Money and the Mechanism of Exchange
The Battle of the Standards
Ever since the great discoveries of gold in California and Australia began to disturb the value of that metal relatively to silver and to other commodities, it has been a continual subject of discussion what standard of value should be ultimately adopted. There have been partizans of the now antiquated silver standard, of the double standard, and of the gold standard. Having in England long possessed a gold standard, we have been only in a secondary degree concerned in such discussions, upon which quite a library of works has been written by distinguished French, Belgian, German, Swiss, Italian, and Dutch economists. The changes actually effected in the currencies of Europe since 1849 are of the most extensive character. Some nations have more than once changed their policy. Holland, anticipating a great fall in the value of gold, adopted silver as the single standard of value in 1850. This change had to be effected at considerable pecuniary loss, and it is understood that Holland is again exposed to the trouble and expense of having to admit a gold standard, either as a sole legal tender, like Germany, or else concurrently with a restricted silver coinage, like Belgium and the other monetary allies of France.
From the time of Locke to that of Lord Liverpool, the comparative advantages of gold and silver, as the principal measure of value, were a frequent subject of discussion among English political writers. Locke and most of the earlier English economists upheld silver. Lord Liverpool definitely decided English policy in favour of gold, and the tendency of opinion is now strongly in the same direction. Several countries have recently changed from silver to gold, and since the single example of Holland no nation has passed from gold to silver. Even Austria, which is still supposed to represent the silver standard, has taken a step towards a change by coining ten- and twenty-franc pieces in gold, the inscriptions 10 Francs and 20 Francs now appearing, as well as 4 Gulden and 8 Gulden, on the new gold coins of the Austro-Hungarian empire.
The Double Standard.
The single silver standard having been practically abandoned as regards the currencies of Europe, the battle has more recently waged between the partizans of the double standard, represented in the currencies of France and the Monetary Convention of Western Europe, and those who uphold a gold standard combined with subsidiary coinages of silver and small money, somewhat in the manner of the English system. The advantages of the double standard have been most ably advocated by MM. Wolowski, Courcelle-Seneuil, Seyd, Léon, Prince-Smith, and others, while MM. Chevalier, De Parieu, Hendriks, Frère Orban, Levasseur, Feer-Herzog, and Juglar, have been some of the leading upholders of the gold standard. The literature of the subject is very extensive and, to most readers, dreary in the extreme, but I will try to give a tolerably concise statement of the principal arguments.
In the first place, I have no doubt whatever that M. Wolowski is theoretically quite correct in what he says about the compensatory action of the double standard system. English writers seem completely to have misunderstood the question, asserting that the system exposes us to the extreme fluctuations of both metals. No doubt, when gold and silver are both legal tenders to unlimited amounts, there will be a tendency to pay in that metal which is overrated in the legal ratio of 15½ to 1. Only when the price of standard silver is exactly 5s. 0 13/16d. per ounce is it a matter of indifference in France whether a debt be paid in gold or silver, and this exact price has only been quoted a few times in the London market in the last thirty years. Accordingly, it has been urged that the double standard is not really a double one, but only an alternative gold and silver standard. When silver is lower in price than 5s. 0 13/16d. per ounce, silver becomes the standard; when silver rises above this price, gold takes its place as the real measure of value.
So far the English economists are no doubt correct; but, in the first place, it does not follow that the prices of commodities follow the extreme fluctuations of value of both metals, as many writers have inconsiderately declared. Prices only depend upon the course of the metal which happens to have sunk in value below the legal ratio of 15½ to 1. Now, if in the accompanying figure we represent by the line A the variation of the value of gold as estimated in terms of some third commodity, say copper, and by the line B the corresponding variations of the value of silver; then, superposing these curves, the line C would be the curve expressing the extreme fluctuations of both metals. Now the standard of value always follows the metal which falls in value; hence the curve D really shows the course of variation of the standard of value. This line undergoes more frequent undulations than either of the curves of gold or silver, but the fluctuations do not proceed to so great an extent, a point of much greater importance.
