The History of Bimetallism in the United States
Part II, Chapter XII
Cause of the Late Fall in the Value of Silver
§ 1. After having thus presented in the foregoing chapters of Part II the monetary events which have affected the relative values of the two precious metals since 1850, it is now intended to make a brief statement of the conclusions to be drawn from this account as to the value of silver, and to give in brief form what seems to me to have been the essential cause of the depreciation of silver. Before this can be done, however, it will be necessary to show whether a fall of silver actually did take place, and to what extent a depreciation has been proved.
At the beginning of the present century the price of silver fell until about 1825; then the course of its value remained fairly unchanged until about 1850, when the new gold was discovered; and until 1872 no great fluctuations had occurred. The movement of its value in later years may be seen by the line of Chart XIII, which shows the yearly changes since 1687. A comparison with Chart IV will show that since the discovery of America the value of silver relatively to gold has been moving steadily downward, while, as we know, gold itself has also fallen in value; but in the present century, after the effect of the Mexican production was finally realized in a generally lower level, there had been nothing of great importance to disturb its position until the later period with which we are now dealing. A glance at Chart XIII will make it clear how marked and sudden a change took place after 1872, and in the years immediately following, as compared with the general movement of silver since 1687. This sharp and distinct fall, especially after 1874, and continuing since then to 1885, has no parallel in the whole history of the precious metals. Within ten years the ratio of silver to gold has been changed from an annual average relation of about 15½:1 to nearly 19:1.
As is well known, London is the chief silver market of the world, and prices of silver*74 are given in pence per ounce for English standard silver, 37/40 fine. That is, the price of silver is estimated in the English gold currency. From 1853 to 1866 the price did not change much from about 61d. per ounce, which is equivalent*75 to a ratio of 15.46:1; from 1867 to 1872 the price was a little more than 60d. per ounce. By examining the table*76 of monthly prices of silver, it will be seen that the fall first began in November, 1872, when the price was about 59½d. Then from November, 1872, until January, 1876, there was a steady decline, as seen from the monthly prices, to about 55d. And in the year 1876 the price fell still more rapidly, from about 55d. in January to the lowest recorded price of 46¾d. in July (equivalent to a ratio of 1:20.17). Since then there have been reactions toward better prices, but, on the whole, the price has steadily declined until, in September, 1885, the price is almost, if not fully, as low as it ever was in 1876.
It will appear from this statement, therefore, that silver has unquestionably fallen very seriously since 1872 in its relation to gold. But the question may very justly be asked, Has this fall been accompanied by a general increase of purchasing power in gold as regards other commodities? If so, the fall of silver relatively to gold, when other articles have also fallen relatively to gold, will have left silver in the same relative position to other goods as before; and so it can not be said that silver has fallen, but that gold has risen, in value. This question, while eminently fair, is not capable of being answered in a brief way; and to answer it fully would lead me away from the object of this inquiry. It has been urged by Mr. Goschen and Mr. Giffen that there has been an appreciation of gold by 1879 as compared with 1873; but I shall not now consider their positions because the years to be here compared, in order to keep parallel with the movements of silver, are, on the one hand, 1871, and on the other, 1876 or 1877. And I waive for the present—what is of the utmost importance in discussing the appreciation of gold—the fact that there was a great collapse of credit in 1873 and a fall of prices due to other causes than the abundance or scarcity of specie in the world. In order to bring the fall of silver into comparison with the movement of prices between 1871 and, 1877 I subjoin the following table of prices, taken*77 from the London "Economist's" figures for the first of January each year, being the prices of 22 articles, each on a scale of 100, making a total scale of 2,200, which represents the average prices of these articles in 1845-1850:
From these figures it will be seen that prices were as high in 1876 and 1877 as they were in 1875, and even higher than from 1868 to 1871 (inclusive). That is, so far as prices tell the story, it can not be said with any show of truth that gold had appreciated (that is, increased in its purchasing power, because prices had fallen). If, then, gold continued to buy about the same quantities of other goods from 1871 to 1877, and if in that time silver fell relatively to gold from about 60d. to 46¾d. per ounce, it is quite correct to say that silver fell not merely with reference to gold, but with reference to all other commodities, including gold. As compared with 60¼d., the average price in I722, the fall to 46¾d. in July, 1876, indicates a depreciation in the value of silver of more than 22 per cent; that is, silver lost general purchasing power over other commodities by July, 1876, equivalent to 22 per cent, and it is to explain this fall in the value of silver that the chapters of Part II were written. In this chapter it is intended to collect the threads which have been followed in preceding pages and to present our conclusions, based on the historical evidence which has been gathered.
