The History of Bimetallism in the United States
Part II, Chapter XIII
The Continued Fall in the Value of Silver since 1885
§ 1: The events affecting the relative values of gold and silver since 1855 are so striking and so unprecedented in the whole previous history of the precious metals that we are practically face to face with a new problem. In the previous editions of this book issued to 1885, the decline in the value of silver relatively to gold from about 1:15½ in 1870 to about 1:20 in 1885 seemed momentous enough to require the most serious investigation; and this change of value had stirred the liveliest discussion among students of money. But the problem presented by the changes since 1885 are far and away so much more phenomenal that our attention is forcibly arrested. By reference to Chart XV, it is seen that the really revolutionary action in the downward movement of silver has come since 1890. From a ratio of about 1:20 we have to discuss a change to a level of 1:34. In the short period between September, 1890, and March, 1894, the price of silver fell to one-half its value on the former date (the average monthly ratio for September, 1890, being 1:17.26, and for March, 1894, 1:34.36). No such change has ever before been recorded in the history of gold and silver. Neither the famous output of silver from the South American mines in the sixteenth century (see Chart V), nor the greater production of silver in Mexico about 1761-1820 (see Chart VI), had anything like such an effect. To what causes can this last and greatest change in the relative values of gold and silver be attributed? This, without doubt, is the most absorbing and interesting part of our whole inquiry. In order to address ourselves properly to this question, we shall first recount the recent events which, in Europe, have had an important bearing upon it.
§ 2. In order to gain a more complete conspectus of the intentions of European countries regarding gold and silver, brief mention should be made of the action of Holland. In 1816, September 28, a legal double standard was established at a ratio of 1:15.87 between the silver guldens (9.61 grains fine) and the ten-gulden gold pieces (6.056 grains fine gold). This legal rate did not conform to the market rate, especially before 1821, and as gold bought more coined silver than silver bullion, gold went to the mints, and silver, except clipped coins, was withdrawn from circulation. To correct this difficulty the ratio was changed, March 22,1839, to 1:15.60, without success.
After long debates in the Chambers on the question of a double standard, the single silver standard was established, November 26, 1847, on the basis of the silver gulden (10.945 grains fine) as a unit.
The action of Germany in 1873 led Holland to suspend the coinage of silver (provisionally) on May 21, 1873 (and definitively December 3, 1873). The curious state of affairs was presented of a country stopping the free coinage of silver, when not allowing the coinage of gold. By a limitation of the silver coins, which yet retained their function of legal payment to the state and between individuals, they were saved from depreciation. This, however, was not a sound position, and June, 1875, the Dutch mint was opened to the coinage of gold (the relation to the over-valued silver guldens being 1:12 5/8), while the coinage of silver (except for subsidiary purposes) remained suspended. As is the case with the silver thaler in Germany, the Dutch silver gulden remains, an unlimited legal tender; but silver coins are not immediately redeemable in gold.*91 Holland, therefore, although a small country, has felt the influence of the events which are leading all European commercial countries to the gold standard.
§ 3. The attitude of the states constituting the Latin Union has been such since 1885 as to afford little hope of any change of policy regarding silver. In the official discussions of the Union the question of reopening the mints to the free coinage of silver has been entirely dropped out. No suggestion in that direction is ever heard, because it is recognized as an impossibility by men of all shades of monetary belief. In the Conference of 1885 at Paris, it was emphasized that, whatever might have been the character of the Union in the past, a transformation had taken place in its purposes; that it preserved nothing of a bimetallic nature; that all transactions and exchange were now based upon gold; that, in short, "the bimetallic rose had withered."
The Conference of the Latin Union in 1885 claims attention, however, from the fact that it produced a new treaty; that Belgium seceded, and subsequently returned; and that the Union at present continues to prolong its existence from year to year under the provisions of this new treaty.*92 The discussions of this Conference and its conclusions related mainly to the practical means for escaping from the consequences of the fall in the value of silver, in case of a disruption of the Union. These states found themselves with a quantity of silver five-franc coins issued at the ratio of 1:15½ with gold; now they are worth intrinsically but one-half as much. The problem of maintaining this silver coinage at par is for the Latin Union the important necessity. Nor is there any hesitation about accepting the obligation. The only question raised was, Upon what states, and in what proportion, shall the burden of redeeming the silver issued by the Union be placed? Should a situation be created by which redemption of the depreciated silver could be forced upon the issuing country, it would mean that its budget must provide means for that purpose to the extent of about one-half of the whole quantity of five-franc pieces in circulation. It was therefore a question of ways and means; and according to the condition of the budget would each country be affected by the dissolution of the Union. For the dissolution of the Union would immediately throw upon each state the necessity of caring for its own coinage.
The Conference of 1885 provided an agreement by which the countries of the Union should redeem their respective five-franc silver coins, in case of a dissolution of the Union. Redemption of this silver coinage would have been undertaken then and there, a gold currency with a subsidiary silver coinage would have been at once established, but for the sheer financial inability of the several contracting states. To meet the demands for redemption of their silver five-franc pieces, consequent upon the disruption of the Union, meant financial ruin to the weaker states, and a great strain upon France. Hence, in 1885, the Union was continued, and it exists to-day, because of the actual impossibility of ceasing to exist. Like the man who fell from the platform of an express train, but caught on the railing with a single hand, he must hold on in the hope of coming aid; to let go means certain damage. But such an "expectant attitude" has its evident perils.
Inasmuch as the coins of all the states were uniform, they circulated indifferently throughout the Union; Belgian coins were in use in France or Italy, or vice versa. Moreover, more coins than Belgium, for example, would need in its own circulation had been struck at the Belgian mint, during the years when there was a premium on sending silver to be coined, and before coinage had been stopped. The question arose, Should Belgium be obliged to redeem all the silver which bore its stamp, even though much of it had never circulated within its own territory? In this connection the real nature of the Union distinctly emerged. Was the Union a cohering mass, so that the burden of future redemption should be borne proportionately among the population of the several states? Or should each state be held individually responsible for its own past acts? It was then disclosed that the Union was of a negative rather than of a positive character. For instance, the Union had not even dictated the amount that each state should coin; it had only regulated details, such as the weight and fineness of coins; and it had omitted any control over bank and state paper issues.
