fact, they would hail the event as a
blessing. But if it is admitted that evil results
would follow the abandonment of bimetallism, it
will not do only to look at one half of the picture,
and only to consider those evils which would arise
if some natural tendency of the metals to vary
in value should burst the bonds of bimetallism,
without endeavouring to estimate the probable
eifects of the same causes under the existing
systems. It must be admitted that it is but a
choice of evils. For example, if it be assumed that
the disruptive forces could only be restrained by
legislative means for, let us say, half a century, then
the relative advantages and disadvantages would be
as follows. If, on the one hand, the existing gold
and silver monometallic systems were maintained,
we should have fifty years of fluctuating exchanges,
Ch. XII.] FAILURE OF BIMETALLISM. 141
with a general drift in one direction ; and, if that
direction were towards the further depreciation of
silver, the difficulties of the Governments of the
United States and of France would soon become
serious. If, on the other hand, bimetallism were
introduced, we should have half a century of steady
exchanges and of steadier prices, followed by what-
ever evils might accompany the sudden return to
monometallism under such conditions. No doubt
when the restraining force was removed at the end
of the bimetallic period there would be a more
rapid change in the ratio than would take place
if it had been free to act during the whole inter-
val; but there is no reason to think that the
total change would be greater in the one case than
in the other. The choice may, in fact, be likened
to that between a lingering ailment and a sharp
short illness, and, of these, it is hardly possible
to be quite certain which would be the greater
evil.
These considerations, therefore, lead to the con- Market-
elusion that there is a high degree of probability ^etalHsm
that market-ratio bimetallism could be maintained ; if once
that it is probable that it would be maintained ; jg ij^eiy to
that the evils accompanying its abandonment may ^^ P^'^"
be easily exaggerated ; and, should such an event but, if it
take place, that the troubles due to alterations in t^e damage
the ratio might be little or no more than those will not be
which must accompany the present system. If°
these conclusions are correct, it is evident that, as
bimetallism has been proved to possess undoubted
142 BIMETALLISM F. MONOMETALLISM. [Cii. XII.
advantages, other argumeuts ought to be forth-
coming before it is rejected. The additional ob-
jections against market-ratio bimetallism, which
are few in number, will now be considered.
Cii. XIII.] OBJECTIONS TO BIMETALLISM. 143
CHAPTER XIII.
OTHER OBJECTIONS TO BIMETALLISM.
In the first place it is claimed for gold that it is Silver,
intrinsically a better metal for coinage purposes j^^^^gj. f^^j.
than silver, both because it forms a more stable a ffiven
t ^ n ^ 111 -x-- value than
standard oi value, and also because it as m every gold, is less
way more convenient ; and, on these assumptions, it convenient
is urged that the adoption of the joint standard small
would be an injury to existing gold-using countries. ^utToM
As to the relative stability in value of the two would not
metals, something will be said later on ; but it out of
cannot be denied that gold coins are more conve- circulation
o by market-
nient than silver coins, except for the purposes of ratio bi-
small change, being lighter in weight for a given ™^ ^^
value. As to the relative cost of conveyance of the
two metals, the greater weight of silver is said to
be almost compensated for by the fact that gold
is more easily stolen, and requires more careful
packing. Thus gold is the more convenient metal
of the two for coins of considerable value, and if
it could be shown that bimetallism would tend to
drive it out of circulation in considerable quanti-
ties, the proof would afford, no doubt, a legitimate
144 BIMETALLISM V. MONOMETALLISM. [Ch. XIII,
argument against this reform. As far as can be
seen this would not be the case with market-ratio
bimetallism. The amount of either metal in cir-
culation depends on the total amount of metal in
existence, and on the amount used for hoarding
and in the arts ; it is the difference between the
two. If the introduction of bimetallism did not
cause any variation in the relative values of the
two metals (that is, if we adopted the market ratio),
there is no reason why it should cause any variation
in the relative output of gold and silver from the
mines ; and, if this reform did not alter their
relative values, neither would it affect the relative
demand for the two metals either for use in the
arts, or for hoarding ; and if neither the total pro-
duction of the two metals, nor their total consump-
tion for non-monetary purposes is affected by bi-
metallism, the difference between the two, or the
amount used for currency, will be unaffected also.
The amount of gold in circulation will not, there-
fore, be decreased, and no inconvenience will on the
whole be caused in this way. It is possible, however,
that the increased use of gold in the currencies of
the East might necessitate more silver being used
in the West in order to adjust the balance, as it
were ; and it may be true that we should suffer, in
this way, for the increased convenience of silver-using
countries. But, if the metal used for coinage is
determined by the habits of the people, as is often
asserted by monometallists, there is no reason to
expect that such a change will occur to any material
Ch. XIII.] TOKEN COINS. , 145
extent. And it must be remembered that if more
silver did flow into the Western currencies, the
inconveniences thus caused might be completely,
or almost completely, obviated by the increased use
of paper money.
Objection has also been taken to market-ratio "With the
bimetallism on account of the cost and inconvenience ^j-ef
of increasing the weight of silver token coins so as ratio, the
to bring them up to their full metallic value. This silver coins,
is, no doubt, jpro tanto a legitimate argument. It ^^ *^^°
is true that a vast amount of silver has been coined would be
at a low ratio. But it is doubtful whether much fncre Jed
or any expenditure in recoining this metal would But the
token
prove to be necessary, because some or all of these system
existing token coins might remain in circulation ^^^^^ ^^
1 /. mi 11- retained,
after the proposed reform. The only objection to a aad greater
moderate use of token coinage is the temptation |^^p™^g^_
it affords to false coining. This does not appear to tiWe notes.
be a very serious evil, and it should be weighed
against the many merits of the token system, some
of which we are apt to forget. Token coins are, of
course, convenient as being lighter than those which
contain their full weight of silver ; this is true now,
and it would be true under a market-ratio bimetallic
system. We all recognize the convenience of having
a sufficiency of small change freely circulating about
the country, and this is greatly facilitated by the
token system ; in the first place, the profit made by
governments in issuing coins at a greater value
than the value of the metal they contain affords a
strong inducement to get as much small change
146 BIMETALLISM F. MONOMETALLISM. [Ch. XIIL
into circulation as possible ; and, in the second
place, there is no temptation to melt down such
coins for use in the arts at home or for export,
because, when melted into bullion, they lose much
of their value ; no one exports shillings, because
they are only worth about sixpence abroad. In
bimetallic discussions we often hear of the danger
of gold leaving the country, but never of the danger
of a scarcity of silver ; yet under a bimetallic
system, with no token coinage, a diminution in the
amount of available silver might, in some countries
and under certain conditions, become a source of
very considerable inconvenience. Thus there are
excellent reasons, besides the mere cost of recoinage,
why something of the nature of the existing token
system should be retained ; and, if it is retained,
the plea against bimetallism, on the ground that it
will increase the weight of silver coins, is completely
answered as far as small change is concerned. It
would, however, be necessary to coin a standard full-
weight silver coin, because the mints would not,
of course, be freely open to the coinage of token
coins; but, by means of an increase in the use of
convertible notes, much of this heavy silver might
be allowed to remain in deposit in the vaults of the
banks. To still further obviate these inconveniences,
it has been suggested — and the suggestion is a
good one — that the mints should issue notes against
deposited bullion, without actually going to the
expense of coining the metal at all. But, whatever
plan was finally adopted, there' can be no doubt
ch. xiil] effect on contracts. 147
that the difficulties due to the increase in the
weight of the new silver coinage might be more or
less completely overcome by means of an increase
in the use of notes, and by the retention of the
system of token coinage.
In discussing the choice of a ratio, it was seen The effect
that forces would be brought into play which would ratS^t^ **
raise, or tend to raise, the general level of prices if metallism
a low ratio were adopted. This would, of course, contracts "
alter the effect of contracts, for both the interest ^'°"\^^®,
small, and
and the capital due to creditors would become less the in-
valuable ; and the result would, therefore, be in- 1^ |^®_ ^
equitable. But, if the ratio in the market were <iividual
adopted as the legal ratio, no change in prices would ° "
be caused by this reform, and this adverse plea falls
to the ground. It has, no doubt, been frequently
suggested that bimetallism of any kind would be an
unfair interference with existing contracts, because it
would give to the debtor an option, not contemplated
in the contract, of paying in either metal, whichever
might be cheapest. But this objection assumes the
failure of the system ; because, if it is successful, the
two metals would remain permanently at the same
relative value, and one of them could not be said, in
this sense, to be cheaper than the other. Directly
the one metal did become cheaper than the other,
all debts would be paid in that metal, and the cir-
culation of the dearer metal as legal tender would
entirely cease ; and this has been seen to be a very
improbable contingency. The objection may, how-
ever, be raised in another form. If gold prices
148 BIMETALLISM V. MONOMETALLISM. [Ch. XIII.
continue to fall, it is true that, in gold-using
countries, creditors and the receivers of fixed gold
payments will find their receipts becoming more
and more valuable under the existing system.
Whereas, according to the views of bimetallists,
international bimetallism would place a check on
the increasing use of gold, and consequently on the
increasing value of all payments measured by that
standard. The creditor would, in fact, by this
reform, be deprived of the advantages which he
may now expect to derive from the effect on gold
prices of any further abandonment of the use of
silver, and, to a certain extent, of the advantages
due to any rise in the value of gold caused by
any increase in the use of that metal in the arts.^
On this assumption, the debtor would, no doubt,
gain and the creditor would lose to a certain extent
by the introduction of market-ratio bimetallism.
It may perhaps be worth noting that it is possible,
though, I think, improbable, that the creditor in
gold-using countries might be benefited by the
adoption of bimetallism. The belief in the con-
tinuation of the recent fall, both in the general
level of prices and in the price of silver, may be
fallacious. If, under existing currency conditions,
we are in reality about to enter on a period of rising
prices, and if silver is about to rise in gold price,
then the introduction of the joint standard at the
^ In just the same way that the debtor in India, by the
introduction of the monopoly-rupee system, has been deprived
of the benefits of a fall in the value of silver.
Ch. Xm.] EFFECT ON CONTRACTS. 149
present moment would act as a check on this
rise in prices ; and international market-ratio bi-
metallism would prove to be a benefit to the creditor
rather than to the debtor. But, in either case, the
problematical injustice to the individual thus fore-
shadowed is, I think, of the type and of the degree
which should be neglected in considering broad
national issues.
It is more material to observe that if it would be The in-
dishonest to interfere with existing contracts by or the
giving the debtor, by introducing a bimetallic abandon-
system, an option as to the method of payment metallism
which was not taken into consideration when the^^^ ^""^
contract was agreed to, it would be equally dishonest, censure if
by abolishing a bimetallic system, to deprive the of contracts
debtor, to the supposed advantage of the creditor, of ^^^J1 °°'
the option virtually included in his contract as to altered
the metal in which the payment was to be made ; the ^^^ ^'
establishment or the abandonment of bimetallism
are in this respect equally open to attack. Mono-
metallists are apt to accuse the advocates of bi-
metallism of dishonesty ; but it is evident, as far
as this consideration is concerned, that they ought
equally to censure any nation, like the United States
or France, which abandons bimetallism in favour of
monometallism ; and an impartial consideration of
this fact will lead, I think, to the conclusion that
both charges may, under certain conditions, be
dismissed. It must be remembered that, at the
termination of the Latin Union system, no sudden
alteration in the ratio took place, and the holders
150 BIMETALLISM F. MONOMETALLISM. [Ch. XIII.
of gold and silver bullion, coins, debts or securities
did not immediately find their situation altered ;
the introduction of bimetallism would, in all proba-
bility, equally escape the charge of dishonesty if, in
like manner, it caused no sudden change in liabilities
or credits; and this could only be the case if the
ratio in the market were selected as the bimetallic
ratio.
It is a If a bimetallic system, after being introduced,
ar^*™**r ^^^^^ *^ break down, each nationality might, it may
against bi- be urged, then drift into or adopt a monometallic
that 3^01). system with the cheaper metal as their standard,
portunity thus lessening the burden of national and com-
is afforded • ^ -, ^ -m ■, • t. ^
of adopting mercial debts. It the parity oi exchange is not
^g^^J^^gP^^ maintained, it has already been seen that the
the Stan- cheaper metal will be used in all legal tender
system transactions, to the complete Exclusion of the dearer
shoTJd metal. The risk of drifting, in those circumstances,
down. into monometallism with a depreciated standard is,
therefore, an objection to bimetallism, and one that
must be considered in balancing its advantages
and disadvantages. As to the deliberate adoption
of monometallism with this object, any change in
the currency no doubt makes it more easy to accom-
plish other changes — an argument that may be
urged against all reform — and the intervening bi-
metallic period would, therefore, make this kind of
veiled repudiation of existing liabilities slightly
more probable. This inequitable method of easing
the pressure of debts, contracted before the estab-
lishment of bimetallism, could only be adopted by
Ch. XIII.] THE CHEAPER METAL. 151
any existing monometallic country if, at the break-
down of bimetallism, monometallism with a different
metal to that in use at the present time were
adopted ; because to return to the use of the metal
which was legal tender at the time at which the
contract was made can hardly be called inequitable.
Are existing gold-using countries likely to adopt
silver monometallism in such circumstances in order
to lessen the burden of debts ? To me this seems a
very improbable contingency. As to silver-using
countries, it is true that they might adopt the gold
standard if they found, when the Bimetallic Union
had dissolved, that silver had risen in gold price ;
and, as far as their action affected debts contracted
in silver before the establishment of bimetallism, it
would no doubt amount to a kind of repudiation.
But if international bimetallism is ever established,
it will, I believe, only be abandoned as the result
of some unforeseen and very serious disturbance in
the relative values of the precious metals ; and the
risk of the kind of repudiation here under consider-
ation appears, therefore, to be small, and must,
moreover, be weighed against the evils which the
same causes would produce "Under monometallic
conditions.
With regard to all contracts made after the
establishment of bimetallism, the uncertainty as to
the metal in which payments would be made if the
system were to be abandoned would, it is suggested,
raise the rate of interest on loans as an insurance
against the risk of the depreciated metal being
152 BIMETALLISM F. MONOMETALLISM. [Ch. XIII.
selected. This is no doubt a legitimate argument ;
but if bimetallism were to last for some time, the
belief in its continuance would reduce the insurance
against this risk to a vanishing point.
The com- England has become, so monometallists declare,
mercial the great commercial centre of the world because
greatness /? i i i n- i • •
of England 01 her gold monometallic system ; because it is
to her *^^^ known that English debts are certain to be paid in
currency gold. If by this it is meant that gold monometallic
system, but ,. , , ^ i ^
toother nations must have great advantages m commerce
causes. over bimetallic countries, then the assertion may
indicate a reason for the commercial supremacy of
England in Europe in so far as it was gained during
the half-century before 1873. It cannot account
for our relative progress during the eighteenth
century, because all the great commercial nations
of Europe were then bimetallic. And as to the last
twenty-five years, the currency systems adopted by
our great European commercial rivals are so nearly
similar to ours in their general effects, that we are
practically competing on equal terms with them in
this respect — at all events as far as industrial enter-
prise is concerned ; and, as we should still compete
with them on equal terms after the establishment
of international bimetallism, it is difficult to see
why the change should materially influence our
position. In France no doubt silver coin is legal
tender to any extent, and if this " limping " standard,
as it is called, is in reality a disadvantage to that
country, it is one she can remove (at a certain cost)
at any time by altering her laws ; the existing
Ch. XIII.] ENGLISH COMMERCE. 153
system is (or may be) a disadvantage to France
rather than an advantage to us, and though we can
hardly be expected to advocate reform on the
ground that it will place the currency of a rival on
a sounder footing, it is questionable if that ought
to be a reason for resisting it. If monometallists
contend that our currency system has created a
general belief that England is less likely than other
nations to take any step which would have the
effect of a partial repudiation of debts, it may be
replied that if this belief really does exist, it is
due to our high reputation for commercial honesty,
which would remain as an advantage to us under
any sound system of currency. If it is contended
that our gold coinage gives us an element of
superiority in trade over silver-using countries,
the advantage, even if admitted, is one likely to
diminish as the use of gold monometallism becomes
more and more widely extended. But if, as seems to
me most probable, our commercial supremacy, such
as it is, is due to causes more deeply seated than
our currency system — such as our coal supply, our
accumulated capital and industrial experience, the
two centuries of internal peace we have enjoyed,
our naval supremacy, etc. — then no doubt this
objection to bimetallism, based as it is on the
supposed benefits we have received from mono-
metallism, is quite unsound. It must, however, be
admitted that London is the place where gold is
obtained with most certainty and ease, and that it
is difficult to tell how much this is the cause and
154 BIMETALLISM F. MONOMETALLISM. [Ch. XIIL
how much the result of London being such an
important financial centre. Bankers are, as a rule,
especially nervous as to the results of bimetallism ;
but, as Mr. Goschen has said, the primary cause
which makes London the great banking centre of
the world, "is to be found in the stupendous and
never-ceasing exports of England, which have for
effect that every country in the world, being in
constant receipt of English manufactures, is under
the necessity of making remittances to pay for
them." ^ If this is the correct explanation, there is
reason to think that our position will be maintained
as well under one system of currency as under
another, provided that we are at no disadvantage
compared with our neighbours in this respect. In
any case this is a national and not an international
argument against bimetallism. Of course each
nation must consider its own interests ; France and
the United States may desire a low ratio in order to
increase the value of their stocks of silver, or may
prefer a postponement of any detailed settlement
of the question in the belief that silver is about
to appreciate in value; other countries may have
individual circumstances to consider ; but those
who come to the conclusion that an international
bimetallic system would be an advantage to all
nations — their own included — must be prepared to
sink separate national considerations to a certain
limited extent in order to bring about a common
agreement.
1 *' The Theory of Foreign Exchanges," Goschen, p. 33.
RISING AND FALLING PRICES.
Ch-xiv.] the fall in prices. 157
CHAPTEE XIV.
ARGUMENTS BASED ON THE RECENT FALL IN PRICES.
All the objections which can reasonably be urged A bimetal-
against bimetallism with a suitable ratio have now, m^st not
I believe, been considered. This is, however, only ^® ^^™-. ,
one side of the argument ; lor the disadvantages the existing
attached to future currency arrangements, if bi- of'^t^fn^ •
metallism is not adopted, must be weighed in the
balance. The problematical evils of bimetallism
must not be compared with the existing condition
of things, for we are passing through a transition
period. The saying, " A devil you know is better
than a devil you don't know," expresses the spirit of
many of the arguments in favour of gold brought
forward by those who admit that the present
currency arrangements are anything but perfect;
but the truth is that the immediate past is, in any
case, but little guide as to the future. It is said
that bimetallism would be a leap in the dark, but
the diagram showing the ratio in the market may
well lead any one to doubt which of the two ought
to be described in that way — a bimetallic currency
policy resembling in many respects that which
158 RISING AND PALLING PRICES. [Ch. XIV.
existed for centuries up to the year 1873, or a
monometallic policy, the full effect of which has
only been observable since the abandonment of the
last bimetallic laws at that date. We are now
leaping into the dark, if by that is meant that
unforeseen dangers may at any moment spring up
in our path. One of the great political parties in
the United States is advocating the free coinage
of silver without waiting for international agree-
ments ; and if it be true that the hidden spring of
this movement is the desire for a partial repudia-
tion of debts, it must be admitted that such a
method of repudiation would have been impossible,
and that this cry could not have arisen, as long
as the parity of exchange at the old ratio had
been maintained by the bimetallic tie. The great
change in the ratio which has taken place since
1873 has forced the government of India to adopt
a currency system which is defended by abso-
lutely no one, except as a stop-gap. Surely the
advent of such unexpected evils as these in the
space of only a quarter of a century is enough to
justify us in asserting that this is an epoch of
great monetary changes,
because The closing of the Indian mints is certainly the
m ftit^ most striking proof that we are passing through a
play a transition period, for this action was intended to
important ^^ * provisional step leading directly to gold mono-
part than metallism. But there are many other signs of
it does even .... « i
at present, instability in the currency arrangements of the
world. Eussia is moving in the same direction
Ch. XIV.] INCREASING USE OF GOLD. 159
as India, only even more decidedly. In Japan, a
country already accustomed to the idea of a gold
coinage, a law has been promulgated for the intro-
duction of a gold standard. China and Mexico
remain as the solitary great silver-using countries,
and China is likely to be largely influenced by
Russia and Japan as to her commercial policy.
Such an abandonment of the use of silver by these
countries will lessen the demand for that metal, and
will increase the demand for gold as its substitute ;
and this will certainly be a cause tending to
produce a still further fall in the gold price of
silver. The trouble may not stop here ; for, if
silver does fall still lower in price, the danger of
false coinage may make it impossible for the
governments of gold-using countries to maintain
the existing token silver coins in circulation. If
this proves to be the case, the weight of each token
must be increased; the silver coinage will have
to be withdrawn to be recoined into a smaller
number of pieces. The deficiency in the currency
thus created might be filled either by the coinage
of additional silver, or by the natural flow of gold
into the currency ; and, as in these circumstances,
silver coins would become inconveniently heavy,
the latter seems the most probable contingency.
If, therefore, as seems probable, the majority of the
existing silver-using countries do definitely adopt
a gold standard, not only will they absorb vast
additional quantities of that metal for coinage and
reserves, but more gold may also be required by
160 RISING AND FALLING PRICES. [Ch. XIV.
Universal
mono-
metallism
and inter-
existing gold-using countries. The world appears
to be drifting towards gold monometallism, and,
in discussing a hypothetical bimetallic future, we
must compare it with the probable monometallic
future, when gold will both be more in demand
and will play a far more important part than it
does at present.
The truth of this forecast may, of course, be
denied. The Silver Party in the United States may
carry their point ; and, if the mints are open to
the free coinage of silver without international
agreements, it is very probable that this would lead
to what would, in reality, be silver monometallism
in America. And, as to India, it may be urged that
the monopoly-rupee system must give way to a
true silver coinage. There is, however, nothing
in these views to dispel the belief that we are
passing through a period of great monetary unrest.
And, if it is true that there is to be such reaction
in favour of silver, it is evident that the evils due
to fluctuations in the rate of exchange will be more
severely felt in the future than at present, because
the volume of international trade passing between
gold and silver-using countries would be vastly
increased by such a change. But, in my opinion,
a movement in favour of gold is a more probable
contingency than a reversion to silver mono-
metallism.
Many currency reformers no doubt view the in-
creasing use of gold with complete satisfaction ; and
it is true that one of the most important benefits to
ch.xiv.] increasing use of gold. 161
be derived from bimetallism — the establishment of national bi-
a common standard of value throughout the world — will equally
would be gained equally effectively by means of Jj™^**!*.^
universal monometallism. The general movement in foreign
in favour of the gold standard may be said to ^''''^"°°^^-
indicate that this means of curing the evils due to
fluctuating foreign exchanges is more easy of attain-
ment than is the establishment of international
bimetallism ; if this is so, and it can be shown that
no serious evils will follow in its train, we have
here a strong argument in favour of monometallism.
The consideration of the objections to a universal
gold standard must, therefore, form an important
part of any discussion on bimetallism.
It is often asserted that the recent adoption of The
gold monometallism by various countries proves ^f ^oij ^y
that their governments consider that system to be silver-
preferable to bimetallism. This statement, how- countries
ever, gives an erroneous impression. Every silver- ^ofs not
using country can, at its pleasure, adopt the gold that mono-
standard ; but each, separately, is powerless to bring ™ ^^gfe ™
about a system of international bimetallism with a able to in-
common ratio. These two courses are not alterna- bimetal-
tives between which these governments can choose, li^ra.
and all that their action proves is that they con-
sider gold monometallism preferable either to
silver monometallism or to bimetallism without in-
ternational agreements. Granting, for the sake of
argument, that it is right for any country at this
moment to forsake the silver standard, all that this
indicates is that the advantage to any nation of
M
162 KISING AND FALLING PRICES. [Cu. XIV
having the same standard of value as the great
commercial nations of the world outweighs the
disadvantages, if any, due to the use of gold.
Silver-using nations may be right, under existing .
conditions, in adopting a gold standard; but this
does not prove that they would be \\'rong to adopt
international bimetallism, had they the chance of
doing so.
The In considering the evils alleged to be due to the
obiections . . n ij j. r. x.j. i.
uj-i-ed increasing use oi gold, we are at once brought to
against the consider various questions connected with the recent
more ex- „ ,, . . -tr i • i i •
tended use fall m prices. JNo one denies that there has, m
depend on Europe at all events, been a great fall in average
the e^dls prices during the last twenty-five years ; for a mere
in" prices, glance at any table of Index numbers is sufficient
to prove this assertion.^ Bimetallists, as a rule,
advocate their proposals on the assumption that
the abolition of bimetallism on the Continent
caused a fall in average prices ; that the fall in
prices caused a depression in trade ; and that the
re-establishment of bimetallism would, therefore,
produce a commercial revival. The argument can
hardly, however, be adduced in this form in favour
of market-ratio bimetallism ; for the introduction
of such a system would not even be an attempt
to force up prices to their old level. If it is
agreed that bimetallism is not to be made an
engine for inflating trade, we must accept any
injuries that have resulted in the past from falling
prices as troubles which time will cure, but for
* See Appendix.
Ch. XIV.] THE FALL IN PRICES. 163
which there is no other remedy. But if it is true
that the abandonment of bimetallism did cause a
fall in prices, and if it is also true that the fall
in prices has caused a depression in trade, then it
may fairly be argued that the re-establishment of
bimetallism will nullify some of the forces still
tending to lower prices, and that it will, therefore,
have a beneficial effect in lessening such evil
influences in future.
To fully consider the fall in prices and all its Division
results, would necessitate a lengthy inquiry into ar^ment
the statistics of trade, and that, as already stated, ^^^ four
does not come within the scope of this volume. A inquiries.
general outline of the points raised in the discussion
will, however, be given, and to do this it will be
convenient to divide the argument into four separate
inquiries —
(1) If bimetallism had been effectively main-
tained, would the fall in prices have been less rapid ?
(2) If prices had fallen less rapidly, would it
have been better for the general well-being of the
community ?
(3) Are prices likely to continue to fall too
rapidly under existing conditions ?
(4) Will the reintroduction of bimetallism check
the action of any of the causes tending to pro-
duce this fall in prices without producing any evil
effects ?
If all these questions can be answered in the
aflSrmative, then, we have a valid argument in
favour of international bimetallism.
164 RISING AND FALLING PRICES. [Cii. XV.
CHAPTER XV.
WOULD PRICES HAVE FALLEN LESS RAPIDLY HAD
BIMETALLISM BEEN MAINTAINED ?
Bimetal- The first question, therefore, for consideration is
lists claim ^vhether the abandonment of bimetallism in America
that the
demand for and on the Continent did cause a fall in prices ; or,
have been ^'•^ P^^ ^^^ inquiry in a more logical form, would
less and average prices have fallen less rapidly if bimetallism
AvoiUd had been effectively maintained? The bimetallic
hHi ^^h^d ^I'g^ii^snt in favour of answering this question in
silTermain- the affirmative depends on the monetary changes
old place which took place in 1873 and in subsequent years,
in the ^t that date, France took the first step towards the
systems of abandonment of the free coinage of silver. The
demand for gold also began to increase in Germany
at about the same time, because of the substitution
of a gold for a silver standard. In the Netherlands,
by a law passed in 1875, the adoption of a gold
coinage was authorized, and the free coinage of
silver, which had been the standard metal till that
date, was permanently suspended. By a convention
ratified in 1876, Norway, Sweden, and Denmark
the world.
Ch. XV.] DEMAND FOR GOLD. 165
adopted a common system of currency, based on the
single gold standard ; that previously in use having
been silver. The demand for gold for the United
States was created by the anticipated resumption
of specie payment on a gold basis in 1879 ; the
currency had been on an inconvertible paper basis
for many years before that date ; but, as regards the
state of the law, it had been bimetallic till 1873 ;
and, had specie payment been resumed without any
alteration in the law, the demand for gold would
probably have been less. Thus there have been
many demands for gold which would not have been
felt had silver been allowed to occupy its old place
in the currency systems of the world; and the
effect of these demands has been, according to the
bimetallic view, to raise the value of gold, and
therefore to lower the price of all things measured
by gold as a standard. Prices, according to this
view, would have remained stationary, or, at all
events, would have fallen less rapidly had bimetallism
been maintained.
The reply most commonly made by monometallists The recent
to this argument is that production has increased price" jg
enormously during the last twenty -five years, and said to be
that this is the true explanation of the fall in jncreasino-
prices. production.
In examining this contention, it is necessary to
be extremely careful as to the exact meaning which
it is intended should be attached to the various
words employed ; for there is no more fruitful source
of confusion than the use of terms with vague
166 RISING AND FALLING PRICES. [Ch. XV.
significations. It will be as well, therefore, first
to clear the ground in this respect.
Definition The " value " of any object means, according to
of value, jjiodern economists, the power of purchasing other
commodities which the possession of that object
conveys. If we imagine a minute sample of every
commodity, using the term in its widest sense, to
be thrown together as one lot on the market, the
size of the sample in each case being in proportion
to the amount of business done in that commodity ;
and if we also imagine a commodity which always
agreed in value and in price with this lot of
samples, we may conveniently give the name of
"the average commodity" to this hypothetical
substance. The value of any object will then be
measured by the amount of the average commodity
which can be obtained in exchange for a given
measure of the object in question. And, as this
is a general definition, it must also be true in the
case of gold, silver, and paper notes ; that is to say,
it holds good of all things whether they happen
to be used as standards of value or not. Thus the
value of gold is measured by the amount of the
average commodity which can be bought for a
sovereign.
Definition The "price" of a commodity is the number of
of pncB.
units of the standard of value which have to be
given in exchange for a given measure of the com-
modity in question; in fact, it is the amount of
money for which it can be bought. In order to
connect the terms " price " and " value," let it be
Oh. XV.] VALUE AND PRICE. 167
supposed that the exchange here contemplated is
not made directly, but that both the money — let us
say the sovereigns — and the object are first ex-
changed for the average commodity. It has been
seen that each sovereign will exchange for the
amount of the average commodity which may be
taken as representing the value of gold ; and the
object to be bought will exchange for an amount of
the average commodity which represents its value.
From this it is evident that the price to be paid
is determined by the number of measures of the
value of gold which go to make up the measure of
the value of the object in question. That is to say,
price is the ratio of the value of the commodity in
question to the value of the standard ; and price will
vary with every change in the value of the com-
modity, and inversely with every change in the
value of the standard. To many minds this will
seem to be almost self-evident ; but the proof has
been given in extenso because it is a fundamental
proposition without which the whole subject is chaos.
