Money and the Mechanism of Exchange
In a book upon money written in the present day, reference must certainly be made to the scheme put forward, and even the steps accomplished, towards a world-wide system of International Money. Much time will no doubt pass before such a notion is realized, and the recent retrograde action of the German government tends to retard so great an achievement of advancing civilization. Yet in all our changes and discussions of monetary matters we ought to bear in mind the eventual introduction of a uniform monetary system. We may surely look for a gradual amelioration in the relations of nations, though wars cannot yet be avoided. We have international copyright, extradition of criminals, maritime codes of signals, postal conventions, treaties for lessening the horrors of war. Nations have long since ceased to be isolated bodies wishing evil to all their neighbours; and as free trade becomes everywhere predominant, and communication by means of railway, steamboat, telegraph, post, and newspaper continually increases, we may look for the time when all people will seek to break down, as far as possible, the barriers between one family and another of the human race.
I will first of all state the advantages which may be expected to accrue from an international system of metallic money, and will then describe in succession the corresponding possible disadvantages, the progress which has already been made towards the simplification of monetary systems, the principal schemes set forth, and their comparative merits and demerits.
Advantages of International Money.
Short-sighted people have objected to all schemes of international money, that the object in view, if ever realized, would only save trouble to the comparatively few people who travel from nation to nation. This is the least of all the benefits which the uniformity of money would confer. I am disposed to put in the first place the immense good which would arise from facility in understanding all statements of accounts, prices, and statistics, when expressed in terms of a uniform measure of value. To the statistician it is almost intolerable to meet with tables of information, variously expressed in francs, pounds, dollars, thalers, metres, yards, ells, hundred-weights, kilograms. The labour of statistical inquiry is sufficiently great without the preliminary labour of reducing great masses of figures to a common unit. To the merchant, or man of business, the variety of moneys and measure is equally perplexing. In many places the value of the currency is not certainly known, and only those who happen to have special knowledge of a locality, and the money and measures there employed, can venture to trade with it. The difference of monetary systems, again, renders calculations relating to the foreign exchanges very complex, so that profit fall to those who have acquired skill in calculations of the kind.
In the second place, the actual adjustment of the foreign exchanges would be rendered more prompt and perfect when the coin of one country could be transferred directly into the circulation of another country. One result of international currency would be that the precious metals would be held more in the form of coin. At the present time, what is coined by one country has often to be melted up and recoined by another, although to some extent the principal kinds of coins, English sovereigns, American eagles, French napoleons, Mexican dollars, are held by banks and bought and sold. With a single system of coins, all stocks of gold and silver would, as a general rule, be kept in the coined state, ready to go into circulation at any moment. Some small savings would accrue from the less amount of mintage required, though this is a very secondary matter. One of more importance is the lessened opportunities of profit which there would be for bullion brokers and others, who trade upon the difficulties of conducting the bullion traffic in the present state of things. Nor is the saving of trouble and loss to travellers a matter of indifference. As international communication increases, the number of travellers will increase, and we ought to break down, as far as possible, all factitious difficulties.
One benefit of international money which has been insufficiently noticed, is the improvement which its adoption would probably effect in the currencies of minor and half-civilized states. In many parts of the world there is still a mixture of coins of various and uncertain value; and as long as the principal nations coin money on totally different systems, the coins will circulate elsewhere and make confusion. Already for a long time the practically international currency of the Mexican dollar has been a matter of great convenience; and where it is the unit of value, merchants know on what basis they are making contracts. Now, if all the leading nations combined to issue coins of one uniform series of weight and sizes, these would by degrees form the currencies of non-coining state, and would effect a reform in the most remote parts of the world.
Disadvantages of International Money.
There are, no doubt, certain evils which might possibly arise from the circulation of money between nation and nation. One government, for instance, might coin money slightly inferior to the proper standard, and such money, once introduced, would, in virtue of Gresham's law, be difficult to dislodge. The French mint has been in fault in this respect. French gold coin, when carefully assayed, is found to have a fineness of 898 or 899 parts in 1000, instead of 900 parts. There is, indeed, a mint remedy of two parts, so that the coin was legally issued; yet the mint authorities have taken advantage of this remedy in an improper way. On the average, the coins issued by any mint ought to have almost the exact standard fineness, and the divergence allowed under the name of remedy is only intended to cover accidental faults of workmanship in particular coins, and not an intentional average divergence from the standard.