Belgium felt constrained to refuse responsibility for redeeming all the coins bearing her stamp. France, as the country having the largest volume of transactions, naturally drew the coins of Belgium into her channels of circulation. She firmly demanded that Belgium should redeem all Belgian coins. The counter proposals of Belgium being refused, the latter seceded from the Conference. This result explains why the treaty of 1885 was ratified without the assent of Belgium. And yet, if Belgium did not re-enter the Conference and ratify the new treaty before January 1, 1886, it meant the practical disruption of the Union. If it had been a political or financial possibility, Belgium (with other states) would have been only too willing to establish the gold standard. But France could not throw over her depreciated silver coins. So long as she could maintain these coins at par she would not be willing to liquidate. Finally, in Belgium, the party that foresaw the ultimate necessity of redeeming her silver, even if she seceded, brought about a compromise; and as 12½ per cent of the French circulation was composed of Belgian coins, France could have presented this coin and greatly embarrassed her neighbor. Nor did France enjoy the independent attitude, together with the attraction toward the single gold standard, evident among the other states. As, a, compromise, France met Belgium half way: it was agreed that only one half of the Belgian coins should be presented for redemption conformably to the terms of the new treaty, and in respect to the other half the coins might be returned by the usual channels of exchange, and Belgium would not hinder this process. Thereupon Belgium ratified the treaty before the expiration of the year 1885.
The new treaty of November 6, 1885, went into effect January 1, 1886, and remained in force to January 1, 1891. Then, as agreed in the treaty, "if, one year before this time, it has not been denounced, it shall be extended in full force from year to year by tacit renewal, and shall continue to be obligatory during one year after the January 1st which shall follow the denunciation." Under this system of tacit renewal the Union remains in existence to this time. The peculiar complications in the Italian paper currency led to special provisions for the redemption of their coinage, such as were contained in the treaty of the Latin Union of November 15, 1893. But the essential provisions of the treaty now in force relate to redemption in case of possible disruption of the agreement. The idea constantly present and fully understood is that the course of monetary events has brought about a situation in which not only is the coinage of more silver five-franc pieces entirely given up, but the contingency is ever present of a break-up in the Union, in order to allow the individual attraction among the members toward a single gold standard to take effect. The bimetallic character of the Union has now wholly disappeared. It exists only under an agreement to regulate the burdens of redemption of coins issued under a system now discarded. There is admittedly no intention of ever returning to that system. The limitation of the old treaty of 1865 (providing for coinage of silver five-franc piece) by that of 1878 (entirely suspending their coinage), and finally the substitution for existing agreements by that of 1885 (dealing with plans for possible liquidation at short notice), has a significance which can not be mistaken.
§ 4. The monetary history of Italy is closely connected, of course, with that of the Latin Union, of which she is a member; but the accumulation of gold in preparation for resumption of specie payments in 1883 is an essential part of the recent history of gold and silver, and we shall recount the events which will give us a clear view of this measure.
Suspension of specie payments in Italy, May 1, 1866, had its roots in the financial burdens incurred immediately upon the proclamation of the new kingdom, March 17, 1861. The assumption of the debts of the old governments; the cost of removal of the capital; the taking on of useless officials; the large standing army; the annexation of the Church estates (1862), of Venice (1866), and of Rome (1870); the establishment of schools and public works—all created a heavy burden on the young nation, and heavy deficits to 1866.*93 Increase of the debt and declining credit followed, Italian rentes falling from 86½ in 1860 to 66 in 1865.
The financial stringency throughout the money centers of Europe in the winter and spring of 1866 was severely felt in Italy. The pressure upon the banks in Turin, Genoa, and Florence was such as to render failures imminent; and these failures would have brought on a general commercial ruin. As if this situation were not bad enough, the breaking out of hostilities between Prussia and Austria forced Italy to join the war against Austria (entering into a treaty with Prussia, April 20, 1866). The outlook was certainly very dark: the deficit for the year was estimated at 265 million lire; no loans could be obtained from Italian sources; and large funds for the war had to be provided just at the time of an impending commercial crisis. In this emergency the Italian minister Scialoja decreed the "corso forzoso," or suspension of specie payments, on May 1, 1866.*94 Thus began a period of irredeemable paper money, lasting seventeen years, until 1883—the same length of time as the paper-money period in the United States, from 1862 to 1879.
The issue of irredeemable paper money, originally intended as a temporary measure (the usual illusion in all such cases), passed beyond control. The state issues increased from 250 million lire in 1866 (the loan from the National Bank) to 940 million by 1875. The issues of the banks, over which the Government had little control, expanded from 245.9 million lire in 1866 to 633.2 million in 1874. The result was to have been expected: the paper money depreciated, as shown by a premium on gold of 20½ per cent in 1866,*95 and all the metallic money, including the subsidiary coinage, disappeared from circulation. Since the smallest denomination of paper money was 20 lire, a great gap in the circulation—just as in the United States in July, 1862—was created.
It will thus be clear to the reader that, in the next year after the establishment of the Latin Union in 1865, Italy, by suspension of specie payments, practically placed herself out of any important relation to the gold and silver circulation of the Union. Her relation to that system was only nominal. By driving out her metallic circulation during the years between 1866 and 1883, Italy really escaped, in a measure, the effect of the fall in silver which took place in that period; for she did not accumulate a large silver circulation at a high value, which subsequently fell to about one-half its former value. Some coinage, it is true, took place according to the regulations of the Union; but Italy's action was insignificant in this respect. Her relations to the Union until 1883 were mainly those brought about by the presence of a depreciated paper at home. And this furnishes interesting illustration of the operation of a monetary Union; since it is quite impossible that the Union itself should dictate to an individual state its entire policy in regard to monetary affairs, the issue of irredeemable paper must always remain a matter of internal financial policy. With this general understanding regarding the position of Italy in the Latin Union, we may now turn to the attempts made to resume specie payments, and the effect of this upon the relative values of the previous metals.
The evil effects on trade of the depreciated and fluctuating standard of payments began to require a reform. Magliani declared that "Italy paid a discount, owing to the depreciation of her paper money, on exports and imports of 10 per cent; and this discount rose at times even to 16 and 17 per cent." That is, foreigners exacted returns sufficient to protect them against the risks of fluctuation in Italian money.*96 The notes, moreover, had only local circulation. "In spite of the forced circulation, notes issued at Naples did not pass in Milan; and at Florence, all notes except those having a Tuscan origin were refused."*97 Indeed, the situation was similar to that in the United States under the old State bank system. This confusion was reduced by creating the "consorzio" of six banks, to whom the right of issue*98 was confined, April 30, 1874.