Nor is this the whole error of the English writers. A little reflection must show that MM. Wolowski and Courcelle-Seneuil are quite correct in urging that a compensatory or, as I should prefer to call it, equilibratory action, goes on under the French currency law, and tends to maintain both gold and silver more steady in value than they would otherwise be. If silver becomes more valuable than in the ratio of 1 to 15½ compared with gold, there arises at once a tendency to import gold into any country possessing the double standard, so that it may be coined there, and exchanged for a legally equivalent weight of silver coin, to be exported again. This is no matter of theory only, the process having gone on in France until the principal currency, which was mainly composed of silver in 1849, was in 1860 almost wholly of gold. France absorbed the cheapened metal in vast quantities and emitted the dearer metal, which must have had the effect of preventing gold from falling and silver from rising so much in value as they would otherwise have done. It is obvious that, if gold rose in value compared with silver, the action would be reversed; gold would be absorbed and silver liberated. At any moment the standard of value is doubtless one metal or the other, and not both; yet the fact that there is an alternation tends to make each vary much less than it would otherwise do. It cannot prevent both metals from falling or rising in value compared with other commodities, but it can throw variations of supply and demand over a larger area, instead of leaving each metal to be affected merely by its own accidents.
Imagine two reservoirs of water, each subject to independent variations of supply and demand. In the absence of any connecting pipe the level of the water in each reservoir will be subject to its own fluctuations only. But if we open a connection, the water in both will assume a certain mean level, and the effects of any excessive supply or demand will be distributed over the whole area of both reservoirs. The mass of the metals, gold and silver, circulating in Western Europe in late years, is exactly represented by the water in these reservoirs, and the connecting pipe is the law of the 7th Germinal, an XI, which enables one metal to take the place of the other as an unlimited legal tender.
The Demonetization of Silver.
M. Wolowski has earnestly warned Europe against the danger of abrogating the law of the double standard, and demonetizing silver. Germany, in adopting a gold standard, is causing a considerable demand for gold, and at the same time throwing many millions of silver coins upon the market. Austria, Denmark, Sweden, and Norway are likely to follow her example. If other countries were to insist upon suddenly having a gold money, it is evident that gold would tend to rise in value compared with silver, which might be largely depreciated. If France, Italy, Belgium, and other countries now possessing theoretically the double standard, were to allow the free action of their monetary laws, the depreciated silver would flow in and replace the appreciated gold, so that the change of values would be moderated. M. Wolowski asserts that if this compensatory action be suspended, and the demonetization of silver be extended, there must ensue a disastrous rise in the value of gold, thus rendered the sole standard of value. All debts private and public will be legally due in this metal, and all burdens will be greatly increased.
Within the last year or two the predictions of M. Wolowski may seem to have been verified in some degree. The price of standard silver, which was at one time 62½d. per ounce, has already fallen as low as 57¾d. while the demonetization of silver in Germany is only partially accomplished. The whole effect of the great discoveries of gold was only to raise the price from about 59¾d. to a maximum of 62½d., while the double standard system freely worked; but since its action has been, as we shall see, suspended, the minting operations of a single government can affect the price in a greater degree.
Agreeing that M. Wolowski is entirely correct in an abstract point of view, and is justified to some extent by the course of events, I must adhere to the opinion which I expressed at his request in 1868, and which was partially published in his volume, "L'Or et l'Argent "(p. 62).
The question seems to be entirely one of degree, and in the absence of precise information is quite indeterminate. If all the nations of the globe were suddenly and simultaneously to demonetize silver, and require gold money, a revolution in the value of gold would be inevitable. But M. Wolowski seems to forget that the nations of Europe constitute only a small part of the population of the world. The hundreds of millions who inhabit India and China, and other parts of the eastern and tropical regions, employ a silver currency, and there is not the least fear that they will make any sudden change in their habits. The English government has repeatedly tried to introduce a gold currency into our Indian possessions, but has always failed, and the gold coins now circulating there are supposed not to exceed one tenth part of the metallic currency. Although the pouring out of forty or fifty millions sterling of silver from Germany may for some years depress the price of the metal, it can be gradually absorbed without difficulty by the eastern nations, which have for two or three thousand years received a continual stream of the precious metals from Europe. If other nations should one after another demonetize silver, yet the East may be found quite able to absorb all that is thrust upon it, provided that this be not done too rapidly.