It is hardly to be supposed that a state issuing money under international obligations would wish to make a profit of one or two parts in a thousand in this way. To secure uniformity, it would be desirable for the assayers and officers of different mints to meet and agree upon a common standard process, and uniform trial plates. Experience does not show that one nation need distrust the faithfulness of another in matters of coining. We do not look upon Spain and Mexico as models of financial integrity, yet so faithfully used the mints of those countries to maintain the standard of weight and fineness in the issue of silver dollars; that these coins have for a hundred years past been received by tale almost without question in most parts of the world, and were at one time made current in England. The possibility of international currency is proved by the fact that, without any international treaties, the coins of several nations are recognized as a legal tender elsewhere. This is the case with English sovereigns, not only in the British colonies and possessions, but also in Portugal, Egypt, Brazil, and probably elsewhere. The napoleon has circulated freely in most parts of Europe. The ducat of Holland has also been a highly esteemed coin; and of the wide circulation of several species of dollars I have frequently spoken.
Conflict of Monetary Systems.
The chief difficulty in establishing an international money, arises from the fact that there are several great nations, the French, English, Americans, and Germans, each with its own system of money, which, from motives worthy and unworthy, it is unwilling to give up. There is no overpowering advantage which marks out any one of these systems on its own merit as distinctly the best. There is accordingly a balance of power which produces a dead lock. Each of the three first-named nations has much to say in favour of its own system. The French system, founded on the franc, is an eminently perfect decimal coinage, and has the prestige of being recognized as international money in Belgium, Switzerland, and Italy, besides being adopted with international currency as regards gold in Austria, and without it as regards silver in Spain, Greece, and some minor states.
The English may very properly urge that, though the subdivision of the pound is not to be recommended, the pound sterling is itself an excellent unit of value. It is the largest existing monetary unit, and on a gold basis, so that it seems to be peculiarly suitable for the growing wealth of nations. Though recognized only in a small corner of Europe, namely, Portugal, we must remember that Europe is rapidly ceasing to be the exclusive centre of trade and civilization. In the Australian, Polynesian, and African colonies are growing states which will make their might felt ere long, and they adhere to the pound. The world-wide extension of British commerce and British shipping makes the sovereign known in all the ports of the world.
On their part, however, the Americans might have much to say in favour of the dollar. It is decimally divided, and, as we shall see, in the most convenient manner. It corresponds to the coins which have for two or three centuries been most widely circulated and treated as units of account, so that there is much weight of experience in its favour. But, above all, it is firmly adopted as the money of a nation, which, as far as human wisdom can penetrate the future, is destined to be the most numerous, rich, and powerful in the world. That nation, which has arisen from the best stock of England, has absorbed much of the best blood of other European nations, and has inherited the richest continent in the world, must have an importance in coming times of which even Americans are barely conscious.
International Monetary Negotiations.
It is quite impossible that I should in this brief work give any sufficient sketch of the long series of discussions, meetings, congresses, associations, negotiations, and conventions which resulted in the actual establishment of an international money among the nations of western continental Europe. I must refer the reader, desirous of more information, to the excellent pamphlet of the eminent actuary, Mr. Frederick Hendriks, which first made the subject well known in England. It is called "Decimal Coinage; a Plan for its immediate Extension in England in connection with the International Coinage of France and other Countries," and was privately printed in 1866. Mr. Seyd's "Treatise on Bullion and the Foreign Exchanges" may also be consulted, and the Journal des Economistes is full of information on the subject.
The International Association for obtaining a Uniform Decimal System of Measures, Weights, and Coins, was founded in Paris in 1855, and the English branch carried on active operations. In 1858 the United States made proposals towards the assimilation of currencies. In 1860 and 1863 important international congresses were held in London and Berlin, and, at the latter one especially, important resolutions were adopted which we shall have to consider. It was, however, the close contiguity of the countries, Belgium, France, Switzerland, and Italy, and the fact that French gold, and even silver coin, could not be prevented from passing the frontiers, which forced the question forwards, and led in December, 1865, to an actual Convention for International Currency.