Several schemes*99 for resumption failed in the face of an economic condition of the country and of serious deficits, which made it impossible to accumulate the needed reserves. Toward 1880, however, the industrial situation had so far improved as to produce a decided change for the better.*100 The exports of cattle, meat, poultry, eggs, hemp, garden products, oil, wine, and fruit increased, and less cereals were imported. The increased yield from taxation brought about the happy result of a surplus, regularly recurring after 1875,*101 and a general consensus of public opinion in favor of resuming specie payments sprang up. The plan*102 which was finally successful in abolishing the "corso forzoso" and resuming specie payments in 1883 was introduced by Magliani, November 15, 1880. The scheme as presented to the Chamber is given in Appendix IV. It appeared on examination that the speculative element introduced into all transactions by a fluctuating paper had caused a higher rate of discount in Italy than elsewhere in Europe, and that the existence of a paper money would prove a menace in case of political complications or war with other states. The adoption of the reform would save Italy an annual burden of about fifteen million lire; and the marketing of bonds to secure the gold reserve would of itself tend to raise the price at which these bonds could be sold. Nor would there be any final contraction of the circulation. After vigorous discussion, the plan, with very slight modifications, passed the Chamber by a vote of 266 to 27. It received no modifications in the Senate, and became a law April 7, 1881.
By this measure the "consorzio" of banks was dissolved on June 30, 1881, and their notes made convertible into coin. These were the notes furnished to the state by the "consorzio," and were assumed by the state. After a withdrawal and cancellation of notes until the amount of 600 million lire was reached,*103 the customs duties should be paid in gold (for all sums above 50 lire). To provide the means for collecting the gold reserve, the Government was authorized to sell 644 million lire of bonds, at least 400 millions of which should be for gold. And, of course, if the state provided for the redemption of the "consorzio" notes, the rentes deposited for the security of these notes would be released. From this source the necessary bonds to be sold for gold were to be obtained (Art. XI).
The operation of this plan is of supreme interest in the study of gold and silver, because it touches the demand for gold. But it should be recalled here that bimetallic writers have emphasized this demand of Italy for gold about 1883 as an important factor in causing an "appreciation of gold." And yet Italy is a member of the Latin Union—that is, although nominally a part of the Latin Union, Italy, in 1881, proceeded to resume specie payments in gold, and as a resumption in gold its effects have generally been discussed the world over. This is significant matter for judging of the essentially un-bimetallic character of the Latin Union as early as 1881. It shows indisputably that the closing of the mints to free coinage of silver by the Latin Union was virtually a declaration for the gold standard. Italy's position was exceptional among members of the Latin Union, because (owing to her paper régime) she had practically no accumulated stock*104 of silver on hand to weigh her down, as was the case with other members of the Union. To be sure, the other states of the Union have also put themselves on the gold standard in fact; but they have also to maintain a large quantity of depreciated silver at par with gold. They have stopped the coinage of silver, because that was necessary to the maintenance of the gold basis.
Italy carried her plan into execution with great skill. A contract was made with a syndicate composed of the National Bank of the Kingdom, and the Credito Mobilare, the Banque d'Escompte of Paris, and the London houses of Baring Brothers and Company and C. J. Hambro and Sons, to dispose of the 5-per-cent rentes to the nominal sum of 729,745,000 lire at 88.25, in return for providing the 444,000,000 lire of gold and 200,000,000 of silver by September 30, 1882. The limit of time was later extended to February 15, 1883, a concession which led to an agreement to provide in addition 47,000,000 lire of gold—or 491,000,000 lire in all (about $98,000,000).
This was not a large sum of gold, but fear was expressed that a new demand of this sort would excite anxiety, even if it did not produce a disturbance in the money market. In the years 1880 and 1881 the United States was importing gold to the amount of about $100,000,000, while the annual production was somewhat smaller than usual. Prices, however, showed no "appreciation of gold" in this country, at least during this operation;*105 prices being, in fact, higher in 1880-1883 than before, and so gold was cheaper. The gold for Italy, however, was secured so skillfully and quietly that it had hardly any appreciable effect. "Sometimes the influence of the operation appears in the fact that gold on the way from Australia to an English port is intercepted on its passage. Sometimes a report comes that a supply has been drawn from an out-of-the-way foreign bank, where the existence even of any stock on a comparatively large scale had scarcely been imagined."*106 Various countries furnished amounts of gold,*107 Italy herself providing the largest quota. By the end of 1881 150.5 million lire of gold and 16 million lire of silver had been paid in. Installments were regularly paid in throughout 1882; on January 31, 1883, the syndicate closed its account with the Italian Government; and on March 1st it was dissolved after declaring a profit of a little over 1 per cent.*108 As the success of the scheme appeared certain, the premium on gold fell; and a royal decree of March 1, 1883, appointed April 12th as the day for the resumption of specie payments. On and after that date no pressure for specie was felt, and in operation the plan achieved a triumphant success. In 1886 "the total stock of metal actually in hand after three years of specie redemption" was "291.13 million lire."*109
The needless disasters which have lately fallen upon the Italian currency are due to the failure to take advantage of the lessons learned in the régime of depreciated paper. The resumption of specie payments gave Italy abundant foreign credit; the prosperity produced overtrading and speculation; the cholera of 1884 was followed by the bad harvests of 1885; and a financial crisis arrived in 1887, due partly to "the extensive building operations carried on by a system of loans granted by loan associations to builders, often upon very easy terms," and partly to the withdrawal of foreign capital which followed "as an inevitable consequence of the reappearance of a premium on gold."*110 The depreciation of paper had been caused anew by the unrestrained and misguided fatuity of the banks. They had again issued more notes than they could redeem on demand, and redemption became a fiction. In the law of 1881 the regulation of the bank issue had been left (Art. XVI) to the future, and not until after the crisis of 1887(in August, 1893) was the regulation of the bank issues enacted. Therefore, while nominally on a gold basis, Italy is struggling with a paper circulation not easily kept at par.