§ 2. In the reasons heretofore assigned for the fall in the value of silver, nearness to the events, in my opinion, has acted to magnify immediate causes and obscure distant ones, or those acting under a general progress of events. Such an objection, it seems to me, is to be urged against the conclusions reached by the Committee of the House of Commons which reported on the "Depreciation of Silver" in 1876. Inasmuch as these conclusions have been quite generally received, it may be just to include them here before passing on to any criticism
"Your Committee are of opinion that the evidence taken conclusively shews that the fall in the price of silver is due to the following causes:
"(1) To the discovery of new silver mines of great richness in the State of Nevada.
"(2) To the introduction of a gold currency into Germany in place of the previous silver currency. This operation commenced at the end of 1871.
"(3) To the decreased demand for silver for export to India.
"It should be added:
"(4) That the Scandinavian governments have also substituted gold for silver in their currency.
"(5) That the Latin Union, comprising France, Belgium, Switzerland, Italy, and Greece, have since 1874 limited the amount of silver to be coined yearly in the Mints of each member of the Union, suspending the privilege formerly accorded to all holders of silver bullion of claiming to have that bullion turned into coin without restriction.
"(6) That Holland has also passed a temporary act prohibiting, except on account of the Government, the coining of silver, and authorizing the coining of gold.
"It will be observed that two sets of causes have been simultaneously in operation. The increased production of the newly discovered mines, and the surplus silver thrown on the market by Germany, have affected the supply. At the same time the decreased amounts required for India, and the decreased purchases of silver by the members of the Latin Union, have affected the demand. A serious fall in the price of silver was therefore inevitable."*78
In this very clear statement, account is taken of immediate causes, and none whatever of the more fundamental causes lying behind these operations—causes which might be supposed to show that there was some sequence in these events, and that they were controlled by a common force. Although it is not formally included in their reasons for the fall of silver, they have, however, hinted at some deeper cause. In the first place, they admit that the actual changes in the supply could not be supposed to have brought about so serious a fall in the value of silver; for, after having formally given the causes of the depreciation of silver as already recited, the Committee qualify their report by some very important statements, which to my mind come very much nearer the truth than their formal enumeration of causes: "It is, however, an important and remarkable fact... that, though the increased production of silver in the United States is a fact beyond question, no actual increase of imports of silver from the United States to Great Britain has taken place since the year 1873.... Indeed, the amount of the imports into Great Britain from the United States for the year 1875—viz., 3,092,000l.—is the smallest since the year 1869. In the same way, though the new currency laws of Germany affected a vast silver coinage, the sales of silver actually made up to the 26th of April in the present year  do not appear to have exceeded 6,000,000l., distributed over several years."*79 This Committee, moreover, show that in the early part of the century silver was produced, as compared with gold, in the proportion of 3 to 1; in 1848, of .68 to 1; between 1852 and 1856, of .27 to 1; and between 1857 and 1875, of .68 to 1. Therefore, notwithstanding the new product of silver in Nevada since 1871, the relative production of silver to gold has not been very different in late years from the relation in 1848, to say nothing of the early part of the century. Consequently, the Committee decide*80 "that a review of the relations of the metals in times past shews that the fall in the price of silver is not due to any excessive production as compared with gold." Although the fears of dealers may have magnified the potential supply, we may, therefore, in agreement with this conclusion, understand that the fall was not explicable on any sufficient grounds arising from an increased supply.
Indeed, the Committee only touched upon the true explanation when, leaving the question of supply and taking up the question of demand, they assert: "The fact is that, as was correctly pointed out by Mr. Giffen in his evidence, the changes have been in the uses of the metals. Gold has come more generally into use than before, and, indeed, the condition of trade and the situation of various countries using gold and silver respectively have entirely changed."*81
§ 3. A change in the uses of the metals has undoubtedly, taken place; and the cause of it is to be sought in the natural forces which underlie the processes of exchange and trade. The increase of commerce and the need of making large payments in wholesale transactions, while it has developed the check and clearing-house system, and all banking devices*82 by which the risk in the actual handling of large sums of metallic money has been avoided, has at the same time increased the demand for that one of the two precious metals which has the greatest value in the smallest bulk. This is the modern form of the preference, or prejudice, for gold as compared with silver, and it is most evident in the countries which have the largest commercial interests at stake.
