The Natural Law of Money
By William Brough
William Brough was born in 1826 in Kelso, Scotland. In his early childhood, the family moved first to Canada and then to Vermont. He began to study medicine but gave it up for business. He moved to New York in 1849 and then to Pennsylvania, where he was a pioneer in the development of the oil industry. He became the first president of the Oil Producer’s Association, and was involved in some important U.S.-Russian oil ventures. He retired in 1885, devoting his time to the study of social and economic subjects and to the writing of two books on money. A chaired professorship at Williams College is named in his honor.In
The Natural Law of Money, William Brough argues forcefully that privately-supplied money offers benefits not offered by government-supplied money.Brough’s analysis includes a discussion of Gresham’s Law. Gresham’s Law is commonly summarized by the catchy phrase “bad money drives out good.” It is just as commonly misunderstood. To understand Gresham’s Law, just remember this one simple requirement for it to hold: Fixed exchange rates.Historically, coins minted of valuable metals like gold or silver frequently became “bad” when they were clipped or shaved, making them weigh less. Coin-defacers could profit by shaving bits off of good coins and then reselling the metal clippings. Shop-owners, too busy to weigh coins for every transaction, were generally content to accept clipped coins at face value, so long as they could later spend those coins at that same face value. In daily transactions, the clipped coins were identical to the unclipped coins–they traded 1 : 1. Once this cycle got started for a currency, the bad coins quickly replaced the good ones, as coin-defacers snapped up and clipped any good coins in circulation. Thus, a gold coin stamped by the government with the value of one dollar might typically contain increasingly less than a dollar’s worth of gold over its lifetime. Eventually a critical point would occur, as the holders of bad coins became worried that other sellers would no longer accept their degraded coin at face value. Those left holding the bag stood to lose a great deal.In the modern world of fiat paper currency, the exact same effect occurs if a money’s quantity is relatively increased by its issuing Central Bank. Its value declines in principle, but it may temporarily be accepted at its stamped face value by those using it for daily transactions or to purchase other currencies, in the expectation that it will retain or return to that stamped value so it can be spent without loss. If the government further requires that the bad currency be exchangeable with another (good) currency at face value (i.e., at a fixed exchange rate), the bad currency will most certainly replace the good one in circulation. Why not accept a piece of paper worth less than a dollar if you can instantly buy with it another currency worth a full dollar? Why not keep any good pieces of paper under your mattress, and simply spend–recirculate–the bad ones? “Good” currencies are hoarded by the knowledgeable or used in illicit trade (because black market transactions typically involve large quantities of cash, which has to be accumulated and held by someone, risking an interim decline in confidence in its value), leaving the “bad” currencies in daily circulation.Gresham’s Law, so obvious and disturbingly critical to daily life that it was discussed in the streets for centuries, does not seem very relevant today. Why not? Gold coins of verified weight are good currency–why do they not drive paper monies out of existence? Because Gresham’s Law requires fixed exchange rates–exchange rates between the “bad” and “good” money that are fixed either by law, custom, or expectations. When coins are clipped but their stamped values trade 1 : 1 with unclipped coins–a fixed exchange rate–the bad coins soon drive out the good ones. When fiat money values are eroded by the increased supply of one relative to the other, but their relative legal values for transactions are mandated by government restrictions, the inflated currency drives out any available uninflated one. If gold or silver coins are required by law–fiat–to exchange with paper money at a fixed rate, and afterwards the quantity of paper money increases relative to that of the precious metal, the paper money will supplant the coin in daily transactions. Many other historical examples abound. The key factor in every case is fixed exchange rates between the bad and good currencies.But if the currencies’ values are instead determined by the market–that is, if they “float” relative to each other–then the clipped or overly-supplied money simply loses value (“depreciates”). Instead of the bad currency supplanting the good one, both currencies can exist side-by-side in circulation, trading at the market rate of exchange. The market participants have an incentive to keep tabs on the relative supplies or market exchange rates because no one wants to accept at face value money that will be worth much less when it comes time to spend it.Consequently, today, flexible exchange rates, supplied by nations implicitly competing in world money markets and simultaneously allowing their citizens access to those international money markets, enable people to substitute quickly their holdings of their domestic currencies for other currencies if they lose faith. The euro competes daily with the British pound, the U.S. dollar, and the currencies of Asia, Eastern Europe, and any other currency that gains a reputation for retaining its value–all of which helps keep values and monetary policies in line. Having suffered through enough fixed-exchange-rate tribulations and inflationary crises, many nations float their exchange rates and allow citizens to hold and use other currencies, at least to limited extents. Emigration allows further competition in money choices; and improved communication via computers allows instant access to information about international conditions affecting money supplies and demands. Thus, Gresham’s Law does not often rear its head in discussions. But Gresham’s Law still holds when rates of exchange are fixed; and it remains an Achilles’ Heel in discussions of returns to gold standards, unified currencies, or fixed (including managed) exchange rates. In money, as in all goods, market competition helps keep supply and demand in line.Does international competition in currencies effectively substitute for private competition? What conditions optimally determine the areas over which a single currency–the most extreme example of fixed exchange rates–can effectively operate? These questions excite international economists today.William Brough is one of only a few writers from the late 1800s who correctly explained Gresham’s Law, as well as many other matters concerning money supplies and these exciting matters of competitively supplied money. For more works on money supply from the late 1800s-early 1900s, see:Primary resources (historical order):
Bagehot, Walter,
Lombard Street (first published 1873)
Jevons, William Stanley,
Money and the Mechanism of Exchange (first published 1875). See, on Gresham’s Law,
Chapter 8, pars. 27-34.