§ 5. The chain of events looking to the abandonment of silver and the adoption of gold did not by any means end with the action of Italy. The place which Austria occupies in this chain is admirably expressed by an Austrian economist:*111 "Until very recently few Austrians would have dared to believe that their country, which they had heard characterized as burdened with debt, creditless, deficient in capital, feeble, should be in condition to supply itself, in a time of general demand for gold, with the great quantity of the precious metal necessary for securing the gold standard. Ten years, or even five years earlier, there had seemed scarcely a prospect that we should be able to supply our necessities. But the condition of the market had changed. The 'gold blanket' which, according to Bismarck, was found to be short, has since, throughout Europe, grown broad in all directions. The great banks were able steadily to increase their stock of gold. Discounts fell, showing that the money markets were well supplied; at the same time the news from the gold-producing countries was growing more favorable, the annual output was increasing, and approached the largest production which had ever been known in the years of greatest abundance. Those European countries which had decided to adopt a gold standard, or (as, e.g., the Latin Union) to reorganize their double standard with gold as a basis for calculation had for the most part concluded their operations, or at any rate brought them nearer a provisional conclusion. This gave an opportunity for additional states to supply themselves out of this abundant output, and among the European countries yet remaining it was undoubtedly Austria's turn next. The writer of economic history will at some future time be able to take a clear survey of the process by which, from 1850 on, the channels of circulation were filled with gold—gradually, now here, now there; first partly, then completely; first temporarily, then permanently; the states following each other in a more or less definite order, which was conditioned by the degree of industrial development and of wealth, by inherited currency laws and customs of reckoning, and by accidental circumstances; and although broken in some cases by precipitate action, this order was governed, on the whole, by a sort of tacit understanding. Austria, which had long voluntarily held back, might therefore well feel that it was her turn to act."
Since 1857 silver had been the Austrian standard of value; but as early as 1867, in the Treaty of Commerce between Austria and Hungary (Art. XII), the conviction was expressed that, in an advanced community, silver alone can not be retained as the permanent standard of value.*112 The same tendency appeared when, although not made legal tender, gold coins wWere struck in 1870; and again in 1876, when both parts of the empire issued loans on a gold basis. But for financial reasons the matter was left in abeyance. The events finally culminating in the crisis in the silver market in 1876 practically gave the quietus to any serious discussion of the double standard in Austria-Hungary.
Although on the silver standard since 1857, the note circulation based on silver was irredeemable. From 1848 to 1858 the discount on the paper money averaged 14.73 per cent; from 1859 to 1865, of 23.09 per cent; and from 1866 to 1870 of 20.21 per cent. And the discount on paper*113 relatively to gold was about the same in these periods. When the fall in the value of silver began after 1874, the market value of silver in the gulden (or standard coin) declined relatively to the value of paper money. Some vague association even then existed between paper and possible redemption on a gold basis; so that silver fell relatively to paper. Finally, in 1878, the fall of silver brought it to par with the depreciated paper (while the premium on gold remained). And, further, it became profitable to import silver into Austria, because silver fell below the value of paper money. Silver then flooded the circulation, to the great surprise of a community that had had only irredeemable paper for generations. Silver rushed to the mints for coinage, as the less valuable money always does.*114 To save herself from complications arising from an accumulation of silver, Austria promptly suspended free coinage of silver in 1879, "when the ministers gave directions to the mints at Vienna and Kremnitz to accept no further orders from private persons for the coinage of the legal-tender silver coins. Thereafter silver was to be coined only in moderate quantities on account of the Government."*115 Here, then, in 1879 was another action of a most decisive character affecting the estimate of silver as a monetary metal. Taken in connection with the complete suspension of silver coinage by the Latin Union in 1878, and as an indication of the future policy of Austria, it had a far-reaching importance not understood or generally known at the time.
The actual suspension of silver coinage in 1879 throws light on the previous phenomenon of an irredeemable paper (nominally based on silver coins) retaining its value while the silver coins on which it was based (although inconvertible) fell in value below the irredeemable paper.*116 The closing of the mints to silver was a practical declaration for a possible gold standard, and as such it was generally regarded. The diffusion of such a conviction in 1879 must have been anticipated and discounted years before by those familiar with monetary matters; and long previous to 1879 the hope of a transfer from a silver to a gold standard, which we have already mentioned, adds evidence to show that tacitly the paper money had its value set by the chances of future redemption in gold. And that these chances were far from illusory was strongly manifest in the suspension of silver coinage in 1879. Silver could no longer be regarded as the standard, because it was virtually reduced to the position of a subsidiary money,*117 being limited in its access to the circulating medium. The money which was in practice the standard was the Government note, depending for its value on the possibility of future redemption—no longer in silver, but—in gold.
The radical departure undertaken by Austria in 1879, in closing its mints to silver, was, of course, only a first step in the new direction in which she was facing. The continued fluctuations and uncertainty in the value of silver had frightened the public. If they had not escaped the silver standard, "year after year, all our payments to and from foreign countries, our entire foreign market with its scale of prices, the fate of the countless enterprises and individuals, and especially the finances of Austria and of Hungary, burdened with obligations calling for payment in gold, would have been exposed to the danger of fluctuations incalculable in extent."*118 The inevitable result of the action of 1879 was the determination to adopt a gold standard.
The effect of the act of July 14, 1890 (the "Sherman Act"), in the United States, and the consequent speculation in the silver market in New York, and London, which temporarily raised the value of silver to about 18:1 (see Chart XV), produced a "curious result in Austria. While the premium on gold as compared with silver guldens in 1887 averaged 23.68 per cent, on September 2, 1890, it was not quite 9 per cent.*119 (The value of the paper money would, of course, depend on the growing strength of the credit and finances of the state.) The collapse of the silver speculation, and the consequent headlong plunge in the value of silver, brought to the public mind a new idea. The suspension of silver coinage in 1879 had been intended to secure the standard of payments against depreciation. But this sudden appreciation in the silver gulden excited alarm quite as great as the opposite movement. "For the very reason that it was so sudden and so great, this 'improvement,' however advantageous to individual, was detrimental to the general interest, in that it was a considerable alteration in a standard which completely serves its purpose only when it remains unaltered."'*120 Such insecurity, arising not only from a fall but from a rise in the value of silver, caused general recognition of the complete insecurity of the Austrian currency system, and led to a final determination to resume specie payments in gold.