The following may perhaps be given as a useful The value
illustration of the confusion due to the inaccurate gtanckrd
use of words. The price of a commodity, according ^^^ average
,1^.... ., n pnces are
to the definition just given, is the amount ot money measured
which has to be given in exchange for a unit ^° ^^^o^g™^
measure of the commodity in question ; and from being the
this it follows that the measure of average prices is ^f^t^g
the amount of money — the number of sovereigns — ^^^^^-
which has to be given in exchange for a unit
measure of the average commodity. But it was
168 EISING AND FALLING PRICES. [Ch. XV.
seen that the value of gold is measured by the
amount of the average commodity which can be
obtained in exchange for a unit of the standard of
value — for a sovereign. Thus " average prices " and
the " value of gold " mean exactly the same thing,
only they are measured in opposite ways; or, in
more accurate words, one is the reciprocal of the
other. And when we hear the candid monometallist
remark that he is prepared to admit that the fall
in average prices may have something, though it
cannot have much to do with the value of gold, we
can see that either he is talking absolute nonsense,
or else that he is giving some unknown meaning to
his words.
"With in- After defining the words to be used, the question
notes ^ ^^ hand — the eifect on average prices of an increase
prices will of production — can now be considered. The level of
fall in average prices is measured by the amount of the
f^th""^*^"" standard of value which has to be given in exchange
increase of for a given amount of the average commodity. If
™°QgY inconvertible notes form the standard of value; if
actions. the number of notes in circulation does not alter ;
and if all other things, including the state of credit,
remain the same ; then the increase of business
transactions, which must accompany any increase of
production, will cause an increase in the demand for
these notes, without any increase in their supply ;
this will raise their value ; and this rise in the value
of the standard is the same thing as a fall in prices.
This is, in fact, the simplest example of the quanti-
tative theory of prices. The rapidity of the fall in
Ch.xv.] increasing production. 169
prices measured in inconvertible notes will roughly
approximate to the rapidity of the increase in
production ; or, more accurately, to the increase in
volume of business transacted; because, as the
number of transactions increases, the proportion of
the fixed note circulation utilized in each trans-
action must diminish proportionately to that in-
crease. An increase in the value of inconvertible
notes when their number is diminishing has fre-
quently been observed ; and as this fact is capable
of the same explanation as that given above, it
helps to prove the truth of the foregoing argument.
Very different results may, however, follow an But with
increase of production if any article of merchandise *? a^icle
is used as the standard of value. If our money had chandise
been made of aluminium, or if wheat had been used standard
as the standard of value, then average prices would pnces may
, . 11- ^ .1 either rise
have risen enormously during recent years ; these or fall if
articles have fallen in price more than the average, p^'iiictioii
„i ,11 1 . increases.
and therefore more of them would have to be given
in exchange for a given amount of the average
commodity ; that is to say, they have fallen in
value, and prices, if measured by them, would have
risen. If we had had an aluminium coinage, it might
well have been said that the effect of modern
mechanical and scientific progress had been the
cause of phenomenal rise in prices. On the other
hand, it has been asserted that prices remained nearly
stationary for several years with silver as the
standard ; whilst there has been a steady and con-
tinuous fall in gold prices for a very long period.
170 RISING AND FALLING PRICES. [Ch. XV.
If the Thus, when production is increasing, the effect on
the^tan- prices varies greatly with the standard of value used.
AaxA rises, ^}^q value of any commodity depends on the demand
and vice ' for and on the supply of that commodity. When
'*'■***• changes are taking place in the factors of production,
the variations in supply and demand will cause some
substances to rise in value and others to fall. And
as the value of the standard is the same thing as
average prices, only measured inversely, it follows
that if the standard of value is a substance which
rises in value in these circumstances, then average
prices will fall ; and if the standard falls in value,
average prices will rise. This briefly gives the clue
to the whole question.
A general ^j^g « Supply" of a commodity is, of course, a very
increase of -^f •' .' ' ^ j
production different thing from its annual production. The
produce a ^^PP^J ^^ *^® amount on the market, or readily avail-
rise in the able to be brought on the market, and the supply
the pre- in this sense may take years to accumulate. The
metels and ^*°^^ ®^ S^^^ i^ t^® world is the result of centuries
therefore a of production ; and it follows that even a large pro-
portional increase in the annual output of that metal
would cause but a very small proportional increase
in the supply. With commodities, generally, this is
not the case ; and a given proportional increase in
production would, therefore, cause a greater propor-
tional increase in the supply of the average com-
modity than in the supply of gold. But when the
supply increases, the value normally falls. Thus a
general increase of production will cause the value
of gold to rise in comparison with the value of the
pnces.
Ch. XV.] INCREASING PRODUCTION. 171
average commodity ; or, in other words, more of the
average commodity will be exchangeable for a given
quantity of gold, and there will be a fall in average
prices. Then, again, looking to the question of
demand, the market is very easily glutted with
commodities of which there is a limited consump-
tion, such as wheat, for example ; and a small
increase of production in such cases would cause a
relatively great fall in price. In the case of the
precious metals the demand is less easily satisfied,
and a given increase of production will cause a
comparatively small fall in price. Gold cannot, of
course, fall in gold price ; but, by reasoning similar
to that just given, it is evident that gold will rise
in value in the case of a uniform increase of pro-
duction of all things, even including gold. Thus,
as regards both supply and demand, if the output
of gold were to increase proportionately to the
increase of the output of commodities in general, it
would seem that the value of that metal would
tend to rise, and that prices as measured by that
standard would therefore tend to fall.^
The result of this investigation is to show that But even
monometallists are right in asserting that an in- 1^ aii other
crease of production is a cause tending to produce a causes
fall in gold prices. But to agree with them thus far the value
in no way affects the answer to be given to the *^^ ^°^^
•' ° must have
their due
* This argument may not apply to a pennanent and steady effect on
increase of production, lasting for a very long period. See prices ; and
Prof. Edgeworth on "Monetary Reform" in Economic •^'^''"'^^ ?.^u^ now
for September, 1895.
172 RISING AND FALLING PRICES. [Ch. XV.
be higher question under discussion. Price is a ratio — the
metallism ^^^^^ of the value of gold to the value of the corn-
been main- modity ; and what we have to inquire is whether
any causes have been at work tending to raise the
value of gold which would not have been in opera-
tion had bimetallism been effectively maintained.
No matter what can be proved as to the effect of
any general increase of production on the value of
various commodities, it will still be true that prices
would have been higher if any independent cause
tending to raise the value of gold had not been
operative. It is not, as a rule, contended that the
abolition of bimetallism actually caused an increase
of production ; production would have increased in
the same way under a bimetallic regime ; and, if
this is so, so far as the comparison between the
present level of prices and the level of prices
under bimetallism is concerned, the direct effect of
the increase of production in recent years may be
neglected as being equally applicable to both
cases. After what has been said as to the way
in which various countries have increased their
demands for gold for coinage purposes since
1873 — demands intimately connected with the
abolition of bimetallism — it cannot be denied that
new forces have been brought into play tending to
raise the value of gold ; and it is therefore, as it
seems to me, equally impossible to deny that all
prices now measured in gold would have been higher
had bimetallism been maintained.
Of course these arguments may be met by the
Cn. XV.] CAUSE OF THE FALL IN PRICES. 173
assertion that the ratio could not have been main-
tained nnder any circumstances. This is, however,
to reopen the questions already disposed of in
Chapters I. and II. If the United States and
France had maintained their bimetallic laws, with-
out succeeding in maintaining the legal ratio as
the ratio between the value of the metals in the
market, these countries would have found themselves,
in fact, on a silver basis. But, even in that case, the
demand for gold would have been less than it has
been ; the value of gold would have been lower ;
and gold prices would have been higher than at
present, though not as much higher as if the
relative value of the metals had remained unaltered.
The authority of the Gold and Silver Commission Views of
has already been frequently quoted, and it may be ^^^ gy^g^
interesting to note the opinion of the commissioners Commis-
on this important point. The monometallic members
of the Commission only went so far as to state that
the recent " fall in the price of commodities may
be in part due to an appreciation of gold," ^ by
which they probably intended to indicate their
belief that the more extended use of gold, together
with its lessened output, may have been amongst
the many causes of the fall in prices ; though why
a doubt 'arose in their minds is not apparent. To
what extent this one cause had been operative, they
thought it " impossible to determine."
The Commission, however, unanimously reported If a Bi-
that they were " irresistibly led to the conclusion union had
1 Final Keport, p. 83. continued
174 RISING AND FALLING PRICES. [Cii. XV.
to control that the operation of" the Bimetallic Union had
either gold " exerted a material influence upon the relative
have been * ^^^^^ ^^ t^® ^^^ metals." This conclusion appears
higher or to me to involve the admission that, if a powerful
musThaivr Bimetallic Union had been maintained, it would
^een lower; j^ave continued to have had a material influence on
bothresidts the ratio ; that is to say, that it would have prevented
followed^-^^ the fall in the gold price of silver either entirely or
to a material extent. It follows, therefore, as regards
all goods influenced by the trade between gold and
silver-using countries, that either their gold prices
would have been higher ; or that their silver prices
would have been lower ; or that both results would
have followed. One of these results must inevitably
have followed the maintenance of the Bimetallic
Union, granted its controlling influence ; and, as it
seems probable that the effect of bimetallism would
have been felt in both silver and gold-using
countries, this view of the case tends to confirm the
belief that, but for the action of the Latin Union
and of the United States, gold prices would every-
where have been at a higher level, and silver prices
would everywhere have been at a lower level,
but it is But if we inquire, not only whether, but also to
impossible what extent prices would have been higher under
howSch ^^y supposed conditions, then we enter a region of
higher or extreme doubt. I myself have never seen how such
prices problems can be satisfactorily solved ; we can do no
would have more than give vague indications of the answer.
If the "^^^ arguments based on the increase of pro-
increase of duction appear to imply that monometallists believe
Cii. XV.] CAUSE OP THE FALL IN PRICES. 175
that prices would, in any case, have fallen nearly as production
much as they have done, and that the abolition of ^^Q ^^j"
bimetallism produced but little effect. It may be factor, then
noted, by the way, that if this deduction is admitted in prices
by monometallists, it weakens their plea as'ainst ^^o^ld have
•' ' r D coincided
the restoration of the old ratio on the ground that closely
it would cause a disastrous rise in prices, and it yariations
would, therefore, be an act of robbery. If the aboli- i? produc-
tion of bimetallism produced no fall in prices, why this has
should its restoration cause a rise ? But a logical °^* ^^^°
° . the case.
argument to prove that the increase of production
is the main factor to be considered in estimating
the level of prices under different conditions would
run somewhat as follows. If it could be said that we
have an accurate record of the rate of the increase of
production for a long period, and if it could be shown
that the variations in average prices coincided more
or less closely with the variations in the rate of
the increase of production, then we should have the
strongest evidence, not only that the two were inti-
mately connected, but that all other factors might
be more or less completely neglected in estimating
future prices. This would be logical, but, unfortu-
nately for those who would use such an argument,
it would be entirely unsupported by facts. We have
not an accurate record of the increase of average pro-
duction even in the principal commercial countries
of the world ; and, as far as can be seen, the varia-
tions in average prices have not coincided at all
closely with the variations in the average output.
No one denies that the amount of commodities
176
KISING AND FALLING PRICES. [Ch. XV.
There are
evidently
other
factors of
great
importance
influencing
average
prices ;
and recent
events are
consistent
produced in 1884 was vastly greater than the amount
produced in 1854 ; yet wholesale prices in England
were at about the same level at these two dates. It
is true that prices have been falling heavily since
1873 ; and, to account for the fall in prices having
commenced at the date at which bimetallism was
abandoned on the Continent, it is asserted that pro-
duction has been increasing more rapidly during the
comparatively peaceful period since that date than
it did during the disturbed times between 1850 and
1873 ; also that a period of inflation, such as that of
1871-1873, is naturally followed by a corresponding
period of depression. To these contentions, bimetal-
lists reply that the increase in the rate of the increase
of production since 1873 has not been proved ; that,
in any case, it is not denied that there was a great
increase of output in 1884 as compared with 1854,
without a corresponding fall in prices; that the
steady decline in prices since 1873 does not in the
least bear the character of an ordinary period of
depression in trade; and that this fall has been
more severe than any which has occurred for many
years.
The above is a brief outline of the arguments
used by the contending parties. Though the sub-
ject is one of great complexity, it is quite evident,
in my opinion, that other factors of great importance,
beside the increase of production, have greatly
affected the general level of prices. Looking to
the century as a whole, there can be no doubt that
prices have shown a general downward tendency
Ch. XV.] CHANGES IN PARTICULAR PRICES. 177
which is quite consistent with the view that an with the
increase of production tends to produce that result, gold prices
But the rise in prices which took place after 1850 would ha^e
^ , 1 • 1 T J heen higher
had every appearance, and was at the time believed had bi-
to be due, in great measure, to the Australian gold J^ge^^aTn.
discoveries. The severity of the fall in prices tained.
since 1873 is certainly consistent with the view
that the increase in the demand for gold since that
date has materially augmented the fall in prices
which the increase in production would have tended
to have produced. All these considerations seem
to me to make it certain that average gold prices
have been materially affected by the conditions
primarily affecting the currency, and that they
would now be considerably above their present level
if bimetallism had been effectively maintained.
Before passing on to consider the question dis- it is urged,
cussed in this chapter from a somewhat different l^^f?}^'
point of view, the commonest, but, as it seems to fact that
me, the most feeble argument in favour of the belief noHallen^*
that the recent fall in prices has had little con- uniformly
. , 1 . 1 -ill l^ proves that
iiection with the various changes in the laws oi cur- this fall
rency, must be mentioned. It is often urged that T^ °°*
if the recent movements in average prices " were any cause
due to the appreciation of gold, surely the fall in the c^?
the price of all articles would be universal and rency.
would be uniform ; " and, as this has certainly not
been the case, we must look elsewhere for an ex-
planation of the phenomenon.^ Here, again, the
1 See, for example, the speech of Sir M. Hicks-Beach in the
House of Commons, on March 17, 1896.
N
178 RISING AND FALLING PRICES. [Ch. XV.
word appreciation is used in some ill-defined sense,
for an appreciation of gold is a general fall in prices
according to the definition here adopted. Probably
what is implied by such observations as these is the
belief that the causes which have been mentioned
as being likely to influence the value of gold, and
therefore to influence all prices alike, have not
in reality had the effect attributed to them. In
such matters as these, many minds are influenced
by analogies, though the analogy is often but half
worked out. In this case, a rise in the value of
gold may have been likened to the effect of a tide,
which sweeps all floating objects at a uniform pace
in one direction ; whilst the movement in particular
prices may have been compared to boats moving
under other forces on the surface of the moving
water. If we were to notice a considerable amount
of movement amongst rowing boats on a tidal river,
some few moving up, but the majority moving
down stream, we might, perhaps, be tempted to
argue that there could not be a very strong tide
running, or all would be swept together in one
direction. Arguing in this way, • it might be
urged that the causes affecting gold cannot have
had much influence, or all prices would have
simultaneously fallen in a nearly uniform way.
But, returning to the simile of the tidal river, all
we should, in reality, know as to the tide would
be that it could not be running very fast as com-
pared ivith the average movement of the hoots on the
water; and, from this analogy, it may truly be
Ch. XV.] CHANGES IN PARTICULAR PRICES. 179
said that the alterations in the causes affecting ^
the value of gold cannot be very great as compared
with the average alteration in the causes affecting
the values of particular commodities. This, however,
gives ample margin for a considerable effect being
produced by the causes primarily affecting gold.
But this analogy, or others like it, must be used But the
with great care ; for it is wholly false in one very fn^pafticu!
important particular. The visible movement of the lar prices
boats is the movement produced by the rowers sub- prove°the
tracted from (or added to) the movement produced absence
ot CQ.US6S
by the tide ; whereas price is a ratio, and the altera- affecting
tion in the price of any commodity is the result of ^^^ Prices.
the effect of the causes primarily affecting the value
of that commodity divided (or multiplied) by the
effect of the causes primarily affecting the value
of gold. No alteration in the value of gold will ,
directly affect the ratio of the prices of any two
commodities ; and it is not easy to see, therefore,
how any change in such relative prices can give us
any certain clue to the changes in price due to
causes primarily affecting the value of gold.^
' This argument is capable of mathematical demonstration.
Let a and h be the values of the commodities A and B ; let
X be the value of gold ; then - and - will be the prices of A
and B. The price of A will, therefore, be to the price of B as
a is to 6 ; and, as this ratio is independent of a;, it can be seen
that no variation in cc, the value of gold, can cause any variation
in the relative prices of A and B. And however accurately
wo may know the variations in the ratio r we cannot ascertain
the variations in x tlicrefrom.
180 RISING AND FALLING PRICES. [Ch. XVL
CHAPTEE XVI.
CREDIT, AND THE QUANTITATIVE THEORY OF
PRICES.
It is neces- In discussing the way in which the general level of
prOTe*that prices would have been affected by the retention of
the views bimetallism, prices have thus far been regarded as
in the last being measured by the ratio of the value of particular
chapter are commodities to the value of one standard commodity.
m harmony . .
with the According to the quantitative theory of prices in
Srothwrv ^*^ crude form, prices are, however, said to be deter-
mined by the quantity of money in circulation ; and
it may be as well to show that this theory is not
antagonistic to the views expressed in the last
chapter, if it is correctly interpreted. At the
same time, it will be possible to discuss certain
objections which have been raised in opposition to
the views of bimetallists as to the effect on prices
of the recent changes in the laws of currency ;
though the discussion is rendered difficult by the
vague way in which the objections are generally
brought forward.
It is denied It has been seen that, during the last twenty-five
that the , ^ ' . ? , -,. , ^Z . ^
newde- years, a number 01 countries, including the United
Ch. XVI.] THE QUANTITATIVE THEORY. 181
States, France, and Germany, have altered their mands for
monetary systems, making gold the sole standard, lessened the
Bimetallists believe that if the continental bimetallic anjoupt of
gold in
systems had been effectively maintained, more silver circulation
would have been coined, and less gold would have ^j|°
been used by these nations ; and they argue that countries,
the additional amount of gold thus left available for
currency purposes would have been used in the
currencies of gold-using countries, and that it would,
in accordance with the quantitative theory of prices,
have maintained prices at a higher level than that
to which they have now fallen. In reply, it appears
in the first place to be suggested that, granted the
correctness of the views here expressed as to the
demands for gold in countries formerly bimetallic, it
is not certain that the volume of gold in the English
currency, for example, would have been greater had
these demands never been created ; and that, even
accepting the quantitative theory of prices, it cannot,
therefore, be confidently asserted that prices would
have been higher under bimetallic conditions.
If it is agreed that more gold has been absorbed The gold
into the currencies of countries formerly bimetallic *b^orbed
than would have been the case had the continental migl}* now
currency system remained unaltered, the question is, in the
where would that gold now be had it not been thus ^^^}t ^l,
P . ^ _ used in the
absorbed ? This is the first point for consideration, arts, or in
It is obvious that either it might now be in the cigg*''^"^"'
earth, and not yet available for use in any way ; or
it might now be swelling the currencies of England
and other gold-using countries ; or it might now be
182 RISING AND FALLING PRICES. [Ch. XVL
employed in the arts. Each of these three sup-
positions must be considered separately.
The in- With regard to the first of these alternatives, if it
thrdemand ^^ asserted that all the gold now added to the foreign
for gold currencies would still have been in the earth had no
have^been monetary changes taken place, it is evident that this
partially jg equivalent to stating that these recent demands
satisfaed ^ °
by an for gold have been completely met by an increase
ratimr ** ^^ output. If no changes had taken place in the
currency systems of the world, it is certainly
possible, and it seems to me most probable, that the
output of gold would have increased nearly as much
as it has done ; and it is important to note that it
is only the increase of output, which would not
have taken place had bimetallism been maintained,
which should be taken into consideration in the
comparison between the present volume of gold and
the volume which would now have been in existence
under bimetallic conditions. But if these new
demands for gold did, as bimetallists believe, raise
the value of that metal, then it is no doubt true
that the gold industry has had an additional
stimulus applied to it ; and that the output of gold
may have been increased in this manner, thus
partially satisfying these new demands for the
foreign currencies. But these demands cannot have
been entirely satisfied in this way; for any such
additional output of gold can only result from an
increase in the value of gold due to the extra
pressure of such demands ; and if the demands had
been quite satisfied by the additional output, there
CH.XVI.] VOLUME OF GOLD CURRENCIES. 183
would be no reason for there being any such extra
pressure, or any such additional output. IMore-
over, the stimulus to the gold industry has in all
probability not been very effective ; because it can
only have acted with much force in the ceise of
mines where the receipts and expenditure nearly
balance each other, which is probably the case in
only a minority of instances; for all other mines
would have been kept fully active in any case.
Thus the idea that the new needs of foreign countries
have been supplied to any material extent by an
increase in the production of gold, which would not
have taken place under a bimetallic regime, may be
dismissed ; and it must be admitted that, but for the
currency legislation on the continent and in America,
there would at the present time have been more gold
either in the currencies of other gold-using countries
or in use in the arts in various parts of the world.
When gold is required for foreign currency pur- Extraneous
poses, the part which comes from England will no fo™goid
doubt, in the first instance, be taken from the banking ^yi^^ lessen
1 the amount
reserves or the currency rather than irom the metal of metal
in use in the arts, using that word in its widest, art^and*^*'
and now somewhat obsolete, meaning. Assuming in the
the quantitative theory of prices to be true, prices a^^"ii[ '
will therefore be lowered in consequence of any such t^y^ ^"^^"^
prices,
foreign demands; that is to say, that these demands
will have the effect of making a larger amount of
commodities exchangeable for a given quantity of
gold. At present, people are willing to give a
certain amount of commodities for a certain amount
184 KISING AND FALLING PEICES. [Ch. XVL
of gold for use in the arts; but if only a di-
minished quantity of gold could be obtained for
the same amount of commodities (i.e. if prices were
falling), there would, other things remaining the
same, be a decrease in the use of that metal in the
arts, and a corresponding increase in the amount
available for the currency. Thus, when prices are
lowered by money being taken out of the currency
for foreign export, the eifect of the fall in prices is
that a certain amount of gold is withdrawn from the
arts, and that the demand is thus partially satisfied.
On the other hand, if the gold for export should in
reality be taken directly from the bullion market
or from the arts, it is evident that the result would
be to raise the value of gold as an article of mer-
chandise, without at first raising the value of the
sovereign. Sovereigns would, however, immediately
be melted down, and the void created in the bullion
market would thus be partially filled ; and this
abstraction of gold from the currency would lower
the level of average prices. In whatever way we
imagine the extraneous demands for gold to be
satisfied, it is therefore evident that in the end the
result of such demands will be a lessening of the
gold in circulation, and, granting the truth of
the quantitative theory of prices, a fall in average
prices; though the fact that gold is an article of
merchandise as well as the standard of value will
to a certain extent mitigate the fall.
tende?use ^^ *^^ foregoing argument, the truth of the
of credit quantitative theory of prices has been assumed ; but
Ch. XVI.] CREDIT INSTRUMENTS. 185
the right to make any such assumption is denied, was not
T p 1, X -x 1 i-T- i • considered
In a former chapter it was proved that, in a very in djscuss-
primitive state of society, prices would depend on ^°g the
, . ^ ''..,. ^, , quantita-
the quantity oi money m circulation, and that, tive theory
under such conditions, a diminution in the amount P™^^-
of money would cause a fall in prices, because there
would be less money available for each transaction.
In that discussion it was assumed that an issue of
inconvertible notes was the only form of money in
use. But, in considering the application of the
quantitative theory to modern times, the eifect of the
use of such credit instruments as cheques, fiduciary
notes, bills, book-entries, etc., becomes of the highest
importance. The arguments which were used to
j)rove that prices vary with the quantity of money
in circulation depended on the fact that the in-
convertible notes, when one transaction had been
completed, would be certain to be used again im-
mediately because, being valuable, they would not
be allowed to lie idle. If this was the case with
all forms of money in . circulation, each trans-
action would employ a definite proportion of the
whole currency, and there would be a definite pro-
portional relationship between the volume of the
currency and the level of average prices. But
these assumed conditions as to the continuous
circulation of money no longer hold good; notes,
when returned to the bank, are not certain to be
reissued ; cheques are, as a rule, created and de-
stroyed at each transaction ; and, when business is
done by book-entries, there is no transfer of anything
186 EISING AND FALLING PEICES. [Ch. XVL
which can be called money, even in the widest sense
of the word. It is, therefore, suggested that no re-
liance can be placed on the quantitative theory of
prices, for the conditions on which its proof is based
are no longer fulfilled. Moreover, as prices vary im-
mensely with the state of credit, and as the actual
transference of gold now takes place in only a minute
fraction of all business transactions, it is urged that
it is credit, and not coin, bullion, or notes, which
regulates prices.
Intheob- In discussious such as these, the true difficulty
^hisTheor'- ^^ *^ 8^^ * clear issue between the contending
itisassumed parties. Here the real question underlying these
isnore-^^ doubts as to the truth of the quantitative theory of
lationship prices is whether, at any one time, there is or is not
the volume a definite quantitative relationship between the
trans-^^^ amount of coin in circulation and the total money
actions and value of the business being transacted by aid of the
the amount • ,. .->.•, 1-1
of coin in Currency m question; that is to say, whether an
circulation, increase or a decrease of the one will always, other
things remaining the same, be accompanied by an
increase or a decrease of the other. It is easy
enough to see, by aid of a numerical example, that
if there is such a relationship, the quantitative
theory of prices is right in principle, however ex-
tended may be the use of credit. Let it be assumed
that transactions, which would involve the transfer
of 200,000 sovereigns if conducted in coin— which
may be called transactions to the money value of
£200,000 — are being carried through by the use
of only £4000 in gold, or with that sum of coin as
Ch. XVI.] CREDIT. 187
a basis ; then, on the supposition that a quantitative
relationship exists between the money value of the
transactions and the amount of gold in circula-
tion, and that this relation is one of simple pro-
portion, it follows that if the coin is reduced to
£2000, the business transactions must be reduced
in money value to £100,000. Now, if all other
things remain the same, the amount of commodities
changing hands in the two cases must be the same ;
and it is evident, on these suppositions, that prices
must be halved at the same time that the amount
of gold in circulation is halved. In fact, after the
reduction of the amount of coin in the above ex-
ample, the half-sovereign will, on these assumptions,
have the same value as the sovereign had before
the reduction ; and 4000 half-sovereigns will then
play the same part as the 4000 sovereigns did
previously. If such a relationship exists, prices
will therefore vary as the quantity of coin in
circulation, even if every transaction is made by
cheque or book-entry, and however small may be
the fraction of business transactions in which gold
actually passes.
In passing on to state the reasons for believing
that some such relationship does exist, it must first
be admitted that any alteration in the amount of
coin available, contrary to the assumptions just
made, does in all probability cause a temporary
alteration in the rate of production, and therefore
in the quantity of commodities being exchanged
through the medium of money. But in speaking
188 RISING AND FALLING PEICES. [Ch. XVI.
of the level of prices resulting from any change in
the currency, what is meant is the level that prices
would ultimately attain when trade had returned to
its normal condition, if all other things remained
unchanged ; and trade would ultimately return very
nearly to its original normal condition if no other
change besides that connected with the currency
were to take place, because the amount of counters
used in business transactions cannot ultimately
govern the amount of human energy displayed.
Moreover, it cannot, I think, be proved that the
relationship between the vohmie of the currency
and average prices is one of simple proportion as
indicated in the above example ; though I see no
reason for thinking that any other relationship is
more likely to hold good. But if it can be shown
that the amount of the standard of value in circula-
tion and the money value of business transactions
are tied together in any manner so that an increase
or a decrease of the one must be accompanied by an
increase or a decrease of the other, then it follows
that prices will rise with an increase of coin; and
that gold prices would have been higher had the
state of the foreign currencies allowed more gold to
remain in circulation in gold-using countries.
Prices are In Considering the efiect of credit on prices, a
v^g*^^ distinction must be made between two different kinds
without of influences; though, as between other distinct
tionln^he things, the line of separation is often hard to deter-
amoimt of mine. On the one hand, there is the slow growth
com in „ , ' ^
circulation ot modern commercial methods, leading to the more
Cn. XVI.] COMMERCIAL CONFIDENCE. 189
and more extended use of credit instruments in because of
place of gold ; and, on the other hand, there is the [n"he'°'"
constant expansion and contraction of credit, due state of
mainly to variations in the state of commercial con-
fidence. With regard to the latter of these in-
fluences— the variations in commercial confidence —
no doubt a general increase of credit, if considered
separately, appears to be a force tending to raise
prices. " The demand which influences the prices of
commodities consists of the money offered for them."
The purchaser "may make purchases with money
which he only expects to have, or even only pretends
to expect. He may obtain goods in return for his
acceptances payable at a future time ; or on his note
of hand ; or on a simple book credit, that is, on a
mere promise to pay. All these purchases have,"
according to Mill, " exactly the same effect on price,
as if they were made with ready money ; " ^ and such
purchases no doubt increase with an increase of
credit. This explanation, however, it seems to me,
is not strictly accurate; for the effect on prices
appears to be due to the action of the resultant of
several forces. On the one hand, an increase of
business due to an increase of credit causes an
increase in the demand for gold, both for use in the
arts, and to serve as a basis for these additional
transactions in gold-using countries; and this in-
crease in the demand for gold raises the value of
that metal as measured by its exchangeability with
the average commodity. On the other hand, there
1 Mill's "Political Economy," vol. 2, pp. 51, 52.
190 RISING AND FALLING PRICES. [Ch. XVL
is the above-mentioned increase in the demand for
all other commodities, which raises the value of
commodities, in general, in comparison with gold.
And the change in the level of prices will depend
on the equilibrium established between these op-
posing forces. The demand for gold as an article
of merchandise is, however, very inelastic, and will
not increase greatly in times of inflated trade ; more-
over, the general increase of confidence in the times
of increasing credit induces the mercantile world to
undertake business with a smaller stock of coin to
meet a given amount of liabilities ; and, for both
these reasons, the demand for the average commodity
increases more rapidly than the demand for gold ;
and this means a fall in the value of gold, or a
rise in average prices.^ But, whether this is the true
explanation or not, it can hardly be denied that
commercial confidence and the state of credit are
constantly varying, and that prices vary accordingly,
even when there is no alteration whatever in the
amount of coin in circulation.
Some This constant variation in the level of prices,
^ns? without any corresponding variation in the basis of
actions are,
no doubt, 1 If iron were the standard of value, a general increase of
out anT confidence might be followed by a fall in prices ; because, in
regard to these circumstances, the demand for iron increases more rapidly
the volume than the demand for the average commodity ; iron might then
cureenc • "^^ ^° ^^^"^' ^°'^' ^^ ^°' P'"^^®^ ^^ measured by iron would fall.
^ ' The reserves of iron in the banks (if such an idea is conceivable)
would be used up rapidly in trade at such times, thus, in harmony
with the quantitative theory of prices, reducing the amount of
the standard " coin " in circulation.
