The History of Bimetallism in the United States
Part II, Chapter X
Germany Displaces Silver with Gold
§ 1. The movement inaugurated by the United States and France—both of which countries accepted with complacency the substitution of gold for silver—was assisted by Germany. Seeing the great commercial nations of the West taking heed of the opportunity to provide themselves with gold, Germany was shrewd enough to seize her opportunity before it was too late. Had she not done so, she would have but offered to her rival, France, the occasion to do the same thing—the thing which France would to-day most willingly do if it were possible for her to do it. As we have seen, France and India had not absorbed more than about one half of the new gold. Probably $1,500,000,000 of the gold produced from 1850 to 1876 was yet to find a demand either in the arts or in the currencies of other nations. It was from this source that Germany proposed to help herself before it was too late, and thereby array herself in the rank of commercial states which, having large transactions, chose gold, not merely as the most stable in value of the two metals, but as the best medium of exchange for large payments. Here, again, we meet with the undoubted preference for gold over silver. No matter what the cause is, the simple historical fact is undeniable that among commercial nations most men concur in believing gold to be the most stable in value, and the most convenient and trustworthy of the two metals as a medium of exchange. We will not say that this is an unmixed good; but so it is, as a fact of modern history. If any modern commercial country were placed in a position where it could choose on even terms (or even at some sacrifice) between gold and silver, there is no more doubt that gold would be preferred than there is that of two pieces of land a farmer would select for cultivation the one which (other things being equal) was the more fertile and accessible.
Germany, consequently, saw an opportunity to secure gold instead of silver, and was far-sighted enough to understand that, if other countries were permitted to anticipate her in the course of monetary progress, the acquisition of gold necessary to the up-building of a great commercial state with large transactions might later on possibly become a more costly proceeding. At the close of the Franco-Prussian war the new German Empire found the opportunity referred to in the plan for the establishment of a uniform coinage throughout its numerous small states, and was essentially aided in its plan at this time by the receipt of the enormous war-indemnity from France, of which $,54,600,000 was paid to Germany in French gold coin.*30 Besides this, Germany received from France bills of exchange in payment of the indemnity which gave Germany the title to gold in places, such as London, on which the bills were drawn. Gold in this way left London for Berlin. With a large stock of gold on hand, Germany began a series of measures to change her circulation from silver to gold. Her circulation in 1870, before the change was made, was composed substantially of silver and paper money, with no more than 4 per cent of the whole circulation in gold, as may be seen by the following statement:*31
By this it will be seen that in 1870 Germany had but $22,750,000 of gold in circulation, and as much as $375,000,000 of silver possessing full legal-tender power. The sales of silver by Germany were generally believed to have been responsible for the fall in the value of silver in 1876. I do not think that this can be substantiated by a study of the chronological order of events affecting the value of silver, which will be made in another place.*33 But for the present, it will be well first to describe the measures by which Germany carried through the reform of her coinage.
§ 2. The substitution of gold instead of silver in a country like Germany which had a single silver medium was carried out by a path which led first to temporary bimetallism and later to gold monometallism. And for this purpose the preparatory measures*34 were passed December 4, 1871:
"Sec. 1. There shall be coined an imperial gold coin, 139½ pieces of which shall contain one pound of pure gold.
"Sec. 2. The tenth of this gold coin shall be called a 'mark,' and shall be divided into one hundred 'pfennige.'
"Sec. 3. Besides the imperial gold coin of 10 marks (Sec. 1), there shall be coined imperial gold coins of 20 marks, of which 69¾ pieces shall contain one pound of pure gold.
"Sec. 4: The alloy of the imperial gold coins shall consist of 900 thousandths parts gold and 100 thousandths parts copper. Therefore 125.55 pieces of 10 marks, 62.775 pieces of 20 marks, shall each weigh one pound.
"Sec. 6. Until the enactment of a law for the redemption of the large silver coins, the making of the gold coins shall be conducted at the expense of the Empire....
"Sec. 8. All payments which are by law to be made, or which may be made, in silver coins of the thaler system, of the South German system, of the Lubec or Hamburg current system, or in gold thalers of the Bremen system, can be made in imperial gold coins (Secs.1 and 3) in such manner as to count the 10-mark piece equal in value to 3 1/3 thalers, or 5 florins 50 kreutzers of the South German system, 8 marks 5 1/3 schillings of the Lubec or Hamburg current system, 3 1/93 gold thalers of the Bremen system....