Even before the Government measures*121 were proposed the collection of gold began (1890-1892). In carrying out these measures two steps were necessary: (1) The change from the old metallic basis of silver to that of gold, and (2) the acquisition of means for redemption on the new gold standard. The peculiar conditions in Austria made this first question complicated, because of the necessity of establishing a relation between the new gold standard and the paper gulden in general use. Consequently the enactments of 1892, which are primarily concerned with this first of the two steps, are known as "the regulation of the standard," and do not complete the scheme for resumption of gold payments; and to the present year (1896) no final arrangements have been made.
The average quotations of the previous thirteen years were taken as the basis of the relation between the paper gulden and gold, which is nearly expressed by the proportion of 100 of gold to 119 of paper. Although actual redemption has not taken place, this regulation has given a permanency of value to the paper never before obtained. It is evidently accepted that actual resumption in the future at this rate is a certainty.
The provisions*122 of the Austrian monetary reform create the krone instead of the gulden (or florin) as the unit of account, the krone*123 being one half the gulden, and legal tender only to the amount of 50 krone. Silver is therefore refused both free coinage and unlimited legal-tender power. Silver is highly overvalued, and appears only as subsidiary coinage in the new system. For standard coins only gold pieces of 10 and 20 krone are proposed.*124 The kilogramme of fine gold is to be coined into 328 10-krone pieces, or 164 20-krone pieces (of 6.09756 grammes each).*125
It is to be borne in mind that Austria has some surplus of silver to be disposed of. The country people have hoarded much of the old silver, and there is the whole of the recent coinage. Taking no account of the sums of silver in the hands of the public, April 28, 1892, there was in the public treasuries, in the hands of railroads and banks, something over 180,000,000 gulden;*126 although in 1888 the whole mass of silver was estimated at 230,000,000 gulden. But the exact amount is said to be unknown. As against this stock, in the conversion into the new krone, only about 75,000,000 gulden will be needed to make the limited sum of about 200,000,000 over-valued krone. The surplus of silver to be disposed of, or indefinitely carried by Austria, is probably not less than 175,000,000 gulden (or about $77,000,000). But it is assumed that no silver will be sold, from fear of affecting the general situation.
The second step in the reform which was concerned with providing means for collecting the gold was begun, but not finished, in the laws of 1892. Act V gave authority for a gold loan of 153,456,000 gold florins for Austria and 78,000,000 for Hungary. Of the sum of 312,000,000 florins of state notes to be redeemed, Austria is responsible for 70 per cent, or 218,400,000 florins (which, on the ratio of 100 to 119, is about equal to the new loan of 183,456,000 florins). The rest of the 312,000,000, or 30 per cent, is to be provided for by Hungary. By the end of 1894, 100,000,000 florins of bonds had been sold by Austria for gold, and the gold delivered to the mint. Since then two installments of 25,000,000 florins each have been issued, and at least 150,000,000 florins of gold have been accumulated by Austria. Hungary, however, has sold only 42,000,000 florins of the 78,000,000 of bonds authorized, but shows no disposition at present to go further in obtaining the required amount. Austria, therefore, is delayed in completing the scheme until Hungary is quite ready. While only about 32 per cent of gold is now held against the bank and state paper, competent observers believe that at least 100,000,000 florins more of gold will be required.
The gains from the new plan are regarded in Austria as clear. "The chronic scarcity of money which resulted from our paper standard, and the high rate of interest to which it led, lead us to expect a stimulus to... an influx of gold.... The steady growth of capital in our national economy will now find a secure foundation and a steadily growing circulation.... Greater emancipation from foreign capital, increasing stimulus to domestic industry, enlarged consumption by the entire population, are the objects to be attained."*127
It remains to be said that no difficulty was experienced in obtaining the required gold. Europe seems to have been preserved from any drain by the conditions which sent gold out of the United States. Von Wieser remarks: "The increase of our gold supply has been achieved without perceptible draft on the stock of other European countries; particularly, the reserves of the great banks of issue have not been trenched upon. The foreign financial world, which at first regarded our purposes with mistrust, now recognizes the skill and discretion of our agents, who leave thus far in no way disturbed the monetary system of Europe.... That which worked for our good still more, and beyond all expectation; was the fact that an unusually abundant supply of gold flowed out from the United States just at the moment when Austria applied herself to procuring a stock of that metal. All the great European banks of issue profited by this opportunity, and we, too, made the most of it. It is in part your republican eagles, stamped with the imperial eagle of Austria or the royal crown of St. Stephan of Hungary, that are just now furnishing the basis of our gold standard."*128 Although the relatively small amount of about $88,000,000 of gold in all has been thus far accumulated by Austria-Hungary—or only about two years' annual product of this country—it is suggestive of the character of our irrational silver legislation that distrust at home has sent our gold abroad to aid the countries of Europe in strengthening their monetary position while weakening our own.*129
§ 6. The movement of silver to India in recent years furnishes no grounds for changing the conclusion reached in Chapter IX, that the Indian demand for silver has had but little influence in regulating the market value of silver. The revision of Chart XII makes it clearer than ever that the line indicating the ratio of silver to gold not only has no correspondence with the line indicating the imports of silver into India, but that the two have gone in opposite directions. While India has been importing increasing quantities of silver since 1880-'81, the value of silver steadily fell for years, then rose during the silver speculation of 1890, and finally took a plunge downward out of sight. The exports of silver to India are one of the forms of demand for silver; but in view of the large supply and of the lessening demand in other directions, the needs of India for a relatively small amount (perhaps $50,000,000 or $60,000,000) does not suffice to maintain its value in the market.
The reasons for the importation remain just what they have always been; and the amount of silver imported still depends upon the extent of purchasing power which the industrial condition of the country allows to be expended upon silver, especially for hoarding, and upon the events which cause the Indian Government to make large expenditures in India (requiring, therefore, imports of silver to cover their expenses). The bad harvests and famine during the years 1875-1879 reduced the population by 5.25 million,*130 and lessened the purchasing power of the people enormously. The extraordinary import of silver in 1877-1878 was due to the sums sent by the Government to relieve the distress. Since 1880 the purchasing power of its population has increased, and silver has again flowed in.