Newcomb, Simon,
The ABC of Finance (first published 1877)
Laughlin, J. Laurence,
The History of Bimetallism in the United States (first published 1885). Empirical evidence on Gresham’s Law.
Brough, William,
The Natural Law of Money (first published 1896)
Fisher, Irving,
The Purchasing Power of Money (first published 1911). See, on Gresham’s Law,
Chapter 7.
Mises, Ludwig von,
The Theory of Money and Credit (first published 1912)
Cannan, Edwin,
“The Application of the Theoretical Apparatus of Supply and Demand to Units of Currency” (first published 1921)
Suggested Secondary Resources (alphabetical by author):
Mundell, Robert, Optimum currency areas. Online, see
International Economics, particularly Chapter 12,
A Theory of Optimum Currency Areas.
Timberlake, Richard H.,
“The Government’s License to Create Money” (
Cato Journal, The Cato Institute, Fall 1989). Online pdf file with helpful discussions of Brough, plus useful bibliography.
White, Lawrence H.,
“Competing Money Supplies,”The Concise Encyclopedia of Economics. Online at the Library of Economics and Liberty.
White, Lawrence H. and George Selgin,
“Why Private Banks and Not Central Banks Should Issue Currency, Especially in Less Developed Countries” Online at the Library of Economics and Liberty, April 19, 2000.
Lauren Landsburg
Editor, Library of Economics and Liberty
August, 2003Special thanks to George Selgin, Associate Professor of Economics at the Terry College of Business, University of Georgia, for biographical information on William Brough.
First Pub. Date
1896
Publisher
New York: G. P. Putnam's Sons
Pub. Date
1896
Copyright
The text of this edition is in the public domain.
CHAPTER II.
BI-METALLISM AND MONO-METALLISM.
IN calling our silver and gold coins by the same name, “dollar,” and in trying to hold them at an equal value under a fixed ratio, is there not evidence of a lingering belief that the power of sovereignty can regulate the value of coin? And is not the effort to enforce the circulation of the two coins at equivalent value a survival of the king’s mandate in modified form? Have we not overlooked the fact that silver and gold are commodities, the values of which are regulated only in one way, and by the same rule that regulates the value of other commodities—by letting them find in open market what that value is? They are not alike, not even in their money functions. They are both metals, to be sure, as wheat and barley are both cereals: what more cogent reason is there for making silver and gold an equivalent tender than for making wheat and barley
an equivalent tender? Is it not evident that we have inherited from the past a vague notion that we can, in some mystic manner, regulate the value of our metallic money? If a legislative enactment could confer that power, similar legislation would enable us to regulate the value of all our commodities.
The well-meant efforts to hold silver and gold coin at a parity in value have had no other effect than to drive one of these metals out of active current service. This has been our experience from the beginning of our government down to this day. We have not had both coins in circulation simultaneously, except during the short intervals when one was going out and the other coming in, and all other nations have shared this experience. Whenever the metals composing the two coins are put up for sale in open market, the price of each is governed by the supply of and demand for each; in no other way can their true value be ascertained; each must stand on its own merits. The efforts of governments to give them equality in value seem to have had the opposite effect.
It is estimated that three-fifths of the volume of silver and gold in the world are used in the arts, and two-fifths in money; but this is only an estimate—accurate figures cannot be had. That the amount
of these metals used as money is sufficiently large to considerably affect their market value is, however, a matter of course; but that the efforts to hold them at a relatively fixed value have utterly failed, is proved by the whole history of bi-metallism.
All the leading commercial nations at one time or another have tried to harness these two money-metals together, and make of them one monetary standard. We may suppose the first step towards this end to be the determining of the amount of silver and of gold respectively that shall constitute coins of equal value, the ratio being adjusted to the relative market value of these metals at the time. The act authorizing this coinage would also make the silver and gold coin an equivalent tender at the ratio fixed. This is what is termed
bi-metallism. In course of time, the market values of the two metals part company; one may go up or the other down, or they may move simultaneously in opposite directions. As soon as this separation takes place, the coin of the metal which has risen in value begins to disappear from the circulation. This movement, unlike the intelligent order of free selection (in which the superior money supersedes the inferior), has nothing to do with the inherent fitness of the metals for service as money; indeed, the coin going out of circu
lation may be the more serviceable money for the time and place; it disappears only because it is worth more as bullion than the coin remaining in circulation.
The mode of operation whereby, contrary to the law of natural displacement, an inferior money may expel a superior money from the circulation, is known as the Gresham law, and is so called because first expounded by Sir Thomas Gresham, who lived in the sixteenth century, and who was the founder of the Royal Exchange of London. The Gresham law would never have been heard of had coin passed by weight only, because in that case the recipient would have taken the coin only at the market value of the precious metal it contained; but when coin became king’s money and people were required to accept it by tale at its face value, objection was made to pieces that did not contain the full complement of precious metal; as, however, the king’s money was mandatory, it could not be refused so long as his imprint remained upon the coin. The fact that coin could not be refused—whether it contained the full complement of precious metal or not—was practically an invitation to every holder of a coin to abstract some metal from it before passing it, and this was practised to such an extent in England that in course
of time, and by slow degrees, the whole coinage of the realm was reduced to about two-thirds of its standard weight and value.