"Sec. 10. No coinage of gold coins other than those established by this law, nor of large silver comas, the coinage of medals excepted, shall take place until further action."
This law of 1871 created new gold coins, current equally with existing silver coins, at rates of exchange which were based on a ratio*35 between the gold and silver coins of 1:15½. The silver coins were not demonetized by this law; their coinage was for the present only discontinued; but there was no doubt as to the intention of the Government in the future, since in Section 6 reference was distinctly made to further action looking to the withdrawal and permanent retirement of large silver pieces. Therefore, so far as Germany had had an annual demand for silver hitherto to replenish her currency, that demand ceased with the end of the year 1871. Existing silver coins still remained a legal tender equally with gold in a bimetallic system based on a ratio of 1:15½.
The next and decisive step toward a single gold standard was taken by the act of July 9, 1873:
"Sec. 1. In place of the various local standards now current in Germany, a national gold standard will be established. Its monetary unit is the 'mark,' as established in Sec. 2 of the law dated December 4, 1871.... [Five-mark gold coins were authorized, in addition to gold coins authorized by the act of 1871.]
"Sec. 3. There shall be issued in addition to the national gold coins: 1. As silver coins, five-mark pieces, two-mark pieces, one-mark pieces, fifty-pfennig pieces, and twenty-pfennig pieces. [Copper and nickel coins were also established.]
"P. 1. The pound of fine silver shall produce at coinage twenty five-mark pieces, fifty two-mark pieces, etc... The proportion of alloy is 100 parts of copper to 900 parts of silver, so that 90 marks in silver coin shall weigh one pound....
"Sec. 4. The aggregate issue of silver coins shall, until further orders, not exceed ten marks for each inhabitant of the Empire. At each issue of these coins a quantity of the present silver coins equal in value to the new issue must be withdrawn from circulation, and first those of the 'thirty-thaler' standard.*36
"Sec. 9. No person shall be compelled to take in payment national silver coins to a larger amount than twenty marks, and nickel and copper coins to a larger amount than one mark. The Federal Council will designate such depositories as will disburse national gold coins in exchange for silver coins in amounts of at least 200 marks, and of nickel and copper coins in amounts of at least 50 marks, upon demand.
"Sec. 14. P. 1. All payments to be made up to that time [the introduction of the national standard] in coins now current, or in foreign coins lawfully equalized with such domestic coins, are then to be made in national coins....
"Sec. 18. By January 1, 1876, all bank-notes not issued according to the national standard must be withdrawn.
"From that date only bank-notes issued according to the national standard, and in denominations of not less than 100 marks, may be emitted and kept in circulation. These provisions also apply to bills hitherto issued by corporations."...
By this measure gold was established as the monetary standard of the country, with the "mark" as the unit, and silver was used, as in the United States in 1853, in a subsidiary service. Before this change, when silver was coined at its full weight, 90 marks were coined from one pound of fine silver. By the law of 1873, 100 marks were coined from one pound of fine silver. One hundred coins having been issued where 90 had been before, there was an overvaluation of 1/9 in the new imperial silver currency, or, in other words, silver coins were issued 1/9 below their nominal value, or 11 1/9 per cent. The subsidiary coinage, as in the United States, contains less silver than its nominal or tale value expresses; but its legal-tender value was limited to 20 marks (five dollars), and it was redeemable at government depositories. The silver coin, therefore, was regulated by the usual principles governing subsidiary coinage, Germany thus following in the steps of the United States and of England.
The act also limited the amount of the overvalued silver to ten marks for each inhabitant of the Empire, a comparatively low figure. It will be evident that this fact is to be kept in mind in considering the total of silver liberated by Germany, since the amount of the new silver coined and issued was an offset to the total amount withdrawn; that is, not all the silver drawn in was sold, since some of it was recoined and issued in the new form.