The exceptional imports of silver in 1890-1891 bear interesting evidence on the extent to which the great silver speculation of 1890 spread. The passage of the Act of July 14, 1890 (the "Sherman Act") in the United States was followed by a concerted speculation in all the silver markets of the world to push up the price of silver. The price was carried as high as 54 5/8d. per standard ounce in London (and to $1.21 per fine ounce in New York) in September, 1890. The silver brought to India was for speculation, probably in view of a further rise.*131 The people of India, instead of taking this additional supply of silver, perversely saw in the rise in the price of silver an unusually favorable opportunity to exchange silver for gold. Consequently the silver speculation had the curious result of bringing to light the desires of the Indians—of all people in the world—to take gold whenever they could afford to have it, and to give up silver in exchange. Hence, an unusually large excess of importation of gold in 1890-1891, amounting to Rx. 5,636,172.*132 The very large excess of exports of merchandise in 1890-1891 and 1891-1892 encouraged the operation, and even permitted the absorption of a great deal of silver in addition. When the collapse in the silver speculation came (beginning as early as October, 1890) the speculative shipments of silver cased. Thus the Indians shrewdly took advantage of the temporary high price to sell silver; and, contrariwise, when the downward movement of silver in 1892 got full headway, and fell below 38d. per ounce, they straightway began to sell gold for silver. Never before in history could one buy so much silver with a given weight of gold. Hence, a practically unknown event in Indian statistics was recorded, the excess of exports of gold in 1892-1893 to the sum of Rx. 2,812,683.
The extraordinary fall in the value of silver since the collapse of the silver speculation in 1890 is unparalleled in the history of the precious metals. From a London quotation of 54 5/8d. per standard ounce in September, 1890, it fell to 27d. in March, 1894. In a period of three years and six months the price of silver fell exactly one-half. Here is a phenomenon compared with which the aberrations of silver in 1876 are insignificant. The imports of silver into India give absolutely no clew to the causes. But the action taken by the Indian Government, June 26, 1893, has had an unmistakable influence on the value of silver. Of course, the closing of the Indian mints to the free coinage of silver in 1893, to which I refer, could not alone have produced so astounding a result. It was only that it was an additional and very significant record of the desire throughout the civilized world to give up the use of silver as a monetary metal. Independent of all abstractions about bimetallism, the simple but overwhelming pressure of facts forcibly compelled the deposition of silver. Against the pressure of this stream of events no country could possibly stand up. It was quite natural and necessary that India should adapt herself to the facts of the situation; but her action, taken in connection with that of Germany in 1873, that of Holland in 1875, the Latin Union (including all the states of France, Belgium, Italy, Switzerland, and Greece) in 1878, that of Austria-Hungary in 1879, that of Italy in 1882, and the failure of the Brussels Conference in 1892, made a great impression upon the imagination of the world. The woodman's axe had been plying on the huge tree-trunk, the chips had been flying, the tree had been shaken; but this last stroke brought the tree crashing down through the forest. It was a tree no longer; in the future it was to be only lumber. The action of India, followed by the repeal of silver purchases by the United States, November 1, 1893, brought silver down from its position as a monetary metal; henceforth it was to be relegated to the class of ordinary non-monetary commodities.
Although the single silver standard was introduced into British East India in 1835, the gold mohur*133 was made receivable for 15 rupees on January 13, 1841, thus establishing a bimetallic system on the ratio of 15:1. Alarmed by the great discoveries of gold in Australia and California, the right to pay gold coins at the treasuries was withdrawn on January 1, 1853; thus again the single silver standard was adopted. By 1864 the Chambers of Commerce began an agitation for a gold standard, without results. But the depreciation of silver brought new and overwhelming difficulties both into the budget and into the currency. The Government of India has entered into obligations payable in gold, and its annual charge payable in sterling in England is about £76,000,000.*134 As its income is payable in silver, grave difficulties arose in adjusting the budget. These difficulties grew not so much out of the loss, as out of the embarrassing uncertainty, and impossibility of making correct estimates. But more than this, the doing of business on a fluctuating silver standard had placed the Government at the mercy of foreign influences beyond its control: "Our financial situation is dependent on the mercy of the exchanges, and of those in whose power it lies to influence the price of silver."*135
The condition of the civil servants in India, who were paid in silver, was alarming. As silver depreciated, of course, prices of articles of daily consumption rose; but, receiving a fixed income in silver, the effect was to lower their salaries by reducing their purchasing power. The operation of rising prices took place early, while the Government were long in even understanding the situation of its employés. This distress led to a pathetic address to the viceroy, on January 31, 1893, a part of which I quote:*136 "Since 1886, when the depreciation of silver became acute, there has been a sharp and rapid rise in the price of almost all articles produced in India, including food, in the wages of servants, and in house rent. In the same period the retail price of goods imported from Europe, on which a portion of our salaries is spent, has also risen largely from the same cause; and the prices paid for them increase with each successive fall in exchange."
After many and urgent communications from the Indian Government upon the necessity of adopting measures to regulate the relative values of gold and silver, the failure of the Brussels International Monetary Conference in 1892, and the possible suspension of silver purchases by the United States, led to the decision that the only outcome for India must be the closing of the mints to coinage of silver for private persons.*137 October 21, 1892, a committee*138 was appointed by the Secretary of State to investigate the conditions of the Indian currency. The memorandum of Sir David Barbour, the Indian Minister of Finance—and himself an advocate of bimetallism—written June 21, 1892, really outlined the policy finally adopted. The Indian Currency Committee began its sessions October 27, 1892, continued them until after the close of the Brussels Conference, and laid its report in secret before the Secretary of State on May 31, 1893. The committee unanimously recommended the closing of the Indian mints to private persons for the coinage of silver; that all further coinage of rupees should be made only by the Government; and that the Government should furnish silver rupees for gold at the rate of 1s. 4d. for a rupee (or 15 rupees to a sovereign). No one having any knowledge of the conclusions of the committee, the acceptance by the British Government of these recommendations was unknown until the decree that the Indian mints were closed to silver was flashed over the world by telegraph, June 26, 1893.
It is to be noted that coinage of rupees has not ended, but that additional coinage is at the discretion of the Government of India. It is an attempt to maintain the rupees at a fixed relation of 1s. 4d. to gold by limiting the quantity coined. Of course, this will not be permanently effective unless there is some definite method of redemption of the rupee at this rate. Such a result will require a reserve of gold (of perhaps $75,000,000), which in the existing conditions of the budget can not now be provided; but it is evident that the action of 1893 is only preliminary to the future establishment of a gold standard, leaving silver as the common medium of exchange, but limited in quantity and redeemable in gold. This refers merely to the use of silver as money.