As nothing is more destructive of industrial prosperity than a money of indefinite value, this continuous mutilation of the coinage finally involved the nation in intolerable distress, and how to restore the coinage to its normal standard was a problem the solution of which long puzzled the people of England. The belief was general that if the full-weight coin were put into circulation, it would of itself, as being a more desirable money, drive the light-weight coin out of use; and this view seemed all the more reasonable in that the people were unanimous in demanding of their government a reformation of the coinage.
But this view did not take into account the natural forces that control the circulation of money, nor did it recognize the personal character of money, and its relationship to the individual; it regarded money only from the public stand-point—as an impersonal agency. As all the transformations and movements of money take place naturally, through individuals acting separately and independently, each one in his own interest, and without any purpose to further a general law, we must recognize this personal and
private interest as the real and only means whereby the coinage could be restored to, and preserved in, its normal integrity. So long as the king’s effigy was the important factor, individuals continued to abstract from the coin any metal that could be taken without impairment of the effigy; but if the law were repealed which gave the king’s effigy the quality of money, the coin would be taken only at its bullion market value. Each individual, acting for himself, without the least reference to the public interest, would refuse to receive the coin on any other terms, which would at once put a stop to any further debasement of the coinage.
As then there could be no further profit in the clipping and sweating of coin, clipping and sweating would cease; the debased coin at its bullion market value would be as good money intrinsically as that which came fresh from the mint, but as the clipped pieces would be of different values and intrinsically below their nominal value, they could be used in trade only by weighing them. Hence the same individual interest that had formerly led to the debasement of the coinage would now require that the pieces be made of uniform weight and fineness for the greater convenience of counting them and of expressing value.
In thus minutely defining the means by which a debased coinage could be restored, our object is to call especial attention to the fact that the debasement of the money was caused solely by its legal-tender quality, and that its restoration and preservation could only be effected by the removal of that cause. Nothing more was needed, because, as soon as the money was deprived of its legal-tender feature, it came under the law of natural displacement, and under this law, it is only the money of
superior efficiency that can maintain supremacy in the circulation; whereas, when the artificial quality of legal-tender is given to money, it is always the
cheaper money that expels the money of
higher value, without the least reference to the efficiency of either.
The English government was finally enabled to restore the coinage by decreeing that clipped coin should pass by weight only, thus virtually repealing its legal-tender quality; but before taking this step the government had confidently expected to accomplish its purpose simply by recoining the mutilated pieces. As the government received the clipped coin at its full nominal value, and as the people were consequently eager to obtain the new money in exchange for their clipped money, it was taken for granted that the coinage could be re-estab
lished within a short time by increasing the output of the mints; and this was accordingly done. Much of the coin in circulation had been minted by hand, with shears and hammer, at earlier dates than the time now referred to, which is 1695-6; these pieces were so rudely formed that the edges could be clipped without detection; but as the new coin was minted with milled edges, to clip it was a more hazardous undertaking, and this strengthened the public confidence that a sound currency would soon be established.
Meantime, the law against clipping was vigorously enforced; counterfeiting had long been punished with the same extreme penalties as treason, and in the reign of Elizabeth the clipping of coin was also made a capital offence. Besides the clipped silver money, there were also in circulation at that time gold pieces issued in the reign of Henry VIII., which had been debased by that monarch to half their nominal value, and it is to this gold coin that Sir Thomas Gresham especially referred in expounding his law, which he did in a letter to Queen Elizabeth, written in the year 1558. Though he explained the practical working of the debased money, showing clearly how it drove the full-weight coin of Elizabeth from the circulation and from the country, he did
not suspect the real cause of the evil, which was the mandatory character of the debased coin. He noted in this letter the disadvantage which the English merchants labored under in their exchanges with the continent—for it is in a foreign country that the coin of a nation must surely answer the test of bullion value. The superstitious awe that hedged a king in his own country had no influence upon the value of his coin when that coin went abroad; nor were the Jews, who were the principal dealers in money and bills of exchange, in the least misled by the king’s image on the coin.
A persecuted and plundered race, everywhere in Europe denied the right of ownership in real estate, the Jews had no avenue of commercial activity save the dealing in such personal property as could easily be secreted; thus they found their recompense in the establishment of a monopoly of the most lucrative of trades. Themselves freed from monetary delusions, their course as money-changers operated as a constant protest against the debasement of the coinage, and so contributed to raise the standard of monetary integrity.
The English government having in 1695 entered seriously upon a reform of the coinage by practically giving full weight for light-weight pieces, while at
the same time requiring that both full and lightweight pieces should circulate at their nominal value, and there being no doubt in the public mind as to the ultimate success of this measure, attention was naturally fixed upon the circulation to note the process of change from the old money to the new. Great was the disappointment when, after large sums of the new money had been coined and paid out, there was no perceptible increase of new pieces in the circulation; they vanished almost as fast as they came from the mint. The financiers and the politicians of that age seem alike to have expected that the new money would soon displace the old, and, as Macaulay has said, they “marvelled exceedingly that everybody should be so perverse as to use light money in preference to good money.”