The reform in the gold and silver coinage was accompanied by measures affecting the bank-notes and paper money in circulation. The issues of the various small states were withdrawn and a new paper money issued, distributed according to population among the various states, and redeemable in the new imperial currency. The inconvenience of the heavy silver in use in Germany had formerly stimulated the use of substitutes for specie in the form of bank-notes. The act of 1873 regulated the issues of the banks, and bank-notes of a denomination less than 100 marks ($25) were forbidden. This was an important measure, because it opened a new demand for silver to take the place of the prohibited bank-notes. If no notes were issued under 100 marks, more coin would be needed to fill the vacancy caused by their retirement.
§ 3. Under the terms of this legislation Germany began to withdraw her old silver coinage, and to sell as bullion whatever silver was not recoined into the new subsidiary currency. The following table*37 will show the amounts of silver sold in the open market by Germany, and the price at which it was sold, until the end of May, 1879, when sales were suspended:
The silver withdrawn by the end of the year 1880 was 7,474,644 pounds of fine silver;*38 of this it is stated that, at the end of 1880, there remained unsold in the hands of the German Government 339,353 pounds of fine silver. Germany was interrupted in her sales of silver by the decline in the value of silver in 1874, and particularly in 1876; but she adopted the policy of stopping her sales when the price of silver was low, and again selling when the price rose. It will be seen by the table given above that the largest sales were made in the year 1877, when the price of silver was much higher than it had been in 1876. In May, 1879, however, the Government suspended all further sales of silver, and has not resumed them to the present time.
It has been thought by many that the sales of silver by Germany, to the extent of the new supply of silver which was thrown on the market, had been the cause of the extraordinary fall in the value of silver in 1876. It was, therefore, held that if the sales of silver were suspended, the price should recover something of its former height. It was this opinion which led the managers of the Imperial Bank of Germany, in whose vaults a large amount of the old thalers had collected and had not yet been redeemed, to advise the cessation of further sales in 1879. Their advice was taken; but the price of silver did not show the expected buoyancy after sales were suspended. It can hardly be thought now that the fall of silver, which has continued to the present day, was due to the sales of Germany which ceased in 1879.
The later status of the reform in the gold and silver coinage will make our statements in regard to 1876 somewhat clearer. We have the advantage of ten years later information*39 than that which was accessible in 1876 to either the German Government, or to the Committee of the House of Commons, which investigated the causes of the depreciation of silver in that year:
The population by 1880 had increased to 45,194,172, making the amount of fractional silver which can legally be issued 450,000,000 marks, or about $113,000,000. This would absorb $7,000,000 of old silver coin outstanding and yet to be withdrawn. It is quite likely, moreover, that ten marks per head will not prove a sufficient allowance for the silver medium. A rate of twelve marks per head is already discussed. Then it is to be remembered that the thaler pieces yet out must be replaced by other coinage.
Now, adding to $164,000,000 (which was the amount actually to be sold as the result of withdrawals less recoinage to 1880) the sum of thalers yet outstanding, $105,000,000, we get as a maximum about $270,000,000 as the total amount of silver which Germany could throw upon the market as the result of her policy of displacing silver with gold.*40 I think this is a very liberal estimate, and yet it is not a sum in itself to which a very extraordinary revolution in the price of silver can be attributed; the less so because, between 1873 and 1885, or in twelve years, only $141,000,000 of Germany's silver have actually been put upon the market.
But inasmuch as our object in Part II is to arrive at an explanation of the causes which affected the price of silver in 1876 and subsequent years, it will be necessary to discover what effect German demonetization had had by 1876. By that year Germany had sold in the open market only from $30,000,000 to $35,000,000. That sum represented the actual and visible addition to the supply of silver caused by the German act of 1873. But dealers in silver bullion must always take into consideration more than the actual sales; they in must consider also the potential supply. The proper theory of market value has regard not merely to the actual visible supply present and offered for sale, but also to the amount of the prospective supply, the amount which, although not actually present, is capable of being brought at once to market. The potential supply, therefore, was naturally taken into account by dealers in silver, and estimates as to its amount had an important influence upon the price of silver. But, as given above, the total supply of silver which Germany could by all her operations put upon the market was about $270,000,000. Subtracting $30,000,000, the amount actually sold by 1876, the potential supply was about $240,000,000. In 1876, however, the German Government underrated the quantity of the old silver still to be withdrawn. To that date $110,000,000 had been withdrawn, leaving about $265,000,000 still outstanding. In 1876 the estimates on this sum varied from $40,000,000 to $150,000,000. One of the best authorities*41 believed that the face value of the coin to be withdrawn was $195,000,000, which Dr. Soetbeer now assures us was $375,000,000 in 1870.