The report of the Congress of 1863 concerning currency is a highly important document. It point out the superior convenience of a gold standard, with a subsidiary coinage of silver and bronze; advocates uniform fineness of nine parts in ten for all standard coins; suggests a definition of weights of coins, on the metric system; and, finally, propounds a scheme by which the existing monetary units could be brought into simple relations with each other.
In 1870, a short time previous to the declaration of war with Germany, France summoned a fresh Imperial Commission, presided over by the Minister of Commerce and the Minister President of the Council of State (M. de Parieu), to take evidence from all sides on the various questions connected with the standard and its bearing upon international coinage. No less than thirty-seven witnesses were examined, and the results of the inquiry, printed by the French government in two very large volumes in 1872, show that the majority of the witnesses and of the Commissioners were decidedly in favour of a single gold standard.
Owing to a purely accidental coincidence, the principal monetary units already closely approximate to simple multiples of the franc. The following table shows the present relative values of these units and the multiples to which it is proposed to make them exactly conform.
It is only requisite to raise the florin 1.21 per cent., and to lower the dollar and pound sterling respectively 3.5 and 0.88 per cent., to establish very simple ratios between them. Thus, without any appreciable change of monetary systems, it would be possible to reduce statements from one mode of expression into another; moreover, the coins might themselves have international currency, the pound sterling serving as a twenty-five franc piece in France, and as a five-dollar piece in America, the American gold dollar reciprocally circulating as an écru in France, and a four-shilling piece in England.
The congress abstained from recommending any one unit for universal adoption, but urged that every nation, not possessing one of the four units named, should select that which pleased them best. Had this scheme been accepted by all nations in an intelligent and liberal spirit, we should ere now have probably seen our way clearly to the selection of the best unit. Since 1865, unfortunately, both the German empire and the Scandinavian kingdoms have made alterations not in accordance with these principles. A great assimilation of moneys has taken place, but it is in the direction of groups of national, rather than of international currencies, although, as has been demonstrated by Mr. Hendriks in several articles in the Economist, the new coins have many fresh and important points of contact and of agreement with the metrical and decimal systems, so that some real progress has actually been accomplished.
Decimalization of English Money.
Since Lord Wrottesley in 1824 proposed in parliament to adopt a decimal subdivision of the pound sterling, an immense amount of discussion has taken place upon various schemes for a new arrangement of our money. The advantages of several plans are so nearly balanced, and the difficulty of carrying any one into effect is so great, that no practical result has yet been achieved by half a century of debate. The two principal schemes, which perhaps need alone be noticed now, are the Pound and Mil scheme, and the Penny and Ten-franc scheme.
The former of these schemes reposes upon the fact that the farthing is nearly the thousandth part of the pound. Since 960 farthings make a pound, it would only be necessary to alter the farthing 4 per cent. to obtain the lowest decimal submultiple, to be called the mil. The penny would be five mils, like the French halfpenny or five centimes; as some have supposed a new coin, in value 2.4d., would have to be introduced, as the hundredth part of the pound; but this is unnecessary, and the florin would be one hundred mils, and the half-sovereign five hundred mils. The great advantage of this method is, that it retains the pound as the principal unit, together with several other familiar coins. Against it has been urged, (1) the supposed fact that it excludes the most familiar of all coins, the shilling and sixpence, and (2) that the mil is somewhat too small a submultiple to begin with. This is, however, not necessarily the case. The shilling might remain, as coin of circulation, of the same weight, fineness, and value as at present, but would be translated, as coin of account, into fifty mils instead of forty-eight farthings, and the sixpence into twenty five mils instead of twenty-four farthings. This subdivision is not more complex than the one successfully, and in the almost parallel forms of fifty and twenty pfennige, centimes, lire, öre, etc., pieces, carried out in the new coinages of Germany, Scandinavia, or of the monetary allies of France. As to the mil being too small a submultiple, it seems to be overlooked that it is 2½ times as large as the initial submultiple of the French system, and 2 1/25 times as large as that of the new German system.