Ch. XVL] BARTER. 191
coin, in no way proves, however, that, for a given
condition of commercial confidence and of the other
variables, there is not a definite quantitative rela-
tionship between the volume of the currency and
prices. It is true, no doubt, that as regards some
business transactions, there is no such direct relation-
ship ; for additional sales and purchases may take
place without even the most indirect use of money,
and therefore without creating any additional
demand for the commodity selected as the standard
of value. An increase of business of this descrip-
tion will have no direct effect on the value of the
standard, or on average prices measured thereby.
This is, I think, obviously the case when cross pay-
ments are made for a simultaneous exchange of
commodities by a mere balance of book-entries ; for
this is really a case of barter, the documents used
in such transactions being mere certificates of rela-
tive value. If, with such book-entries, the value
of wheat, for example, was used as the standard of
comparison, there is no reason why an increase of
these entries should have any effect on the demand
for wheat ; the value of wheat would be unaltered
by any increase in these transactions, and so
would prices as measured by wheat. Prices in such
transactions are measured solely by the value of the
standard as an article of merchandise, and have no
direct connection with the amount of coin in circu-
lation. On the assumption that a state of society
may exist where all transactions are made by book-
entries of this type, it becomes hardly possible
192 RISING AND FALLING PRICES. [Ch. XVL
to discuss whether, in these circumstances, an in-
crease of the currency would aifect prices, for there
would be no necessity for the existence of a currency
at all ; the £1,600,000,000 worth of gold and silver
coins would all have disappeared from circulation ;
and prices would be regulated by the value of the
standard as an article of commerce ; that is, in the
case of a gold standard by the value of gold, and,
in the case of an inconvertible paper standard, pre-
sumably by the value of waste paper ; proof enough
that we are very far from such an imaginary state
of things. No doubt, under such hypothetical con-
ditions, when all transactions would be done in
credit, there would still be a rise in gold prices
with an increase of confidence ; but this would
have nothing to do with the currency ; it would
be entirely due to the different way in which the
metal gold and the average commodity would be
affected by the general increase in trade,
but this But the special point to be noted in the foregoing
affectThe P^^^^g^^^P^ is that it must be admitted that a pro-
principle portion of all money transactions is conducted with-
quantita- o^^* any regard whatever to the amount of coin in
tive theory circulation. The effect on the problem in hand
ot pnces. n 1 •
of the existence of such transactions may best be
illustrated by returning to the numerical example
above given. Out of the transactions to the
money value of £200,000, which are supposed to
be negotiated in a unit of time, let it be assumed
that transactions to the money value of £50,000
are carried out by simultaneous book-entries, or by
Ch. xvl] barter. 193
some other method having no regard to the volume
of the currency ; and, as to the remaining £150,000
worth of transactions, that there is a definite pro-
portional relationship between their money value
and the amount of coin in circulation, which was
assumed to be £4000. Now, if the coin is reduced
so that only £2000 remains permanently in cir-
culation, other things remaining the same, then,
ex hypothesi, the money value of this latter fraction
of the total transactions will fall to £75,000, and
the price paid for all commodities included in these
transactions will be halved. This means that the
value of the gold in the coinage will be doubled.
But the value of gold as an article of merchandise
must be the same as the value of the gold in the
coinage ; and, as prices in the balance of the total
transactions, formerly worth £50,000, are regulated
solely by the value of gold as an article of mer-
chandise, these prices will be halved also ; and prices
in all commercial transactions will be affected alike.
Thus, if with regard to a definite fraction of all
business transactions, there is a definite quantita-
tive relationship between prices and the volume of
the currency, then there is nothing in the existence
of even a very large proportion of transactions of
the nature of simultaneous book-entries to shake
the belief in the general principle of the quantitative
theory of prices.
And surely no man of business will deny that a ^"jg^g
very large proportion of all monetary transactions as to the
are affected by variations in the amount of the
principle.
194 RISING AND FALLING PRICES. [Ch. XVL
monetary standard of value available. In most instances the
actions, a Connection between prices and the volume of the
quantita- currency is indirect and is difficult to trace through
lationship the ramifications of commerce ; and it is undoubtedly
prices and *^^® *^^*' ^^ *^^ average, the basis of coin for a
the amount given volume of transactions is exceedingly minute,
in the A.11 mercantile engagements, under the present
currency, legislation in England, involve promises to pay in
tative gold ; and, according to Mr. Goschen, " it is of the
prkeYis highest importance to the whole banking and
correct in mercantile community, with the view to the certain
fulfilment of such engagements, that the aggregate
stock of bullion in the country should suffice to
meet all wants." The amount of credit transaction
depends entirely on the sentiment and will of the
great body of creditors ; one creditor may rely on
another, but the ultimate creditors pay the greatest
attention to the amount of coin available — to this
matter which is to them of the " highest import-
ance." If the available coin increases, there will
also be an increase in the money value of the
advances made by the ultimate creditors ; and the
two will, as I think, ultimately increase in the same
proportion. But, in any case, if both these variables
do increase simultaneously, it will be according to
some economic law ; and a definite, though possibly
a variable, relationship between the coin available
and the total credit transactions will continue to
exist. To deny that there is a relationship is
equivalent to saying that bankers and others in
gold-using countries are just as ready to advance
Ch. xvl] credit and coin. 195
money when they have little gold at their com-
mand as when large reserves of specie are available,
either in their own hands, or held for them by
others. If we trace credit to its roots, we shall find
that there is always or nearly always some negotia-
tion in which the possibility of having to find coin
or bullion to meet the liability must be present in
the minds of the financiers engaged. And the eager-
ness with which the Bank of England reserves are
watched at all times, and the serious consequences
which follow an exceptional rise in the rate of dis-
count consequent on any exceptional variation in
the quantity of gold held in reserve, prove that the
amount of gold in the country is a factor of the
utmost importance in regulating credit. Com-
mercial confidence varies immensely, and prices vary
with the state of commercial confidence and with
other variables ; but, for a given condition of all
these variables, the forces just described must, it
seems to me, create a fixed relationship between the
amount of coin in circulation and the total money
value of a very large proportion, at all events, of all
the money transactions in which the standard in
question is used, either in the form of coin or of
credit instruments ; and, other things remaining the
same, this relationship will make prices, not only in
the transactions in question, but throughout all
commerce, vary with the volume of the currency.
No doubt it cannot be assumed that other things
will remain the same. If, for example, the currency
is increased by an increase of the banking reserves,
196 KISING AND FALLING PRICES. [Ch. XVI.
then discounts will be lowered, and a stimulus will
be given to trade. The number of business trans-
actions will at first be increased ; but, as already
remarked, it is impossible to believe that the number
of counters used in trade will ultimately affect human
energy ; and it is certain, therefore, that, in a more
or less considerable time, the inflation of trade will
subside, and the number of transactions will sink
back to very near their former level, assuming that
the other conditions of commerce remain unaltered.
And if the money value of all credit increases, and
if the number of transactions remains the same, it
is only possible to reconcile these two conditions
by a rise in prices. In fact, however largely credit
instruments may be used in commerce, an increase
or a decrease of the currency will be accompanied
by a rise or a fall in prices, if all the other con-
ditions remain constant.
Tlie recent If an average of prices is taken over a sufficient
prim is nuinber of years, it is evident that it will cover
not con- periods of commercial confidence and of commercial
credit. depression. We shall, therefore, with such an average,
get a level of prices independent of the particular
variable under discussion ; that is, independent of
the factors which cause inflations and restrictions of
trade. If the period of the average is not a short
one, it can be shown that average wholesale prices
have fallen continuously since 1873 ; and the cause
of this fall can hardly, therefore, be connected with
the state of credit. But even if it could be shown
that during these years there had been a decline in
Ch. xvl] commercial evolution. 197
commercial confidence, and that this decline had
lowered prices, the proof of this fact would hardly
affect the question under discussion. It could not
be held that this decrease of confidence was due to
the abandonment of bimetallism on the Continent
or in America ; if the Latin Union had continued
to control the ratio, the factors of credit would
have been in the same condition as they are now ;
and neither the comparison between the existing
state of things and the state of things which
would have existed had bimetallism been retained,
nor the conclusion previously reached, that gold
prices would now have been higher in the remaining
gold-using countries had more gold remained in
their currencies, are in any way affected by these
considerations.
But, as already noted, there is another variable Economies
element connected with credit which has to be con- ^^ ^^^^^^
sidered ; an element which has little or nothing to raise
do with the forces which create periods of depression at any' one
or inflation. The difference between this subiect V"^® *^^
•' does not
and the one just discussed may be illustrated by the influence
following example. If a customer gets an additional lat^o'^Qgiiip
overdraft from his bank, the banker knows that he between
becomes liable for a further amount, and he has there- and the
fore to keep more gold by him ; whilst the customer, currency,
by the purchases made with this credit, increases
the general demand for commodities ; the net result
of the opposing forces being a rise in prices. This
illustrates the subject disposed of in the preceding
paragraphs. But, taking-the case of an old-fashioned
198 RISING AND FALLING PRICES. [Ch. XVL
gentleman who never wrote a cheque for less than
£5, and who paid all bills for smaller sums in coin,
if at his death his property were to fall into the
hands of a more modern individual, who paid almost
every bill by cheque, here we have an illustration of
the second variable element connected with credit.
The effect, in this instance, is that the banker, as
soon as he knows that the new conditions of business
are permanently established, will keep less gold by
him, for less will be demanded across the counter.
Less gold being kept by bankers will lessen the
total demand for the metal, and this will lower its
value, and thus raise gold prices. This example of
the slow growth of modern commercial methods
illustrates an important movement in commercial
evolution ; for there are many other ways in which
the use of gold is being economized ; the increasing
use of book-entries, notes, and bills being the chief
methods employed. Every arrangement which in-
creases the pace at which business is done, as, for
example, telegraphic transfers, also acts in the same
way ; for gold is thus set free and made available
for a second transaction more quickly than would be
the case without such contrivances. There can be
no doubt that all these reforms do tend to lessen the
demand for gold, and therefore to lessen its value
or to raise gold prices. But, at any one time, the
economic forces controlling these matters are very
rigid. Whether much or little money is drawn in
cash, the banker has to keep a certain amount of
gold in reserve in his safe; and the fact that the
Ch. XVI ] COMMERCIAL EVOLUTION. 199
banker of the next generation will be able to carry
on business with a smaller reserve does not in
the slightest degree influence the existing banker
in deciding the amount of coin he now thinks it
wise to keep in hand. There is nothing in this
slow organic development of commercial life to
give rise to any doubt as to the existence, at any
one period, of a definite quantitative relationship
between the amount of the standard of value in
circulation and the total money value of the trans-
actions in which the standard in question is used.
It has no doubt often been said that the economies And the
in the use of gold may be relied on to keep up these
prices in future, and that the fears of bimetallists are economies
, „ .,, L n 1 • T . would nave
therefore illusory. As tar as the immediate point at been the
issue is concerned — that is, as to the eifect of foreign ^iJ^etal^
legislation on prices — this remark is certainly not lism been
to the point. This progress in commercial methods tained.
is not said to have been due to the abandonment of
bimetallism on the Continent, and it would have
taken place under any probable conditions. It does
not, therefore, affect the comparison between prices
as they are and prices as they would have been if
bimetallism had been effectively maintained.
The questions connected with commercial evolu- It should,
llOWGVGr
tion are, however, very important ; for it is true that be noted
the economies in the use of gold do tend to raise ^^'^^ \}^^^
c are other
prices. But it may be as well to point out here, causes
though it is somewhat wide of the present discussion, io",e "^
that there are other forces at work tending in the pii^'^s ;
opposite direction. Monometallists usually connect
200 KISING AND FALLING PRICES. [Ch. XVI.
the fall in prices with the vast increase in the
facilities for the production of commodities ; but
they forget, as a rule, that it may also be connected
with the growing tendency to complexity in busi-
ness methods. In old times the raw material for the
manufacture of any article may only have changed
hands once ; it may have passed direct from the
producer of the raw material to the consumer of the
finished article. But at present all commodities
in the market, or parts of them, have in almost
every instance passed through the hands of many
firms, including those connected with their trans-
port, during the course of their manufacture. If,
for example, during any period the number of
times the material changes hands is on an average
doubled, then the number, or rather the volume of
business transactions measured by the value of the
average commodity, will be doubled also, even if
there is no increase of production ; and the increase
in the amount of coin required on account of the
increase in the number of these transactions may, at
all events, outweigh the effect of the economies in
the use of gold in each one of them. If prices have
fallen in proportion to the increase of production,
then the increase of production is not a reason for
any additional gold being held in reserve ; if any
economy has been made in the amount of gold
required as a basis for the monetary transactions
connected with the production of each finished
article, then it would on this account be possible
to actually reduce the reserve of specie. But, as a
Ch. XVI.] BANK RESERVES. 201
fact, banks have in recent years largely increased their
stocks of nietal,^ and there must be some forces at
work, such as those due to the increased complexity
of business methods, which are not generally recog-
nized. And we cannot count on prices being main-
tained by economies in the use of gold in the
future, any more than they have been in the past.
It is often urged that the great increase in bank and that
reserves, above mentioned, proves that there is no » scarcity"
" scarcity " of gold, and the prices cannot, therefore, ?^ goW
have been lowered by that scarcity. What is the pression
exact meaning intended to be attached to the word J^^?^
" scarcity " ? I do not know, but I presume the argu- meaning,
ment hints in a vague way at a denial of the exist-
ence of a quantitative relationship between the coin
in circulation, including reserves, and the money
value of business transactions. This point has
already been discussed. But those who argue in
this way fail to recognize that this accumulation of
gold is kept in the banking reserves for a definite *
purpose ; it is not lying idle there, heaped up by
some fortuitous circumstance ; it is not accumulated
" hastily and without any pertinent reason." With
regard to America, " what it means, beyond a shadow
of doubt, is that the supply of gold is so abundant
that the character and safety of the note circulation
have been improved in a signal manner." ^ The desire
^ See Gold Standard Defence Association Papers, No. 23.
2 Prof. Laughlin's words quoted in Wells's " Recent Economic
Changes," p. 209, though mine is not, probably, the deduction
he would draw from them.
concerning
credit to
shake the
202 RISING AND FALLING PEICES. [Ch. XVI.
to improve the stability of credit, after the Baring
and other experiences, has been strong enough to
induce bankers to retain this gold in reserve, with-
out reference to the wants it might otherwise have
satisfied ; and this tendency to increase the reserves
of specie may have been one of the very causes
tending to raise the value of gold, and thus to lower
gold prices.
Thus But to return to the subject immediately in hand,
notMn^ in *^® discussion in this chapter shows, I believe, that
these con- the quantitative theory of prices may be relied on,
if accurately stated. It may, I think, with truth be
asserted that, though there are many variable factors
beiietthat affecting prices, yet for a given condition of all
woull hat^ these other variables, there is a definite quantitative
been higher relationship between the ultimate level of prices and
under a, ■ n ■, ii^i-.i
bimetiiUic the quantity oi the standard ot value in circula-
rg-gtme. ^^^^ . ^j^Q^gij^ possibly, the relation is not one of
simple proportion. The quantitative theory, even
if correctly stated, has, however, the mischievous
efiect of merely drawing our attention to the gold in
the currency, and of thus taking it away from the
equally important consideration of gold as an article
of merchandise. It is most important to keep in
mind that, in Lord Farrer's words, " gold is the
measure of value as well as a medium of exchange,
and, as all credit is expressed in terms of gold, any
alteration in the value of gold affects proportionately
the value of each item of the whole fabric of credit." ^
However much credit may swell or contract, a £1
1 " What do we pay with? " Lord Farrer, p. G7.
Ch. XVI ] CAUSE OF THE FALL IN PRICES. 203
credit instrument will be normally worth a sovereign,
and the sovereign will be worth no more and no less
than the value of the gold in the sovereign ; ^ this
will be true where a system of free and gratuitous
coinage exists, for any difference between the value
of the coin itself and the value of the metal in the
coin will be at once corrected by metal flowing in
or out of the currency. The value of the metal
gold is the ultimate regulator of gold prices, and
that value depends on the equation of supply and
demand, the demand being the total demand for
the metal for use in the currency and in the arts.
If the demand for gold is lessened by that metal
being partially displaced from the currencies of
certain countries by the substitution of silver, then
its value will be lowered. But if the value of gold
is lowered, more of that metal will flow out of the
currencies of countries remaining on a purely gold
basis, thus, in accordance with the quantitative
theory, diminishing their total volume, and raising
prices. And, whether we look to the quantity of
metal in circulation, or to its value as an article
of merchandise, there is nothing in these considera-
tions to shake the belief that, had bimetallism been
effectively maintained on the Continent, average
gold prices would now be higher in all gold mono-
metallic countries ; or, by similar reasoning, that
average silver prices would now be lower in silver
monometallic countries.
' Neglecting the small differences due to causes mentioned
on p. 10.
204 RISING AND FALLING PRICES. [Cii. XVIL
CHAPTEE XVII.
Before
proceeding
Avith the
argument,
the effect of
alterations
in the value
of the
standard
must be
considered.
THE EFFECT ON PRODUCTION OF APPRECIATING AND
DEPRECIATING STANDARDS.
The next question for consideration is whether
it would have been for the well-being of the com-
munity if the fall in prices in recent years had been
less rapid ; but, in order to solve this problem, it is
necessary to review the whole question of appre-
ciating and depreciating standards of value. The
word " appreciating " is not always used in the same
sense. Here, an appreciating standard of value is
merely intended to denote a standard in use at a
time when the average price of commodities, as
measured by that standard, is falling, without any
regard to the causes which are producing that fall.
In this chapter we shall be occupied in considering
the influence of rising and falling prices on trade
— on the production of commodities. In the next
chapter, the way in which the distribution of com-
modities amongst the different classes of consumers
is influenced by the variations in the value of the
standard will be discussed.
Ch. XVII.] EFFECT ON PKODUCTION. 205
In the first instance, an objection which may be It is the
urged against the line of argument followed in an™^not^e
these two chapters should be noticed. The ultimate ultimate
,, J, 1 . • j-i.- effects of
results 01 any changes m economic conditions are any such
no doubt those to which most attention should, as alterations
which are
a general rule, be paid ; but, this is no reason for not important.
fully considering the temporary effects of economic
causes. To prove that a result will only be felt for
a limited period no doubt reduces the weight which
should be attached to that result in shaping our
future policy ; it does not in the least indicate that
it should be neglected. And, in judging of the
importance of any economic cause producing merely
temporary results, we must consider both how fre-
quently the cause is likely to be operative, and also
how slowly its influence dies out. Far greater
weight should, for example, be attached to the
effects of the ordinary variations in the value of
the standard, which are being perpetually felt, than
to similar effects which may only be experienced on
one occasion, as at the introduction of a bimetallic
system. If any cause is constantly recurring, and if
its effects last for a long time, then almost the same
consideration should be given to it as if it produced
some permanent results. Few, if any, of the effects
of an appreciation or a depreciation of the standard,
it is true, will be felt for all time ; but as such
disturbances subside very slowly, the changes in
the currency which produce them have, neverthe-
less, it appears to me, a very considerable influence
on the well-being of the community.
206 RISING AND FALLING PRICES. [Ch. XVII.
The in-
fluence of
falling
prices ^^^ll
be here
discussed.
Two lines
of argu-
ment will
be pursued.
In the
first place,
when
prices fall,
profits are
diminished,
less capital
expendi-
ture is
incurred,
and pro-
duction is
checked,
The opinion of Jevons as to the beneficial effects
of the rise in prices due to the Australian gold
discoveries has already been quoted ; and other
economic writers might be cited in the same sense.
The testimony of men who actually witnessed these
events is very valuable, though it is quite possible
that the stimulus to trade, which they attributed to
the increase in the currency, may have been in part,
at all events, due to other causes. So far only a
brief allusion has been made to the actual way in
which such beneficial results are produced. Here,
I propose to deal almost exclusively with the effects
of falling prices. The arguments used, however, all
apply, if reversed, to a depreciating standard, and
the influence of a rise in prices is easily deducible
from any conclusions arrived at with regard to the
effects of falling prices.
Two very distinct reasons can, I think, be given
for believing that an appreciation of the currency
will have a tendency to put a drag on trade, and to
check production.
It is generally admitted that any cause tending to
raise the value of the standard, such as an increase
in the demand for the precious metals for non-mone-
tary purposes, will lower prices, but that a long time
will elapse before they will fall to their ultimate
level. Such a cause will thus produce a gradual fall
in prices, and, therefore, a gradual diminution in the
gross income of all industrial concerns. It is also
generally admitted that various items of expenditure,
such as the interest on debts, taxes, salaries, wages.
Ch. XVIL] DECREASING PROFITS. 207
freights, etc., will, at first, at all events, fall more
slowly than prices. Expenditure decreasing less
than income means, of course, a diminution in
profits ; and this result of a fall in prices is a fact
so well established by experience that it hardly
requires any theoretical reasoning to establish its
truth. Now the owner of any industrial concern, like
every other individual, is under a strong temptation
to keep his personal expenditure up to its usual
money level ; and, in the same way, in order to
meet the views of their shareholders, directors of
companies are always anxious not to declare a lower
dividend than usual. And it is evident that if the
private expenditure of producers and the dividends
of companies do not diminish sufficiently rapidly
to balance the whole of the diminution in profits,
then there must be some diminution in the in-
dustrial expenditure to make good the loss. Pro-
ducers will in consequence probably curtail their
expenditure either by not maintaining machinery
or other fixed capital up to its former level of
efficiency; or by ceasing to make expensive im-
provements in the methods of manufacture ; or by
turning out an inferior article ; or by keeping less
stock in hand ; or by diminishing the expenditure
connected with the distribution of goods ; or by
not paying off debts ; or by not starting new com-
mercial enterprises, etc., etc. As far as existing
industries are concerned, there is perhaps no reason
to expect, if profits are large, that there will be
any great diminution in productive expenditure ;
208 RISING AND FALLING PEICES. [Ch. XVII.
but such economies, to whatever extent they are
made, must all result, sooner or later, in a diminu-
tion of production, at all events in comparison with
the production which would have taken place if
these economies had not been made,
and when It was assumed above that the profits made by the
tobsses"'^ manufacturer are considerable. If, however, the
this in- margin of profit is so small that the diminution of
be quickly gross income due to any fall in prices turns that
felt. profit into a loss, then the only alternatives for the
manufacturer are either to live on his capital, or to
borrow, or to economize by some of the methods
mentioned in the preceding paragraph, or to suspend
work more or less completely. If he either lives
on his capital or borrows, he is using up capital
which would probably have been employed pro-
ductively in other ways. Thus, whichever alter-
native he selects, it must be one tending to check
production.
The It is true that in some cases the lessening of
inventive P^'^fits may stimulate the energies and inventive
power powers of producers in a beneficial manner ; but the
counter- stimulus of the ever-present desire for an increase
Er^ of wealth is so great that little can, I think, be
influences, expected from this additional incentive. The
diminution of profits will, moreover, diminish the
desire to embark more capital in industry ; and, on
the whole, there is no reason to doubt that falling
prices will tend after a time either to actually
diminish, or to check the rate of increase of pro-
duction in all industries, and that, if the profits in
ch. xvil] decreasing profits. 209
any trade are so small as to be turned into losses,
these results will be quickly felt.
In reply to this argument, it may be said that A fall in
a fall in prices does not diminish the wealth of^^^gg^^^
the world ; it only transfers it from one person to wealth;
1 Tie 1 -111 T- ^ut wealth
another ; and, therefore, there will be no diminu- ig thus
tion in the fund available for capital expendi- J^^^^^^^^
ture. This objection must be answered, but, un- less likely
fortunately, the answer is here somewhat out o£^j.^^^_
place. It is no doubt strictly true that the de- timely,
struction of wealth is not the primary effect of a
fall in prices ; it is at first a mere transfer ; but is
the person to whom the wealth is transferred as
likely to invest it in productive works as was the
person from whom it was taken ? We have seen
that the effect of a fall in prices is to diminish the
producer's profits, and therefore to lessen the pro-
ductive expenditure incurred by him. But, on the
other hand, when prices are falling the purchasing
power of money increases, and this is a benefit to the
labourer and to all to whom fixed payments are due,
either as interest on loans, or for any other reason.
In fact, the wealth which the producers lose is trans-
ferred to the working classes, and to what may, per-
haps, be called the creditor class, though it includes
others besides creditors. One or both of these classes
might, therefore, in these circumstances, be able
to utilize some of this additional wealth for capital
expenditure, whilst continuing to purchase the same
amount of necessaries and luxuries as before ; and
the question is whether they are likely in this way
210 EISING AND FALLING PRICES. [Ch. XVII.
to make up the deficiency in productive expenditure
due to the falling off in the amount forthcoming
from the producers. As to the working classes, they
habitually spend the bulk of their earnings imme-
diately ; and little of the capital not expended by
the producer is likely to be replaced by the labourer.
As to creditors, no doubt some additional savings
will be forthcoming from that quarter ; but many
of this class will, like the labourer, spend the whole
of their incomes, notwithstanding the increased
purchasing power of the fixed money payments they
receive. Moreover, various portions of the fixed
charges on industrial concerns (taxes, for example),
do not go directly to individuals ; and the loss to the
producer, due to the increase in the value of such
payments, is not likely to result in a correspond-
ing economy on the part of the corporate bodies
receiving them. Thus, though it is true that the
first result of a fall in prices is to transfer wealth
from one class to another, yet that transfer will have
the effect of diminishing productive expenditure,
and, therefore, sooner or later, of diminishing pro-
duction.
A rise in Turning to the consideration of rising prices for a
stimulates ^^o^^^i!*? if the rise comes from causes primarily
production, affecting the currency, profits will increase, and the
producer will be the only person immediately
benefited by the change. He will be in a position
to expend more either on himself or on his business
enterprise. He will no doubt do both. But his
increased prosperity will probably make him more
Ch. XVII.] INCUEASING PROFITS. 211
desirous of increasing his out-put. He may supply
the necessary new capital out of his additional
profits, or by means of credit ; and the credit
will be all the more easily obtainable because
of his increasing profits. Thus a rise in prices
will, in this manner, certainly stimulate production.
No doubt there will also be some corresponding
diminution in capital expenditure ; for the rise in
prices will diminish the savings of the labourer and
creditor classes. As to the working classes, who, as
a general rule, live up to their incomes, they must
perforce reduce the amount of commodities they
purchase ; they, in fact, must economize, and their
economies are transferred to the producers. Here
we are only concerned with the question of pro-
duction, and whatever else may be said, it appears
certain that this transfer will be accompanied by an
increase of productive expenditure, and therefore,
sooner or later, by an increase of production, other
things remaining the same.
Returning to the question of an appreciating xormal
standard, it has been seen that a fall in prices will conditions
n . 1 • /. 1 Will no
at first increase the purchasmg power oi wages and doubt ob-
salaries ; that is to say, it will increase the real *f[^/|*^°
wages of the great mass of the people. This will long
have the eifect of increasing the demand for com- ^" ^
modities, an increase which will tend to raise average
prices. It has been seen, also, that, under the same
conditions, there will be a decrease in production ;
which, according to the quantitative theory of
prices, is another circumstance tending to raise
212 RISING AND FALLING PRICES. [Ch. XVII.
prices. Thus a fall in prices will be checked by
itself creating forces tending to act in the opposite
direction; and this is one of the reasons why an
alteration in the conditions primarily affecting the
standard of value may be expected only to produce
a gradual fall in prices. In time the diminution of
production, by throwing men out of employment,
will bring down wages and salaries ; and, the cost
of production thus being lowered, prices will fall.
New industrial concerns will also be started under
the new economic conditions ; all the fixed capital
thus created, the buildings, machinery, etc., will be
obtained at a lower price. These new ventures will,
therefore, be less burdened with debt ; no part of
their indebtedness will b« due to the fall in prices ;
and the profits they make will be as great, when
wages have fallen to their ultimate level, other
things remaining the same, as those made by the
original manufacturers before the fall in prices.
Thus, after a time, the normal condition of things
will be reached, and the effects of the apprecia-
tion of the standard will die out. It will be
said, no doubt, in order to minimize the import-
ance of these temporary influences, that trade ac-
commodates itself quickly to its surrounding con-
ditions. This is true in a sense. During the process
of adjustment after any change in the value of the
standard, the 'primary conditions to which trade has
to adjust itself are not the same as those which
existed before the disturbing cause ; and, considering
the length of time during which some of the factors of
Ch. XVIL] PRIME COST. 213
trade will remain in an abnormal condition, it would
appear that a long period must elapse before an
appreciation of the currency will have completely
worked out its full effects in lowering profits, and,
consequently, in producing a benumbing effect on
trade.
Passing on to the second reason for believing that In the
a fall in prices will put a check on production, it is pi^ce
first of all necessary to prove somewhat more fully P"™e cost
that prices only respond slowly to any alteration respond but
in the conditions which determine the value of ^^^''^^J. ***
vanatious
the standard. This is due to several causes. In in the
the first place, when prices are falling, a certain „{ l^^
force is required to overcome the disinclination standard ;
of each manufacturer to lower his price list ; the
mere conservative instinct of mankind will, in this
manner, prevent a fall in prices due to any change
in the conditions of the standard from taking place
coincidently with that change. No doubt custom
and habit will often produce very little effect, but
in a minority of cases these forces may have con-
siderable influence.^
A more important effect on prices is, however,
produced in the following manner. In settling
price lists, the managers of going industrial con-
cerns must chiefly take into consideration those
^ Prices of finished articles will respond less readily to
economic forces than prices of raw materials. But if, as the
sequel will show, this delay will check the sale of the finished
article, it will equally check the sale of the raw material. For
no more raw material is sold than is required for the manufacture
of the finished article.
214 IlISING AND FALLING PRICES. [Ch. XVII
items of expenditure which they can diminish by
diminishing their production; that is to say, the
j)rime cost of producing their goods. If, when
prices are falling, the prime cost does not fall as
quickly as the price of the product, then the profit
on the turnover will diminish ; and when the price
reaches the point at which the profit on the turnover
vanishes, then the manufacturer will, as a general
rule, decline to lower his prices any further, because
it would pay him better to lose his trade rather than
to do so. Of course a desire to keep up trade-con-
nections will often induce firms to trade at a lower
price, and therefore at a loss ; but, even in that
case, business will be pushed with less vigour. But,
on the other hand, manufacturers will often have
decided, as the result of experience, on the profit on
the turnover which they ought to make to cover the
standing expenses of their industry ; and, when that
is the case, they will frequently refuse to lower
their prices except in proportion to the fall in the
prime cost, whatever may be the result of their
policy. Thus the prime cost of goods plays an
important part in settling prices. Now many of the
items which make up the prime cost, and conse-
quently the prime cost itself, will fall very slowly
as a result of any change in the value of the
standard ; as, for example, taxation (when included
in prime cost), railway charges, royalties, the price
of some raw materials {e.g. to take an extreme case,
water when supplied by a corporate body), etc., etc.