But it was really everybody’s preference for the full-weight pieces that kept these pieces out of the circulation, for, as their bullion value was half as much more than the bullion value of the clipped pieces, each person who received a good piece naturally held it and paid out his clipped money. Each naturally sought to appropriate the extra value that the new coin possessed, and this he could do in several ways: he could melt it and sell it as bullion; he could abstract the extra value from it by paring it down
before passing it; or he could hoard it until he found opportunity to pass it at its actual bullion value. All these things were done; but that the rapid disappearance of the new coin from the circulation arose mainly from hoarding by the people who could afford to hoard, was afterwards shown by its reappearance when the government decreed that the clipped coin should no longer pass as money.
For at least a hundred years clipping had been a capital offence; a law was now enacted against melting or exporting coin, but it could not be enforced; nor could hoarding be prevented; even the laws against clipping were ineffective, notwithstanding the terrible punishments inflicted upon offenders. Macaulay narrates that in one day seven men were hanged and one woman burned for clipping, yet the number of clippers multiplied in proportion as the volume of new coin thrown into the currency increased; which demonstrates not only the futility of governmental regulation of a people’s money, but its utterly demoralizing effect upon money and people alike. Harsh as was the law against the crime of clipping, it was even more unjust than harsh, for, in compelling the acceptance of debased coin at its nominal rather than at its actual value, the government was in fact an abettor of the crime it was seeking to suppress.
Although the English government, by demonetizing the clipped coin, was enabled to restore the coinage, this action was not prompted by any intelligent perception of the real cause of the debasement, but came upon government and people alike as a dynamic necessity. We have seen that it was the legal-tender quality of the coin that caused its debasement, and that if it had been deprived of this quality, individual interest and action would have restored and preserved the coinage in its integrity; but as it was the general belief that money circulated only through the mandatory authority of the Crown, this simple, natural law of money was not perceived. In other words, the trying experience of the English people with their clipped coin did not dispel the delusive idea that the Crown could regulate the value of money; in the belief of the people, the clipped coin ceased to pass because the decree had gone out that it should not pass, and the sound coin passed because the decree had gone out that it should pass.
The same Parliament which decreed that the clipped coin should not pass, also made it a penal offence to give or take more than twenty-two shillings for a guinea, which is conclusive evidence that this Parliament believed in the power of sovereignty to regulate the value of the coin. Silver was then
the predominant money; it was this metal that was the common medium of exchange and measure of values, gold occupying a secondary place. The name “guinea” is still used in England to express twenty-one shillings, though the coin is no longer minted or in circulation; the actual value of these gold pieces then, as measured by the new silver pieces, was twenty-one shillings and sixpence, but before the coinage was restored, their exchangeable value, as measured by the clipped money, was about thirty shillings. Though the clipped money could not be made to pass current at its nominal value, it did pass for more than its actual bullion value, for the reason that the government accepted it at its nominal value for the payment of taxes. The decree of Parliament in reference to the guinea was supererogatory legislation, as, after the restoration of the coinage, this piece passed at its normal value of twenty-one shillings and sixpence.
In the act of Parliament which undertook to hold the gold guinea in circulation at a fixed silver valuation, is plainly indicated the mandatory theory of money which, twenty-one years later (1717), led England to adopt bi-metallism, and which has more or less influenced her monetary legislation down to the present time. After nearly a century’s practical ex
perience with bi-metallism, England abandoned it for mono-metallism; gold meantime having become the dominant metal, was made her monetary standard.
The course taken by England with her metallic money, and which has been followed by some of the chief commercial nations of Europe, may be briefly stated thus: bi-metallism has first been adopted; then, after experience has shown that the silver and the gold coin cannot be held at a parity, the law which was designed to make one monetary standard out of two independent money metals, has been repealed; the metal found to be the less serviceable has been discarded, and the other by enactment made the only legal tender, thus creating what is called
mono-metallism. Whilst mono-metallism is undoubtedly an advance upon bi-metallism, inasmuch as it furnishes a more definite monetary standard, both systems embody the mandatory theory, and interfere with the natural flow of money.
Although the mandatory theory of money is still acted upon, even by the most advanced governments, it is gradually yielding to the pressure of natural forces. This is shown especially in their coinage legislation. Except in bi-metallic countries, no attempt is now made to enforce the circulation of coin on any other basis than its intrinsic value;
the pieces are by most nations made a legal tender at a full and a short weight, the difference between these weights being very slight, and designed only to provide a margin for the ordinary abrasion from a reasonable length of service. When a piece falls below its short weight it ceases to be a legal tender.
There is really no more occasion for a legal tender short weight in coin than there is for a legal tender short weight in the pound-weight. A moment’s reflection will show that the tendency of such legislation by inciting fraudulent abrasion, is to degrade coin to the lowest level at which it may be tendered. It is estimated that of the gold in the currency of England, one-half the pieces, amounting to fifty million pounds, are barely above their short weight. Higgling over short-weight pieces is not uncommon there, although this is precisely what the long and short weight is intended to obviate.
In our own country, coin enters so sparingly into the general circulation that the deterioration from natural wear is very much slower than in England, and the short weight is so nicely adjusted to the natural wear by our Coinage Act of 1873, that there is practically no temptation to fraudulent abrasion.