The second scheme was suggested by the late Professor Graham, and by Mr. Rivers Wilson, in their Report upon the Proceedings of the International Monetary Conference of 1867. It is founded upon the fact that the ten-franc piece is within ¾d. of eight shillings, and only differs 4 per cent. from one hundred pence. Thus it would only be requisite to introduce a gold piece of ten francs, temporarily serving as a token for eight shillings, to obtain a link with the French system. The subsequent reduction of the penny by 4 per cent., and the replacement of the shilling by a franc or tenpenny-piece, would give us a truly decimal system. A great advantage of this proposal is, that it retains, almost unaltered, so familiar a coin as the penny, and makes it, as it is for the most part at present, the lowest money of account. It is, moreover, in close accordance with the French monetary system. The main difficulty is that it involves the abandonment of the pound, which becomes two and a half of the new unit; and that, of all our present coins, only the florin, penny, and halfpenny, would fall in conveniently. To convert sums of money from pounds sterling into the new currency, it would be requisite to multiply by the factor 2½, which would be regarded by most people as a very troublesome process.
When the decimalization of English money was first proposed, the notion of international money had never been seriously entertained, and hardly indeed conceived. So much progress has now been made, that it is impossible to consider the one reform without reference to the other. The difficulty of making any change whatever is so great, that it would not be worth while to achieve a partial reform.
The Future American Dollar.
The most easy and important step which can now be taken towards an international money, consists in the assimilation of the American dollar to the five-franc piece. A great opportunity arises from the fact that the currency of the United States is now a variable paper currency. Considering the enormous fluctuations of value which have been experienced in the last ten years, it would be altogether needless scrupulosity to bring it back to the old standard, to the last degree of exactness. Every change of value of the currency, whether it be a fall or a rise, is so far injurious. Now the American dollar consists of 25.8 grains of gold, valued in English money at 49.316 pence. When gold is at 111 the paper dollar will be at a discount of 10 per cent., and will therefore be worth 44.384 pence, whereas the French dollar, or five-franc gold piece, weighs 24.89 grains, and is worth 47.58 pence. It would be obviously desirable, therefore, to make the new metallic dollar exactly of the same weight as the French one, and to commence specie payments when the greenback currency shall have risen to par with this coin. As regards all contracts made in paper, all current prices and charges, this change would involve no breach of faith whatever; it would in fact imply less change and breach of contracts than if the paper currency were reduced sufficiently to come to par with the old dollar.
The reduction of weight of the dollar would indeed lead to a repudiation of all gold contracts, including all bonds of the United States, railway companies, and other bodies payable in coin, unless provision were made to alter the terms of such contracts. This difficulty, however, could be overcome by simply enacting that each 103½ of the new dollars shall be received and paid as equivalent to 100 of the old ones.
There is little doubt that the adhesion of the American government to the proposals of the Congress of 1863 would give the holding turn to the metric system of weights, measures, and moneys. It is quite likely that it might render the dollar the future universal unit. The fact that the dollar is already the monetary unit of many parts of the world, gives it large odds. In becoming assimilated to the French écu, American gold would be capable of circulation in Europe, or wherever the French napoleon has hitherto been accepted. It may seem unpatriotic in an Englishman to advocate a change which may lead to the defeat of the pound sterling, but I look upon any one scheme of unification as better than none. Whatever may be the ultimate results, I desire to see assimilation between the French and American systems adopted as soon as possible. For reasons subsequently stated, I consider the dollar so good a unit that it would be mere national prejudice to oppose it, were there a fair chance of its general adoption. Even if it were not generally adopted, it would be a great step in advance if Great Britain, America, and France were to agree to coin gold money identical in weight and fineness, which might circulate indifferently as sovereigns, five-dollar pieces, and twenty-five franc pieces.
German Monetary Reform.
The new monetary system of the German empire is introducing a good money where all was before confusion. In a few years it will hardly be comprehensible to Germans that they had so long endured a state of the currency in which two, or even three or four, inconsistent series of coins were mingled without any method. In many respects the new system is all that could be desired. In spite of the antiquated silver standard, gold is selected as the measure of value, the sole principal money, and unlimited legal tender. The unit of account is the mark, consisting of 6.1465 grains of gold of the fineness of 9 parts in 10. Its value is, therefore, about 11¾d. The principal coin will be the twenty-mark piece, weighing 122.92 grains, or 7.964954 grams, and containing 7.168459 grams of pure gold. There is also a ten-mark piece of exactly half the weight.
The subordinate coins of silver and nickel-copper are issued on the footing of the composite tender, or English system, being tokens. The seignorage to be levied on the German silver coins, will be 11.111 per cent., exceeding the amounts subtracted from the English and French silver money, which are about 9 and 7.784 per cent. respectively.