As regards the gold required to replace silver, it does not seem to be evident that there will be any scarcity. The adoption of the gold standard does not necessarily involve the coining of much gold, for some countries may, like Norway, or Italy, or Scotland, have a principal currency almost entirely composed of paper. In other countries, such as France and Germany, the cheque and clearing system, which we shall shortly consider, may be gradually introduced, and may economize to a great extent the rise of the metallic currency. The current supply of gold from the mines is still very large, and we cannot be sure that it will not be increased by fresh discoveries in New Guinea, South Africa, North and South America, and elsewhere.
In short, then, the amount of supply and amount of demand of both the precious metals depend upon a number of accidents, changes, or legislative decisions, which cannot be in any way predicted. The price of silver has fallen in consequence of the German currency reforms, but it is by no means certain that it will fall further than it has already done. That any great rise will really happen in the purchasing power of gold is wholly a matter of speculation. We cannot do more than make random guesses on the subject, and, as a mere guess, I should say that it is not likely to rise. Gold has since 1851 been falling in value, and an increased demand for gold is not likely to do more than slacken, or at the most arrest, the progress of depreciation.
Disadvantages of the Double Standard.
While the need for maintaining the system of the double standard is a matter of speculation, the inconveniences of the system are beyond doubt. So long, indeed, as its operation resulted in substituting a beautiful coinage of napoleons, half-napoleons, and five-franc pieces in gold for the old heavy silver écus, there was no complaint, and the French people admired the action of their compensatory system. But when, a year or two ago, it became evident that the heavy silver currency was coming back again, and that the gold coin was likely to form the circulating medium of other nations, the matter assumed a different aspect. The French, in short, have been educated to the use of gold, and they are not likely to wish for the return of a currency 15½ times as heavy and cumbrous. Moreover, the change involves a loss to the community in general, who receive their debts in a metal of lessened value; and a part of the benefit is reaped by bullion-brokers, money-changers, and bankers, for whom a factitious trade in gold and silver money is created by the law of the 7th Germinal, an XI. The statesmen of the countries still maintaining the double standard must have reflected that other nations showed no tendency whatever to adopt the same system. Thus, if France were to continue to act as a great compensatory currency pendulum, she would bear the cost and inconvenience, while other nations would reap equally with herself the advantage of the increased steadiness of value of the precious metals. The founders of the Monetary Convention and the advocates of International Currency never intended to sacrifice themselves to this extent for the benefit of the world. Accordingly they have in effect abandoned the double standard.
When the renewed tendency to coin silver five-franc pieces in large quantities first became apparent, the French government at once suspended the coinage. Subsequently an agreement has been made from year to year between France, Switzerland, Belgium, and Italy, that each country shall coin only a fixed quantity of silver écus proportional to its population. An agreement to the same effect had before existed as regards the silver token currency of two-franc and smaller pieces; but the coinage of écus, which were in theory standard coins and legal tender for unlimited amounts, had been left unrestricted. The result of the limitation of coinage now imposed is to destroy the action of the double standard system. Silver being coined only in limited quantities cannot replace and drive out the gold, and the five-franc pieces, although worth more than five single franc pieces, are worth less than the fourth part of a napoleon or twenty-franc piece in gold. Although, so far as I understand, they remain a legal tender for unlimited amounts, they cannot be had in unlimited quantities, and are thus practically reduced to the rank of token coins. By the least possible legislative change, the French and other governments of the Monetary Convention have thus practically abandoned the double standard, and have adopted one which is hardly distinguishable from the composite legal tender of England and Germany. Ever since 1810 copper or bronze money had only been legal tender in France to the amount of 4 francs 99 centimes, and since the fineness of the smaller silver currency was lowered, this money also was restricted as a legal tender to the amount of 50 francs for any one payment between individuals, or to the amount of 100 francs for any payment to the public treasuries. The silver écu forms the single link by which France holds the double standard, and this link is half severed.