This being the character of the monetary desires of modern nations, the opportunity of satisfying these desires, rendered possible to a very large extent by the enormous production of gold since 1850, has been, in my judgment, the cause of the fall in the value of silver. The situation, in brief, was this: In 1850 the Western world possessed a certain sum of both gold and silver (with the exception of England and the United States, chiefly silver) in use as a medium of exchange, both metals, be it observed, being in use for a common purpose—the interchange of goods. Now, there was suddenly added in 1850-1875 about $3,000,000,000 of gold. What was the effect? A very simple and natural increase in the use of gold by all the countries which could get it. But just to the extent to which the desire for gold could be satisfied, by countries which had hitherto used silver wholly or in part, so far was the demand for silver as a medium of exchange diminished. The new gold, therefore, because it was always preferred to silver, pushed it out of place, and, by filling the vacancy, took away from silver a part of the previous demand for the heavier metal. To the mind of the commercial world it was a substitution of a more convenient for a clumsier medium of exchange. In considering this movement in monetary progress, and comparing it with similar events in industrial progress in almost every branch of activity, no illustration seems to me more exactly to describe the change caused by the introduction of the new gold than that of steam. In former days the world carried on its exchanges by the slow, uncertain, and clumsy methods of coaches, wagons, and sails; now all is done, at less expense, more rapidly and conveniently, by railways and steamships. Both coaches and railways existed to transfer passengers and freight; so both gold and silver were used to interchange goods. Formerly coaches were our chief dependence; so was it with silver. In later years the railway has supplanted the coach because it does the same service much better, leaving the coach to do minor work in other directions; in the same way gold is supplanting silver because it serves the needs of commerce better, and silver is relegated to use as subsidiary coin for retail transactions. Consequently, when there is offered to a commercial country the choice between using gold and using silver, we should as soon expect it to prefer silver as we should expect merchants to-day to send their goods from New York to Chicago by wagons instead of by railway. This is the tendency among modern states to which we wish to call attention. Inasmuch as the production of gold from 1854 to 1875 was as great as in the 357 years preceding 1850, it can easily be seen what an opportunity was given to gratify the universal preference for gold to silver, coming as it did at the opportune moment when commerce began to expand in an unusual degree. To the extent of the surplus gold this absorption of gold could go on without interfering with its value, except to keep it from a fall. This is a striking fact in monetary history: increase the production of gold enormously, and it is eagerly absorbed, and so does not undergo much depreciation; but if the production of silver be increased to the same extent, it is not permitted to displace gold in the commercial states, as in the case of gold; and the increase of silver only creates distress to know whether the usual outlets for silver in the East are sufficient to carry off the surplus.
Thirty-five years ago England and Portugal alone*83 had a legal gold standard; all other countries, either by law or by the effect of circumstances, employed a silver currency. The United States had a double standard with but little silver in use; but Germany, France, and the countries of Continental Europe had a silver medium.*84 Today the situation is entirely reversed. In Europe there is not a Mint open to the free coinage of silver. Gold has unquestionably become the only real medium of exchange for commercial Europe. And all this, I contend, has been brought about by two things:*85 the commercial preference for gold, and the extraordinary production of gold in California and Australia.
In proportion as gold found a market, silver was deprived of one, since they were both in use for the same purpose.
§ 4. The operation of this cause, which has thus been only generally stated, may now be traced more in detail in each of the monetary events which have happened since 1850; and I trust that the grounds for my conclusion may be clearly seen in the history of these last thirty-five years.
The first in the series of events, after the action of the United States in 1853, caused by the new gold was the displacement of silver by gold in France as early as 1865. The willingness of France to take gold and give up silver sustained the value of the former, and to the same extent deprived the latter of a market. In other words, France, from 1853 to 1865, first began the movement in Europe against silver; and the latter would at that time have felt the effects of this change in demand by a fall in value, had not the exceptional circumstances connected with the "cotton famine" in England, and the extraordinary shipments of silver to India from 1861 to 1866, served to find a new market to counterbalance the loss of an old one.
In the whole progress of this monetary revolution caused by the new gold, whenever the substitution of gold for silver in the West threw an amount of surplus silver on the market, the part played by the Indian demand*86 was only so far important that, as the market successively failed in the West, the East was anxiously watched by dealers in silver to see how far it could take the surplus off the market and permanently absorb it. It was as if the horses, which may have been thrown out of use by the building of a railway in the United States, should have been shipped off to South America for sale in countries where railways had not yet taken away the use of wagons for transportation. But if the South American market should have become sated, the price of horses in the United States formerly used in transportation would fall, and fall in proportion to the curtailed demand at home. India and the East, therefore, play the part in this movement of silver as a drainage-ground for the West; the question always is whether the East can absorb as fast as the West produces or discards silver.