Clearly there is no need of making coin a legal
tender at any specified weight. If governments would confine their legislation to fixing by enactment the fineness of the precious metal and the number of grains that shall constitute each piece of a given name, they may safely leave the maintenance of the coinage in its integrity, and the value of the pieces, to be regulated by individual interest and action. In practice this point of monetary advancement has been reached by most of the civilized nations; but in the useless, although comparatively harmless act of decreeing coin a tender at the authorized legal weight only, is manifested the extreme conservatism which still clings to the old delusion that legislation may in some vague sense regulate the value of coin.
Although this delusion is harmless as embodied in many coinage acts, it becomes extremely mischievous when the attempt is made to regulate the value of the silver and gold coin at a fixed ratio of weights under the ruling of bi-metallism; and it is only in a less degree mischievous when one of the money metals is ejected from the circulation under the ruling of mono-metallism. As the efficiency of coin as a medium of exchange depends on its circulating only at its bullion market value, and on the freedom with which it may circulate, any attempt to
interfere with these natural conditions operates as a restriction of individual rights.
A government can render most important service by assaying the precious metals and minting the coin, by verifying the fineness and weight of the pieces, by guarding the coin against criminal deterioration, and by shaping the pieces in accordance with the actual needs of the time. More than this no government can do without trenching upon the freedom of the money, and, as a consequence, upon the rights of the individual, for his rights are bound up with his money, and his money, be it ever so sound, must have freedom to render him its most efficient service.
Money is identified with man as an individual, and not with man in mass; it is through the individual acting independently that it acquires all its potency. Moved by the incentive of gain, and for the gratification of his desires, the individual works only for himself and for those who come within the compass of his affections. It is by such delicate, complex, and hidden relationships to the individual that money becomes the circulating medium of a nation; and as the free circulation of the blood vivifies the body, so the unrestricted circulation of money vivifies the nation. If governments had limited their legislation to the simple requirements
mentioned above, Sir Thomas Gresham would have had no occasion to expound the law that inverts the order of natural selection and drives money from circulation regardless of its efficiency; nor would we have any silver question to discuss; the two metals might then circulate as efficient money in one country at the same time; if one went out of use, it would be because it was no longer needed and could do better service in other occupations; the transition would be quiet and without disturbance to industry.
Let us now make an application of the principles of money to the actual workings of bi-metallism, as exemplified by the experience of our own and other nations. It has been shown that money may be any commodity that is used as the common medium of exchange, which is money only when so used. From the beginning of trade down to the introduction of paper-money, commodities employed as money necessarily possessed for that use full intrinsic value, except when kings, clippers, or sweaters abstracted a part of that value, or when law-makers undertook to create a factitious value. Although the money of the Massachusetts Indians had no value to the colonists, we need not doubt that it had real value to the Indians; that is, it had cost them as much
to produce as they could get for it. The colonists counterfeited this money, which they would hardly have done if they could have produced the genuine more cheaply than they could obtain it through trade. It has also been shown that silver and gold, through a series of displacements, proved themselves better qualified for monetary service than all other commodities, and so came into use wherever a people had risen high enough in industrial civilization to appreciate this superiority. It has also been shown that silver and gold differ in their monetary functions, the first being adapted to trade, while the second performs the larger and more complex duties of commerce; and when we extend our inquiries to paper-money, we shall see that its functions differ from those of silver and gold; that it is an implement of higher refinement than either, performing more complex duties; that it is, in short, the money of a still higher civilization, requiring for its most effective working a higher intelligence and a higher degree of integrity. It has also been shown that metallic money acquires its highest efficiency when left perfectly free to find its actual value in open market.
The open market here referred to really represents the whole world, for the precious metals are every
where in use and everywhere bought and sold; it not only embraces the accumulations of all former ages, but receives the entire current product of these metals, which is continuously pouring into it. While we cannot compute either the amount of the precious metals in the world, or the amount required for the many different uses to which they are applied, we can easily see that fortunately this market is too large, and broad, and free, to be brought under governmental control; if it were not so, the usefulness of the metals for money service would surely be paralyzed or destroyed. In the magnitude and freedom of this market, in the constantly changing form of the metals as they pass from one use to another, a continuous movement is kept up, and an even poise is preserved by innumerable buyings and sellings. Every change that peoples may make in their money, every transaction in trade and commerce, wherever made, touches and influences to some extent this wonderful market.
A little thoughtful study of this market should suffice to show that the bi-metallic theory of money is a mistake. A slight change in the market value of silver and gold from the ratio fixed by law will drive one of these metals out of monetary service; and the only effect of an effort to retain both by making the
coins interchangeable will be to impose upon one the burden of carrying the other.
England adopted bi-metallism in 1717, and changed to mono-metallism in 1816, selecting gold as her standard. Germany made a similar change in 1871, and her example was followed by Norway, Sweden, Denmark, and our own country, all within three years. But there is no evidence that these nations were prompted in their action by the fear of an approaching decline in silver, or by any other desire than to secure a more stable standard of money. The price of silver had not materially fallen at the time these changes were made, nor had the output of the silver mines increased to any marked degree, as they did later; so that no one could have had any reason to suppose that silver would fall in price, as it subsequently did.