§ 4. At the same time that Germany was liberating silver she was absorbing gold in her new coinage. In order that a comparison may be made between the condition of the currency in Germany under the old silver régime and the present condition under the new coinage system, I take*42 from Dr. Soetbeer a table, corresponding to that of 1870 before given, which will show the progress made toward a gold standard by 1885:
It will be seen by comparison with the previous statement for 1870 that the amounts of gold and silver coins in 1885 are almost exactly reversed. In 1870 there were 1,500,000,000 marks of silver; in 1885, 1,500,000,000 marks of gold coin. But the substitution of the new for the old silver coins has not yet been finished, since 450,000,000 marks of silver thalers are yet to be withdrawn.
The coinage*43 of gold in Germany from 1873 to the end of 1880 is as follows:
The old gold coinage of about $23,000,000 previously in circulation is to be subtracted from the total coinage of $437,000,000, leaving $414,000,000 as the probable demand of Germany on the gold stock of the world.*44 The German demand on the new gold which resulted from the discoveries in California and Australia then amounted to $414,000,000 to a date as late as 1880. With the $1,160,000,000 coined by France, and the $440,000,000 imported by India, this makes a total of about $2,000,000,000 taken out of the new supplies of gold by what was practically a new demand in these three countries. I include in Germany's demand the sums absorbed as late as 1880, that there may be no danger of undervaluing the demand for gold, although our immediate purpose confines us properly to the period ending in 1876. There is thus left about $1,000,000,000 of the production of gold from 1850 to 1876 to be accounted for.
Following in the lead of Germany, Denmark, Norway, and Sweden changed their silver circulation to gold, but threw upon the market*45 only about $90,000,000 of silver.
Notes for this chapter
See Léon Say's "Rapport fait au nom de la commission du budget de 1875 sur le payement de l'indemnité de guerre."
Dr. A. Soetbeer, "Gegenwärtiger Stand der Währungsfrage and die Zukunft des Silbers" (April, 1885), p. 36; also in "Viertjahrs. für Volkswirt.," xxii, Heft ii.
This item includes 90,000,000 marks of the Prussian War Treasure and the Austrian thalers current in Germany. The item does not include the coins of Alsace and Lorraine.
Chapter xii, § 3.
For the full text of these laws, as well as for the French law, see Appendix III, C.
The price of silver in 1871 in London was 60½d., equal to a ratio of 1:15.58.
By the treaty between Austria and the German States in 1857, a pound of fine silver was coined into 30 thalers.
"French Report of Mon. Conf. of 1881," i, p. 16. Marks are reduced at the rate of four marks to one dollar.
1,080,486,138 marks of silver coins were withdrawn; 382,648,841 marks were used in the recoinage; the remainder, 697,797,069 marks, divided by 90 (the number of marks to a pound under the old system), give 7,474,644 pounds. It will be noticed, however, that these figures, taken from the "French Report of Mon. Conf. of 1881," i, p. 16, do not exactly prove. The figures in this "Report," already referred to, are unfortunately marred by many errors.
"French Report of Mon. Conf. of 1881," i, p. 16; and Dr. Soetbeer's various writings; particularly the one already referred to, "Währungsfrage."
The amount withdrawn from 1880 to 1885, however, must be added to this sum.
Mr. G. Pietsch, manager of the sales of silver for Germany in London. See "H. C. Report of 1876," Questions 739-760. The estimate of one third for disappearance on the amount of the original coinage was found in fact to be, on an average, only 21 per cent for three kinds of coin.
Ibid., p. 37.
French Report Conf. of 1881," i, p. 15.
From 1871 to 1876 gold to the amount of $119,930,000 was purchased by the German Government in London ("H. C. Report of 1876," Q. 325}; $50,000,000 of gold came from France in the War Indemnity; and other amounts came from France, Belgium, and Russia.
See "H. C. Report," p. 30.
Part II, Chapter XI
End of Notes
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