It cannot be too much regretted by all friends of progress that, in deciding upon the weight of the new mark piece, the German government should have studiously avoided assimilation to the French system. The sovereign contains 7.3224 grams of pure gold, the twenty-five franc piece when coined will contain 7.2581, and the twenty-mark piece has been made to contain 7.1685. The only ground on which this precise weight could have been justified, is that three marks are approximately equal to one thaler. But so various was the coinage of the German states, that the field was open to the adoption of any system; and it is impossible to suppose that in so great a reform a difference of 1¼ per cent. would have been an insuperable obstacle to the adoption of international coinage.
Systems of Fractional Money.
A unit of value having been chosen, there are three competing methods according to which it might be subdivided, the binary, duodecimal, and decimal. The first system is carried out most perfectly in our avoirdupois weights, in which sixteen ounces make a pound; but it is also freely employed in our monetary system, the sovereign being divided into half-sovereigns, crowns, and half-crowns, the shilling into sixpences and threepenny pieces; and the penny into halfpence and farthings. At the same time, the duodecimal method is represented in our money by the division of the shilling into twelve pence, of which the third part is still in circulation as the groat, or fourpenny piece, now being withdrawn.
Each system of subdivision has its own advantages, and there must always exist a kind of natural competition between them. They have thus competed from the earliest times. In ancient Italy the duodecimal system predominated to the south of the Apennines, while the decimal division was in use to the northward. In Sicily the two methods were confused together. China has had a purely decimal system from an unknown epoch in antiquity. In England duodecimal and binary divisions have existed from very early times. It will be readily allowed that the binary system is most simple and natural, involving as it does the least possible factor above unity. The duodecimal system also has marked advantages, because it allows of division into several aliquot parts, involving the factor 2 twice over, and the next higher factor 3 once. Thus the shilling is divisible exactly into two sixpences, three fourpences, four threepences, and six twopences.
The decimal system is far less simple, and in some ways less convenient. Ten admits of only two factors superior to unity, namely, 2 and 5, and 5 is a more complex prime factor than appears in either of the previous methods. But the system has the supreme advantage of exactly falling in with our decimal system of numeration and calculation. Although probably not the best method which might have been selected, had selection been open to us, decimal numeration is firmly fixed among the institutions of the human race, as an hereditary habit, derived from the early practice of counting on the fingers. We have no choice but to accept the inevitable, and as all our arithmetical processes are conducted on the decimal method, there is an overwhelming advantage, as education and the use of writing advance, in making all our weights, measures, and coins conformable to the same system.
A perfectly and purely decimal system, indeed, would admit only the decimal multiples and submultiples, thus:—1000, 100, 10, 1, 0.1, 0.01, 0.001. But it is so troublesome to have to count out as many as ten coins, before coming to the next higher unit, that the rigour of the decimal divisions has always been relaxed. In the French system, the half and the double of each multiple are allowed to be represented by intermediate coins, the series being 1, 2, 5, 10, 20, 50, 100, 200, 500, etc. The American coinage is less simple and symmetrical, since it admits the half and quarter eagle, half and quarter dollar, the ten and five-cent pieces, and also a three-cent piece. I am inclined to prefer the French method, and to think that the American mint has issued too many dominations of coins.
Final Selection of the Unit of International Money.
I will conclude this chapter by some remarks on the reasons which should guide us in selecting the monetary unit to be finally established as the basis of a future universal money.