It is remarkable that the changes thus effected in the money of Western Europe are almost the same as those by which the United States had previously abandoned the double standard. Until the year 1853 the silver dollar of the United States mint was a standard coin of unrestricted legal tender, concurrently with the gold coinage of eagles and their fractions. The legal ratio of silver to gold in weight indeed, was 16 to 1, instead of 15½ to 1 as in France. More silver being thus required to make a legal payment in America than elsewhere, gold was naturally preferred for this purpose, and the silver was sent abroad. To remedy this state of things the government of Washington, in 1853, reduced the half-dollar and smaller silver pieces to the condition of token coins, and though the single silver dollar pieces remained of standard weight, they were coined in very small quantities and were practically suppressed. The predominance of an inconvertible paper currency suspended the question of metallic money for a time. The Coinage Act of the United States Congress came into operation on 1st April, 1873, and constituted the gold one-dollar piece the sole unit of value, whilst it restricted the legal tender of the new silver trade dollar, and of the half-dollar and its subdivisions, to an amount not exceeding five dollars in any one payment. Thus the double standard previously existing in theory was finally abolished, and the United States was added to the list of nations adopting the single gold standard.
The Monetary Systems of the World.
On reviewing the changes which have recently taken place in the currencies of the principal nations, we notice an unmistakable tendency to the adoption of gold as the measure of value, and the sole principal medium of exchange. This system is now adopted throughout Great Britain and Ireland, the Australian colonies, and New Zealand, the African colonies, and many of the minor possessions of the British empire. It has existed for some time in Portugal, Turkey, Egypt, and in several of the South American States, such as Chili and Brazil. It has been established by recent legislation in the German empire, and also in the Scandinavian kingdoms of Denmark, Norway, and Sweden, where a gold currency, and principal legal tender, of twenty-kroner pieces, is now being issued. Even Japan has imitated European nations, and introduced a gold coinage of twenty, ten, five, two, and one-yen pieces, the yen, being only three per mille less in value than the American gold dollar. The new fractional money of Japan is to consist of fifty, twenty, ten, and five-sen pieces in silver, the sen corresponding to a cent, and forming a token money at the fineness of eight parts in ten.
The double standard is still theoreticallv maintained in France, Italy, Belgium, Switzerland. Spain, Greece, and Roumania have also in recent years reformed their currencies in imitation of the French system, and must, I suppose, be considered as having a double standard. In the New World, Peru, Ecuador, and New Granada, profess to have the same system.
A few years ago a very considerable part of Europe might have been classed as retaining the ancient system of a single silver standard, with gold coins circulating, if at all, at varying rates, as commercial money. The whole of Germany, north and south, together with Austria, the Scandinavian kingdoms, and Russia, belonged to this group. Owing to the changes already mentioned, only Austria and Russia now clearly represent the silver standard in Europe, and even Austria has begun, since 1870, to coin gold pieces of eight and four florins, the same in weight and fineness as the French gold twenty- and ten-franc pieces. By an imperial decree, dated Vienna, 12th July, 1873, it is ordered that the French, Belgian, Italian, and Swiss gold pieces of twenty, ten, and five francs shall be internationally accepted in the Austro-Hungarian empire in the ratio of eight gold florins to twenty francs of gold coin of the other nations. Nevertheless the silver standard practically prevails over a large part of the world. The vast populations of India and China, Cochin China, the East Indian Islands, portions of Africa and the West Indies, Central America and Mexico, have a currency mainly consisting of silver coins, either rupees as in India, sycee bars as in China, or silver dollars as in many other places.
The gold standard has thus made great progress, and it will probably continue to progress. When the United States return to specie payments, they will certainly adopt gold, and Canada, whose currency can hardly be classed at all at present, must do the same. The Latin nations, having once abandoned the double standard in practice, are not likely to return to it, and Austria must follow. An extensive monetary change is hardly to be expected in Russia, although it is very remarkable that in the province of Finland, a part of the empire highly distinguished for intelligence and good education, Russia has positively admitted the franc system and its decimal subdivisions, the Finnish marc or quarter-rouble having the precise silver weight and value of the franc, lira, and peseta. A great step towards a future international coinage is thus effected. Like changes are impossible among the poor, ignorant, conservative nations of India, China, and the tropics generally. Hence we arrive, as it seems to me, at a broad, deep distinction. The highly civilized and advancing nations of Western Europe and North America, including also the rising states of Australasia, and some of the better second-rate states, such as Egypt, Brazil, and Japan, will all have the gold standard. The silver standard, on the other hand, will probably long be maintained throughout the Russian empire, and most parts of the vast continent of Asia; also in some parts of Africa, and possibly in Mexico. Excluding, however, these minor and doubtful cases, Asia and Russia seem likely to uphold silver against the rest of the world adopting gold. In such a result there seems to be nothing to regret.
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