By demonetizing silver in 1873, we doubtless helped to strengthen the general movement towards mono-metallism, but in no other way could our action have had any effect on the price of silver, as for about thirty years there had been practically no silver dollars in our circulation, and in 1873 we were on a paper-money basis. That our subsequent action, in passing the Silver Bill of 1878 had a depressing effect on the silver market, is more than
probable; it was regarded by the world at large as an effort to give to the metal an artificial value, and this impression created a distrust that greatly restricted the freedom of the market. An attempt made a few years ago to control the copper market of the world created a similar distrust, which had the effect of putting the price of copper below its normal level, as was plainly seen when the syndicate, which had attempted to advance the price, broke down in bankruptcy, thus putting a stop to its interference.
France has done more than any other nation to maintain the double standard; her bankers and economists have been strong supporters of this monetary theory; five other nations co-operate with her, composing what is termed the Latin Union; yet in all these countries, if there is not a premium on, there will be a preference for, one of the metals; and even a preference is sufficient to lessen the usefulness of both. France closed her mints against free coinage of silver in 1876, and it is quite evident from the way in which she is accumulating gold and discarding silver, that she is moving toward a monometallic standard.
There is a limit to the amount of money that any community can employ productively, and what that
limit is can never be measured mechanically. If the money metals are left free to flow in and out of a country, their supply will be self-regulating, and every legitimate demand for metallic money will be met. If the supply of these metals in the world at large is at any given time insufficient to meet the demand, there will necessarily be an appreciation in the value of money; if, on the other hand, the supply is in excess of the demand, money will depreciate. These fluctuations are constantly occurring, but they are so slight as to be hardly noticeable. In reviewing a long period of time, however, we find that the general tendency is towards lower values, and this applies not only to the precious metals, but to all products of man’s labor. Since the introduction of steam power, machinery, and subdivision of labor, the tendency towards lower prices has been more decided than before. To obtain a more abundant supply of the necessaries, comforts, and luxuries of life, is the object of all industry, and with the increase of supply comes the reduction in price. This is the natural order of progress, of civilization.
As nearly as we can now judge, the decline in value of the precious metals has kept comparatively even pace with the decline in prices of commodities. There have been but two marked exceptions to this
rule, arising from natural causes; one when Europeans got possession of Mexico and Peru, and the other when the gold fields of California and Australia were opened. In the latter case there was a depreciation in the price of gold; this was made evident by a general advance in the price of commodities, including silver, all over the civilized world. It was not until 1879 that gold recovered the value that it had had, as compared with other commodities, before 1850.
If England, instead of demonetizing silver in 1816, had permitted her silver and gold coin to circulate independently, and if the other European nations had followed this example, both metals would have circulated freely in all these countries, and with much slighter fluctuations, and the people would have been perfectly competent, in making their exchanges, to adjust them to the two monetary standards.
There has been too much legislative interference with money, and the best we can do now is to recognize this and act accordingly. In a country like ours, there can never be a lack of efficient money, if we observe the natural law of money; our immense natural resources and the industry of our people are a guaranty against it. We have now a super-abundance of money that does not properly perform
its functions. Gold is practically our standard, but it is burdened with carrying silver, whereby the efficiency of both metals is reduced; nor does it alter these conditions to issue silver in the form of paper-money. The silver in the Treasury vaults is of no more use to us now than when it was in its native hills. Nobody questions the capability of the United States to redeem any obligation it may assume; the only question that has been raised in reference to our silver money is, what is its value? And this is a point upon which there should never be any room for doubt.
Two examples have been given showing how one money may replace another in the circulation; the first was the natural order of displacement, whereby the more serviceable money displaces a less serviceable money; the second was the artificial displacement that occurs under bi-metallism, when the cheaper money drives the more valuable money from the circulation. It remained for the United States to give a third example of displacement, which, like the second, was artificial. It was furnished by the silver legislation of 1878 and 1890, by which there was injected monthly into the currency a specified amount of silver. This feature of the legislation was a monetary anomaly; nothing of the kind had ever been
attempted before. It worked upon what is called the “per capita” plan—so many heads, and so many dollars per head. Machinery was set in motion to grind out a given number of dollars per month, and the country was forced to take them and pay for them, whether it needed them or not. There is a limit to the amount of money that any community can employ productively; therefore, to force money into the circulation after that limit is reached, is to force other money out. It will be seen that in this third example the displacement is purely mechanical, and without reference either to serviceableness, as in the first example, or to value, as in the second; the money goes simply because it is not needed.
Having thus stated the three forms of monetary displacement, we will now consider them somewhat more specifically, as exemplified by the operation of the acts referred to, especially that of 1890, commonly called the Sherman Act. We have seen that while money may be mechanically forced into the circulation, it cannot be retained there unless there is employment for it. The country has had a practical illustration of this in the necessary retirement of a large volume of national-bank notes, though these notes were practically the same in efficiency and value as the silver notes supplied by the govern
ment. Many of the banks found a little more profit in redeeming their own notes and using the government notes instead, but this profit was not in itself sufficient to induce them to retire their notes if there had not already been an excess in the volume of the currency. That this was so is shown by the fact that much of this retired money reappeared when the volume of the circulation was reduced by the paper-money hoarding which began in the summer of 1893.