I attribute very little weight to arguments concerning the absolute amount of the rival units. It is said that as the wealth of nations increases, and the value of gold at the same time sinks, we need a larger unit. The pound is recommended on this ground as clearly superior to the franc. If we count in francs our figures will be twenty-five times as large as in pounds sterling. It seems to be forgotten that the same unit can never suit the extremely different sums which we have to express, so that we must use multiples or submultiples of the actual unit. Just as we use inches, feet, yards, furlongs, miles, or diameters of the earth's orbit, according to the magnitudes to be measured, so we vary the unit with money. If we are discussing a workman's weekly wages, we count in shillings; if we speak of a clerk's yearly salary, we speak of pounds; if the fortune of a merchant or banker is in question, we take notice only of thousands of pounds; in matters relating to the revenue of the kingdom or the national debt, we give our exclusive attention to millions of pounds. The Portuguese unit of account, called the rei, is worth only about the nineteenth part of an English penny, and is probably the smallest unit in the world. Practically, however, the milreis, or thousand reis, worth 53 1/3d., becomes the unit. In the same way Indian merchants speak of lacs and crores of rupees. The French estimate their national debt in milliards of francs. No doubt it is puzzling to Englishmen to interpret exactly the meaning of a milliard of francs, but, to those accustomed to count in francs it is no more difficult than a million of pounds. Exactly the same considerations apply to units of weight; thus, though the French use so small an ultimate unit as one gram, or 15.43 grains, yet according to the magnitudes of the objects to be weighed, they use smaller or larger units, centigrams or milligrams on the one side, or decagrams and kilograms on the other. The absolute amount then of the ultimate unit seems to me to be entirely a matter of indifference in this point of view.
As regards the subdivision of the unit there are considerations of more importance. The subdivision ought of course to be decimal, and it ought to be so contrived that the lowest submultiple shall correspond to the smallest sum which is thought worthy of being recorded in mercantile transactions. Now the franc is divided into 100 centimes, so that the centime has a value of less than the tenth of a penny. Though bronze pieces of one and two centimes were coined to the amount of about 5 per cent. of the whole bronze currency, it is found that they hardly circulate. Even if they were used in the smallest retail transactions at baker's shops, they would not be entered in account books. Thus the lowest entry which a French accountant makes is five centimes, and the next lowest ten centimes, corresponding to our penny. A needless complexity is thus introduced into small accounts. It is indeed so inconvenient to have to call the smallest coin in general use cinq centimes that it is still common to speak of it as a sou, in spite of the ninety years during which the decimal system has existed in France. The Portuguese rei is so small a unit that it is not represented by any coin at all. It nevertheless has a place in Portuguese mercantile accounts, and thus needlessly adds a figure to all pecuniary statements.
In England the smallest coin in actual use is the farthing, but in accounts little notice is taken of farthings or halfpennies, so that the penny is the lowest money of account. The post-office, in the regulations of the savings bank business, refuses to recognize any coin less than the penny. But the penny is inconveniently related to the pound, the hundredth part of which is 2.4d., and the thousandth part about a farthing. Thus the decimal system applied to our pound would oblige us to record as the lowest money of account an inconveniently small coin, namely, the mil. In this respect, indeed, the pound, and mil scheme is superior to the franc and centime system. Thus 12s. 6d. may be expressed as 625 mils; but in French money (at twenty-five francs to the pound) it would become 15.625. Taking the ten-franc piece as the principal unit, it would become 1.56 units, or 156 metrical pennies. In many cases it would require less figures to express a sum in pennies than in mils or centimes.
The American system is unexceptionable in this respect. The dollar is divided into one hundred cents, each of which has the value of about one halfpenny. Although half-cents have been coined, and may be used in some trifling purchases, they need never be entered in ordinary accounts. The cent thus seems to me to correspond to the smallest sum which need be treated in accounts, so that money statements are reduced to the greatest possible simplicity. The question may well be asked whether the lowest coin actually recorded is not truly the unit, of which all other coins are multiples. Perhaps the best answer would be to say that the unit is indifferently the cent, or the dollar, or the eagle. In English money it matters not whether we regard the pound, or its twentieth part, or its two hundred and fortieth part, as the unit. The absolute amount of the unit, I repeat, is totally a matter of indifference, and the only point we have to consider is whether it, or any decimal part of it, corresponds to the smallest sum of which we need take account. In this respect the dollar is the best existing unit; but it might admit of discussion whether the double dollar, or ten-franc piece of gold, equal to eight shillings, or one hundred pence, would not be better. If the wealth of nations continues to grow, and the value of gold to fall, even the cent will be too small a coin to appear conveniently in accounts, and the penny will be a better lowest unit. In this case the hundred pennies, or the ten-franc piece, would become the best unit. The choice thus seems to me to lie between the five-franc and the ten-franc piece in gold as the ultimate unit of international money. In favour of the ten-franc piece it may be added, that it would make a convenient gold coin of the smallest size which it would be well to issue. The gold dollar and five-franc piece are too small, and suffer great abrasion.
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