As we have said, France began the march away from silver to gold (unless we place the United States ahead in 1853). In 1867 the International Monetary Conference, in its recorded preference for the single gold standard, but expressed the universal tendencies of commercial nations at that time. When Germany anticipated France*87 in establishing a single gold standard in 1871-1873, thus following the advice of the Conference of 1867 in that respect, another mass of silver was thrown on the world's hands. Could this sum be drained off to the East? As we have seen, by 1870 India could not take as much silver as before, owing to its indebtedness to England. The value of silver accordingly began to fall; but it fell not in proportion to the sales*88 of silver by Germany (for the price did not rise when the sales stopped), but in such a determined headlong descent, when in 1874 the Latin Union suspended free coinage of silver, as to indicate fear so very decided that it could have had its roots only in some deeper reason than the actual demonetization of silver. That is, the German sales did not much depress silver; but when, in addition to the German monetary reform, the whole Latin Union decided to give up silver rather than lose their gold, it became clear that the new gold had begun to have its perfect work. I can not think that the fall of silver is to be attributed to the action of Germany alone, or to the suspension of silver coinage by the Latin Union alone (but if to any one thing alone, then chiefly to the action of the Latin Union); but to the displacement of silver by the new gold, which had by this time accumulated momentum enough to reach a large mass of the silver currency of Europe, and so to disclose what was to be the tendency of things in modern states. To assign the incentive to Germany is to ignore the real, and to magnify the indirect or secondary, cause. During a recent hurricane in a small village a man in the street was overwhelmed by the flying timbers of a house and instantly killed. If it had been said that the man came to his death by a piece of falling timber, the statement would have been correct, but it would not have given the true cause, which was that the man came to his death by the hurricane. If he had not been killed by that one piece of timber, he would have been by any one of several others, all of which had been set in motion by the original disturbing cause, the hurricane. So in regard to the fall of silver after the demonetization by Germany. It might be said that in 1872 and 1873 the fall began; this forced the Latin Union to suspend coinage; and so it may be said that silver fell because Germany demonetized silver. And the answer is true; but true only in so far as it was true to say that the man above referred to was killed by a piece of timber. If we stop there the whole truth is not told. We need to be told that the hurricane set the timbers in motion; so we need to be told that the new gold set in motion a displacement of silver, which must continue as long as any surplus gold remained; and that as this new supply made it possible for Germany to put herself on an equal basis of gold with commercial states like England and the United States, and to satisfy the universal preference for gold, it left the discarded silver to find its own market; that, as a consequence of there being no unlimited absorptive power in India, this silver (or the possible rather than the actual amount) fell with a heavy weight on its own market and depressed the price.
The action of the Latin Union in 1874 and in 1878 was only a further register of events of the same kind; inasmuch, as it meant that states which held large amounts of silver, and so would have done what they could for the maintenance of its value on selfish grounds, had decided to keep possession of their gold. It meant that there was no longer any market whatever for silver in Europe. The territory formerly occupied by silver was invaded by gold (first Germany, and then the Latin Union), and silver was obliged to retreat either to India and the East, or submit to a feeble decline from lack of attention. Just in proportion as the gold, augmented in quantity since 1850, covered more territory, in that proportion silver was shut off from gaining nourishment for its life from that district, and obliged to subsist on a narrower space; and now that space seems to be narrowing still more. The general influence of these causes may, therefore, be seen not merely in the sudden fall of silver in 1876, but in the subsequent downward tendency of the value of silver after 1876, as shown in Chart XIV. This chart shows the monthly fluctuations*89 of silver from the beginning of 1876 to the end of 1879. It will be noticed that the general movement of which I have been speaking, not manifesting itself in one event, but in many, has not felt the influence of a single counteracting cause like that of the attempt of the United States in 1878 to uphold the price of silver by passing the Bland-Allison Bill.
All the appeals of later days for bimetallism have united in demanding a remonetization of silver by all the above-mentioned countries, in order to reinvigorate the value of silver. Things, however, can not go back to the former status unless we eradicate the preference for gold, and annihilate the enormous production of gold in the last thirty-five years. The countries having gold do not complain of any disadvantage in their situation; it is the countries like France and the United States, which, having silver to dispose of and to protect, want something to be done to save them from the loss due to the late depreciation. The drift of events, in my judgment, is against them, and they must suffer for their lack of foresight in not avoiding their present predicament.