The most important items included in the prime
Ch. XVn.] PRIME COST. 215
cost are, however, wages and salaries ; the wages and
salaries paid by the manufacturer himself, and those
paid by the makers of the raw material he buys, and
by other firms that he deals with. When prices are
falling, trade will be depressed, and wages will be
forced doAMi. But the question is whether the
earnings of labour will immediately, or even quickly,
respond to any cause affecting the value of the
standard. Of course when men are actually thrown
out of employment they will, after a time, be ready
to work on almost any terms ; and, then, their
competition will act as a powerful lever in forcing
down the level of wages. But very commonly the
first effect of slack trade is merely to shorten the
hours of work per week, without throwing men out
of employment, and without altering the nominal
rate of pay. In these circumstances, the hope of
stimulating trade and of thus increasing their total
earnings is not a sufficient inducement to make
workmen willing to accept a lower rate of wages ;
for, though it might really be sound policy for them
to submit to the fall, yet they could hardly tell
whether the result would not merely be to increase
their master's profits. Even when trade is actually
being checked by a fall in prices, it is very difficult
for the working classes to be certain that the greater
regularity of work accompanying a reduction of
their money wages would compensate them for that
reduction ; and, when trade is naturally progress-
ing, it becomes still more difficult for them either
to prove or realize this conclusion. Commonly,
216 RISING AND PALLING PRICES. [Ch. XVIL
prices, therefore, wages will not respond quickly to the eifect
1 r^d ^^ falling prices. And as to salaries, they are always
dependent largely regulated by custom, and custom changes
cosrdT ^^* slowly. Thus, on the whole, it may be concluded
not, there- that many of the items of expenditure, including
fore,an8wer i . ■■ • i ^ .■, • j. j}
quickly to Salaries, which make up the prime cost oi any
^^^ „ article, will respond slowly, and wages, the main
the Stan- item, will not respond quickly to any change in the
value of the standard. And as the prime cost plays
an important part in settling prices, it is evident
that average prices will not, therefore, respond
quickly to any changes in the conditions of the
currency.
Prices must According to the quantitative theory, prices
propOTtion ^^^y ^^*^ ^^^ quantity of money in circulation,
to any the smaller the quantity, the lower being prices,
in the Now in the case of each individual manufacturer,
currency, {i jg obvious that if he postpones the lowering of
volume of prices unduly, he will be under-sold by others, and
bi^in^s j^-g gales, and consequently his production, will
diminished, diminish. This will be readily admitted. And if
there is a general delay on the part of all manu-
facturers to drop their prices in a manner corre-
sponding with any decrease in the currency, it is
equally true, though the result is not so apparent,
that their action will result in a general limitation
of production. If all those coming to a market to
buy bring less money with them, and if all those
coming to sell decline to lower their prices in pro-
portion, it is obvious that the usual amount of busi-
ness will not be done. Or, to put the matter more
Ch. XVII.] THE CHECK ON PKODUCTION. 217
generally, it has been seen that there is a certain
relationship between the volume of the currency
and the money value of business transactions ; if,
therefore, the quantity of currency in circulation
diminishes without a corresponding fall in prices,
then there must be a diminution in the volume of
business done, other things remaining the same. It
is extremely difficult to tell how effective the forces,
described above, will be in delaying the lowering of
prices ; but, to whatever extent they do act in that
manner, they must have the effect of putting an
immediate check on trade.
Several objections may be raised in opposition to Trade mil
this view as to the influence of the standard of value pgred by
on production. In the first place, it will perhaps ^?y^^'
be said that a large proportion of commercial trans- standard
actions do not necessitate, even indirectly, the use standard is
of any gold whatever ; and that, in such cases at not used as
. , amediumoi
all events, the scarcity oi the currency can have exchange,
no effect whatever in hampering trade. In many
transactions gold is, undoubtedly, only used as the
standard of value, and not as the medium of ex-
change ; the exchange of commodities by simul-
taneous book-entries being a typical example of
this method of conducting business. But the drag
on trade when prices are falling is, in reality, due
to the price demanded, rather than to any diminu-
tion in the volume of the currency ; and the effect
is the same whether the standard is or is not used
as the medium of exchange. To make this point
clear, let it be assumed that, in some gold-using
218 EISING AND FALLING PRICES. [Ch. XVII.
country, the manufacturers of two commodities,
A and B, exchange their goods by simultaneous
book-entries ; but that they use wheat as the
standard of value in place of gold. If equal values
of A and B are exchanged, then the book-entries
will exactly cancel each other ; no wheat will be
used in the transaction ; and no liability in wheat
will be created. Now when actual transactions are
made by book-entries in gold-using countries, it is
not denied that the goods exchanged are really
equal in value to the gold contained in the number
of coins at which they are priced ; it is not denied,
in fact, that gold is the standard of value in such
cases. In the same way, in the hypothetical case
under discussion, it may be assumed that the amounts
of A and B thus exchanged are really equal in value
to the amount of wheat at which they are nominally
priced in the book-entries. For simplicity, let it
be assumed that A and B are equally valuable, and
that a ton of each of them is equal in value to a
quarter of wheat ; a " quarter " is then the price in
wheat of these commodities per ton. Next, let it be
assumed that there comes a bad harvest, and that
wheat rises in value ; prices in wheat must then
tend to fall. If, however, the manufacturer of A
refuses to drop his price in wheat, he is in fact con-
tinuing to demand, in exchange for every ton of A,
either a quarter of wheat, or an amount of B equal
in value to a quarter of wheat ; but the quarter of
wheat, having risen in value, is now worth more
than a ton of B. Hence, by declining to lower his
Ch. XVII.] THE CHECK ON PRODUCTION. 219
price list, the manufacturer of A is in fact declaring
that he will not do business unless he gets more of
B in exchange for his goods than he did before ;
and it is easy to see that this is also true if, though
lowering his price in wheat, he does not lower it
at once in proportion to the rise in the value of
wheat. Similar reasoning would of course show that,
if the price of B is not at once dropped to this full
amount, the manufacturer of that commodity is in
like manner demanding more of A than he got
before. And if both hold out, each for an increase
in the amount of the goods made by the other,
they cannot possibly come to terms, and no business
will be done. In this way sales will be stopped, and
this will soon put a check on production. When
the amount of any commodity in the market de-
creases, its value rises as compared with other com-
modities ; A and B will both begin to rise in value
as compared with wheat ; and, taking the case when
both manufacturers obstinately refuse to make any
reduction in price, this will go on (if no other makers
of A and B exist) until these goods acquire their
old relative value compared with wheat — their
old price in wheat, which the makers continue to
demand ; and then of course business can go on as
before. If, however, the prices of A and B in wheat
are somewhat reduced by the makers, then business
can be resumed at a proportionately earlier date.
If the production of wheat remained stationary,
whilst improvements in machinery (or other causes)
tended to increase the production of A and B, that
220 KISING AND FALLING PKICES. [Ch. XVIL
would also be a circumstance tending to raise the
value of wheat as compared with A and B. If this
assumption had been made in the foregoing argu-
ment, it could equally well have been proved that
if the manufacturers of A and B did not lower their
prices as measured by wheat, then the full increase
of production which might normally be expected to
follow such improvements in the method of manu-
facture would not take place. In fact, the stability
of price would put a check on trade.
If goldi If these conclusions are true with regard to the
noHall in exchange of any two articles, they must also be true
proportion ^j^j^ regard to all. Thus if wheat were used as the
to any ten- "
dency on standard of value, and if average prices did not fall
gold^to*rhe ^^ ^^^® ^^ accordance with any tendency on the
in value, part of wheat to rise in value, then sales would be
volume of checked and production would slacken (absolutely
business qj. relatively to the production which would other-
must .
diminish, wise have taken place) until a position of equili-
brium was reached. And when gold is used as the
standard of value, exactly the same thing must occur.
No doubt a certain complication arises on account of
the fact that gold is also the medium of exchange ;
for any general diminution of business, by lessen-
ing the demand for the currency, directly tends to
raise prices; but as the decrease in the demand
for currency is the effect of a decrease in the number
of business transactions, that effect cannot be felt
until such business has diminished; and the only
result of such a rise in prices will be to bring things
to a position of temporary equilibrium somewhat
Ch. xvil] the check on production. 221
more rapidly. We may, therefore, lay down the
following as a general law : Any cause, which affects
the standard in a manner tending to raise its value,
will, if the production of commodities goes on at the
same rate as before, produce a definite fall (relative
or absolute) in prices; and when, other things re-
maining the same, such a cause does come into opera-
tion, either average prices must fall (relatively or
absolutely) at once to that definite extent, or sales
must be stopped, and production checked, until
the equation of demand and supply is again adjusted.
But it has been seen that average prices will not
respond quickly to causes primarily affecting the
standard ; and, if this is so, the other alternative — a
diminution in production — would appear to be the
inevitable result of falling prices. Of course it is
not possible to perceive that at one moment sales
are stopped, and that at another moment they begin
again ; the only symptom observable will be that
drag on trade which producers always associate with
falling prices.
In stating our conclusion as to the general result This check
of falling prices, it was assumed that all other ^^P^^^^"
things remain the same. This is a legitimate perhaps,
assumption in studying the effect of any particular o-ated in
cause, provided that, under cover of these words, certain
none of the effects of the cause under examination
are omitted from consideration. And, in this in-
stance, it is true that a fall in prices will have other
influences which cannot altogether be neglected.
When, in a primitive country, prices are falling and
222 RISING AND FALLING PRICES. [Cn. XVIL
profits consequently diminishing, those who have
hoarded money will be induced to discharge some of
their liabilities with coins taken from their hoards.
This will increase the currency, and the tendency to
rising prices, thus produced, will help to restore
things to a position of temporary equilibrium. In
fact, if a sufficient quantity of coin were thus added
to the circulation, even though prices did not fall as
quickly as the other causes affecting the value of
the standard appeared to demand, yet production
might go on unchecked. But this influence will
not be a powerful one ; for, in uncivilized countries,
this supply of coin will quickly dry up; and, in
civilized countries, falling prices will have little
tendency to induce bankers to lessen their reserves.
Another influence of a similar character is due to
the effect of .custom on credit. If, when prices are
falling, the same amount of money as usual is lent
to a customer, this will in reality be an increase in
the amount of real credit ; and such an increase of
credit will help to check the fall in prices. But the
depressing effects of an appreciating standard will, on
the other hand, tend to contract credit ; and little
or no easement is likely to be felt as the net result
of these opposing influences. Thus neither of these
methods, by which a fall in prices might be pre-
vented, as it were, from checking production, are
likely to have any very material influence.
^fma • ■^^ ™^y^ ^■^^°' P^^^^PSj be urged, in reply to these
perhaps,' arguments, that what is really suggested is that
producers will try to check any natural fall in
be com-
Ch. XVII.] LIMITATION OF OUTPUT. 223
prices by limiting their output ; that this would pa™l to a
^ '' , „ • .• 1 combiua-
amount to an endeavour to lorm a gigantic trade tion to
combination ; and that such attempts never succeed ^^Jj^^.
for long. Such a comparison is rather far-fetched.
But it is true that the effect of falling prices is
somewhat similar to that which would be produced
by a universal combination ; the union would, how-
ever, be an unconscious one, having no acknow-
ledged object, the lessening of output not being
recognized by its members as being the result of
their combined action. Ordinary combinations
usually break down because a few firms either
desert, or refuse to join the union, in the hope of
greatly increasing their business by underselling
those in the " trust " ; and they will be able to carry
out their design if the combination has actually
succeeded in raising prices above their normal level.
But, with the unpremeditated union produced by
falling prices, there will at first be no such tempta-
tion ; because we may assume that prices are con-
stantly being lowered by the ordinary forces of com-
petition in proportion, or nearly so, to the fall in
the prime cost of manufacture. Of course if any
one manufacturer could break the bonds which
force all producers to act alike — if he could at
once lower wages, salaries, royalties, taxes, freights,
etc., to their normal level — then, no doubt, such
action would not only be extremely profitable to
him, but it would also help to bring down the level
of prices, and would thus hasten the return to the
original scale of production. But manufacturers
224 EISING AND FALLING PEICES. [Ch. XVIT,
generally will be powerless to do this, and so long
as that is the c£ise, prices will remain above and
production Avill remain below their normal levels.
Hising If the foregoing arguments are reversed, they
P^^^, . prove that rising prices stimulate trade and pro-
stimulate fj . T-» • 1 '1 • Ml
production; duction. But, it may be said, an inconvertible
does not P^P^r currency, continually being depreciated by
justify fresh issues of notes, aifords a ready means of
continuously raising prices, and therefore of obtain-
ing these benefits ; and as no one whose opinion
is worth regarding, could now be found to advocate
such a system, this is equivalent to a general
denial of the beneficial effects of rising prices.
The evils resulting from an inflation of the cur-
rency are, however, due to the way in which any
such action on the part of a government would
destroy confidence in commercial continuity, and
possibly in commercial honesty. If confidence had
previously been destroyed, then perhaps the bene-
ficial effect of such inflation might be apparent ;
because the evil effects, not being produced, would
not hide them. In this connection it may be in-
teresting to note the opinions of Arthur Young, who
closely watched the influence of the depreciation of
the assignats in revolutionary France at the end
of the eighteenth century, during a period of the
greatest social disorder. He writes that " the very
circumstances which, according to common ideas,
should have continued " the depression of manufac-
tures " has most unaccountably revived them in some
measure ; I mean the depreciation of the assignats."
CH.XVII.] INFLATION NOT JUSTIFIABLE. 225
The explanation he gives is not very clear, but pre-
sumably he intends to indicate that the price of
labour became so low that master manufacturers
could " sell the product of that labour to such an
advantage as to create demand enough to animate
their business." ^ Another objection to the use of
inconvertible notes lies in the fact that, if a
metallic currency is ever to be resumed after such
periods of inflation, the only alternatives are either
a general act of repudiation, or a gradual restora-
tion of the standard to its old value, when all the
evils attributed to an appreciating standard will be
felt to the full. The initial benefits arising from
artificial inflation will be dearly bought by the sub-
sequent troubles; and to assert that there may be
initial benefits in no way justifies any such systems
of inflation.
Lastly, as a reason for distrusting all the argu- The liistory
ments tending to prove that a fall in prices checks ?j f™^^
production, it will no doubt be said that facts are years helps
against this conclusion ; for it cannot be denied
that, though during the last twenty-five years there
has been a continuous fall in the average price of
wholesale goods in England, this state of things
has been accompanied by a great increase of
production. But there is no evidence to show that
production would not have increased still more
rapidly if prices had remained steady. It is
possible to conceive that some independent cause,
1 Youngs' " Travels in France," edited by Betham Edwards,
p. 346.
Q
226 RISING AND FALLING PRICES. [Ch. XVIL
such as a great increase in the supply of gold,
might have come into operation at the time the fall
in prices commenced, and that prices might thus
have been maintained at a higher level ; and, had
such been the case, recent events do not prove that
the increase in the production of commodities
would not in those circumstances have been even
greater than it has been. In fact, if causes
primarily affecting the currency have tended to
produce a fall in prices, it is impossible to prove
that commerce would not have been even more
active if no such causes had existed. The ex-
periences gained in recent years helps us but little
in solving this problem.
Recapitu- Thus there are two reasons for believing that
a fall in prices will tend to diminish production.
To put the matter in a somewhat paradoxical form,
when the standard is appreciating, on the one hand,
prices will be too low for the usual profits to be
made, or for the usual productive expenditure to be
incurred ; and, on the other hand, prices will not
be low enough for the original amount of business
to be transacted. Exactly the opposite effects will
be produced with rising prices. Profits, and con-
sequently productive expenditure will increase.
And, looking at the commerce of the world as
barter, it will be as if all manufacturers entered
the market ready to part with goods for less
of their neighbour's products than they received
before ; commerce will be readily transacted ; busi-
ness will increase ; and the increase of production
Ch.xvii.] an increase of real wages. 227
will go on till a new position of equilibrium is
reached.
If a general diminution in production takes place, These
it is evident that there will be fewer commodities are in
to distribute amongst the various classes of the ^^^P^ «*
. rising
community. In these circumstances some, and prices ; but
probably all, must receive less of the necessaries or tion^T*'
luxuries of life ; and such an event is, therefore, the distribution
. „ , , has yet
greatest economic misfortune that can happen to to be
a country. The foregoing arguments, therefore, all discussed.
tend to show that the community will be made more
prosperous by a rise in prices, because production
will thus be stimulated. But, on the other hand,
it is now generally admitted that, up to a point
probably in many instances not yet reached, the
higher the wages of labour the more productive
it becomes ; and here, therefore, is an argument in
favour of falling prices, even if the question is
regarded solely from the point of view of produc-
tion ; for falling prices will, at first at all events,
increase the real wages of the labourer by increasing
the purchasing power of his earnings. How much
force should be attached to this argument is, how-
ever, doubtful. After a fall in prices, the factors
of production all in time return to their normal
condition, and no ultimate eifect would be produced
on real wages by such a cause ; production cannot,
therefore, ultimately be stimulated in this manner.
But in all probability the increased productivity of
labour is an effect which is only attained after a
higher rate of real wages has continued for a long
228 RISING AND FALLING PEICES. [Ch. XVII.
time ; for, at first, the increased value of earnings
is apt to be wastefuUy dissipated; and it is only
gradually that the labourer learns to use his in-
creased wealth in a manner likely to make himself
or his children more efficient in the production of
wealth. If, however, production would in truth be
comparatively quickly stimulated by the increased
prosperity of the working classes, what we have to
inquire is whether that result would in reality be
produced by a fall in prices. This opens up the
whole question of the distribution of commodities
amongst the various classes of the community ; a
subject as important as that of production in
balancing the advantages and disadvantages of
appreciating and depreciating standards.
Ch. XVni.] DISTRIBUTION. 229
CHAPTER XVIII.
THE EFFECT ON DISTRIBUTION OF APPRECIATING
AND DEPRECIATING STANDARDS.
In discussing the distribution of commodities Monetary
amongst the different classes of society, we shall p^^f^ u^
again mainly be dealing with the temporary effects great
of variations in the value of the standard. We effwte"on'
are not, in fact, concerned with normal distribution, distribu-
. . tion.
a subject fully dealt with m many treatises on
economics. Nor will it be necessary again to revert
to the way in which the variations from the normal,
due to monetary causes, gradually die out, or to the
rapidity with which such influences may be expected
to subside ; for that subject was considered in the
preceding chapter, where it was seen that these
effects may be appreciably felt for a very long time.
In the short space here available, only the The dis-
broadest views of this subject can be given. Pro- t^e receipts
bably the easiest way to consider this problem is to ^^ * typical
imagine a hypothetical manufactory, which may be tory be-
taken as typical of the industry of the world, and ^^^°
to see how an appreciation or a depreciation of the earners,
currency will affect the different parties interested, and re-*"'
230 RISING AND FALLING PRICES. [Ch. XVIIL
ceivers The recipients of the benefits arising from this
payments typical industry may be divided into three large
will now be groups.
(1) The wage-earners ; including all those who
make their living by their own exertions, and who
receive wages, salaries, or other payments.
(2) The producers; or the parties to whom the
profits made at the typical manufactory accrue.
This group includes the ordinary shareholder ; and
also the farmer, agriculture being included amongst
the industries which the manufactory is supposed to
typify.
(3) The receivers of fixed payments ; including
creditors receiving interest on loans, debenture-
holders, landlords receiving rents on land and build-
ings, mortgagees, pensioners with a legal claim for
their pensions, etc. Taxes must also be included in
the fixed payments.
These groups really merge one into the other, so
that the precise boundary is often difficult to define ;
for example, a landlord, granting short leases, should
rather be classed as a producer, if he regularly
appropriates to himself any additional profit made
by his tenants in good seasons by temporarily
raising their rents. Moreover, the same individual
may belong to two or three of these groups. But
the general idea of distribution, which can be
obtained by studying the way in which the receipts
of our typical manufactory are shared between the
wage-earner, the producer, and the receiver of fixed
payments, is sufficiently accurate for our purposes.
Ch. XVIII.] A HYPOTHETICAL MANUFACTORY. 231
The following table has been prepared to facilitate The effect
the discussion of this question of distribution. In tionsTn'
the first column (A) are given the gross receipts and the value
the total output of commodities produced by the standard is
hypothetical manufactory, together with the way ||^"^j^™*^
in which the receipts are distributed amongst the following
different classes. The amount of the commodity
thus produced, which could be bought by each of
the parties with their receipts is also given ; and,
as the manufactory is typical of all industry, the
share of the total output of commodities thus, as
it were, allotted to each class represents the amount
of the average commodity they could purchase with
their receipts ; that is to say, the real value either
of their wages, or of their profits, or of the interest
received, as the case may be. Other columns are
given to show how the money and the real receipts
vary from this initial distribution when different
changes in the condition of the currency take place.
It has been seen in the preceding chapter that wages
will not at once respond to any change in monetary
conditions ; and to illustrate the first effect of such
monetary changes, the money paid in wages is
shown in the table as remaining constant, unless
the gross receipts are insufficient to pay the full
amount, or unless it is otherwise stated. It will
be observed, also, that nothing is included in the
outgoings for the purchase either of raw materials
or of other manufactured goods. But, as the ex-
penditure incurred in making all goods may be
divided in the same way, there is no objection to
•^ " ^ ti 5 S a
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s X u S'O ■"
Site o<a5 S 2
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O O 0<M '^ 00
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Profits
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•si^iox -s^diooajjo uo!inqu}si(f
CH.XVnT.] STAGNANT TEADE. 233
taking as our hypothetical industry one in which
every stage of the manufacture of the finished
article is undertaken, including the production of
the raw materials.
It should, however, be most distinctly understood
that this table is merely for the purpose of illus-
trating the following arguments ; it is not intended
to represent facts. Industries differ immensely one
from the other in all these conditions ; and it would
be impossible to give with any approach to accuracy
any figures representing the average of all industries.
In order to facilitate the discussion it will, in the
first instance, be assumed that the typical industry
is not subject to any charges, like royalties, which
are obligatory, but which increase proportionately to
the output. The effect of such charges will be con-
sidered separately.
In discussing the question of distribution it will Certain
be necessary to consider the case of commerce, both tScondi-
when it is progressing, and also when it is in a tions being
stagnant condition. Taking the latter case first — times of
that is to say, when the production of commodities stagnant
, . , . , trade, a
is neither increasing nor decreasmg — let us consider deprecia-
the effects produced by the adoption of a typo- gJ^°,j^^j,J^^
thetical standard of value which so adjusts itself appears un-
that the price of commodities keeps rising ; or, in '
other words, the effect of a depreciation of the
standard. In these circumstances it will be seen
(by comparing columns A and D) that the receivers
of fixed payments are certain to suffer ; for they,
no doubt, would find their incomes of less value
234 RISING AKD FALLING PEICES. [Ch. XYIII.
to them on account of the increase in prices ; and,
if this be the intentional result of any monetary re-
form, no equitable consideration can be advanced
to justify the suffering thus imposed, on creditors
and landlords, unless indeed they were aware that
the standard would depreciate when they lent their
money or fixed their rent. This class will, in
fact, get a smaller share of the output, and what
they lose will be divided between the wage-earner
and the producer, between whom there will be a
struggle for the lion's share of the spoils. Whilst
it is, no doubt, possible that wages might be forced
up so much that the workman would be benefited in
spite of the increase in prices (column E), it is
certain that the wage-earner, if not belonging to a
powerful Trades' Union capable of safeguarding his
interests, would not have his wages raised to that
extent for a long time, and that he would during
the interval suffer from the greater cost of the
necessaries of life ; and government employees, and
those who gain their living in employments not
directly connected with industry, might be even in
a worse position, because of the greater difficulty of
obtaining an increase in their wages or salaries.
The producer's money profits would certainly in-
crease, because the rise in prices would make the
gross receipts increase without any corresponding
increase in the fixed payments for loans, rent, etc. ;
and the real value of his receipts would increase
because the produce of the sales of a smaller propor-
tion of his total output would suffice to meet the
Ch. XVIIL] A RISE IN PEICES. 235
fixed payments. In arriving at any general con-
clusions, it is, of course, necessary to consider the
question of production as well as the question of dis-
tribution ; and in the last chapter it was shown that
an increase of profits stimulates productive expendi-
ture, and that a depreciation of the standard facili-
tates business by rendering transactions more easily
negotiable. Thus, on the adoption of such a system
of currency, on the one hand, the producer would
almost certainly gain ; production would be stimu-
lated as a result of his increased profits ; and this
would tend to revive trade from its stagnant con-
dition, to the benefit of all classes. But, on the
other hand, the receiver of fixed charges would be
injured ; the least protected class of labourer would
certainly suffer; and social discord would arise in
consequence of the repeated agitations to force up
wages, which would be necessary to prevent actual
loss to all classes of workmen. These are the
relative advantages and disadvantages of a change
from a steady to a depreciating standard. The
evils of trade disturbances are so great, and the
immediate sufferings to the working classes from a
rise of prices are so evident, that the problematical
advantages of a rise in prices hardly, perhaps,
warrant the advocacy of a depreciating standard,
unless indeed further reason for believing that it
^^ ould be advantageous to the community are forth-
coming. Thus far, therefore, it would appear that
it would be undesirable to change from a steady
standard to one which is depreciating.
236 EISING AND FALLING PEICES. [Ch. XVIIL
and an ap- The next case to be considered is that of a fall in
ofttie '^^ *^^ prices — that is, an appreciation of the standard
standard — whilst trade is stagnant. (Columns B and C.)
be very ob- On the adoption of such a standard the receivers
jectionable. gf fixed charges would be benefited, because they
would be able to purchase more commodities at
their reduced price; they would, in fact, as prices
decline, receive a continually increasing proportion
of the output of commodities, and this would cause
a continually increasing loss to be shared between
the producer and the wage- earner ; a state of things
which would be inequitable if the intentional result
of any monetary reform, and which would, in any
case, be undesirable. The producer, who would be
the first to feel the loss on account of the impossi-
bility of an immediate reduction of wages, would
find his profits gradually decreasing until, perhaps,
they vanished altogether. This would probably
cause the condition of trade to turn from one of
stagnation into one of actual retrogression, because
of the consequent diminution of capital expendi-
ture, and because of that drag on the trade due to
falling prices, which was described in the preceding
chapter. The workman, as long as his earnings
kept up, would be benefited by the fall in prices ;
but, unless profits were abnormally high, this could
not last long, for the depression in trade would
soon make a reduction in wages possible, and indeed
inevitable. In the first instance (column B), this
reduction in wages might not annul the whole
benefit to the labourer of the fall in prices, but
Ch. XVIIL] A FALL IN PRICES. 237
the change would probably be resisted exactly as
bitterly as if there were no compensating circum-
stances in the case. But (column C), as the fall in
prices proceeded, a still greater proportion of gross
profits would go into the pockets of the receiver
of fixed charges, and the necessary reduction in
wages would cause actual loss and suffering to the
wage-earner. The workman under government or
in kindred employments would, like the com-
mercial workman, benefit at first ; but, especially
in these days when the vote has so much value, his
wages would not fall as quickly as those of the
ordinary workman ; taxes and customary fees would
not fall in proper proportion, and the government
labourer would gain at the expense of all other
classes. It can hardly be doubted, therefore, that
under such circumstances an appreciation of the
standard is a most serious evil.
The introduction either of a standard with an Thus far
inherent tendency to appreciate, or of one with a Ifj-ids ^ ^
tendency to depreciate, would thus far appear to appears
be undesirable ; but a comparison of the results in apprecia-
the two cases makes it clear that the evils due to ^'""^ ^ \
11 • • n 111 '''^^ greater
a fall m prices are far greater than the harmful evil than
effects resulting from a rise in prices. If we desire tfon"^^^"**
to estimate truly the effect of any variations in the
value of the standard on the different classes of
the community, we must consider the distribution
of commodities, and not the distribution of money.
Rising prices at first force the working classes (and
to a lesser extent the creditor and rent-receivin<2:
238 RISING xVND FALLING PRICES. [Ch. XVIIL
classes) to economize in the consumption of com-
modities; and they suffer proportionately. Their
savings are transferred to the producers, who are
consequently enabled to spend more on themselves
and more on productive works. The effect of the
additional fixed capital thus accumulated will be
felt for a very long time ; and it is probable that
the increase in the total output of commodities
thus produced will come to be distributed in the
normal proportions between the different classes,
before this beneficial influence is exhausted ; in
which case, if there is no reaction, all may find
themselves benefited by the depreciation of the
standard. On the other hand, a fall in prices
transfers wealth from the producers to the labouring
and creditor classes ; and this will on the whole
have the effect of diminishing productive, and of
increasing non-productive expenditure ; the result
possibly being that the demand for labour, and
consequently the wages of labour, will at first show
little tendency to diminish, and the labourer may
for a time get the full benefit of the change. But
the fall in prices will place a certain drag on trade ;
and the diminution of productive expenditure must
tell in the long run. In time, therefore, there
will be a diminution of real wages, thus putting
an end to the immediate and possibly short-lived
advantages to the working classes of an apprecia-
tion of the standard. In fact, falling prices induce
the producer to economize in a way which is often
harmful to trade; whereas rising prices force the
Ch.xviil] the labour standard. 239
wage-earner and the creditor to economize with
results which are possibly beneficial for a long
period afterwards. In both cases there will be
suffering ; both thus far appear to be undesirable ;
but, on the whole, I cannot doubt that the effects of
appreciation are far more harmful than the effects
of depreciation.
In considering the case of progressive trade, when The effects
the output of commodities keeps increasing, the gtandard
question becomes more complicated. Let us first giving,
imagine a hypothetical standard of value which, in jg pro.
such circumstances, so adjusts itself that the price of gressmg, a
. , constant
the output per man per hour remains constant ; that price to the
is to say, if the same number of men continue to be i^^l^
employed for the same length of time at our typical (here called
n . . -n p n • A- X the labour
manuiactory, prices will fall m proportion to any standard) ;
increase in production due to new inventions or
to other causes ; and the total money receipts will
remain constant. (Compare columns A and H.)
With this labour standard,^ as it may conveniently
be called, the wage-earner will automatically receive
his share of the increase in the output, because,
owing to the fall in prices, his wages will purchase
more commodities ; the producer will benefit in the
same way, as his money profits will also be more
valuable ; and so will the receiver of fixed pay-
ments ; and a little consideration will show that
these three classes will share in exactly the same
* This term does not imply that the money-wages of labour
remain constant, though it is so shown in the table. A standard
always producing that result might be called a wages standard.