Though the national-bank notes were displaced by this mechanical enlargement of the volume of currency, the gold money which retired was not similarly displaced; nor would it have retired from the circulation had it not been for the Act of 1890, by which Congress sought to give it a silver valuation below its bullion market value. But for this mandatory decree, gold money would, by reason of its superior efficiency, have remained in circulation to the exclusion of silver money when the volume of currency was in excess of the needs. The silver dollar has continued to pass at a parity with the gold dollar, but this has been the case only because it could be exchanged at the United States Treasury for a gold dollar. It was therefore not a difference in the current value of the two coins that caused the retirement of the gold money, but a fear in the
public mind that the Treasury might at some time cease to redeem its silver money with gold. Nor was this fear by any means groundless. The Act of July 14, 1890, does indeed declare it as being “the established policy of the United States to maintain the two metals on a parity with each other,” but this declaration is not sustained by the action of our government in the past, nor is it consistent with the spirit and letter of other portions of the act itself.
Bi-metallism has been the monetary policy of the United States from the beginning of the government, except for five years—from 1873 to 1878—during which time there was no metallic money in the circulation. At all other times, down to 1878, when the money of the country was on a metallic basis, it has been the policy of the government to let the two metals take their natural course, and this has invariably resulted in excluding from circulation the coin of higher bullion market value. The reason for this will be obvious when we reflect that, if in a transaction of trade the seller may exercise his choice, he will naturally demand the most valuable money obtainable, but if he must accept the money that is tendered to him, the buyer will pay him in that which has the least value. It is through such action by individuals, each prompted by his own interest,
that bi-metallism operates to retain in the circulation the money of least value and to expel from it that of any higher value.
Nor can it be said to have been the policy of the government since 1878 to maintain the two metals at a parity, if we are to judge of that policy by the acts of Congress, and not by the practice of the Treasury department. The Act of February 28, 1878, commonly called the Bland Act, made no provision for maintaining the two metals at a parity; it simply authorized the injectment of silver money into the currency, and decreed that the silver dollar should be a legal tender at its nominal value. There is really no act of Congress which definitely commits the nation to maintaining the two metals at a parity, and it is the fact that the nation is not thus definitely committed that discredits our money. By making the two metals a legal tender at a fixed ratio, and thereafter abstaining from interference with the coin in circulation, which was the policy of our government down to 1878, the metal of higher value was expelled from the circulation, leaving the other metal to constitute the monetary standard. By thus permitting the metals to take their natural course, the United States, when on a metallic basis, had always had, down to 1878, a definite and stable
money; in other words, the United States has theoretically had bi-metallism, but practically mono-metallism.
Since 1878, we have had bi-metallism in its most objectionable form, by reason of the effort made to force, by legislative decree, the circulation of the two metals at their nominal values, irrespective of their actual bullion values. This is what the Act of 1890 assumes to do in authorizing the Secretary of the Treasury to pay “in gold or silver coin
at his discretion,” since to maintain the two metals at their legal parity, it is absolutely necessary that the choice of the metal to be received shall rest with the recipient. This fundamental principle is now so generally understood and accepted that no intelligent person can be misled by an act which in one clause declares for the maintenance of “the two metals on a parity with each other,” and in another authorizes the Secretary of the Treasury to pay in either metal at his discretion. In the exercise of this discretionary power the Secretaries have uniformly left the choice of the metals to the person receiving the money, and it is solely through this recognition of a monetary principle in their governance of the Treasury Department that the legal parity of the two metals has been maintained.
Congress can render no greater service to the nation than by substantiating its declared policy under a definite pledge to make the gold and silver money of the United States interchangeable at the Treasury at the option of the holder; nothing it can do would so quickly restore confidence and bring relief to an overburdened people. The repeal of the silver-purchase clause of the Act of 1890 was necessary and commendable; it relieved the country from a burdensome tax, but with our large volume of silver money, the remaining clauses of that act must continue to menace our credit so long as the nation is not definitely committed to redeem its silver money with gold.
We have now little cause to fear that the gold standard will not be maintained: in the agitation and discussion of the silver question, the people have come to realize the injustice that would be wrought by permitting the standard to drop from gold to silver, and on this moral ground, if not from the convincing force of economic logic, they will insist upon the maintenance of the gold standard. While we may ourselves be entirely confident that our government will honestly live up to its monetary professions, it is particularly unfortunate that any occasion should be given to other nations to question our good
faith, and so long as the Act of 1890 remains in its present equivocal form, we cannot logically expect to secure or to retain foreign confidence; but with a definite commitment of the nation to preserve the integrity of its monetary standard, all cause for distrust would be removed. We might then look forward with reasonable assurance to a return of the foreign capital that has been withdrawn from us, the loss of which is the chief cause of our industrial depression.
It is not money, but wise monetary legislation, that the country now needs. There has been no time in the past two years, except during the few weeks when the “paper-money hoarding” craze prevailed, that the money in circulation, though wofully defective in quality, was not amply sufficient in volume for all demands; and if we include the hoarded gold money in the country, the volume has been greatly in excess of what could be profitably employed under normal conditions. It is admitted on all sides that a revision of our monetary system has become absolutely necessary; but no revision can be of any service that does not re-establish public confidence in our money.