Of course, the natural result of this neglect of silver as a medium of exchange is to turn all eyes toward gold, and to consider whether there is enough gold for all countries should they all adopt the single gold standard. I shall not attempt to answer that question here. My object now is only to discover what has been the cause of the late fall in the value of silver; but a résumé of the series of events which I have described in Part II as acting on the value of silver may profitably be arranged in the following form [000,000 omitted]:
This statement, therefore, leaves about $1,000,000,000 of the new gold mined from 1850 to 1875 still to be accounted*90 for, and which might have been absorbed into already existing gold currencies to satisfy any needs arising from the growth of commerce not met by the growth of banking devices. This showing does not indicate a "gold famine" at present, although, on the other hand, it discloses a large surplus of about $800,000,000 of silver left to find a place in the market.
Notes for this chapter
See Appendix II, D, for London prices since 1833. Monthly quotations in each year since 1833 to 1880, by Pixley and Abell, can be found in the "French Report of the Mon. Conf. of 1881," i, p. 197. The average monthly ratio from 1845 to 1880 is given in Appendix II, F.
For the computation of the ratio from the price, see Appendix II, G.
Appendix II, E.
See the movement of the line in Chart III, which is based on these figures.
"H. C. Report of 1876," p. iv.
"H. C. Report of 1876," p. v.
"H. C. Report of 1876," p. v.
Mulhall's "Dictionary of Statistics" states that since 1840 the banking of the world has increased eleven-fold, or three times faster than the increase of commerce, and thirty times faster than population. That in 1863-1870 the precious metals required for the interchange of the sea-borne commerce of the world was 12 per cent of the transactions, and in 1871-1880 only 8 per cent.
"It used to be said until a few years ago that England and Portugal were the only countries where gold was the standard of value; and there were certain countries which had a double standard, but those were not very many; and all the rest used silver. Silver is the normal currency of the world, and from a natural cause, because silver is a much cheaper metal, and is suited to those small transactions which constitute the bulk of the dealings of mankind."—W. Bagehot, Q. 1389, Report to H. C. of 1876, on "Depreciation of Silver."
"In the Low Countries they struck gold ducats which circulated preferably abroad as merchandise without official value. Because of their fineness and the worth of their stamp they were highly regarded in the Orient, and especially in the Balkan peninsula; but these ducats had no circulation in the Low Countries, although their coinage was free. The only standard of the Kingdom of the Netherlands was really a silver standard. Russia, Germany, Austria, likewise struck gold ducats, friedrich d'or, and pistoles for exportation; but, like the Low Countries, they employed at home only silver money. France had, it is true, bimetallic legislation; but its circulation consisted entirely of silver. From 1789 to 1848 she had struck about four thousand millions of francs of silver money, while the amount of gold coined during the same period was only one thousand millions. Generally, in Europe, gold bore a premium; generally, the circulation, both domestic and foreign, was made up of silver."—Dr. O. J. Broch, "French Report of Mon. Conf. of 1881," i, p. 39.
Cf. also chap. viii, § 6.
Although the metallic drain to the East is composed principally of silver, the efflux—at least in its present proportions—is not the less certainly the consequence of the increased production of gold, for the silver of which it consists has been displaced from the currencies of Europe and America by the gold of Australia and California, and the drain to the East is only not a golden one, because silver alone is in that region the recognized standard."—Cairnes, "Essays in Political Economy," p. 99.
"M. Chevalier appears to assume that, when the process now  going on in France is completed, all further substitution of one metal for another will be at an end, and that the action of future supplies, concentrated on gold alone, will tell in the depreciation of this metal with proportionate effect. But we question the correctness of this assumption. We are inclined to think that the substitution of gold for silver in France is only a very striking example of a process which has been in unobserved operation over a much wider area, and which will continue after the French movement has ceased. In India, where there is an immense silver currency the process has already begun, and signs are not wanting that it will soon assume more important dimensions."—Cairnes, "Essays in Political Economy," p. 144.
The sales of silver by Germany, taken by themselves, can not be said to be the chief cause of the depreciation in silver, because other events must have had greater importance. Between 1871 and 1879 the production of silver amounted to $750,000,000; the sale of India Council Bills to $500,000,000; while the sales by Germany in all only rose to $ 141,000,000.
For the figures see Appendix II, E and F.
The amount of $125,000,000 claimed by Mr. Horton as constituting a new demand I do not admit as such; but I insert it in brackets in the table as a matter which has been considered as a new demand. Likewise, in the case of Germany, I insert the whole possible supply of silver in brackets. I need scarcely add that this table does not attempt to do more than approximate to the actual state of things about 1876; but yet I believe it gives the general situation with sufficient exactness to serve our purpose.
Part II, Chapter XIII
End of Notes
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