240 RISING AND FALLING PRICES. [Ch. XVIII.
proportion in the advantages arising from the in-
creased production. It is also to be noted that,
with the labour standard, the workmen employed
by governing bodies and employees in situations un-
affected by trade prosperity — a not inconsiderable
proportion of the working world — would get, by the
fall in prices, their due share in the benefits arising
from any advance in civilization, and this without
it being necessary to increase taxation, or to raise
customary fees and charges. It must, however, be
remembered that under these conditions prices will
fall continuously, and that an appreciating standard
always puts a certain drag on trade, because prices
will not immediately respond to the fall in the
prime cost of manufacture. The volume of business
will thus tend to be less than it would be if prices
were stationary,
and of a Next (comparing columns A and G), let us
givino- a imagine a second hypothetical system of currency
constant which, other things remaining unaltered, would
pncetothe . . . , ° .
average prevent any variation in the average price of com-
(hS^cfi modities, notwithstanding any increased activity of
the com- trade ; a standard which may, consequently, be
standard) called the commodity standard. However great the
hayetobe progress of industry might be, in these circum-
considered; , jo '
stances, the wage-earner would neither lose nor gain
immediately as a result of that progress, because
his wages would purchase the same amount of
commodities as before. For the same reason, the
income of the receivers of fixed payments would
remain constant or invariable in real as well as in
Ch. XVTIT.] THE COMMODITY STANDARD. 241
money value ; and they would never share with the
others in the benefits arising from the increase in
productive power. The whole gain from the in-
creased production would, at first, go into the
pockets of the producers. With an increased out-
put at a constant price (column G), the gross
receipts would increase; the fixed charges would
absorb a smaller proportion of the whole expendi-
ture ; and the increase in profits thus produced, by
increasing productive expenditure, would have the
effect of stimulating trade. As to the working
classes, after a time a rise in wages would certainly
follow the increased activity of trade, and in the end
they might very possibly find themselves materially
better off under this, the commodity standard, than
under the labour standard. But, on the other hand,
the demands for increased wages would often be
accompanied by trade disturbances; and, as to
government labourers and all workers not directly
dependent on commerce, they would have far greater
difficulty in obtaining their just share of the good
things of the world, and would in all probability be
for a long time in a worse position than if prices
were falling.
In comparing the relative merits of the labour and, thus
and the commodity standards, as estimated in this ^{j^ ^p.
manner, it appears, therefore, that there is some- P^*'" *^^*
,. ^ •■, • n /. 1 T 1 • 1 ^ standard
thmg to be said in lavour oi each. Looking merely occupying
to the question of distribution, the labour standard, ^g^"^'
or that in which prices fall proportionately to the position
increase of production, would appear to be the best ; the labour
242 RISING AND FALLING PRICES. [Cn. XVIIL
and the because the benefits of progress would be more
standards evenly distributed amongst all classes of workers,
would be g^jj(j because there would be no necessity for social
the best. , . , ''
discord arising from agitations for increased pay
and wages; though it certainly has the demerit
that the receivers of fixed payments — including the
idle partners — would often share in the benefits of
progress solely due to the exertions of others. But
if the question is considered with reference to pro-
duction, this opinion will probably be reversed ;
for, when trade is progressing, the fall in prices,
which must occur with the labour standard, will
tend to hamper trade ; whereas, with the commodity
standard, or that in which the average price of
commodities remains constant, profits will increase ;
and this will tend to increase productive expendi-
ture; a consideration in favour of constant, if not
of rising prices at all times. To fairly balance
these contradictory arguments would be an almost
impossible task, and a compromise naturally suggests
itself; that is to say, a standard occupying an
intermediate position between the labour standard
(column H) and the commodity standard (column G)
would appear on the whole to be the best.
The question of abstract justice between debtor
and creditor has been much discussed in connection
with this subject. It has been debated whether the
creditor, when he lent his money, expected to be
paid back in money which would purchase the same
quantity of commodities as the money he lent, or
in money which would purchase the output of the
Ch. XVIII.] THE TWO LIMITS. 243
same amount of labour. But, in truth, the question
never entered his head in anything like that form,
and all that justice requires is that we should not
make unnecessary and arbitrary alterations in con-
tracts, especially if such alterations are intended for
the benefit of one party at the expense of the other.
As to future contracts, entered into after any change
in the monetary system, the question of justice
would hardly arise ; because the creditor would
know the conditions under which he lent his money.
With any metallic standard, however, the future
must be so uncertain, that such discussions become
almost purely academical.
Of course the standard may be one tending toTheatan-
make the prices move outside the limits indicated not be one
by the labour and the commodity standards; it^^'^i^S
, ,, . „ ,.. . pncesmove
may tend to make the price oi commodities rise, or outside
it may tend to make prices fall so much that the J^^^*^"
price of the total output falls also. Both these
cases have to be considered. Taking the case of a
rise in prices first, if production increases at the
same time that prices rise (column F), it will be
seen that similar effects will follow to those de-
scribed as resulting from a depreciation of the
standard in times of stagnant trade (column D),
only, if the result of a deliberate policy, they will
be still more inequitable ; for the wage-earner would
have to struggle both to prevent being injured by
the rise in prices and in order to get his fair share
of the benefits arising from the increase in pro-
ductive power ; whilst the producers would get the
244 RISING AND FALLING PRICES. [Ch. XVIII.
full benefit of both movements as long as wages were
stationary. On the other hand, if we consider the
case (columns I and K), when, during times of in-
creasing activity of trade, prices fall so much that
the price of output per man actually diminishes, we
shall find that the results would be almost identical
with those described as resulting from an appre-
ciation of the standard during times of stagnation
(columns B and C) ; the receiver of fixed charges
would gain immensely ; the producer would find
his profits vanishing ; trade would be checked ; and
if the fixed charges were sufficiently heavy, the
labourer would suffer, though not so quickly as if
output were not increasing. Thus far it has been
seen that, in times of progressive trade, the labour
standard (column H) is the best from the point of
view of distribution, whilst the commodity standard
(column G) has certain advantages, and is preferable
from the point of view of production ; and we now
see that undesirable results will arise if the standard
varies beyond these limits, the evils arising from the
price of the total output falling being far greater
than those resulting from the price of commodities
rising.
Thus far the standard has been discussed with
reference to a condition of society capable of being
represented by a single typical manufactory. No
change was supposed to take place in the conditions
of trade, unless specially mentioned. It remains
now briefly to inquire in what manner our con-
clusions are likely to be influenced by the many
Ch. XVm.] PARTICULAR INDUSTRIES. 245
circumstances omitted from sucli hypothetical
discussions.
In considering these theoretical questions with The
regard to the currency, the effect of other causes of other
influencing prices, besides those primarily affecting 9^^^^ ''.^
the standard, must not be forgotten. For even if makes it
it were possible in times of progressive trade to ^^^u^g^
adopt a system of currency which would make the price of
p.-i A J. !• J -J.' the total
average price oi the output oi commodities per man output
per hour remain constant — that is, to adopt the should
labour standard — yet these other variants would
be certain to cause prices to fall below that limit
in many industries ; and, in such cases, profits and,
consequently, productive expenditure would tend to
diminish. If, on the other hand, it were possible
to adopt the commodity standard, thus preventing
average prices from varying, these other circum-
stances would certainly cause a rise of prices
in many industries, thus producing locally the
results due to a depreciating standard, which have
thus far been held to be undesirable. These con-
siderations also point to the selection of a standard
occupying an intermediate position between these
two extremes ; for then particular industries would
be less likely to feel the undesirable effect of either
a rise or too great a fall in prices. But the evils of
prices falling below the one limit have been seen to
be greater than those due to a rise of price above
the other limit ; and the more nearly the standard
approaches the commodity standard, the fewer
will be the number of cases in which individual
246 RISING AND FALLING PRICES. [Ch. XVIII.
The
existence
of charges
of which
royalties
may be
taken as
the type,.
industries will feel the greater evils due to a fall
in the price of the total output. The commodity
standard should, therefore, be that most nearly
approached. In the case of stagnant trade similar
reasoning would indicate the desirability of adopt-
ing a standard producing on the average a slight
rise in prices, so as to mitigate the evils due to
falling prices in industries injuriously affected by
other causes.
So far we have omitted all consideration of the
many extraneous charges on industry which increase
with an increase of output under all conditions of
currency, but over which the producer has no control.
Mining royalties are typical of this kind of burden
on industry ; railway charges, being seldom changed,
also, as a rule, increase proportionately to the amount
of business done, independently of any movement
in the general level of prices; and many other
examples might be given. Now, as to this class
of recipients, of whom we may take the royalty
holder as the typical example, it is evident that
they will find their money receipts increasing with
every increase of production under all conditions
of currency. With the commodity standard, prices
being constant, they will, therefore, be in a position
to purchase more and more commodities; and the
amount (but not the percentage) of the output
allotted to them will increase (columns A, G, and L).
In the same circumstances, the producer will also
find his profits increasing, because wages and fixed
charges will not rise at once in proportion to the
Ch. XVIIl.] EOYALTIES. 247
increase of trade. These two classes, the producer
and the royalty holder, will at first share between
them the whole benefits of the increase in productive
power. This is no doubt objectionable; but after
a rise in wages, consequent on the prosperity of
trade, a fairly equitable distribution of wealth might
be obtained, even if the whole of the extraneous
charges were of the nature of royalties, provided
they were not excessive. On the other hand, with
the labour standard, it is evident that an increase
of trade will enormously increase the value of the
receipts of railway companies and royalty owners ;
for their gain will be due both to the increase in
the output, bringing with it an increased royalty,
and also to the increased purchasing power of the
currency in which the royalty is paid. (Compare
columns A, H, and M.) With the labour standard
we assume that prices will fall so much that the
gross receipts will remain constant, notwithstand-
ing the increase in trade ; we may also assume
that for a time wages and fixed charges will remain
unchanged ; and we may therefore conclude that,
in the first instance, the difference between these
two amounts will be constant also ; that is to say,
that there will be a constant amount of money to be
shared between the producer and the royalty owner.
But, as with every increase of productive power, the
royalty owner will receive a larger payment in
money, it follows that in the same circumstances
the money profits of the producer must get less and
less ; and it is not difficult to see that if the royalty
248 KISING AND FALLING PRICES. [Ch. XVIIL
charges were heavy, his real profits would diminish
in the same way. The conditions of trade cannot
be healthy if those managing industrial concerns
are placed in such a position that any increase of
production will be an injury to them ; and, as with
the labour standard this will be the case with all
trades subject to charges of the nature of royalties,
this consideration indicates that it is very un-
desirable, from this point of view, that prices should
fall to that level.
and the In the foregoing discussion it has been tacitly
oTnew^°° assumed that no additions to the fixed charges are
fixed ever made. This is certainly an erroneous assump-
make the tion if the commercial concern under discussion is
standard ^q j^g taken as typical of industry generally. The
giving a . •' ■"• . .
constant increase of the burden of taxation is a fact too
the'outout f^i'iili^.r to US all ; and new capital is always being
of labour invested, the part which takes any form involving
beun- the payment of a fixed interest constituting a
desirable, definite addition to the weight of indebtedness
pressing on industry. These new burdens have to
be met, and if the old burdens are not cancelled
sufficiently rapidly, and if the money receipts remain
constant, the net increase in the fixed charges must
come out of the pockets of the producer or of the
employee, one or both. Almost every one admits
the advantages of keeping down national and muni-
cipal indebtedness by constantly paying oif a por-
tion of the debt ; and the arguments in favour of
a diminution of indebtedness are equally strong in
the case of industry. This will, probably, be readily
Ch. XVm.] FIXED CHAKGES. 249
admitted if a comparison is made between the com-
mercial condition of two industrial companies, the
total capital in the two cases being the same, but
one having a large debenture debt or mortgage, and
the other having none. For, the less the debenture
debt, the stronger will be the position of a company
to meet difficulties in times of commercial depres-
sion ; and if at such times it becomes necessary to
reduce dividends, the larger the ordinary capital
the smaller need that reduction be ; the hardship
of bad times will, in fact, be less severely felt if
there are no debenture-holders, because it will be
spread over a wider area. But a stronger objection
to fixed indebtedness is to be found in the fact that
it is only by allowing profits to fluctuate that a
tolerably even rate of wages can be maintained ;
heavy fixed charges, by diminishing the possible
range of such fluctuations in profits, must con-
sequently increase the fluctuations in wages. No
doubt the decay of old firms, and the establishment
of new ones, has the effect of constantly wiping
out these burdens. But this is an objectionable
way of obtaining the desired result, and it is natural
to inquire whether no better method is available.
Debts no doubt could be reduced by the introduc-
tion of a system of currency producing constantly
rising prices ; but there are many strong objections
to any steps being taken with that definite object,
and such a system would be but a rough and crude
way of producing a better distribution of wealth.
It is, nevertheless, true that if the price of the
250 KISING AND FALLING PRICES. [Ch. XVIII.
total output of the industries of the world does
not rise, there will without doubt either be a
constant cancelling of old debts through bank-
ruptcies, etc., or a perpetual increase of the burden
on industry. And this consideration does show
that some benefits will be experienced if prices rise
when trade is stagnant, or if prices do not fall so
much during times of progressive trade that the
price of the total output remains constant.
Trade The commerce of all countries goes through
more^ periods of depression, and careful attention should
readily if be given to the causes which tend, at such times,
nsin"-. to produce a revival of trade. When commerce is
active, workmen are working full time, and there is
a large production of commodities ; these commo-
dities are exchanged one for the other, and are then
distributed for use and consumption. In times of
depression there are many idle days for the labourers
in the industries affected, and there are fewer
commodities manufactured and available for dis-
tribution. Why cannot this state of depression be
converted into a state of activity by a simultaneous
decision on the part of the managers of all in-
dustrial concerns to work more regularly? Each
industry would then produce the additional com-
modities necessary to exchange with the increased
productions of other manufactories. Of course
such concerted action is practically impossible, but
putting the question in this way may make it
easier to appreciate the stumbling-blocks which
stand in the way of a commercial revival. In the
Ch. XVIII.] THE REVIVAL OF TRADE. 251
lirst place, though it is true that the increased
activity of one branch of trade always causes an in-
creased demand for the output of other trades, yet
each manufacturer must feel confident that this in-
creased demand, due to the increased activity of
other firms, is really about to be felt before he himself
will increase his own output. Confidence is above
all things necessary, and rising prices, from what-
ever causes they may be due, do help to create a
feeling of confidence. Not only must there be
confidence, but there must be the capacity to meet
the increased expenditure for labour, etc., during
the process of the manufacture of the additional
goods, and for the new machinery, etc., which may
be necessary to render the increase in production
possible. Now we have seen that a rise in prices
will have the effect of increasing capital expendi-
ture; and it follows, therefore, that a depreciation
of the currency will render a revival of trade more
probable. Changes in the value of the currency
cannot, it is true, either increase or decrease the total
wealth of the world ; all that can be done in this
way is to alter the distribution of wealth ; but this
redistribution may be done in different ways, some
more and some less likely to produce beneficial
results. A rise in prices from causes primarily
affecting the currency would, in the first instance,
transfer wealth from the workman to the producer ;
but the injury that the workman would thus suffer
might be a step towards better things in the future.
These considerations taken alone point to the
252 RISING AND PALLING PRICES. [Ch. XVIII.
desirability of establishing a monetary system which
in times of progressive trade would not allow prices
to fall so rapidly as to cause a diminution in gross
receipts, or one which in times of stagnant trade
would produce a steady rise in prices. That is to
say, the standard should under all circumstances be
one tending to cause an increase rather than a
decrease in profits ; for then it will be more likely
that improvements will be adopted tending to
increase the efficiency of labour ; an increase on
which the progress of the working classes ultimately
depends. But neither the possibility of a period
of reaction, nor the immediate harmful effects of a
rise in prices, especially on unorganized labour,
must be lost sight of for a moment. The deprecia-
tion of the standard cannot be beneficial unless it
is so slow and steady that a rise in wages follows
close on the heels of a rise in prices.
Thus far In reply to the arguments contained in this, and
cussion has ^^ *^® preceding chapter, it may be urged that we
not dealt have not been considering the effects of a continually
final equUi- appreciating or of a continually depreciating cur-
duced r°' ^^^^7' ^^* rather the results to be anticipated from
different a change from a condition of constant prices to one
of vXe. ^^ either falling or rising prices. This is no doubt
true in a great measure. In considering the hypo-
thetical manufactory, it was tacitly assumed that
the initial condition of things, which served as a
basis of comparison (column A), represented a
position of economic equilibrium ; and a comparison
with the other columns, therefore, served to indicate
CH.XVm.] FINAL EQUILIBRIUM. 253
only the changes in distribution which would be
the first to be felt as the result of any changes in
the conditions primarily affecting the standard of
value, and not the final equilibrium which would
be reached when all the slower movements had fully
worked themselves out. But, as the subject under
discussion is the effect of the introduction of a
bimetallic system, what we want to ascertain is the
effect of the change from one system of currency
to another, rather than the ultimate position of
equilibrium which will be assumed after a very
long time. And the foregoing conclusions may,
therefore, be accepted as far as the discussion in
hand is concerned.
It has, however, been urged that a bimetallic
currency is less likely than one on a monometallic
basis to have a permanent tendency to appreciate.
As little weight should, I think, be attached to this
plea, I do not propose to discuss at any length
the relative merits of permanently appreciating and
permanently depreciating currencies. But, as some
of the arguments in Chapter VII. were based on
such considerations as these, a few words on this
subject may be necessary.
In considering the effect of an appreciation of the
standard, it was seen that the proportion of the
gross receipts absorbed in the discharge of fixed
payments would be increased by a fall in prices
(columns A, I, and K). But it is evident that this
change could not go on for ever ; for, if it did so,
the whole of the gross receipts would in time go
254 RISING AND FALLING PRICES. [Ch. XVIII.
into the pockets of the creditor class, leaving nothing
wherewith to pay the wages. A permanently depre-
ciating currency cannot, therefore, be accompanied
by a perpetual increase in the real value of the fixed
payments. It is true that as long as production
remains unaffected by the fall in prices, and as long
as the fixed charges remain constant in money
value, so long must a fall in prices be accompanied
by an increase in the proportion of the gross receipts
required to satisfy the fixed charges. And this is
where the foregoing table is misleading ; for it
indicates that production, fixed charges, and wages
(in many instances) would remain constant, which
would, of course, not be the case. If a change were
to take place in some of the conditions primarily
affecting the standard of value (as, for example, an
increase in the use of the precious metals in the
arts) then it is evident that a new force would be
brought into existence which would tend to produce
a fall in prices. But this new force would call
into existence other forces tending to readjust the
equilibrium in many ways. Profits would diminish.
Production would consequently be checked. The
diminution in the output would tend both to check
the fall in prices and to bring down wages. The
diminution in profits would tend to produce a fall
in the rate of interest; and the indebtedness on
industry would also tend to decrease in money value,
because capital of the same value could be obtained
at a lower price. Thus the fixed charges on industry
would slowly tend to diminish. And in time all
Ch. XVIII.] FINAL EQUILIBRIUM. 255
these forces would so arrange themselves that some
new position of equilibrium would be reached. But
who would venture to predict with confidence what
would be the exact way in which commodities would
then be distributed ? We know that fixed charges
will alter very slowly; we believe that wages will
rise or fall less rapidly than prices; and we can,
therefore, have some idea of the eifects which will
be experienced for a long time after an appreciation
or a depreciation of the standard ; but to ascertain
the final position of equilibrium is a very difierent
matter.
It may be urged that in the long run, and for But the
a given condition of all the factors of trade, the concl^^ons
same proportion of the gross receipts will always «re pro-
have to be given to the creditor class as the necessary pUcable to
inducement to make them part with their capital, t^efinal as
* . . r ' ^ell aa to
whatever system of currency might be in force. If the first
this is true, then, in the final equilibrium, the appreci-
standard selected will make no difference in the atin? or de-
value of the balance of the gross receipts, which is currencies.
available for profit and wages; and no merit can
be claimed for one standard over another on account
of any permanent tendency either to appreciate or
to depreciate. But, considering the complex con-
ditions which determine the rate of interest ; con-
sidering the impossibility of predicting the future ;
and considering the improvident character of human
beings ; it appears to me that the rate of interest
charged when the currency is permanently appre-
ciating will not, on an average, be so much lower
256 RISING AND FALLING PRICES. [Ch. XYIII.
than the interest charged when the currency is
permanently depreciating, as to compensate for the
fact that the real value of the interest on each
separate loan will always be increasing with an
appreciating currency, and always decreasing with
a depreciating currency. If this conclusion is
correct, the value of the fixed charges on industry
would always be less, and consequently the value
of the share of the gross receipts to be divided
between profits and wages would always be greater
with a depreciating than with an appreciating cur-
rency. A diminution in the value of the fixed
charges was the main advantage claimed for a
depreciation of the currency in the foregoing dis-
cussion ; and the conclusions arrived at in the
chapter, probably, therefore, apply not only to a
change from stability to appreciation or deprecia-
tion, but also to perpetually appreciating or per-
petually depreciating currencies.
General The foregoing conclusions may be summarized as
as to the foUows. In the first examination of the effects of
conditions ^n appreciation and a depreciation of the standard, it
vrhich it IS ^ ^ . 7 n . 1
desirable was assumed that prices m all industries rose and fell
stendard together ; that there were no charges like royalties,
of value which increase with an increase of production ; and
fulfil. that no new loans or other fixed burdens were con-
tracted. Under these hypothetical conditions it was
seen that in times of stagnant trade a perfect mone-
tary system should tend to produce constant prices ;
and that, when trade is progressing, the standard
should occupy an intermediate position between that
Ch. XVIII.] AN IDEAL STANDAKD. 257
giving a constant price to commodities, that is, the
commodity standard, and that giving a constant
price to the output of a given amount of labour,
or the labour standard. But many circumstances
omitted from this preliminary discussion point to
the advantages of a depreciating standard ; or, if
production is increasing, at all events to the com-
modity standard, under which the gross receipts of
commercial concerns would tend to increase. For
example, the evils due to the price of the total
output of commodities falling are far more serious
than the disadvantages resulting from a rise in
prices. Productive expenditure is stimulated by in-
creasing profits, due to a depreciating standard ; and
the burden of indebtedness will decrease with rising
prices. Whereas royalty owners and others will
absorb quite an undue proportion of the proceeds of
industry if prices fall ; and an appreciating stan-
dard always puts a drag on trade. Thus no objec-
tion should be taken to a slow and steady rise in
prices in times of stagnant trade ; and, in times of
commercial activity, the standard should approach
more nearly to the commodity standard than to the
labour standard ; that is to say, whilst the price of
commodities should fall in those circumstances, there
should be an even more decided rise in the price of
the total output of commodities. These conclusions
are more reliable as indicating the first effects of
any change in the condition of the currency, than
as a guide to what would occur if the new conditions
were to hold good for an unlimited period of time.
a
258 RISING AND FALLING PRICES. [Ch. XIX.
CHAPTER XIX.
HAS THE RECENT FALL IN PRICES BEEN TOO
RAPID?
Would it
have been
better if
prices had
fallen less
rapidly ?
The con-
ditions
have been
those of
proCTessive
trade.
It will be remembered that we divided the argument
in favour of bimetallism, which was based on the
recent fall in prices, into four separate inquiries.
The question whether the general level of prices
would have been higher had bimetallism been
maintained was discussed in Chapters XV. and XVI. ;
and an affirmative answer was given. There remain
three more questions to be considered, the first being
whether it would have been better for the general
welfare of the community if the fall in prices during
recent years had been less rapid. In seeking a
reply to this inquiry we must apply the theoretical
conclusions arrived at in the preceding chapter to
this problem of real life.
In the foregoing discussion, the conditions which
it is desirable that a standard of value should fulfil
in times of stagnant, and in times of progressive
trade, were both considered. No one doubts that
the output of commodities has, on the whole, been
increasing since 1873, and this period has not.
CH.XIX.] THE RECENT FALL IN PRICES. 259
therefore, been one of stagnation in the sense in
which the word has here been used. And the ques-
tion is whether, judging by these conclusions as to
the best standard for times of progressive trade,
gold prices have either risen or fallen more than
is desirable since the abandonment of bimetallism
in 1873 ; whether, in fact, the change in the level of
prices has or has not been, on the whole, beneficial
to the community at large.
No one denies that the last twenty-five years has, The gold
on the whole, been a period of falling prices in ^gs un.
Europe, a fact which is easily seen by glancing at doubtedly
any of the published series of " Index Numbers " of ciated ;
average prices. If, for example, we take the mean
of Sauerbeck's " Index Numbers " ^ for the ten years
from 1874 to 1883, and compare it with a similar
mean of the years from 1884 to 1893, it will be
seen that wholesale commodities fell 21 per cent,
in gold price on the average during that mean
period of ten years. Retail prices may have fallen
considerably less than this ; but, after making due
allowance for that possibility, it cannot be denied
that there has been a fall in average gold prices
since the abolition of the last bimetallic laws.
When, however, we pass on to consider whether the ^^^ ^^
price of the output of a given amount of labour has total out-
either risen or fallen, we are on far more debatable J"* j'^'^
ground. We have seen that there is good reason to been not
believe that wholesale prices fell about 21 per cent, stationary.
in a given mean period of ten yeaxs. But this fact
^ See Appendix.
260 KISIKG AKD FALLING PRICES. [Ch. XIX.
is of little service to us in this inquiry ; for, even if
it could be assumed that this represents the average
fall in price of aZZ commodities during that time, yet
we should not know what was the average increase in
the output of commodities with which to compare
it. No doubt more has been produced at a lower
price, but has the price of the total output risen or
fallen ? If, taking the same decennial averages, we
look at the export trade of the United Kingdom,
although it undoubtedly increased in volume, we
find that the value per head of the population fell
from £6 8s, 4:d. to £6 5s. 3d., a fall of 2J per cent.^
Thus, if the exports represent a fair sample of the
whole trade of the country, it would appear that
the fall in prices was sufficient to produce a fall in
the gold price of the total production per head.
But a fall in gold price of the total output is the
same thing as a diminution in the gross receipts
per head ; and it is true that, if such a fall really
took place, we should have expected to find that
there had been a diminution in wages and profits,
one or both (column I). With regard to the move-
ment in wages during this period, the evidence,
though it is conflicting, on the whole appears to
favour the belief that money-earnings have risen
somewhat in the last quarter of a century. But
such estimates cannot be very reliable ; for though
it is comparatively easy to ascertain the rates of
wages in the principal trades, it is always difficult
to estimate the average number of hours per week
^ See Statistical Abstract for the United Kingdom.
I
Ch.xix.] price op the total output. 261
during which wages are earned ; and the earnings
of casual labour are not at all well known. As to
profits, judging from the income-tax returns, they
have undoubtedly increased. These returns, how-
ever, are for various reasons not quite reliable for
the purposes of this comparison. In the first place,
they include profits made out of England, including
those made in silver-using countries. Then, again,
they also include, besides " profits," various other
sources of income to individuals, such as interest on
loans, etc., etc., which we have here classed as fixed
charges, and which may have been increasing.
And, lastly, it will be remembered that in discussing
royalties, railway charges, etc., it was shown that, if,
during a period of increasing trade, the price of the
output remained constant, these charges would in-
crease at the expense of the owner of the industry,
whose profits would diminish in a corresponding
manner. It is interesting to note, in connection with
this view, that, judging from the income-tax returns,
and comparing the means of the same two decennial
periods as before, it appears that the income arising
from the railways of the United Kingdom per head
of the population increased 11 per cent., whereas
the income from ironworks decreased 45 per cent.^
and that from mines 26 per cent, during the same
interval. Thus it is possible that the profits made
by productive industrial concerns decreased during
that period, whilst the total income-tax paying
* The years 1874 and 1875 were, no doubt, very exceptional
ones.
262 RISING AND FALLING PRICES. [Ch. XIX.
incomes increased. It is necessary, moreover, to be
very careful how particular epochs for comparisons
of this kind are selected, for a study of the income-
tax returns between 1874 and 1887 will show that
there is no sign of there having been a general in-
crease of profits per head during that interval.^
It is, of course, extremely hazardous to venture
an opinion on such a debatable subject, but the
impression left on my mind is that from about 1874
to about 1888 the price of the total output of the
United Kingdom was not very far from stationary ;
that is to say, that gold followed approximately the
law of the labour standard during those years.
Since the latter date, there has, I believe, been a
slight rise in the price of the total output, the
increase in gross profits due to that rise having
gone largely into the pockets of those not directly
connected with productive industries.
Only a In the discussions on the effect of appreciating
in^tries ^^^ depreciating standards, two distinct reasons
have were given for believinsr that production does not
escaped ° or
the be- proceed so rapidly with falling as with either steady
SXenceof*^^ rising prices. In the first place, the fact that
^imi^l^- the price of commodities does not immediately
ing profits. , ^ , . , T.^. . .,
respond to any change m the conditions primarily
affecting the value of the standard, affords an
explanation of the way in which a fall in prices
puts a more or less serious impediment in the way
of trade. This check on commerce has, I believe,
undoubtedly been felt in gold-using countries since
^ Gold and Silver Commission, p. 19.
Ch. XIX.] A BENUMBING INFLUENCE. 263
1873. The second reason for anticipating a relative
diminution in production when the standard is
appreciating is due to the way in which a diminu-
tion in profits is normally accompanied by a
diminution in productive expenditure. Now, it
may be urged that until profits actually begin to
diminish, no very serious consequences will flow
from the appreciation of the standard. This may
be true. And if it is also true that, though prices
have fallen, the average price of the total output
per head has been constant during the greater part
of the time since 1873, then it follows that the
money income of the average commercial concern
has remained approximately stationary; and, as-
suming that money wages have not varied materially,
it would, at first sight, appear that profits cannot
have diminished, and that little or no harm can
have arisen in this way. This, however, is not the
case. If the price of the total output remains
constant, then the profits to the o^vners of any
industrial concern will only remain constant if there
is no increase of the fixed charges on that industry,
and if it is not subject to any of those charges
of which royalties were taken as a typical example.
Additions to the fixed charges on industry are con-
stantly being made ; and almost every industry is
subject to some charges which increase in propor-
tion to production. Then, again, the statistics on
which the belief in the constancy of the price of
the output was founded refer to average prices,
and not to prices in particular industries. If the
264 EISING AND FALLING PRICES. [Ch. XIX.
average price of the output did remain constant
during these years, the price of the output of about
half the trades in the United Kingdom must have
risen above, and the price of the output of about
half the trades must have fallen below, that level.
Thus, assuming that the average gold price of the
oiitput remained constant for many years after 1873,
it appears that all average industries which were
subject either to an increase in fixed charges or to
any charges of the nature of royalties, and all in-
dustries in which prices fell below the average
(about half the industries of the country) existed
during that period under conditions tending to
lower the owner's profits, unless, indeed, wages were
falling. If our conclusions as to the level of prices
are right, but a minority of the productive industries
of the United Kingdom have escaped the benumb-
ing influence of diminishing profits during the years
following the great monetary changes on the Con-
tinent, and few, therefore, have been carried on in
the way most likely to be ultimately beneficial to
all classes. In any case, it cannot be denied that
the price of the output of individual industries has
recently gone down, and wherever this has occurred,
the burden of fixed debts and charges must have
been more heavily felt, thus producing a depressing
effect. English agricultural interests, for example,
must have suffered, to a certain extent, from this
cause, though the depression of that great industry
is probably in a very great measure due to other
influences.