The action of 1893, however, will have no effect whatever upon the importation of silver for hoarding. The circulating medium of India will, and must remain silver, and the demands of the people for silver will remain unchanged. So far as the action of 1893 goes, it will not perceptibly change the demand of India for silver. The effect of the closure of the Indian mints upon the value of silver is not, therefore, to be traced to any real subtraction of demand. Its importance to the value of silver is due to its being an additional blow to a situation already more than critical. It was a last straw on the camel's back, especially because it indicated the unsentimental attitude of Great Britain toward the future use of silver. Henceforward, schemes for the rehabilitation of silver could hope for nothing from Great Britain.
§ 7. In recounting the events of the last ten years in this chapter, we find surprising confirmation of the reasons for the fall in the value of silver already given in earlier chapters. The continued decline in silver since 1885, in a manner unknown in all its former history, would be inexplicable if we looked solely at the events which have occurred since that date. Nor can any one event be ascribed as a full and satisfactory cause. It is only when we study the enactments connectedly, as all springing from a common source, that the later events become cumulative and decisive out of all proportion to their immediate character. The great production of gold since 1850 has furnished the possibility of provision for gold currencies; and the silver has been discarded, because gold was at hand from which the currencies could be supplied. The withdrawal of silver has had nothing whatever to do with any scarcity of the precious metals. Indeed, silver has been disused as a money metal solely because gold has become so abundant. The continuity of monetary events, beginning with the action of Germany and ending with that of India and the United States in 1893, has coherence only as we see it from this point of view. This series of acts by the governments of Europe has not been undertaken upon any abstract theory, but in many cases only after strenuous opposition, and in reluctant obedience to the stubborn facts of commercial progress. As they have no artificial character, their permanence may be considered as definitive. There can be no swimming up stream against the current which is bearing gold into the currencies of the world.
This is the more certain because of the phenomenal increase in the production of gold in the last few years. If the fall in the value of silver has been a striking, unparalleled event in the history of the precious metals, the production of gold has increased in a manner equally striking and unprecedented. As the abundance of gold has become a self-evident fact since the surprising output of the South African mines, the recovery in the value of silver has become hopeless. If railways become more numerous and do their work still more cheaply, there is less reason to suppose we shall ever return to the stage-coach as a usual means of transportation.
How important the recent increase in the production of gold is may be seen by Chart XV. And when we recall that we have to deal not merely with the annual product but with the total durable mass in existence (indicated by the whole colored area since 1850), we get some true conception of the situation. The total quantity produced since 1850 is the greatest event in monetary history; nothing is in any way comparable with it. The production of silver has also increased extraordinarily (see Chart XVI), but it bears no comparison with that of gold, except since 1876. By grouping the facts of production*139 together, we may see this most clearly:
Or, contrasting the periods before and after 1850, the result is:
That is, in the 45 years since 1850 the production of gold has been nearly twice the whole production of the world in the 358 years from 1493 to 1851; while the production of silver in the 45 years has been less than one half of that in the corresponding 358 years. And inasmuch as trustworthy authorities say the gold product will continue on the present great scale for at least 15 years (at an annual output of at least $220,000,000), we may reasonably look forward to an addition of $3,000,000,000 in our stock of gold during these years, or an amount as large as, if not much larger than, the whole gold circulation of the world in 1850. The imagination is challenged to picture the results of this abundance, and it is not too much to say that it takes away whatever force may have been left in the argument of the bimetallists that gold is scarce and insufficient for the "needs of trade."
The present monetary needs of the world*140 are given herewith, in order to show that this abundance of gold furnishes an amount far beyond the monetary demand of $4,068,800,000 for the world, and, allowing for the estimated non-monetary consumption in the arts, yet leaves an enormous surplus. Supposing that only $2,000,000,000 of gold existed in 1850, this sum, plus the production in 1850-1895, makes nearly $7,900,000,000 to be accounted for. Taking the annual consumption in the arts for 1895 (which is absurdly high for earlier years) or $60,000,000 as true for all the 45 years since 1850—or $2,700,000,000 in all—the total monetary and non-monetary demand thus amounts to $6,700,000,000, leaving a surplus still unaccounted for of $1,200,000,000.
Notes for this chapter
The gold in the Netherlands Bank having seriously declined in amount, in April, 1384, the Government gave the bank permission to sell twenty-five millions of silver gulden at the market price. The power to sell accomplished the purpose, and actual sale has not taken place, the gold reserve of about $25,000,000 remaining intact.
For the details of the treaty, see Appendix, iv.
"Annuario Statistico Italiano," 1878, Parte Prima, pp. 144-147.
"A forced circulation was given to the notes of the National Bank of the Kingdom of Italy, and to the notes of the Bank of Sicily and of the Bank of Naples, in Sicily and in the Neapolitan provinces respectively. At the same time the National Bank advanced to the Government a loan of 250 million lire for the purpose of carrying on the war. Later in the month the forced circulation was further extended to the notes of the National Bank of Tuscany, and of the Tuscan Bank of Credit within the Tuscan provinces."—A. B. Houghton, "Italian Finances from 1860-1884," Quar. Journ. of Econ., 1889, pp. 245, 246.
Houghton, ibid., p. 245.
See also Say, "Dictionnaire des Finances," i, p. 1304.
The "consorzio" was made up of the five former banks of issue and the Roman Bank—viz., Banca Nazionale del Regno d'Italia, Banca Nazionale Toscana, Banca Romana, Banca Toscana di Credito, Banca di Napoli, and Banca di Sicilia. Instead of the old state note issues, the "consorzio" would furnish the state one billion lire, of ½, 1, 2, 5, 10, and 20 lire notes, printed on white paper, inconvertible, and having a forced circulation. The banks were jointly responsible for the notes; but the state deposited with them an equivalent value in rentes.
The banks continued to issue notes on their own account, on colored paper, in denominations of 50, 100, 200, 500, and 1,000 lire, redeemable in "consorzio" notes or specie, but limited in amount. See Say, ibid., p. 1305; Kaufmann, ibid., p. 144; Houghton, ibid., p. 375, 376.
1867, Ferrara; 1869, Cambray-Digny; 1870, Sella; 1877, Depretis; 1878, Seismitt-Doda; 1881, Magliani.