Before proceeding to illustrate the beginning and growth of paper-money, it may be well to con
sider briefly some of the salient evils that would result, in the event of a fall in our monetary standard from the gold to a silver basis. If such a change of standard were made with due consideration, the government providing for the redemption in gold of the silver money it had issued at a gold valuation, and replacing it with silver money issued at its actual valuation, and also requiring that all contracts and obligations entered into during the continuance of the gold standard should be settled on that basis, the disturbance to industry would be only such as must arise from the adjustment of values to the new standard, and business would soon move along much the same as if on a gold basis. Though our monetary standard would not be improved, no one could then justly charge us with duplicity or bad faith; but to let the standard drop from gold to silver without making full provision for the change, would be criminal neglect.
All metallic money should have a market value as bullion equal to its current value as coin; if it has not this, it is not true money, nor can it be the most serviceable money. As our gold coin is worth as much in bullion as in coin, it answers to this test; but our silver coin, if converted into bullion, would yield only three-fifths of its current value, which
current value, as we have seen, is maintained only because a silver dollar can be exchanged for a gold dollar at the United States Treasury.
The bi-metallic ratio of the United States is sixteen grains of silver to one of gold. When this ratio was adopted it corresponded very nearly to the relative market values of the two metals; at present, however, one grain of gold will buy about twenty-seven grains of silver, which makes the bullion value of our silver dollar about sixty cents.
*1 If, for example, we should melt five silver dollars and three gold dollars separately into bullion, the present market value of these two bits of bullion would be the same, and we should find this to be the case wherever sold.
As gold has been the standard in the United States since January, 1879, every dollar of silver money in the country, whether it be in coin or paper, has cost its owner a gold dollar, or the equivalent of a gold dollar; therefore a drop in the monetary standard to a silver basis would cause these owners to lose forty per cent. of their money. A person with five dollars of silver money in his pocket would lose two dollars; he would still have five dollars
nominally, but
actually only three, as the purchasing power of the five would
have shrunk to that of three. It might seem to him when he came to spend his five dollars that prices had advanced, but what would really have taken place would be a reduction in the value of his money while it lay in his pocket. Commodities, and property in general, would not be affected in value by the change in the value of the money, as would be evident to those who had gold money to spend. In the adjustment of values to the depreciated monetary standard, the advance in prices would disturb for a time the prevailing idea of relative values; but these changes in prices would be nominal; values would remain as they were, subject only to natural fluctuations.
In the derangement of prices that would follow a sudden change of the monetary standard, large numbers of persons, not foreseeing the effect of the change, would be likely in trading to underestimate the value of their property in the new and cheaper money, and thus they would sustain the full loss resulting from buying with gold and selling for silver. The better knowledge of monetary conditions possessed by the few, and their larger opportunities for turning this knowledge to pecuniary advantage, would enable them not only to protect themselves, but to profit by the ignorance or the limitations of their neigh
bors; and thus much of the wealth of the country would be aggregated in fewer hands. But as values of property in general would not be affected by the depreciation in the value of the money, the direct and immediate loss would inevitably fall upon the owners of money, of bank-deposits, and of such assets as were payable in money. This loss would fall mainly upon that great body of frugal and industrious working people that composes more than half the population of the United States, as the savings of these people are generally held in bank deposits. A large majority of them would not understand the situation, and even if they did, it would not be in the power of any considerable number of them to protect themselves.
The number of small depositors in the United States cannot be less than eight millions; in a general liquidation, these depositors would be found to be the principal owners of the money that constitutes our medium of exchange. As their savings are usually left quietly and permanently on deposit, this money becomes, through the intricacies of exchanges in the ordinary course of business, the active lendable money of the nation. The sum of deposits in savings banks alone is $1,712,769,026.00, and the number of depositors is 4,781,605, making an average of $358.20 to
each depositor. As, however, but a small percentage of the money deposited in savings banks is allowed to lie idle, this money goes immediately back into circulation; even the bulk of the reserve money of savings banks is held on deposit in commercial banks, which are the active distributors of money.
If the government should cease to redeem its silver money in gold, about a thousand million dollars of the circulating medium of the nation would drop to the silver basis; but in order to ascertain the full percentage of individual loss on the depreciated money, we must take the total sum on deposit in the United States, and add to it the money in current use, as follows:
| In commercial banks | $2,967,248,529 00 |
| In savings banks | 1,712,769,026 00 |
| In current use (estimated) | $500,000,000 00
|
| $5,180,017,555 00 |
Here we have a sum exceeding five thousand million dollars, upon which there would be a direct loss of forty per cent., or say two thousand million dollars.
While the change of monetary standard would not lessen the volume of actual capital in the country, the loss to individuals would be as abso
lute as if their property had been annihilated by fire; and nothing can be plainer than that the great burden of this vast loss would have to be sustained by the working people who had laid up a little money in bank for safe-keeping, and for the interest it would bring them. There would be no levelling of fortunes, as is vaguely supposed by some people, but only an increased disparity. Trades-people, merchants, manufacturers, and the great industrial corporations, have their capital invested in goods and merchandise, in land, factories, and in the products of factories: the value of all these would be adjusted to the new standard without loss, and as these industries are mainly carried on with borrowed money, the loss from its depreciation would not fall upon them. Nor would the banks that are the lenders of money be the losers, for nearly all the money lent by them belongs to their depositors; banks would therefore in a large measure be able to protect their stock-holders by keeping their reserve money in gold.
A glance at the weekly statements of the National Banks of the City of New York will show that the gold held in reserve by them is really in excess of their total capital.