Ch. XIX.] WILL THE FALL CONTINUE? 265
A rise in prices, or an increase of profits, there- Thus, if
fore, stimulates trade ; and the circumstances which '^^ *^®°'
' _ reucal con-
ultimately govern production are those to which, in elusions are
the interest of all classes, most attention should be i^^^^ '
paid. But, on the other hand, the working classes evident it
are immediately benefited by a fall in prices. In been better
the preceding chapter a compromise between these ^^ ^''i^??
two views was suggested. The influences due to less
two hypothetical standards of value during times of ^^^^ ^'
progressive trade were discussed ; the one, the com-
modity standard, giving constant prices; and the
other, the labour standard, giving a constant price
to the output of human labour ; and the conclusion
arrived at was that a perfect standard should lie
intermediately between these two limits, but that,
of the two, the commodity standard should be the
one most nearly approached. But gold prices have,
I believe, approached very nearly, if they have
not actually touched the other limit — the limit
indicated by the labour standard ; and if these con-
clusions are accepted, it is evident that prices have
fallen too rapidly for the ultimate well-being of the
community.
But if it is true that prices have recently been Is the fall
falling too rapidly, is this too rapid fall likely to continue ?
continue ? That is the next subject of inquiry.
Average gold prices depend on the demand and Theproba-
supply of gold as compared with the demand and pnc^ con-
supply of the average commodity ; and there are, f^^^^^ *",
therefore, a great variety of forces at work, some on the
tending to appreciate and others to depreciate the '" ""*^^ "
266 RISING AND FALLING PRICES. [Ch. XIX.
many standard of value. Many of these have already
foTC^!°° been mentioned, but they must be grouped together,
and viewed as a whole, if an attempt is to be made
to look into the future.
In the first place, with regard to the forces
tending to cause a depreciating of the standard,
the demand for gold has been diminishing in recent
years on account of the introduction of improved
methods of conducting business, by means of which
the volume of exchangeable credit on a given
metallic foundation has been largely augmented,
thus increasing the " money " available for business
transactions, without a corresponding increase in
the metallic currency. The output of gold is in-
creasing, both in South Africa and elsewhere, and
this is another circumstance tending to depreciate
the standard.
The above-mentioned influences, which are tending
to lower the value of gold, seem likely to increase
rather than to diminish in the future. But this is
also the case with regard to the forces having an
opposite tendency. Russia, India, and Japan —
countries which contain between them a very large
fraction of the population of the world — are adopt-
ing, or on the eve of adopting, a gold standard.
The smaller the number of the remaining silver-
using countries, the more will the isolation of their
position be felt, and the more likely are they to
abandon their old standard in favour of gold; an
increase in the demand for that metal is, therefore,
likely to be experienced before long, because of
Ch. XIX.] WILL THE FALL CONTINUE? 267
other countries (Mexico, for example) adopting the
gold standard. Monometallists believe that the
increase in the production of commodities has been
the main factor in lowering prices ; it has, no doubt,
contributed in producing that result, and we must
and may hope that this cause of appreciation will
continue unabated in the future. The population
of the world is rapidly increasing, and the increase
of business transactions naturally incident to this
increase of population ought to be accompanied by
a corresponding increment of money, if there is not
to be an increasing pressure put upon the currency.
If the greater complexity of modern as compared
with more primitive industrial systems necessitates
a larger amount of the standard of value being
used to serve as a basis for the transactions con-
nected with a given volume of production, then
this circumstance tends to neutralize the other
effects of commercial evolution, namely, those due
to the increasing economy in the use of coin result-
ing from the more and more extended use of credit
instruments as money ; and, indeed, when civiliza-
tion is first spreading into new countries, it appears
not improbable, that the balance of these opposing
forces will give rise to an increase in the demand
for a metallic currency. The loss and wear of coins
necessitates a considerable annual increment of
metal to keep the currencies of the world in sound
condition, and this demand for gold will increase
in proportion to the increase in the use of gold
currencies. And, as the last of the causes of the
268 RISING AND FALLING PRICES. [Oh. XIX.
appreciation of gold which will be mentioned, the
demand for that metal in the arts is said to be
" very steadily increasing." ^
The diffi- In the face of such shifting, such ill-determined,
foreteUinw ^^^ such Complex conditions, who will venture to
the future foretell the future? And it is in the impossibility
■wisest to of foretelling the future that bimetallists, I think,
tt^^p^t ^^^ their strongest argument ; for they may well
for guid- say that the wisest course is to shape our policy by
the experiences of the past, without attempting to
weigh these conflicting considerations as to the
future. Prices having fallen in the past too quickly
for the general well-being of the community, we
should, therefore, according to this view, assume a
continuance of this too rapid fall in the future,
granted the continuance of existing currency con-
ditions. Moreover, as a too rapid fall in prices is
more harmful than a rise, a currency policy based
on this assumption would be shaped with the view
of warding off the greater evil of the two.
But if It is, no doubt, difficult to believe that the present
prices are , n i i • ^
now about enormous output oi gold can go on without sooner
SoS;£ie ^^ ^^^^^ lowering the value of that metal ; and the
this plea output seems likely to increase rather than to
lism is " diminish. If we look forward to a time when the
greatly existing condition of things will be no guide as
weakened. , .
to the change which is likely to be produced by
tying the two metals together, and if a period of
steady or rising prices should now be commencing,
^ Royal Commission on Agriculture, 1894, p. 439. Mr.
Foxwell's evidence.
Ch. XIX.] WILL THE FALL CONTINUE? 269
and should be going to last until this indefinite
epoch arrives, then the plea for the introduction of
bimetallism, at the present time, on the ground that
it will diminish the fall in prices is destroyed. For,
on that assumption, prices would continue to rise
under existing monetary conditions until a time
arrived when the introduction of bimetallism would
be as likely to be harmful as to be beneficial in
its effects. What is now wanted is a diminution
in the rate of the fall in gold prices, no matter how,
without shaking commercial confidence, that dimi-
nution is brought about.
Monometallists, who consider that the increase of if the
production of commodities is the chief reason for ^^^^^^11
the decline in prices, are naturally and rightly causes is
desirous that this cause should be as prominent as too^^eat, ^
possible in the future ; and apparently they would t^e ^^es-
welcome a continuance of the decline in prices to whether
an unlimited extent. But this view indicates a^^^^f*^^
certain confusion of thought. It is not logical the fall
to argue that, because an increase of production is checked
good, and because an increase of production causes ^y}\:.
... •*■ . . metalusm.
falling prices, it is therefore wrong to try to check
any fall in prices. It would be logical to argue
that because a fall in prices produces an increase
of production, and because that result is beneficial,
we ought, therefore, to force down prices in every
legitimate way; this would be logical, but the
premises would not be true ; for no one thinks that
falling prices do tend to increase production. It is
a rise, and not a fall in prices, which stimulates
270 EISING AND FALLING PRICES. [Ch. XIX.
trade; though it is true that the increase in the
output thus caused reacts and tends to lower prices.
A fall in prices, if the fall is too great, must be a
cause of depression. Moreover, the fall in prices in
recent years has been due to many causes, and it
is the total fall which has to be considered in esti-
mating its effect on trade. If the total fall has
been rapid enough to be injurious, and if some of
the many causes of that fall produce no direct
beneficial results, what possible objection can there
be to neutralizing the action of some at least of
these forces? This leads to the last of the four
inquiries connected with this subject; that is,
whether the action of any of the causes tending
to produce this fall in prices would be checked by
the reintroduction of bimetallism without any evil
results arising from that reform.
Oh. XX.] FUTURE DEMAND FOR GOLD. 271
CHAPTER XX.
CONCLUSION OF THE ARGUMENT BASED ON THE
RECENT FALL IN PRICES.
It has already been seen that, had bimetallism been Bimetal-
maintained, prices would have fallen less rapidly ; i^^en^tiie
and, as the arguments used in demonstrating that ^^^^
this would have been the case, can be applied to for gold
the future in almost the same way as to the past, ^.^cause
•' ^ silver-usmg
it seems to follow without further proof that the countries
reintroduction of the joint standard would put aj^^gt^""
check on the fall in prices in the future. A few ob- tlie gold
1 . . , 1 T • 1 1 standard,
servations on this point may, however, be desirable.
Whatever might be the effect of the introduction
of bimetallism on the other causes of appreciation,
it cannot be denied that the demand for gold for
monetary purposes would be diminished by the more
extended use of silver. India, and the remaining
silver-using countries, would not establish gold mono-
metallic currencies; and there would cease to be
the same necessity for accumulating gold for the
reserves of countries, like Russia and Japan, which
are in the act of adopting the gold standard. The
fall in prices since 1873 has been exceptionally
272 RISING AND FALLING PRICES. [Ch. XX.
severe, and it would, I believe, have been materially
less if silver had maintained its old position in the
currencies of the world. Market-ratio bimetallism
would not cause an immediate rise in prices, but it
would stop this movement towards universal gold
monometallism, and, thus, prevent a repetition of
the influences which have materially helped to
produce the recent marked appreciation of the
currency.
Bimetal- It has already been seen that bimetallism will
also act produce a more stable standard of value, and its
as^ a check steadying eifect must be considered in estimating
apprecia- the probable changes in level of prices in the im-
CTurency ^ iiiediate future. For example, when a nominally
because of gold-standard country on an inconvertible paper
the greater ^ . . ^ * -^ -n + •
stabuity of basis resumes specie payments, it will create an m-
st ^ i°^^* crease in the demand for gold ; whereas the demand
will be both for gold and silver, if its currency laws
are bimetallic. In both these cases the effect of
the change will be to lower average prices in gold-
using countries; but the effect on prices will be
greater if the demand is for gold only than if the
demand is shared between gold and silver. This
will be admitted if the value of the metals as
articles of merchandise is considered. When a
foreign demand for the standard of value causes
the currency to appreciate, sufficient metal is drawn
from the market to make its value as an article
of merchandise coincide with its value in the
coinage. The foreign country demanding specie
will probably only require metal of a certain value ;
I
Ch. XX.] CONCLUSION OP THE ARGUMENT. 273
for the value of the currency which it is proposed to
establish mil be independent of the particular com-
modity chosen as the standard ; ^ and, if the whole
demand is for gold, it is obvious that more gold will
be taken from the market, and that that metal
will, therefore, rise more in value as an article of
merchandise, than if the demand is partially satisfied
with silver. Thus, when foreign countries resume
specie payment, the fall in prices as measured by
gold under universal gold monometallism would
be greater than the fall of prices as measured by
gold linked to silver under effective bimetallism.
Gold currencies may appreciate because of an in-
crease in the demand for gold either for making
good the waste of the coinage ; or on account of
the increase in business transactions incident to
the increase of population, or to any increase of
production ; or on account of any increase in the
complexity of the industrial system ; and, with
regard to each of these causes, the appreciation of
the standard thus produced will, in the same way,
be less rapid if the joint standard is adopted.
Thus, looking either to the special causes of ap-
preciation due to changes in currency legislation,
or to the increase in the normal demand for the
metals for currency purposes, it appears, granted
the continuance of all other existing conditions,
1 This is evidently trae if the quantitative theory of prices
may be strictly interpreted ; for, as the number of coins in-
creases, the value of each separate coin will decrease pro-
portionately.
T
274 RISING AND FALLING PRICES. [Ch. XX.
that we may count on the fall in prices being less
severely felt if international bimetallism is adopted.
But may But it may be urged that prices will not fall
fdi^™^^ sufficiently quickly for the well-being of the com-
sufaciently, munity, or may even rise under market-ratio bi-
xMeT ^^^ metallism. In the first place, it is to be noted that
market- the introduction of this reform might, in certain
metallism? circumstances, be beneficial in checking a too rapid
^^ ®^' f rise in prices. At present the tendency of the gold
the past is price of silver is to fall, and the effect of adopting
guide^hi a bimetallic system would now be to put a drag
answering q^ the fall in average gold prices. But if gold
tion. should commence to fall in value, and if the fall
should be sufficient to make the gold price of silver
rise, then the introduction of bimetallism would
check the rise in average gold prices. The dis-
turbance due to any great and sudden increase in
the output of gold, combined with a cessation in
the demands of the great commercial nations for
more metallic currency, would, therefore, under the
existing conditions as to the production of silver,
very probably be less if bimetallism were adopted.
Thus it is possible that the introduction of bi-
metallism might be beneficial in preventing either
too great a fall or too great a rise in prices; the
former being at present far the most probable con-
tingency. And the question is whether these two
contingencies are sufficiently probable to serve as
the foundation for a serious argument in favour of
this reform. It was seen that it is almost hopeless
to foretell whether gold prices will rise in the
Ch. XX.] CONCLUSION OF THE ARGUMENT. 275
future ; and the case becomes still more complicated
if we have to consider the causes affecting the value
of silver as well. In order to determine if bi-
metallism would produce a beneficial effect, we have
to compare gold monometallic prices in the future,
when the value of gold may be influenced by further
changes in the laws of currency, with prices in the
future as measured by the joint standard, which
would, if bimetallism were effectively maintained,
be influenced in no such way. Bimetallists may
again adopt a strong position in saying that, with
these complex conditions, it is better to look to past
facts rather than attempt any forecast based on
theoretical considerations. From this point of view
the question for consideration is, therefore, whether
the joint standard would have produced beneficial
results if it had been adopted in the past.
Prices, as measured by silver, have, it is generally Had
believed, remained fairly constant ; ^ and until about ™j[q
1893 silver fell in gold price in England somewhere bimetallism
about as much as the average commodity. We generally
may therefore conclude that silver, as a standard *f°P*^, ^"
•' . 1873, the
of value, has behaved, until the last year or two, standard
1 Gold and Silver Commission, p. 18. See also an interesting
paper by Mr. F. J. Atkinson in the Statistical Review for
March, 1897. He concludes that prices are rising ; but, from
his figures, I should conclude that the oscillations have been so
great that it is not possible to determine the general drift of
silver prices. See also the Blue Book on the Moral and
Material Progress in India during 1891-1892; where, however,
the examples of rises in particular prices since 1873 are too
isolated, I think, to prove conclusively a continuous rise in
average prices.
276 RISING AND FALLING PRICES. [Ch. XX.
since that approximately like the commodity standard. It
have *lso appears to me probable that, for some years
fulfilled after 1873, the gold price of the output of com-
reqaire- modities per head in England did not vary much,
ments. ^^^ ^^^^ g^j^j -j^^^ behaved somewhat like the labour
standard. Gold and silver have, therefore, repre-
sented with rough approximation these two hypo-
thetical standards ; and if it was right to conclude
that a perfect standard of value should occupy an
intermediate position between these two extremes,
approaching, however, more nearly to the commodity
standard than to the labour standard, then it would
seem that, had the two metals been tied together by
market-ratio bimetallism in 1873, a standard in
accordance with theoretical requirements, or one
which, if it erred at all, would have erred on the
side of not keeping up the level of prices suffi-
ciently, would have been adopted. Thus, judging
by the past, market-ratio bimetallism may now
safely be adopted, as far as the level of prices is
concerned.^
1 To assume, had bimetallism been adopted in the past, that
the movement in prices as measured by the joint standard woxild
have been the same as the mean between the movements in
prices as actually measured by gold, and as actually measured
by silver under existing an-angements, is but a very rough
approximation to the truth. This assumption might, I believe,
be made if the supply and demand schedules for both gold and
silver followed the law of simple proportion, and if, on the
supposition that the value of the stocks of gold for monetary
and non-monetary purposes differs from the value of the stocks
of silver, there is a corresponding difference between the
schedules in the two cases. None of these conditions do,
i
Ch. XX.] CONCLUSION OF THE ARGUMENT. 277
But it must be admitted that it is questionable if The past is
the state of trade during the last two or three the best
decades should carry much weight as a permanent jr^de for
guide with regard to our future currency policy, ^^j^^^'
Bimetallists contend that gold has not fulfilled the unreliable
conditions of an ideal standard during recent years, distant
mainly because of the e£fect of foreign legislation, ^"t'""^-
and not so much because of the inherent qualities
of the metal itself. But even if it is urged that
either metal, as a commodity, has fulfilled the con-
ditions of a standard of value in a more perfect
manner than the other, it must be admitted that the
time in which gold is said to have " behaved better,"
or " behaved worse " than silver is too short to serve
as any sure guide as to its conduct in the dis-
tant future ; and no very strong argument can be
based on such narrow foundations, either for or
against bimetallism, as far as the permanent merits
of the system are concerned. We cannot tell which
metal would form the most perfect standard of value
when the great commercial nations have ceased to
influence the value of money by legislative changes,
and when, if ever, the final improvements in con-
nection with the mining industries have produced
their ultimate effects ; all we can hope to do is to
fasten the two together so that the combination will
form a steadier standard of value than either taken
separately. But as regards the less remote future,
probably, hold good, but they indicate the kind of error made in
assuming that joint-standard prices would have moved as mucli
as the mean movement of gold and silver prices.
278 KISING AND FALLING PRICES. [Ch. XX.
the foregoing considerations appear to afford the
best indication obtainable as to the future move-
ment of prices under bimetallism, though it may
not be a very strong one ; and this indication clearly
points to prices neither rising nor falling too much
under market-ratio bimetallism.
Thus the Whether bimetallism would be advantageous or
chain of j^q^ jjj preventing the further appreciation of the
argument ^ ° ^ ^
in favour standard is, of course, only one of the questions to
metailism ^® decided in this controversy. The comparison of
based on the merits and the demerits of bimetallism has
fall in been the subject to which several of the preceding
commits chapters have been devoted; and the probability
though it of benefits arising from the check on the fall in
w?ak mik P'^ices should be added as a weight in the balance in
in it. favour of the joint standard in giving the verdict
on the whole currency question. For, to summarize
the whole argument, it has been seen that the
general level of prices, since the abandonment of
bimetallism in 1873, has been falling too rapidly
for the ultimate well-being of the community ; that
the fall in prices, taking the past as the most re-
liable guide, is on the whole likely to continue with
too great rapidity in the future, this, however, being
the weakest link in the chain of argument ; that
prices would have fallen less rapidly if bimetallism
had been maintained ; and, as the arguments on
which this last conclusion was based apply to the
future as well as to the past, that the reintroduction
of bimetallism would put a check, but not too great
a check, on the fall in prices in future. It obviously
Ch. XX.] CONCLUSION OF THE ARGUMENT. 279
follows from these premises that the joint standard,
if adopted at the present time, would have a bene-
ficial effect.
The natural sentiment of all men of liberal mind General
is to rejoice at falling prices ; and, even should a the evils
study of the subject shake their faith in their of falling
. . . . prices,
previous convictions, as I think it undoubtedly
would, many may nevertheless feel that the troubles
due to an appreciating currency have been painted
in too high colours. Exaggerated language may
often have been used with regard to this subject,
but, in my opinion, the merits of monometallism
and the dangers of bimetallism have been far more
grossly and persistently exaggerated. In selecting
the best currency system, it is no doubt a choice
of relative advantages and relative disadvantages;
but, in making this choice, it should be admitted
that the evils due to a too rapid fall in prices,
though they may not be appalling, are yet suf-
ficiently serious to weigh heavily in the balance. As
a single illustration of this truth, the national debts
of the world now amount to some £6,000,000,000,^
and a fall of 10 per cent, in average prices would
have the same effect in increasing the real taxation
necessary to pay the fixed money interest on this
vast sum, as would have the negotiation by the
governments of the world in times of steady prices
of a new loan of £600,000,000, a sum about equal
to the total value of our own national debt. In
both cases the greater real taxation thus thrown on
» Lubbock's " Uses of Life," p. 164.
280 EISING AND FALLING PRICES. [Ch. XX.
manufacturers must necessarily lessen the value of
the amount available for profit and wages. It is
true, no doubt, that the only direct effect of an
appreciation of the currency through causes primarily
affecting the standard is to transfer wealth from one
class to another ; yet this transference has the effect
of lessening the expenditure on productive works,
of checking output, and of diminishing the value
of the funds available for the payment of labour.
It is true, also, that little or no ultimate effects are
produced by an alteration in the value of the cur-
rency; but a consideration of the case of national
debts shows how very long it will be before that
ultimate condition of things is reached. The fixed
charges on industry, though they may not impose
such a rigid burden, yet they are enormously greater
in amount than all the national and municipal debts
combined ; and, even if production is only hindered
to a moderate extent by the increase in the pressure
of such debts, the effect on the well-being of the
community may be very considerable. It may be
difficult to point to recent years as a warning for
the future; but if it is true that, supposing bi-
metallism had been effectively maintained, the out-
put of commodities would have increased even more
rapidly than it has done, and that the value of the
fund out of which the real wages of labour are paid
would have been greater, then the check on trade
due to the recent fall in prices is none the less a
real evil because it is obscured by the general
industrial progress due to other causes.
FOREIGN TRADE.
Ch. XXI,] OPINIONS OF BIMETALLISTS. 283
CHAPTER XXI.
THE OPINIONS OF BIMETALLISTS AS TO THE
EFFECTS OF INTERNATIONAL TRADE.
The more obvious and direct disadvantages arising The effect
from the fluctuations in the rate of foreign exchanges °.* i"|«™a-
o o tional trade
were discussed in Chapter XI. The consideration has now to
of the important and difficult questions connected gidered.
with the indirect effects of international trade on
home prices was, however, postponed. Having in
the mean time dealt with the results to be anticipated
from an appreciation or a depreciation of the standard
of value, we are now in a position to resume this
inquiry.
It has often been contended that prices have been The views
lowered in gold-using countries as a direct conse- metallic "
quence of the fall in the value of silver ; and that "^T^^q , ,
a great injury has thus been inflicted on our own and Silver
producers. As I do not altogether agree with the ^o^^this
opinions usually held by bimetallists on this subject, subject,
it will, perhaps, be best to quote the most authorita-
tive statement of their views that I can find. The
following extract is taken from the minority report
284 FOEEIGN TRADE. [Ch. XXI.
presented by the bimetallic members of the Gold
and Silver Commission; the italics are, however,
mine, being inserted to indicate the passages which
appear to me open to criticism,
" The most familiar, and, perhaps, the simplest illustra-
tion of our meaning may be found in the effect of the
exchange on the export of wheat from India, and on the
relative position of the growers of that commodity in
either country.
" If, when the gold price of wheat is 406-. a quarter, the
rupee, measured in gold, is worth 2s., the producer of
wheat in India will receive 20 rupees for a quarter
of wheat.
" If the gold price of wheat then falls 25 per cent, to
30s. a quarter and the gold price of the rupee falls 25
per cent, to Is. 6d, the Indian producer will still receive
20 rupees for his quarter, and they will purchase as much
as they did before, because prices in India have remained
practically the same.
"The position of the English grower, on the other
hand, is materially changed.
" He will only receive 30s. instead of £2, and unless all
other prices have fallen in the same proportion, he must
be a loser. And the precise measure of his loss ivill be
the difference between the purchasing poiver of 30s. at the
present time and the purchasing potver of &2 at the former
period.
" If, then, the English and the Indian producer were
competing upon equal terms, before the fall in the
exchange occurred, the result will be to largely reduce
the profits of the former and to leave the latter exactly
where he was before. He is able to take the lower price
of 30s. a quarter for his produce, instead of 40s., without
Ch. XXI.] OPINIONS OP BIMETALLISTS. 285
loss to himself, and the market price of wheat in England
is thus imduhj depressed.
" A similar result ensues in the case of articles which
are sent from England to silver-using countries, as, for
instance, in the case of cotton goods exported from
Lancashire to India, where the effect of the fall in exchange
is equally injurious to the English manufacturer.
" For example, cotton goods are sent to India, for which,
in order to make a profit, the English exporter must
receive a certain sum, say £10,000.
" With the rupee worth 2s., £10,000 is realized by the
payment of Es. 100,000.
"With the rupee at Is. 6d., Rs.133,333 are required to
realize that sum.
" Will the Indian importer give this greatly increased
price for precisely the same article as bought before ?
" Obviously not, because prices in India, as we have
seen, remain the same, and the English manufacturer is,
in consequence, obliged either to take the same silver
price as formerly, viz. Es.100,000, which means a greatly
lowered gold price, viz. £7500, or not to sell at all ; and
in either case he undergoes a loss ^vhich must he traced
directly to the fall in the gold price of silver.
"The industries which have suffered most /rom the fall
in the exchange are naturally those which are most
directly connected with the trade between gold and
silver-using countries, such, for example, as the cotton
and the agricultural industries of the United Kingdom.
" We are not prepared to say, and it is not our view,
that the fall in the exchange can operate permanently as
a bounty on Indian exports, or as a protective duty
against imports ; but it is obvious —
" Fu-st, that the loss lohich it occasions to the producer
in gold-using countries, whatever that may be, must
286
FOREIGN TRADE.
[Ch. XXI.
contain
the unjusti-
fiable as-
sumption
that the re-
sults de-
scribed are
caused by
the fall in
the gold
price of
silver.
continue to operate until there has been a general adjust-
ment of the price of commodities, or in other words,
until all prices and all the incidents of production have
on the average fallen in the same proportion.
" Secondly, that the measure of that loss is the difference
between the purchasing poiver of the higher price received
for commodities before the fall and that of the price received
at present ; and
" Thirdly, that the date of such a general adjustment is
uncertain, but will probably be remote, and may he
postponed for an in de/inite period of time," ^
At first sight this reasoning appears very con-
clusive; but a careful examination of the whole
subject will, I think, show that there is a serious
error running through this and all similar argu-
ments. It is no doubt fair for the purposes of
discussion first to assume a change in the ratio
between the values of gold and silver ; and, having
made such an assumption, it can, as we shall see,
without the least doubt be proved that a change in
the relative levels of prices in gold and silver-using
countries must occur coincidently, or nearly so, with
such a change in the ratio. But from these premises
it does not follow that the alteration in the level in
prices can, in any sense, be said to be caused hy the
alteration in the ratio. There is nothing in the
foregoing argument which goes to prove that the
cause which produced the fall in gold prices would
not have been equally operative whether that cause
did or did not also tend to produce an effect on the
' Final Report, pp. 95, 96.
Ch. XXL] GOLD PRICE AND SILVER PRICE. 287
relative values of the metals. To whatever extent
gold prices would have fallen if no trade had been
carried on with silver-using countries, to that extent
the fall in gold prices can in no sense be said to be
due to the change in the ratio. Herein lies the
error in the bimetallic argument, which I hope to
be able to demonstrate.
The idea of price — gold price — in gold-using Definition
countries is familiar to all. The gold price of a ff .silver
commodity is measured by the amount of gold plied to a
which has to be given in exchange for a given foult^'"^
quantity of the commodity in question ; it depends,
in fact, on the ratio of the value of the commodity
to the value of gold. In considering questions
connected with international trade it will also be
convenient to speak of the silver price of goods, even
in gold-using countries. Goods might be obtained
in England by exchanging silver for them ; and the
amount of silver which would thus have to be given
in exchange for such goods may conveniently be
called their silver price. The silver price of a com-
modity depends, in fact, on the ratio of the value of
the commodity to the value of silver. In the same
way, in silver-using countries, we may speak of the
gold price of goods, though gold is not used as
a standard of value.
In the first instance, let it be assumed that
a change takes place in the ratio in a gold-using
country, without any change in legal tender prices
anywhere. This is at all events a possible assump-
tion ; for such a state of things would be the first
288 FOREIGN TRADE. [Ch. XXI.
immediate result of an increase in the output of
silver in a gold-using country, before the additional
metal had time to flow into silver-using countries.
Until that flow took place, there would be no reason
why silver should fall in value in silver-using coun-
tries, or why silver prices should be affected therein ;
and gold prices would everywhere remain unaffected.
A change For the purposes of illustration let us take the
due to same example as that selected by the Gold and
causes Silver Commissioners — the price of wheat in Eng-
affecting t-tt7/» t t • /> i •
silver is ad- land, and m India before the closing of her mints.
sUvw^flow- ^^ take, therefore, the price of a quarter of wheat
ing into (or at 40s. in England, and at 20 rupees in India ; and
ver-nsing" ^6 take the sovereign to be equal in value to the
'^°th*"r' ^^^^^^ i^ 20 rupees ; or, in other words, we take the
any change rupee as worth 2s. In these circumstances let it be
maVleTel supposed that there is a sudden increase in the
of gold amount of silver in the market in England, and
produced. * that, as a first effect, the quantity of silver equal in
weight to a rupee falls in price in England from 2s.
to Is. 6d. ; that is to say, that the sovereign rises
in silver price in England until it becomes equal in
value to the silver in 13^ rupees. This change
in the gold price of silver will not tend to alter the
price of wheat as measured by gold in England, and,
as long as the additional silver remains in England,
neither will it affect the price of wheat as measured
by silver in India. There will, in fact, as the first
immediate effect, be a rise in silver prices in Eng-
land, without any corresponding rise in silver prices
in India.
Ch. XXL] TRAFFIC IN BULLION. 289
Now consider the case of a merchant who has
been in the habit of exporting sugar, for example,
from England to India, and of importing wheat from
India to England. The cost of the carriage both
ways must ultimately be divided between the pur-
chasers of the goods in the two countries, according
to the principles discussed in all treatises on
economics; but, with regard to the broad issues
here under consideration, this aspect of the question
may be neglected. Putting the cost of transport of
both goods and specie aside, we can see, therefore,
that our merchant will purchase sugar to the value
of £2 in England ; he will export it to India, and
sell it for 20 rupees ; and with those rupees he will
purchase and bring back to England a quarter of
wheat. Will he continue to carry on his business
in this manner after the fall in the value of silver
in England ? He could do so, because prices will
at first nowhere be affected ; but he certainly will
not. With his £2 he will buy an amount of silver
in England which can be coined into 26f rupees
in India ; he will export this metal to India, and
with it he will purchase 1^ quarters of wheat, or a
third of a quarter more than he could have obtained
if he had stuck to his old line of business. Thus
there will be a diminution in the amount of sugar
exported to India, and silver will be exported in its
place. The export of silver will raise the value, and
therefore the gold price of that metal in England ;
the merchant will find, as time goes on, that he can
get less and less silver for his sovereigns ; and the
u
290 FOREIGN TRADE. [Ch. XXI.
silver price of wheat and other commodities will fall
in England. In India this traffic will have the
opposite effect ; silver, becoming more abundant,
will fall in value, and silver prices will rise ; and the
merchant will find that he is getting less wheat for
the silver he sends out. This export of metal to
India will, therefore, in time cease to be profitable ;
and this will evidently occur at the moment when
the silver price of wheat (and of other exportable
commodities) has fallen in England and has risen in
India to such an extent as to make them identical
in the two countries; for then there will be no
special gain in shipping silver to India in pre-
ference to any other article of merchandise. Then,
and not till then, will the merchant go back
to his old trade, and the export of sugar will be
resumed.