Wages had increased from 100 in 1862 to 136.99 in 1814, and to 144.08 in 1878, while prices were much lower in 1878 than in 1865.
"Annuario," 1892, pp. 866-869.
The exposé, or report, accompanying this plan is one of the most valuable documents in monetary literature relating to the experiences of a country with a depreciated paper. See "Bulletin de Statistique et de Législation comparée," 1881, pp. 162-167, 251-258, 341-347, and 429-434.
The ½, 1, 2, and 5 lire notes were to be withdrawn and canceled, making altogether about 315 million lire. After they were retired, notes of other denominations were to be withdrawn in like manner until the amount of 600 was reached. It will be observed that this plan prepared the way for a metallic subsidiary money, while redeemable paper was to form the rest of the circulation.
It was estimated that about 1880 the treasury held 44 million lire of silver, and private persons held perhaps 127 million, or only about $34,000,000 in all.
The index numbers of the Aldrich Senate Report, vol. i, p. 99, give United States prices as follows:
"London Economist," December 10, 1881, p. 1517/
The gold was obtained as follows from—
"London Economist," 1883, p. 258.
Houghton, ibid., p. 402.
R. Dalla Volta, "Journal of Political Economy," 1893, pp. 1-25.
F. von Wieser, "Specie Payments in Austria," "Journal of Political Economy," June, 1893, pp. 397, 398.
For this and other points, see the "Report of the Special Commission of the Upper House on the Bills for regulating the Standard of Value and Conversion Parts of the Public Debt," translated in Quar. Journ. of Econ., January, 1893, p. 225.
Since 1866, unsecured treasury notes (1, 5, and 50 gulden) exist to the sum of 312,000,000 gulden. An additional amount may be issued provided that this additional issue, together with the "Saltworks Notes "(interest-bearing treasury notes, for short periods), do not exceed 100,000,000 gulden, thus raising the limit to 412,000,000 gulden.
Report to Upper House, etc., ibid., p. 228.
Cf. Von Wieser's counter opinion that the paper had a value independently of any metallic basis, loc. ante cit., pp. 386, 387.
The Austrian silver guldens already coined, however, retained their full legal-tender character (like the German silver thalers not withdrawn), and passed current, just as subsidiary coins, irrespective of the lessened market value of the silver metal in them.
Von Wieser, loc. ante cit., p. 388.
Ibid., p. 389.
V. Wieser, ibid., p. 390.
The bills were introduced in May, 1892, and approved by the Emperor in August, 1892.
See Appendix IV, F, for the laws.
The crown is 835/1000 fine.
The Austro-Hungarian Bank is required to give to the public for a kilogramme of gold 3276 krone in notes, reserving 4 krone as seigniorage, 3280 being the full equivalent of a kilogramme in coin.
A dollar equals 4.9351 krone.
Von Wieser, p. 403. This does not include the silver in the hands of the public, nor the subsidiary silver.
Report to Upper Chamber, ibid., p. 245.
Report to Upper Chamber, ibid., pp. 399, 400.
"The later development of the monetary question brought an unbroken chain of events, all indicating the deposition of silver from the position of standard money—the continual sinking of the ratio, the complete cessation of silver coinage in the Latin Union in 1878, the suspension of silver coinage on private account in Austria-Hungary (in 1879), the repeal of the obligation previously incumbent on the Austro-Hungarian Bank to redeem silver, the establishment of the gold standard in the Balkan countries, the policy of Holland in regard to silver. Even India could no longer be counted on as an unfailing purchaser of the superfluous silver of Europe; and Japan, shrewdly perceiving the characteristics of modern commerce, established in 1870 the gold yen as a necessary part of its new civilization.
"The efforts of the silver statesmen of America to counteract this natural course of events, notwithstanding the enormous scale on which they were undertaken, proved on the whole unsuccessful. Gold rules even the trade of America. It has long played a dominant part in the countries of the Latin Union, and even in Austria-Hungary. Gold, even though indirectly, is now the basis of our standard of value."—Report of the Special Commission of the Upper House, etc., p. 227.
Cf. Elstaetter's "Indian Silver Currency," translated by the writer (University of Chicago Press, 1895). This gives the best account I know of, in compact form, of the currency situation in India.
"The quantity of silver imported in the years 1890-1891 far exceeded the needs of trade, and this silver brought into India for the purposes of speculation is not therefore to be found in circulation, but rests in the bank like capital waiting for investment."—Report of German Consul-General at Calcutta, "Deutsches Handelsarchiv," 1891, vol. ii, p. 619, quoted by Ellstaetter, ibid. p., 7.
Or perhaps $18,030,000, at present value of the rupee. Rx. is 10 rupees. The traditional use of 1 Rx. = £1, or 1 rupee = 2s., although still appearing, is inexact. At 1s. 4d. the rupee is worth about 32 cents, but its market value is still less than that.
The gold mohur contained 180 grains troy, gross weight, and 165 grains fine gold. The East India Company silver rupee of 1835, following the type of the Madras rupee of 1818, contained 180 grains troy, gross weight, and 165 grains of fine silver. At this weight the rupee at par is worth 44 cents of the United States silver dollar of 371.25 grains. April 1, 1895 its gold value was 21 cents.
The total expenditures for 1893-1894 were estimated at Rx. 91,600,800, as against a total income of Rx. 90,005,700, Ellstaetter, ibid., p. 73.
Sir David Barbour, "Financial Statement for 1893-1894," p. 15, § 31.
"Minutes of Evidence, Indian Currency Committee," p. 186.
In the face of such efficient testimony, it is difficult to understand why some extreme advocates of bimetallism keep on asserting that in silver-using countries silver still keeps its value relatively to goods, or that prices have not risen. Cf. Andrews, "An Honest Dollar," p. 801: "Silver prices have not risen. The rupee has not lost in general purchasing power."
In May, 1892, the Indian Currency Association was founded, and a petition for a gold standard obtained 11,788 signatures.
The Lord High Chancellor, Lord Herschell, Chairman, Mr. Leonard Courtney, Sir Thomas Farrar, Sir Reginald Welby, Mr. Godley, Lieut.-Gen. Strachey, and Mr. Currie.
See Appendix I.
Report of the Director of the U. S. Mint, 1895.
Part III, Chapter XIV
End of Notes
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