Thus the equilibrium of trade in the above illus-
tration will ultimately be established without any
alteration in the value of gold, or any change in the
level of gold prices in England. And this flow of
metal is certain to take place, being so profitable,
provided other things remain the same, and pro-
vided no other method of permanently adjusting
the level of prices can be shown to exist. The rise
of silver prices, or the depreciation of the standard
in India, will no doubt cause a long-continued,
though not a permanent, disturbance of internal
trade, the effect of which must be considered.
But looking only to the final results, the raising
of prices as measured by silver would appear to be
Ch.xxl] traffic in bullion. 291
the only ultimate outcome of any cause tending to
lower the value of that metal.
When an attempt is made, by reference to trade It " diffi-
statistics, either to refute or to confinn the belief ceive the "
that the adjustment of prices after a disturbance in ^''Y ?*,
•' _ ^ metal dur-
metallic values is brought about by a flow of metal ing the ad-
in one direction or the other, great difficulty is3'^tni«Dt-
experienced in the investigation. The idea of a
single merchant carrying on trade in the manner
described in the foregoing illustration is, of course,
not in accordance with facts, and is only used to
indicate the economic forces in action. There are,
moreover, always other causes at work, besides those
connected with the currency, which tend to alter
the relative level of prices in different countries ;
and such alterations in level may obviate the neces-
sity for any movement of the precious metals, or
even make them move in the opposite direction to
that anticipated from a mere study of the relative
values of the metals. Independent forces primarily
affecting the metals themselves, such, for examples,
as those connected with their use in the arts, may
also affect the amount required for export and im-
port. And as any change in monetary conditions
is always gradual, and not sudden as in our illus-
tration, the method of adjustment of international
values above described is generally so masked and
confused by other influences as to be indiscernible.
Although no reason has been seen for believing The pre-
that gold prices are permanently influenced by j^^i^
causes primarily affecting the value of silver, yet being
292
FOREIGN TRADE.
[Ch. XXI.
exported
in place
of other
commodi-
ties will
cause a dis-
turbance of
trade.
This dis-
turbance
would be
slightly
lessened if
a common
interna-
tional stan-
dard were
adopted.
it is obvious that trade will be disturbed in sonie
way or other by the movement of that metal during
the period of adjustment. In the illustration above
given, it was seen that the export of sugar would be
checked. The value of imports must equal the
value of exports; and unless there is some reason
for an increase in the value of the imports, it is
evident that the exported metal must more or less
completely displace some other previously exported
commodity of the same value. But considering
what an enormous superstructure of credit is built
in civilized countries on such a comparatively
slender metallic foundation, it would appear that
the amount of metal, which in most cases has to be
exported to produce the necessary adjustment of
prices, will be small in comparison with the total
volimie of the international trade. After the condi-
tions affecting the currency have become stable, the
equilibrium of prices between the two countries will,
therefore, be quickly reached, and no lengthy dis-
turbance will be produced by the displacement of
other commodities by the precious metals.
But though such disturbances are not very serious,
they are objectionable, and should be remedied or
alleviated if possible. Under all currency systems
the constant changes in the balance of international
indebtedness will tend to cause the metals to flow
backwards and forwards between different com-
mercial centres. This cannot be helped. But if
a universal bimetallic system were adopted, the
effect of an increase in the production of silver
Ch. XXI.] TRAFFIC IN BULLION. 293
would eventually be that prices would rise every-
where alike; the new metal would gradually be
distributed evenly throughout the commercial world;
the amount absorbed into the currency of the
country where the output took place would not, of
course, be exported in the manner above described ;
and the disturbance of trade due to the export of
metal would be reduced to that extent. Moreover,
if gold, for example, were to rise in value every-
where under existing conditions, there would tend
to be a decrease in the use of that metal in the
arts ; and part of the gold thus dislodged from em-
ployment in silver-using countries would flow into
gold-using countries for employment in the currency ;
whereas, if both countries had bimetallic currencies,
there would be no such movement of metal. Dis-
turbances to trade of this character would, therefore,
no doubt be somewhat lessened by the adoption of
a common international standard of value, whether
that standard were bimetallic or monometallic. But
as the alleviation would be small, and as the troubles
complained of are not very serious, bimetallists can
claim no great merit for their system in this respect.
The harmful eifects on trade due to the move- The chief
ments of the metals are not those, however, of which of Wmetal-
bimetallists usually complain, and other and more Jj^^j^^j.
serious alleged evils have to be investigated. Thus that gold
far I have given prima facie reasons for believing ^"en^forc^
that the necessary adjustment of prices, which must down by
occur coincidently with a change in the ratio of the silver-using
values of the metals, will always be accomplished co'«»t"«'-
294 FOREIGN TRADE. [Ch. XXL
by an alteration in the level of prices in the country
the standard of which is primarily affected, with-
out any alteration in the level of prices in the
country where the standard is not primarily affected.
This would appear to be the obvious result. But
it is suggested that silver prices in uncivilized
countries are so fixed and regulated by custom that
some other method of adjustment than that above
described would in reality be found. Changes, it is
said, always follow the line of least resistance ; the
greater mobility of gold prices will allow them to
fall ; and in this way the adjustment will not
necessitate the flow of silver from one country to
another, and it will be made with little or no rise in
silver prices.
If a change This view as to the influence of international
has resulted trade will not, I think, bear careful investigation,
from causes jji the first place it is difiicult to prove that prices
silver, then are more stable in less civilized countries.^ Then,
nen^Talfin ^g^^^' ^^ more silver is thrown on the market, whilst
gold prices the conditions affecting other commodities remain
beenc^a^ed unchanged, it is easy to see that more silver will
thereby. J^ave to be given in exchange for a given amount of
these other commodities ; that is to say, it is evident
that an increase in the supply of silver is normally
a factor tending to cause a rise in silver prices. If
this is so, what is to prevent silver prices rising
eventually in proportion to the fall in the value of
silver which the increase of that metal on the
^ See, for example, Mr. F. J. Atkinson's paper on prices in
India in the Statistical Journal for March, 1897.
Ch.xxi.] a change in the ratio. 295
market would naturally tend to produce? This
would seem to be the inevitable result ; but if
this does not occur, then a fall in gold prices is
not necessary to bring things to a state of equi-
librium. Moreover, it is not explained how an
increase in the amount of silver can alter the value
of gold; that is to say, how such a cause can
make it possible for more goods to be obtained
than previously in exchange for a given amount
of gold; for that is what the suggestion really
amounts to. Bimetallists rely, as I think rightly,
on the quantitative theory of prices ; but, if they do
so, they must not throw over that theory because
it does not square with their views on any par-
ticular question; and in this instance they must
explain how the relationship between the volume of
the English gold currency and the volume of English
business is affected by any change in the demand
for or the supply of silver. Until these objections
are answered, we shall, I think, be right in adhering
to the opinion that prices in gold-using countries
cannot be permanently and materially affected by
any cause primarily affecting the value of silver.
In the following chapter I shall give reasons for
believing that prices in one country are temporarily
affected by variations in the value of the standard
in other countries. But, if our conclusions are
right as to the ultimate results, it is evident that
the recent fall in gold prices — in so far as the fall
is permanent — cannot have been due to a fall in
the value of silver, but must be the result of other
296 FOREIGN TRADE. [Ch. XXI.
independent influences ; and that no permanent
suifering to British producers can have been caused
by any change in the ratio resulting from any
change in the conditions primarily affecting silver.
If a change If, on the other hand, a change in the ratio is
hasresu£^^® to causes primarily affecting gold, it is even
from causes more evident that producers in gold-using countries
gow/^en will experience no permanently injurious effects
gold prices from trade with silver-usine; countries. We have
Wlllultl- ITT 1 . .1
matelyfall seen that disturbances due to an increase m the
exterTt'^""^ supply of silver will be adjusted by a flow of that
whether or metal into silver-using countries, without any per-
carriedon manent effect being produced on gold prices. It
with silver- could, of course, bv similar reasoning, be proved
using coun- . . c i
tries. equally conclusively that any disturbance due to an
increase in the demand for gold in any gold-using
country, would be adjusted by gold flowing into
that country from all other countries (except where
it is required to satisfy any similar demand), and
by a fall in gold prices in the countries from which
it is drawn, without any effect being produced on
silver prices. An increase in the demand for gold in
gold- using countries would not at first tend to raise
the value of that metal in silver-using countries,
but this influx of gold into gold-using countries
would prevent the rise in the value of gold being
greater in gold-using countries than in silver-using
countries ; and in this way the gold price of com-
modities would remain the same in the two places.
But the point to note is that if the fall in gold
prices is due to causes primarily affecting gold, then
Ch. XXL] A CHANGE IN THE RATIO. 297
there is no necessity whatever to drag in the effect
of trade with silver-using countries to account for
that fall. In the next chapter we shall see reasons
for thinking that the fall in gold prices may be
hastened, but not increased, by external trade. But
whether the fall in gold prices resulting from causes
primarily affecting gold is thus hastened or not, it
cannot be said to be due to the influence of inter-
national trade. The fall would ultimately be
equally great whether such trade existed or not.
It may, perhaps, be said that the foregoing argu- The pro-
ment in no way proves that the English producer o-oid-asino'
will not suffer from such a fall in prices. This may countries
be freely admitted. If gold prices are falling, whilst by the fall
silver prices remain stationary, it will nevertheless p^f^ but
be true that exported or imported goods have every- these argu-
where fallen alike in gold price. The fall in the gold uot prove
price of goods made in silver-using: countries will be *^?* 'l'^
exactly the same as the fall in the gold price of the are due to
same goods made in gold-using countries. It is J."^^"'
true, to revert to the illustration of the Gold and trade.
Silver Commissioners, that " the English manu-
facturer ... is obliged to take the same silver prices
as formerly (for his cotton), viz., Ks.100,000, which
means a greatly lowered gold price, viz. £7500 (as
compared with £10,000), or not sell at all." But it
is equally true, since the assumed rise in the value
of gold affects prices in all places alike, that if he is
selling his cotton to an English merchant for use at
home, he must accept " a greatly lowered gold price,
viz. £7500, or not sell at all." The case is precisely
298 FOREIGN TRADE. [Ch. XXI.
the same whether he is selling to England or to
India, and his sufferings cannot, therefore, " be traced
directly to the fall in the gold price of silver." It
is also, generally speaking, true that the loss to the
producer, due to the diminution in his gross receipts,
will go on until " all the incidents of production
have on the average fallen in the same proportion ; "
but this fact again in no way connects that loss
with the effects of international trade.
Thus far Thus whether we assume the change in the ratio
permanent ®^ *^® value of the metals to be due to changes in
effects have the causes primarily affecting silver or to changes in
sidered. " t^® causes primarily affecting gold — it can be due to
no other causes — we have thus far seen every reason
to believe that trade with silver-using countries
produces no permanent effect on gold prices. As
to the temporary effects, no reasonable explana-
tion has yet been given as to how they can arise.
The subject is so difficult and complex that it would
be presumptuous to write with confidence concerning
it. But I will nevertheless state my own views
in the following chapter as to the only possible
effects which can arise from variations in the value
of the standards in other countries.
Ch. XX II.] FOREIGN TRADE. 299
CHAPTEK XXII.
THE INFLUENCE OF TRADE WITH A COUNTRY HAVING
A DIFFERENT STANDARD OF VALUE.
In this chapter we shall be occupied with the
question of trade between two countries, the value of
the standard in the one being subject to some dis-
turbing influence ; whilst, in the other, all conditions
affecting the standard are supposed to be stable.
The influence of commerce of this description will The tem-
more easily be discussed if names are given to the ^^^ of
countries concerned. Let us take England and trade with
India (before the closing of her mints) as the typical with a de-
gold and silver-using countries ; and, at a time when Pjeciatrng
o . . standard
both gold and silver prices are in a stationary con- will now be
dition, let us assume either that there is an increase ^"''^ ^
in the output of silver, or that some other change
takes place in the conditions of the silver market,
which tends to lower the value of that metal;
whilst all the other conditions of trade remain un-
altered. Silver prices will no doubt begin to rise ;
and we have to ascertain what will be the effect of
such a rise in prices on international trade.
The case of rising prices has been selected for
300 FOEEIGN TRADE. [Ch. XXII.
examination in detail. The discussion could be
repeated with the assumption of a fall instead of a
rise ; but the result would merely be to show that
the effects to be anticipated would be the opposite
to those here indicated as probable ; and all the
necessary conclusions can be extracted from this
one example.
Some of With reference to the application to existing
the influ- {q^qIq of any conclusions which may be arrived at,
ences due . -11,1, • ■, , •
to the de- it may be urged that rupee prices have not risen, or
tiontrsn- ^^^^ ^0*' ^* ^^1 events, risen very decidedly. But
vermay the influence of international trade is due to the
studied. relative rather than to the absolute monetary con-
ditions of the countries concerned. For example, if
it be a fact that silver prices in India would have
been lower had silver not been demonetized in
Germany, then by discussing the effect of a rise in
silver prices in India, whilst gold prices in England
are assumed to remain stationary, we shall be study-
ing the way in which the existing conditions of
trade differ from, or compare with, the conditions
which would have existed had the demonetization
of silver produced no such effect on silver prices.
The value of gold may also have been affected by
the same currency legislation, but the effect of such
a fall in gold prices must be separately considered.
These In the chapters dealing with appreciating and
be traced to depreciating standards, it was seen that little or no
wMcTth^ permanent effect on internal trade is produced by
actual con- any change in the conditions primarily affecting the
trade differ standard of value ; for, after a time, the factors of
Ch. XXII.] DIFFERENCE FROM THE NORMAL. 301
trade gradually become adjusted to the new cou- from the
ditions ; and the disturbance slowly dies out. Thus ^^"^.^
'' conditions
the absolutely permanent influence on Indian trade during the
of the assumed rise in silver prices may be neglected. JJjuXient
As the conditions affecting gold are assumed to be ^^^ *^^
stable, it may be asserted with even greater con- ance.
fidence that English internal trade will ultimately
be unaffected by the assumed fall in the value of
silver. And if it can be truly asserted of the ulti-
mate state of the internal trade of both countries
that it is not affected by these monetary changes,
it must also be equally true of the trade between
them. For example, though the present rate of
exchange may have a material influence on the
existing trade with India, yet no one would assert
that that trade is now materially influenced by any
variations in the ratio which took place a century
ago. It is, in fact, generally admitted that the
effects under discussion will no longer be felt when
" all prices and all the incidents of production,"
including interest on debts, " have on an average
fallen in the same proportion," ^ and to their ulti-
mate levels. When the normal is reached, the dis-
turbance will have died out ; and, that being the
case, it would seem that if we desire to discover
what are the efi'ects of the change in the ratio
during the process of adjustment, we should turn
our attention to the way in which the conditions of
trade during that period differ from the normal or
ultimate conditions.
1 See p. 286.
302 FOREIGN TRADE. [Ch. XXII.
If the The first effect of the assumed change in the con-
the valuT ^itions primarily affecting the value of silver will
of the Stan- no doubt be a gradual rise in silver prices. But so
not tend to far no reason has been given for believing that gold
affect pro- prices will be influenced by the same cause. Thus
auction, f -^ .
then it will it would appear that, if the production of goods in
fluencTo^" •^^*^ would not he influenced hy the rise in silver
interna- prices, merchants would find the same amount of
trade. Indian goods in the English market as heretofore,
and at the same gold price ; and, if this would in
reality be the result, I cannot see how the change
in the value of silver could affect their transactions
in any way. If the assumed increase in the output of
silver does not proceed from mines situated in India,
then coincidently, or nearly so, with each step in
the rise in silver prices, there would be a flow of
silver into India of sufiicient magnitude to make the
silver price of goods the same in India as in gold-
using countries. In all probability silver will dis-
place some other commodity from the import trade
of India ; but the effect of this displacement may
now be neglected, for that is not the complaint we
are investigating. Thus the goods entering India
from England will rise in silver price. But they
will only rise in silver price to the same extent
that goods made in India have risen ; and, as buyers
and sellers will find that all goods have risen alike,
there appears to be no reason why the change in
the ratio should affect the way in which Indian
and English-made goods are exchanged one for the
other; provided that the quantity of both classes of
Ch. XXII.] THE EFFECT OF INFLATION. 303
goods in the market remains unchanged. Thus, as
long as the production is unaffected, the change in
the level of prices due to any change in the con-
ditions affecting the standard of value in either
country will have no influence on the international
trade between them.
But can it be assumed that production in India But pro-
will not be affected by the rise in silver prices ? ^'^*'^° "JI^^^
This point has been discussed at length in Chapter by the de-
XVII., and reasons were there given for believing oHhe sten-
that a rise in prices does tend to stimulate com- ^^^'
merce for a more or less considerable time. And
this is, I think, practically the only circumstance
which has to be kept in view in studying the effect
of variations in the value of the standard on inter-
national trade. The output of commodities would be
increased under the influence of such a rise in prices
as that assumed ; and we have now to ascertain what
will be the effect of such a general increase in pro-
duction in India on her trade with England, where
no such stimulating influence is supposed to exist.
The results likely to foUow an increase of pro- A rise in
duction in a silver-using country — whether an actual p"^iy j^l
increase, or an increase in comparison with the pro- creases ex-
duction which would have taken place had the imports ;
supposed cause affecting the value of silver not
been operative — are very complicated, and difficult
to trace out fully. International trade is, in fact,
barter ; and India, having under the supposed con-
ditions an increased supply of goods in her market
— or offering a larger quantity of goods for barter —
304 FOEEIGN TRADE. [Ch. XXII.
will both part with more of her own productions and
receive more goods in exchange for them ; that is,
in comparison with the state of things which would
have existed but for the supposed stimulus to Indian
commerce. Indian exports and imports will, in fact,
both increase.^
but exports But this will not be the only result of the rise in
J^^J^™^Jjg silver prices. At first there will be no greater
standards quantity of English-made goods offered for sale in
crease more t^® Indian market, because Euglish commerce is
*^^i™- supposed to be subject to no such stimulating in-
Irom. fluence, and all the other conditions of trade are
supposed to remain in a stable condition. There
will, therefore, be an increase in the quantity of
Indian-made goods in the market as compared with
the quantity of English-made goods. When a com-
modity becomes more plentiful, it normally tends to
fall in price ; and Indian-made goods will, therefore,
fall in price as compared with English-made goods.
^ If an increase takes place in the production of one com-
modity only, it cannot be assumed as even probable that the
total product of that commodity will be exchangeable for a
greater quantity of commodities produced in other countries.
The value of the commodity is quite as likely to fall so much
that the total product becomes less valuable. This, I presume,
might occur with the whole of the export trade from any country.
But, as under the assumed conditions, there will be a general
stimulus to all trade in the silver-using country, an increase will
take place in the demand for goods of aU sorts ; and, in these
circumstances, it appears to me almost certain that the import
trade will increase also. But, in any case, the conclusions
arrived at in this chapter depend on the fact that trade wUl be
disturbed, and not on the particular disturbance which mil occur.
Ch. XXn.] RIVALS AND CUSTOMERS. 305
India will, consequently, have to give more of her
own goods for a given quantity of English-made
goods ; or, in other words, Indian exports will in-
crease in volume as compared with imports into
India. Combining this conclusion with the conclu-
sion arrived at in the last paragraph, it would appear
that the probable result of the assumed change in
the conditions affecting the value of silver will be
that both exports from and imports to silver-using
countries will increase in volume, but that the ex-
ports will increase more than the imports.
In short, under the assumed conditions, the trade
of India would be stimulated by currency causes ;
and the trade of England would be stimulated by
the better terms on which the barter with India
could be carried on.
Thus far silver-using countries have been regarded silver-
as customers with whom gold-using countries are tri^^must "
dealing rather than as rivals in trade with whom ^ regarded
they are competing, ihe question oi rivalry must, customers
however, be considered ; though, as far as this par- ^° ^^o*^®
ticular branch of international trade is concerned, gold-ming
it is the less important consideration of the two. In
order to facilitate this discussion, let it be assumed
that no commercial intercourse exists between Eng-
land and India, but that both countries are engaged
in trade with Japan. Assuming, as before, that
trade in India is inflated by a rise in prices, whilst
production in England remains stationary, it is evi-
dent that Indian-made goods entering the Japanese
market will increase in volume, whilst the quantity
X
306 FOEEIGN TRADE. ^Ch. XXII.
of English-made goods for sale will remain stationary.
The Indian-made goods will, therefore, tend to fall
in price in Japan, which will not be the case with
the English-made goods. But goods of one kind
must keep on the same level of prices, and English-
made goods must, therefore, be dragged down in
price by the fall in Indian-made goods; a check
will thus be put on this trade, and the importations
from England will diminish. It is, in fact, obvious
that in these circumstances the imports into Japan
from India will increase, and those from England
will diminish ; and that this will be an advantage
to India and a disadvantage to England. And the
general results will not be materially altered if we
imagine either that the Indian-made goods are ex-
ported to England instead of to Japan, or that they
are consumed in India itself. The results indicated
in the preceding paragraph as those arising from
international trade of a non-competitive nature no
doubt remain true ; but from this it is evident that
any inflation of trade resulting from a rise in silver
prices will be a temporary benefit to silver-using
countries, and that it will be a temporary injury to
all trades in gold-using countries which compete
with silver-using countries, wherever their markets
may be.
Trade with Some of the effects of the change in the ratio will
countries be more easily traced out if a hypothetical and ex-
with stable • i r. . . -r
standards treme case IS taken for examination. Let us make
Sproc^s *^® same assumptions as before, but let silver-using
by which countries be represented by a small imaginary island
prices are
Ch.xxii.] the return to the normal, 307
near England, where there is a rupee currency and brought to
an open mint. Let it also be assumed that wheat mal level"
is the only commodity produced on the island ; that
it is all exported to England ; and that the whole
of the commodities consumed on the island are im-
ported from England. The whole of the commerce
of the island will, therefore, consist of an inter-
national trade with a country with a different stan-
dard of value. Now if a fall takes place in the
value of silver, other things remaining the same,
a given quantity either of wheat or of gold will be
equal in value to an increased amount of silver. In
these circumstances the exporter of wheat, if he
exchanges his wheat for silver in England, will be
able to obtain a larger quantity of metal than here-
tofore; and this metal he can get coined into an
increased number of rupees in his island, the increase
being in exact proportion to the fall in the value of
silver. In short, the rupee price of wheat will rise
with little or no delay to the normal level due to
the fall in the value of silver. And, as to the im-
ports into the island, they can only be obtained in
exchange either for silver, the money of the island,
or for wheat, the only exportable commodity ; wheat,
as we have seen, will rise in price at once to its
ultimate level; and a given quantity of silver, if
exported, will only enable its owner to obtain in
exchange for it, in England, a diminished quantity
of goods, the diminution being in exact proportion
to the fall in the value of silver. Thus both
exports and imports — that is, in the imaginary
308 FOREIGN TRADE. [Ch. XXIL
circumstance, the whole of the commodities to
be found on the island — will at once rise in silver -
price in the same degree that silver falls in value
in England. But we have seen that under ordinary-
conditions the stimulating effect of a rise in prices
is in part due to the fact that prices do not tend
to respond immediately to any change in the con-
ditions affecting the value of the standard ; or, in
other words, because they do not reach their normal
at once; the explanation already given of this
stimulating effect being that the delay in the rise
of prices is equivalent to producers being ready to
accept less of the goods of others than heretofore in
exchange for their own ; a state of things which
greatly facilitates commercial transactions. On the
imaginary island, prices will, however, as we have
seen, rise immediately or almost immediately to
their normal level ; and this stimulating influence
will therefore be felt but for a very short time, if
at all.
When the standard of value is depreciating, wages
and many other elements of prime cost will not rise
as quickly as the price of the finished article ; and
consequently profits always tend to increase in these
circumstances. But when profits are increasing, it
is possible for producers to lower their price lists ;
or, in the case of a general tendency to rising prices,
it is possible for them to raise their price lists less
rapidly than that tendency would appear to warrant.
Competition between different producers always
tends to keep down profits; and competition will,
Ch.xxil] the retukn to the normal. 309
therefore, in times of rising prices, have the eifect of
preventing producers from raising their prices as
quickly as would have been the case if profits showed
no tendency to rise ; that is to say, producers will
not at once, as it were, take the full advantage of
the tendency of the value of the standard to fall.
This is why, under ordinary circumstances, prices do
not immediately respond to any change in the con-
ditions primarily aifecting the standard of value.
But in the small imaginary island, previously And wages
under consideration, the wheat-growers, being very ^^j^^^, j^gj_
few in number, will be practically only affected by dente of
the competition of the wheat-growers of England, will, in the
where there is supposed to be a stable gold currency, ?^™^ ^'^J'
and where wages, etc., will continue to absorb the rapidly ad.
same proportion of the gross receipts. Thus the J^ j^^^**'
island wheat-producer, being practically uninflu- conditions.
enced by the coinpetition of others similarly cir-
cumstanced to himself, will be able at once to raise
his prices to the ultimate level; his profits will,
therefore, increase very rapidly ; and this will pro-
duce a stimulating influence on his trade. But
when the labourers see what large profits the pro-
ducers are making, they will demand, and they will
be in a position to obtain, an increase in wages.
Wages will rise more rapidly because of the more
rapid rise in prices. Thus, on the island, not only
prices, but wages also, and in like manner all the
other factors of trade, will reach their normal state
more quickly than would have been the case if no
trade with a gold-using country had existed.
310 FOKEIGN TEADE. [Ch. XXII.
Commodi- If, contrary to our original supposition, there are
mon^totiie some commodities on the island which are neither
two coun- exported nor imported, nor likely to be exported or
reach their imported, then their price will be settled entirely by
normal ^-^^ competition amongst the producers on the island.
quickly We have seen that, when forces are at work tending
moStier' *o make the standard depreciate, the competition of
peculiar to different producers, all of whom find their profits
Avith the increasing, will normally tend to check the rise in
da^^" prices. This drag on the movement of prices will
standard, be fully felt on the island in the case of non-import-
able and non-exportable goods, because the com-
petition amongst the sellers of such goods will be
confined to producers, all equally benefited by the
depreciation of the standard. Prices would not,
therefore, in their case rise to the normal at once ;
whereas the prices of exportable and importable
goods, as we have seen, would rise to their ultimate
height at once. Hence, until all the economic forces
had worked out their full effects, the price of ex-
portable and importable goods will have risen more
than the price of goods not included in the import
or export trade.
The greater With an extreme case, such as that of the
of inter- imaginary island, extreme results will be obtained.
^^i°^^} But the forces disclosed by the consideration of
trade the , , i • i •
more these such hypothetical Circumstances will always be felt,
wm'befdt *^o"g^' when the two countries are comparable with
each other in size, they will be felt less severely.
Eeverting to the case of England under stable
currency conditions, and of India with free coinage
Ch. XXII.] SDMMAKY. 311
of silver and a depreciating currency, it is, I think,
clear that the effect of trade between the two
countries would be to force up prices to their normal
level in India more quickly than if no such trade
existed ; to lessen the duration of the inflation due
to the rise in prices, though possibly to increase its
intensity for the time being ; and to make all
articles common to both countries rise in price more
rapidly than goods which are not capable of being
exported or imported. Indian cotton, for example,
would rise in price, under the assumed conditions, as
compared with Indian millet ; but there would be
no tendency, except perhaps temporarily, for the
silver price of cotton to rise above the level to
which in any case it would ultimately attain.
Thus, to summarize the effects on the commerce of Summary
a silver-using cov/ntry of trade with a gold-using suits of in-
country, when silver is tendiner to fall in value, and ternational
•' , ° . . . trade on a
when gold prices would otherwise be stationary, it silver- ^
appears that both exports and imports will increase, ^™i^
exports increasing, however, more than imports ; when a fall
that imports will rise in price as compared with in the value
exports ; and that both exports and imports will °^ ^^^^"^ >
rise in price as compared with goods not affected by
the international trade in question. These are the
results which will be felt when production is increas-
ing in the silver-using country in consequence of a
rise in prices ; but when production is diminishing,
as it must do when trade is reverting to its normal
condition, all these influences will be reversed, until
the ultimate equilibrium of trade is reached. Every
312
FOREIGN TRADE.
[Ch. XXII.
and of the
results of
the same
causes on
the gold-
using
country.
such disturbance to trade is, no doubt, certain to
be followed before long by other disturbances ;
but the results above described are those which
would, I believe, be seen to follow any one disturb-
ance if it could be completely isolated from all its
surroundings.
The effect of international trade under the same
conditions on the gold-using country, with its cur-
rency under stable conditions, is easily deducible
from the above conclusions. We have seen that a
rise in prices in a silver-using country will stimulate
its trade with all other countries, including gold-
using countries. Both the exports from and the
imports to the gold-using country will, therefore,
increase in volume ; but, as it was seen that Indian
exports would increase more than Indian imports
under the assumed conditions, it is evident that the
imports into a gold-using country will increase in
volume more than the exports. We are assuming
no change to take place in the conditions affecting
trade in the gold-using country ; and the quantity
of goods manufactured for export and of those re-
ceived as imports will, therefore, increase as com-
pared with the amount of goods not included in the
international trade. Prices tend to vary inversely
with the quantity of goods in the market, and there
will, therefore, be a tendency for the price of both
exports and imports to fall in comparison with
articles not affected by the international trade, im-
ports falling more than exports. As there will be
an increase of trade in the gold-using country.
Ch. XXn.] SUMMAKY. 313
without any corresponding change in the currency,
it is also to be observed that, according to the
quantitative theory of prices, some tendency -to a
general fall in prices must be produced.
We have just seen that the increase of imports Agricul-
from silver-using countries into England — the ^^eslain
typical gold-using country — will make these goods gold-using
fall in price temporarily as compared with English- ^fb"^*
made goods. Thus Indian imported wheat will tend somewhat
, fl-uvGrsclv
to fall in price as compared with English-grown affected by
wheat. All wheat must, however, remain at about ^J^^^ ^
the same level of prices ; and the inevitable result pricea ;
will be that English wheat will be dragged down in *
price to a certain extent, great or small, as a result
of the rise in silver prices. Here, then, is an instance
of the harmful influences arising from the deprecia-
tion of silver, which will be felt by those trades
in gold-using countries which are competing with
similar trades in silver-using countries. But there
are, I think, reasons for believing that agricultural
prices in gold-using countries cannot have fallen to
any serious extent from this cause. We have seen
that the influence under discussion is due to the
increase in the production of Indian wheat ; and, as
we are endeavouring to trace out the effect of any
changes in the condition of the currency on prices,
we must neglect the influence of any increase of
production arising either from the extension of rail-
ways in India or in other silver-using countries, or
from other causes which would have been equally
operative if silver prices had not risen. Statistics
314 FOREIGN TRADE. [Ch. XXII.
give us little guide in separating the results of
different stimulating influences. It is, however,
evident that agriculture, especially in India, will
respond less readily than many other industries to
the effect of rising prices. The output of cereals
cannot be materially increased merely by the appli-
cation of more capital to the same land ; and an
increase in the profits of any one proprietor will,
therefore, have comparatively little effect in in-
creasing the productiveness of his holding. More-
over, the increase in profits, on which the beneficial
effect of rising prices largely depends, can only
* be fully felt in the case of a complex industrial
organization. Take the case of wages ; if the land
is cultivated by peasant proprietors, wages and
profits merge into one another ; profits cannot be
swelled by a smaller proportion of the gross receipts
being absorbed by wages ; and profits not increasing,
the stimulating effect of any rise in prices will be
greatly diminished. For both these reasons it
follows that Indian agriculture is likely to have
been far , less affected by any rise, relative or
absolute, of silver prices than would at first sight
appear probable ; and, if this is so, trade with silver-
using countries, though it may have produced some
slight temporary depressing effect on English agri-
culture, cannot account for more than a fraction of
the fall in prices which has recently taken place,
and some We have also seen that the exports from England
trades will tend to increase with a rise in silver prices,
will be ijijig result will be chiefly, if not entirely, felt in the
CH.XXIL] AN APPRECIATING STANDARD. 315
case of goods not also made in the silver-using coun- i^uriously
try ; for, if the trade in question is one which com- the*same"
petes with the products of silver-using countries, ^^*y-
our home industry would suffer from the increase
in the foreign production. If, for example, the
cotton industry has been stimulated in India by the
relative conditions of the two currencies, then, in
all probability, less cotton has been demanded from
England than would otherwise have been the case ;
and our manufacturers of cotton goods have suffered
in consequence. In fact, some English trades will
be stimulated, and others — probably the smaller
number — will be injured by any fall in the value of
silver ; whilst the result to the mass of the people
will be beneficial because of the increase in the
imports.
Space does not permit of a repetition of the above Summary
arguments in order to trace out the effects of a rise electa of
in the value of the standard. If the assumptions V^^ ^
previously made were reversed — that is, if we were of the
to take into consideration the case of India with her s*^^»^^^-
standard under stable conditions, and of England with
her currency appreciating through causes primarily
affecting gold — then by retracing the whole of the
foregoing arguments it could be proved that the
trade of England, including her international trade,
would be depressed as a direct result of the fall in
gold prices ; and that there would be a correspond-
ing, though much slighter, wave of depression in
India (especially as regards articles affected by the
international trade), jaecause of the change for the
316 FOKEIGN TRADE. [Ch. XXII.
worse, from an Indian point of view, in the terms of
the international barter. Exports from and imports
to England would both diminish, but (as in the case
of a rise in silver prices) exports would diminish
more than imports. Moreover, the price of all com-
modities in England, but more especially those
included in the international trade, would be forced
down to their normal level more quickly than would
have been the case if no trade with silver-using
countries existed ; though the ultimate fall in prices
would not be increased thereby. As the trade of
silver-using countries would not be primarily affected
by the depressing influence of the fall in gold prices,
the demand for goods from gold-using countries
would not at first be diminished ; and, consequently,
the depression in gold-using countries would be
mitigated in the case of certain classes of goods
required for export to silver-using countries. Thus,
if no external trade existed, all English manu-
facturers would suffer through the fall in prices ;
whilst the trade with silver-using countries, with its
currency assumed to be under stable conditions,
would tend to make their suffering shorter and
possibly more severe, and would also cause some to
suffer more and some less than the average. Looking
'at the question from an Indian point of view, it
could be proved, as regards those trades where there
is rivalry between English-made and Indian-made
goods, that India would be benefited by the de-
pression in English commerce ; for the diminution of
English exports due to the fall in gold prices would
Ch. XXII.] AN APPKECIATING STANDARD. 317
make English-made goods rise in silver price in
India as compared with Indian-made goods. English
cotton goods, for example, would tend to rise in
prices as compared with Indian cotton goods ; but,
as all cotton goods must keep at about the same
level of prices, the effect will be to raise the price
of Indian cotton goods, and to temporarily stimu-
late their manufacture in India ; provided that they
are sufficiently nearly of the same class of goods
as those exported from England to enter into com-
petition with them. In this case, as in all others, it
must not be forgotten that the effects here described
are relative, not absolute ; and that an actual in-
crease in the export of English cotton goods, whilst
the ratio was rising, would not disprove the existence
of the forces described ; for it would be impossible
to prove that the export would not have increased
still more rapidly had the two countries had a
common standard of value.
Eeasons have been given in previous chapters
for believing that prices would now be materially
higher but for the abandonment of bimetallism. It
may, therefore, in a sense, be said that the various
continental nations concerned caused a fall in gold
prices by the monetary policy adopted in 1873 and
subsequent years. If this is true, the disturbing
influences indicated in the foregoing paragraph are
those which must have resulted from the effects of
this currency legislation wherever there was a con-
siderable trade with silver-using countries.
It now remains to be seen to what extent these
318 FOREIGN TRADE. [Ch. XXII.
An increase Complex effects are harmful or beneficial. The only
^^ Wit of argument which can, I think, be suggested in favour
the return of their being beneficial is that, as the effect of
conditbns Commerce with a country whose currency is under
due to in- stable conditions is to increase the rapidity with
trade, is a which all the factors of trade reach their normal
ady^tao-e l^'^^ls, it appears that international trade of this
description will shorten the period during which
industry would be disturbed by any changes in the
conditions of the currency. This, however, is a
doubtful advantage. If prices are rising through
causes primarily affecting the currency, and if they
are forced up rapidly to their normal level by inter-
national trade, the danger of a reaction may be
increased ; whereas, if the rise in prices was more
gradual, the result might be on the whole beneficial,
or, at all events, less harmful. If the standard is
appreciating, the benefits arising from shortening
the period of falling prices may be dearly paid for
by the increase in the suffering due to the greater
rapidity of the fall. But the point is only of
theoretical importance ; for no one would, I imagine,
advocate the introduction of a number of different
standards of value into different countries — a policy
by which alone this assumed advantage could be
fully reaped.
The way in Whether we look either to the country with its
variations standard under stable conditions, or to the country
m the re- yf[i]j^ {^^ Standard under unstable conditions, we
lative 1 1 ■ •
values of have seen that the most important effect of trade
standards l>etween the two will be to cause a relative
Ch.xxii.] a common standard. 319
instability in the prices of dififerent commodities, tend to
International commerce has, in fact, under such j^ate'^and
conditions, a temporary stimulating effect on some depress
trades and a temporary depressing effect on others, industries
This result appears to me to be an almost unmixed ^^ an almost
unmix fin
evil. If, for example, the cotton industry of India evil.
has been fostered by the fall in prices in England,
a reaction must take place when trade returns to its
normal condition ; for then this fostering influence
will be withdrawn. Such a temporary inflation of
a particular industry must be harmful ; for it in-
volves a waste of capital and a misdirection of
labour. The rapid growth of the manufacture of
cotton goods in India may, however, have been
largely, if not almost exclusively, due to other
influences besides that of the currency. The evils
resulting from the fluctuations in the relative value
of the standards of different countries are, perhaps,
never very strikingly apparent; but they may,
nevertheless, be very real. One of the most serious
disadvantages of our modern industrial system is
that trades are constantly expanding and contract-
ing; that the skill acquired in management and
execution is constantly being rendered useless;
and that capital sunk in moribund enterprises is
constantly being lost. Everything which makes for
stability without checking progress is an advantage.
The adoption of a common international standard
would tend to prevent the growth and decline of
particular trades through the relative rise and fall
in the prime cost of manufacture in different
320 FOREIGN TRADE. [Ch. XXTI.
countries, and it would not in the slightest degree
put a drag on commercial development. Such a
reform would, therefore, be highly desirable, unless,
indeed, evils of a serious nature, such, for example,
as the too great appreciation of the currency, would
be bound to follow in its train.
Prices and It has also been seen that, when trade is inflated
wouldVe^ in one country by currency causes, there will be a
somewhat corresponding though much less marked wave of
if a com- increased production in countries not thus primarily
nXoM^^" ^-ffected ; accompanied, however, by a slight fall in
standard prices. When trade is depressed by an appreciation
adopted, o^ the currency, the corresponding movement in
countries not thus affected will be one of diminished
production and slightly increased prices. Prices
and production do, therefore, vary to a certain extent
with any variation in the value of the standard of
other countries. If two standards of value are
equally likely to vary from inherent causes, then it
follows that, if one of the two were universally
adopted, prices and production would be everywhere
somewhat more stable than if some countries adopted
the one and some the other ; because only the oscil-
lations due to one of the two would then be felt.
As far as this argument is concerned, an effective
bimetallic system would only be preferable to a
universal monometallic system in so far as it is in-
herently more stable. It is, however, clear that the
adoption of a common standard of value would, in this
respect, be advantageous ; and also that every nation
is affected by the standard in use in other countries.
Ch. XXII.] THE EXTENT OF THE EVIL. 321
As in all quantitative questions connected with The extent
the currency, when we endeavour to estimate the ^J^ ^jg_ ^
extent to which all these complex influences may closed de-
be expected to be felt, we are landed in almost the extent
hopeless difficulties. Statistical inquiries give us**^T^^*'^.
^ T. o trade is m-
the result of a hundred different causes, and there flated or
appears to be no way of disentangling the separate ^^yl^,
effects of each. We have seen reason to believe rency
that the influence on prices and production at home,
consequent on the variation in the value of the
standards of foreign countries (other than the effects
directly arising from the flow of the metals), is
due to the way in which production is relatively
inflated or depressed in these foreign countries by
the relative depreciation or appreciation of their
currencies. Those readers of Chapter XVII., who do
not agree that a strong case has been made in favour
of the belief that causes primarily affecting the
currency have a considerable effect on internal trade,
will naturally come to the conclusion that the
changes in the condition of foreign currencies can
have but very little effect on home trade. But, on
the other hand, even if we do not go the length of
considering that a rise in prices sets in motion a new
order of influences " as beneficent as it is mighty," ^
we may yet believe that a very material influence
will be produced on the trade between two countries,
and on their competition in neutral markets, when,
in the one country, a drag is placed for a long time
on commerce by an appreciation of the standard,
» Tooke's " History of Prices," vol. vi. p. 229.
Y
322 FOREIGN TEADE. [Cii. XXII.
whilst, ill the other country, trade is facilitated by a
depreciation of the currency.
The argil- The result of this long inquiry may be summarized
this chapter ^^ foUows : The adoption of a universal standard will
points to slightly lessen the disturbance of commerce due
tages of a to the precious metals ousting other commodities
common fj;Qi^ the flow of international trade. The existing
national diversity of standards increases the rapidity with
without 'in- which all the factors of production reach their
dicating normal condition in any country where prices are
what that , . , , i , < i • •
standard changing through currency causes; but this is a
should be. Joubtful advantage, and one which would disappear
either with universal gold monometallism or with
effective bimetallism. A common international stan-
dard would both check the temporary variations in
the relative price and production of different com-
modities, and, to a much lesser degree, would make
the average price of all commodities more stable.
Thus the whole argument of this chapter tells
strongly in favour of the adoption of one universal
standard of value for all countries ; though when
we come to the question as to what that standard
should be, we get no guidance here, and must look
to other considerations to settle that point.
Gold-using In conclusion, if I am asked whether a change in
Tdlfnot on ^^® ^^^^^ — ^ ^i^® i^ *^® gold price of silver — will
the whole be beneficial to gold-using countries, I can only
fitedbya answer that, granting the correctness of my con-
™lueof^^ elusions, it entirely depends on how that change
silver. is brought about. The ratio may alter in the direc-
tion indicated either by a fall in the value of gold.
Ch. XXIL] A CHANGE IN THE RATIO. 323
or by a rise in the value of silver, or by a relative
movement in the values of the two metals, one
rising or falling more quickly than the other. If
gold falls in value — that is, if gold prices rise —
manufacturers in gold-using countries will be bene-
fited; but whether we should consider this result
as being for the well-being of the community in
general will depend on the view taken of the argu-
ments set forth in Chapters XVII. and XVIII. My
opinion being that it would be better if gold prices
were to fall much less rapidly than they have
done in recent years, I should hold that any cause
tending to decrease the value of gold — or rather to
check its appreciation — would be beneficial, unless
it tended to shake commercial confidence, or to
produce too great or too sudden an effect on prices.
On the other hand, if the ratio changes in con-
sequence of a rapid rise in the value of silver,
commerce will be checked in silver-using countries
by the fall in silver prices; and some trades in
gold-using countries will be stimulated thereby,
whilst a greater number will be depressed. I see,
therefore, no net gain to gold-using countries to he
obtained by forcing up the value of silver, unless it is
a definite step in the direction of obtaining a steadier
standard of valve, or of minimizing the fluctuations
in the rate of exchange. And I would ask those
who are advocating such a course to consider how
the depression of trade in silver-using countries can
be an advantage to us. The greater the eftect of
the appreciation of silver, the greater will be the
324 FOREIGN TRADE. [Cii. XXII.
diminution of trade of silver-using countries, whether
they are acting as our rivals or as our customers.
In estimating the results on our commerce, of this
depression in silver-using countries, we must decide
which is the more important aspect of this branch
of international trade ; and we must remember that
it cannot on the whole be an advantage to us to
cripple the commerce of other nations who are our
customers rather than our rivals.
CONCLUSION.
Ch.xxitl] recapitulation. 327
CHAPTER XXIII.
RECAPITULATION AND CONCLUSIONS.
In Chapter IX. a summary was given of the argu-
ments relating to the choice of the bimetallic ratio.
The ratio in the market at the time of the intro-
duction of the system — the market ratio — and the
ratio of 15^ to 1— the low ratio — were taken as the
extremes to be considered ; and the choice between
the two was discussed on the hypothesis that bi-
metallism is preferable to monometallism. The
verdict was strongly in favour of the market ratio,
though it was admitted that some arguments point-
ing to the advisability of adopting an intermediate
ratio were worthy of consideration. In subsequent
chapters, all the main arguments which have been
advanced for and against the introduction of a
system of bimetallism with the market ratio have,
I believe, been set forth. The following is a brief
recapitulation of the points discussed.
The main objections to market-ratio bimetallism, Recapitu-
with the replies thereto, are : — the objec-
(1) That it would be impossible to obtain the tions "rged
• • 1 rm 1 against bi-
necessary mternational agreements. Ihat may be metallism ;
328 CONCLUSION. [Ch. XXIII.
true, but it is no argument against trying to obtain
them.
(2) That it would be very unwise to place our
currency system at the mercy of foreign powers by
entering into any international agreement. But a
Bimetallic Union would influence the values of the
metals everywhere alike ; and, as regards the general
level of prices, those nations who did not join such
a union would be exactly as much " at its mercy "
as those who did. The international agreement
would presumably contain a clause giving a power
of repudiation after due notice. Bimetallism would
only be adopted after serious consideration ; and a
pledge not to hastily reverse a deliberately adopted
policy would be the only bond fettering the action
of a bimetallic country.
(3) That a fixed ratio of value between the metals
cannot be maintained by the law. In reply, it is
urged that the weight of authority is strongly against
this view, and, moreover, if the system had to be
abandoned, the dangers accompanying such a step
may easily be exaggerated.
(4) That silver, on account of its weight, is an
inconvenient metal for coinage. But, in reply, it
is contended that, under a market-ratio system,
there is no reason to believe that the total amount
of silver in circulation would be increased ; and it
is urged that, in any case, with the aid of notes
and token coinage, the inconvenience attending
the use of the joint standard would not be at all
serious.
Ch. xxiil] recapitulation. 329
(5) That to establish such a system would be an
unfair interference with existing contracts. But it
would be not a whit more unfair than the abandon-
ment of bimetallism by the Latin Union, which no
monometallist has ever yet called a dishonest act.
(6) It is urged that the position of England in
the financial world is due to the soundness of her
currency system. But, on the other hand, it is
asserted that this is a mere speculation, not based
on sound arguments, and that much more deep-
seated causes have produced such prosperity as we
have obtained.
The following are the arguments in favour of and of the
this system, together with the replies thereto : — -Q^itg
(1) That bimetallism, by tying gold and silver favour,
together, would diminish the variations in average
prices whether due to causes affecting only one of
the metals, or to the indirect effect of commerce
between countries with different standards. In reply,
it is stated that the result of recent investigations
indicates that the steadying effect thus produced
will not be very great.
(2) The Government of India has found itself in
serious financial difficulties through the fall in the
rupee ; and bimetallism with a suitable ratio, though
it would not restore things to their previous con-
dition, w.ould insure against further troubles in the
future. In reply, it may be urged that these diffi-
culties have already been nearly overcome by the
monopoly -rupee system ; and that gold mono-
metallism, which it is intended to introduce into
330 CONCLUSION. [Ch. XXIII.
India, will remedy the evils complained of quite
as effectively as bimetallism.
(3) That commerce between gold and silver-
using countries is seriously hampered by the
fluctuations in exchange ; that the depreciation of
silver has put industrial concerns in gold-using
countries at a disadvantage in competing in all
markets ; that the existing diversity of standards
increases the instability in the relative prices of
different commodities, thus temporarily inflating or
depressing particular trades in an injurious manner ;
and that these evils would be remedied with regard
to all gold-using and silver-using countries by
means of a powerful Bimetallic Union, even if all
were not included in it. In reply, it is stated
that these troubles, though no doubt they do exist,
have been greatly exaggerated ; that gold mono-
metallic systems are rapidly being established
throughout the commercial world ; and that these
difiiculties will thus be overcome in so far as they
affect commerce between nations adopting this
common standard.
(4) That theoretical considerations show that we
ought to adopt a system of currency which in times
of commercial progress neither allows prices to rise,
nor allows the price of the output per man per day
to fall ; that, with the silver standard, the average
jirice of wholesale commodities has remained ap-
proximately steady ; that, with the gold standard,
the price of the output of labour has not varied
greatly; and that, judging by the past, a mean
Ch. XXllI.] RECAPITULATION. 331
between the two would form a standard to whicli
no objection could be raised on such theoretical
grounds, ]Monometallists, on the other hand, con-
tend that the fall in prices has been on the whole
beneficial, and that the gold standard should,
therefore, be maintained in the future. It might
be added that it is very doubtful whether the joint
standard would permanently diminish the tendency
to falling prices; and, if it did so, that there is
some doubt as to the advantages thus to be derived.
(5) Lastly, it is contended that, if bimetallism is
not introduced, gold will be more and more used
as the standard of value ; that this will cause an
increasing demand for that metal for a long time
to come ; that we cannot hope always to progress
in the methods of economizing the use of the
standard as rapidly as during the last half century ;
or, at all events, that this check on appreciation
cannot be relied on in the future any more than
in the past ; and that the appreciation of the
currency, resulting from the balance of these con-
flicting causes, is certain to produce very harmful
effects in depressing trade. In reply, it is urged
that the output of gold is increasing, and that this
will prevent the undue appreciation of the standard.
Many facts point to the conclusion that the Of the
monetary condition of the world is at present in a ti\^8 before
state of unstable equilibrium. Russia and Japan us, the
are in the act of adopting the gold standard. The nance of
Indian currency system cannot remain for long in ^°t^ ^°^^
o T • 111 ^^^ surer
its present unsatisfactory condition ; and though mono-
332 CONCLUSION. [Ch. XXIIL
metallic the Government of India apparently looks upon
tifwst^ the change made in 1893 as a stepping-stone
towards gold monometallism, there are, neverthe-
less, some high authorities who think that it will
be necessary for that country to return to a silver
standard. As to the United States, it is clear that
all danger of a victory for the silver party is by
no means at an end. We are evidently passing
through a transition period ; the monetary con-
ditions of the future will, in all probability, differ
widely from those we see round us at present ;
and it is doubtful with what system or systems
bimetallism should be compared. Should the United
States, or India, or any other great nation revert
to silver monometallism, it is possible that gold-
» using countries might reap some benefits from the
change ; for the demand for gold would be
diminished thereby, and the tendency for the gold
standard to appreciate would thus be checked ;
but in other ways the results would be very harmful.
If either India or any country which now has a
gold standard were to adopt or drift into silver
monometallism, then there would be an increase
in the amount of goods made in gold-using countries
and sold in silver-using countries, and vice versa.
In a larger proportion of the trade of the world
the freedom of intercourse would be hampered by
fluctuations in the rate of exchange. And those
evils, which are due to the way in which diversities
of standards create an element of instability in the
balance and burden of international indebtedness.
Ch. XXm.] CONCLUSION. 333
would be increased. To divide the world into two
camps — a silver camp and a gold camp — would, in
my opinion, be the worst of all the alternatives
which lie before us.
Whatever may be the differences of opinion Universal
amongst currency reformers concerning other metaUism"
matters, they all agree that it is desirable to and bime-
....,,. , , 11' tallism are
minimize the disturbance to trade, and the mcon- the most
venience felt by the Governments of silver-using ^[^^^^^^^
countries, which result from the fluctuations in the tives.
rate of foreign exchanges ; though the benefits thus
to be derived are rated more highly by some than
by others. This end can only be attained by the
adoption of a common international standard of
value. In searching for the best standard which
can be adopted, we should, therefore, compare the
merits of effective bimetallism and universal mono-
metallism ; for, even if a standard more perfect
than either of these could be devised, it would at
present be outside the limits of practical politics ;
having no organised party to advocate it. The
movement in favour of gold monometallism has
not as yet, I think, come to a standstill ; and a
monetary system in which gold plays an even more
important part than it does at present is the most
probable future with which to compare bimetallism.
The general adoption of gold monometallism
throughout the commercial world would, no doubt,
be very advantageous in many respects. Such a
movement would probably make the gold standard
somewhat more stable ; both because the indirect
334 CONCLUSION. [Ch. XXIII.
effects of the variations in the value of silver would
no longer be felt, and because the increase in the area
covered by the gold standard would tend to diminish
the size of the waves of disturbance due to the varia-
tion in many of the causes affecting the value of
gold. At the same time all the evils due to the
avoidable fluctuations in the rate of exchange
would cease, and no inconvenience connected
with the maintenance of international agreements
would be felt. But, on the other hand, the
increase in the demand for gold would probably
cause the appreciation of the standard to continue
with its depressing effects on trade. And it is this
very fall in prices which is the origin of the existing
widely felt temptation to adopt some new system of
currency, merely for the purpose of alleviating the
pressure of existing debts. There seems to be no
chance of any serious consideration being given to
the question whether it is possible to put a check
on the appreciation of gold by other means than
the adoption of bimetallism ; and, unless the in-
crease in the production of gold soon begins to
have a material influence on the value of that
metal, the revolt against existing currency arrange-
ments may very possibly tend to increase rather
than to subside. It is, consequently, not impro-
bable that the movement in favour of gold may
add to, rather than diminish, the risk of dangerous
monetary revolutions.
But if market-ratio bimetallism were adopted,
no injustice would be inflicted on any class; the
Ch. XXIIL] CONCLUSION. 335
stability of the standard would be increased; the
drag on trade, through the too rapid fall in prices,
would diminish ; and the system would be one which
might, I conceive, endure for a very long period
of time.
The above is an outline of the arguments to be The
considered in forming a judgment on this difficult on the
question. They are in many respects evenly J^^^^ i"
balanced. IMy own view is that, whatever course market-
we adopt, we are stepping into a future for which J^etau/j,^
the past gives us most inadequate guidance, but
that, on the whole, the balance of probable benefits
and evils is distinctly in favour of market-ratio
bimetallism.
As to the exact ratio to be selected, that may Xo com-
not, within limits, be a matter of the highest on°™e^
importance ; but it is vitally important to know question
with what objects this reform is demanded. Some should be
arguments in favour of a ratio somewhat lower y?*^? ^^'^^^
c> _ _ the in-
than the ratio in the market, which are not based flationists.
on the desire for inflation, may fairly be weighed in
the balance ; but the difficulty which the Govern-
ment of India would experience in adopting a ratio
higher than 25 to 1 is the only one of these con-
siderations which ought, as it appears to me, to carry
much weight. No doubt it will be urged that France
and the United States would never be parties to bi-
metallism with anything like the ratio now ruling
the market, and that, if an attitude of resistance to
all compromise is adopted, this will be practically
equivalent to supporting monometallism. This may
336 CONCLUSION. [Ch. XXIII.
be so, but in considering the question of a com-
promise with those who desire to use bimetallism as
an engine for raising prices, we have to weigh the
strength of our objection to such a course against
the strength of our desire to establish any form of
bimetallism. As the evils of an artificial deprecia-
tion of the currency are abundantly clear, and as
the choice between bimetallism and monometallism
is not free from doubt, it appears to me that almost
any compromise with those who advocate this reform
on such grounds ought to be resisted.
France and The advocates of low-ratio bimetallism seem,
the United itt i t«»ij-
States moreover, to be utterly blind to the dimculties
rfioidd also ^i^ich will certainly spring up in their path. The
favour monometallic party have hardly opened a serious
market defensive campaign in England; but when they
ratio. do so, they will flood the country with orators who
will tell the working classes that the main object
of the bimetallic agitation is to increase the price
of food and of all other commodities, which will be
equivalent to a reduction in wages. Bimetallists,
who adhere with determination to the low ratio,
cannot deny this charge, and can only urge in
reply that the revival of trade would be sufficient
to make annual earnings rise more rapidly than
prices. Even if this argument is sound, it will,
I believe, be found quite impossible to persuade
the working man that dear food will be a benefit to
him. If France bars the way to the adoption of
any ratio but that of 15| to 1, the British con-
stituencies will prevent the adoption of that ratio
Ch. XX in.] CONCLUSION. 337
with equal determination. If, however, the electo-
rate on the Continent and in America ever come to
see that the increase in the value of their stocks of
silver will not repay them for the evils resulting
from inflation, then a more rational system of
bimetallism may be adopted, a system which would
at once dispose of the majority of the objections
raised by monometallists.
I believe there are many bimetallists who object. The
as I do, to all currency reforms introduced for the of'ttie""
purpose of artificially forcing up prices, and who ratio ^ »
yet keep silent for fear of causing a rupture in the
bimetallic camp. When the tug of war comes, they
will very probably find the inflationist section too
strong for them in the councils of their party ; at the
last moment they may have to desert, and to join
the monometallists in resisting a reform >vith which
they have much sympathy. If they speak now,
they may cause wiser opinions to prevail on their
own side. This question of the ratio has to be
fought out; and, until it is decided, probably no
real advance can be made in the bimetallist cause ;
certainly no clear understanding can be established
as to the objects to be striven for ; and many will
feel it quite impossible to decide whether or not to
enrol themselves as advocates of the proposed reform.
APPENDIX.
The following tables are abridged from those given in
the Bimetallist of February, 1897 : —
TABLE I.
The World's Production op Gold and Silver from 1493-1885.
[Calculated from Soetbeer's figures.] '
Yeaks.
1493-1520 ...
1521-1544 ...
1545-1560 ...
1561-1580 ...
1581-1600 ...
1601-1620 ...
1621-1640 ...
1641-1660 ...
1661-1680 ...
1681-1700 ...
1701-1720 ...
1721-1740 ...
1741-1760 ...
1761-1780 ...
1781-1800 ...
1801-1810 ...
1811-1820 ...
1821-1830 ...
1831-1840 ...
1841-1850 ...
1851-1855 ...
1856-1860 ...
1861-1865 ...
1866-1870 ...
1871-1875 ...
1876-1880 ...
1881-1885 ...
Weight pek Annum.
Proportion
Gold, fine.
Silver, fine.
of gold to
silver as
Ito—
Ounces, troy.
Ounces, troy.
186,470
1,511,050
8-1
2.30,194
2,899,930
12-6
273,596
10,017,940
36-6
220,195
9,628,925
43-9
237,267
13,467,635
57-2
273,918
13,596,235
49-6
266,845
12,654,240
47-4
281,955
11,776,545
41-8
297,709
10,834,550
36-4
346,094
10,992,085
31-7
412,163
11,432,540
27*7
613,422
13,863,080
22-6
791,211
17,140,611
21-7
675,665
20,985,591
31-5
571,948
28,261,779
49-4
571,562
28,775,858
50-7
367,957
17,385,756
47-2
457,045
14,807,005
32-4
652,292
19,175,868
29-4
1,760,502
25,090,342
14-2
6,410,325
28,488,598
4-4
6,485,863
30,252,829
4-7
5,949,583
35,401,973
5-9
6,270,086
43,051,583
6-9
5,591,014
63,317,014
11-3
5,543,111
78,775,602
14-2
4,794,755
92,003,944
19-2
' The whole of the figures, and also the proportions, are calcu-
lated from kilogrammes and murks as given in the " Appendix to
the Final Report of the Gold and Silver Commission," pp. 146-148.
340
APPENDIX.
TABLE II.
The World's Production of Gold and Silver from 1873-1895.
[From Tables issued by the United States Mint.]
[Converted at £1 = $5.]
Proportion
Years.
Silver, fine.
Gold, fine.
of gold to
silver as
Ito—
Ounces, troy.
Ounces, troy.
1873
63,267,000
4,654,000
13-6
1874
55,300,000
4,390,000
12-6
1875
62,262,000
4,717,000
13-2
1876
67,753,000
5,016,000
13-5
1877
62,680,000
5,512,000
11-4
1878
73,385,000
5,761,000
12-7
1879
74,383,000
5,262,000
14-2
1880
74,795,000
5,149,000
14-5
1881
79,021,000
4,984,000
15-9
1882
86,472,000
4,934,000
17-5
1883
89,175,000
4,615,000
19-4
1884
81,568,000
4,921,000
16-6
1885
91,610,000
5,246,000
17-5
1886
93,297,000
5,136,000
18-2
1887
96,124,000
5,117,000
18-8
1888
108,828,000
5,331,000
20-4
1889
120,214,000
5,974,000
20-2
1890
126,095,000
5,749,000
22-0
1891
137,171,000
6,320,000
21-2
1892
153,152,000
7,094,000
21-6
1893
165,473,000
7,618,000
21-7
1894
164,610,000
8,783,000
18-7
1895
169,180,000
9,689,000
17-5
Total
2,295,815,000
131,972,000
Yearly average
99,818,000
5,738,000
17-4
APPENDIX.
341
TABLE III.
Mb. Sauebbeck's Index Ntthbebs.
Index-number
Index-number
Years.
of 45 principal
Years.
of 45 principal
commodities.
commoditiea.
1867-1877
100
1885 .
72
1874
102
1886 .
69
1875
96
1887 .
68
1876
95
1888 .
70
1877
94
1889 .
72
1878
87
1890 .
72
1879
83
1891 .
72
1880
88
1892 .
68
1881
85
1893 .
68
1882
84
1894 .
63
1883
82
1895 .
62
1884
76
1896 .
61
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