CHAPTER III.
EXISTING MONETARY SYSTEMS.
Various substances have been used as money in the past. The "survival of the fittest" has, however, eliminated all but three (omitting fractional coins), and these are used, singly or in combination, at present in all the civilized nations of the world. These three are gold, silver, and paper. Gold and silver are generally used in the form of coins of definite weight and fineness. Paper money is a promissory note issued by the government, or by authorized banks, promising to pay the bearer, on demand, the amount of coin specified on its face.
Where this promise is kept, and coin is paid on demand, the paper is said to be convertible. Where, for any reason, the promise is not kept, and the amount of coin specified will not be given on demand, the paper is called inconvertible or irredeemable.
As the coins which are used, and which are promised to be given in exchange for paper, may be either of gold or silver, or both, the system is said to be a gold standard or a silver standard, according to which one is used, or a bi-metallic standard if both are used under certain conditions. At present, as will be explained in considering that system, there is no country that is really using a bi-metallic standard.
Where the paper money is inconvertible, the coin on which it is based does not circulate with it (for reasons which will appear later), and such a system must be regarded as distinct from the others, no matter whether the basis be gold or silver. Three systems are therefore in use,—the gold standard, the silver standard, and the inconvertible paper. The characteristics of each of these will be considered separately, but, taken as a whole, some facts should first be noted.
Money in all countries is at present essentially a creature of the law. Not only does the government fix the weight and fineness of the coins, but it assumes the right to make the coins, and in some cases to limit the coinage to a certain amount, or to stop coining altogether. It also, in most cases, issues the notes or paper money, and where it does not it controls the issue by laws regulating the banks that do issue them. It controls therefore in all cases the volume of money issued, both by specifying that it shall be made of certain metals which are scarce, and perhaps limiting the coinage of those, and by limiting the amount of paper money that is generally used, to a greater or less extent, in all systems.
There is no international coin or money. Gold and silver when shipped from one country to another go as so much bullion; their value is practically the same whether coined or uncoined. As Walter Bagehot observes, in his work "Lombard Street":—
"Within a country the action of a government can settle the quantity, and therefore the value, of its currency; but outside of its own country no government can do so. Bullion is the cash of international trade; paper currencies are of no use there, and coins pass only as they contain more or less bullion."
Not only is the value of money as a whole, in any country, governed by the law of supply and demand; but each of these three kinds of money, and each of the substances of which they are made, is individually subject to the same great law.
The Gold Standard.
The wide and long-continued use of gold as money has led to a popular impression, current even among well-informed men, that somehow, or in some mysterious way, gold has stability of value and is independent of those fluctuations which they recognize in the values of all other substances. That this is wholly erroneous is admitted by every writer on finance, and quotations are hardly necessary to support the statement that gold varies in value in the same way and is subject to the same law of supply and demand which regulates all other values.
Along with this conception of stability in the value of gold, has grown up a very natural belief that where paper or silver circulated concurrently with gold, so long as they were mutually convertible, gold was the medium which regulated the value of all; and that no matter what the quantities of the others might be, they did not affect the value of the gold or of the money as a whole. This is another popular misconception.
In one sense the gold regulates the value of the money, but only to the extent that it limits, under the existing laws, the volume of the whole by its scarcity. In another and wider sense the value of the gold is itself fixed and controlled by the value of the money in its entirety. The use of gold for money is so enormously greater than its uses for all other purposes, that its value as money fixes its value as a whole, since its money use is by far the largest factor affecting the demand for it.
The demand for money is generally an indiscriminate demand, satisfied with paper money or silver as well as with gold where they circulate together. Hence, every issue of paper or increased coinage of silver in any such country, demand remaining the same, lowers the value of the money as a whole by increasing the supply, and since the value of gold is determined by its value as money, that is lowered with the rest.
The value of gold varies, therefore, with that of the money as a whole of which it forms a part.
In gold standard countries the coinage of gold is unlimited, and—not to speak of the small mint charges—generally free. Under these conditions the value of gold coin and gold bullion are the same, weight for weight. The silver coin, which is used to some extent in gold standard countries, does not have either free or unlimited coinage at present. Its bullion value is less than its nominal and actual value, which is maintained at a par with that of gold by the limitation of its issue,—just as in the case of paper money,—and by the fact that within the country of issue it does the same work as the gold, just as paper money does. Men will give just as much of any commodity for the silver coin or the paper as they will for the gold, because, their utility being the same, their exchange value must also be the same.
With these facts explained, we can proceed to consider a very important law affecting the value of money and its distribution among different nations.
Gresham's Law.
It was noticed and stated many years ago by Sir Thomas Gresham that full-weight coins would not continue to circulate with clipped, worn, or light-weight ones, and that the latter would drive the former out of the country. This statement has been extended and enlarged into what is known as Gresham's Law, which, as generally formulated, is that a poorer money will drive a better one out of circulation. In this form it is commonly accepted as true, but is often misunderstood and misapplied.
It is, in fact, but a particular case of the more general law that any commodity will seek the market where it is worth the most, where it will exchange for the most of other commodities.
The full-weight coins would exchange for no more in the country of issue than would the light-weight ones (within certain limits), but when it was desired to ship coins to other countries where they were valued by weight and not by tale, the full-weight ones were more valuable, and were, therefore, selected for such shipment, leaving the poorer ones to circulate at home.
The larger application of Gresham's law to money as a whole is as follows:—
The resultants of all the various forces acting on money value through supply and demand evidently must be different in different countries, and thereby may cause the money of one country to rise in value while that of another falls. When this occurs between two countries using the same metal as a part of their money,—that is, either between two gold-standard or two silver-standard countries, Gresham's law immediately operates to bring the two moneys again to a uniform value.
Since the gold varies in value with the money as a whole, it will, under such circumstances, be worth more in the country having the higher money value than in the other, and a flow of gold will set in from the country where it is worth the least to the one where it has the greater value. This flow of gold decreases the amount of money in the country from which it goes, and increases the amount in the other, thus raising the value of money in the one, and lowering it in the other, until they are again on an equality within the limits of the cost of shipping gold from one to the other.
The operation of this law, therefore, tends to make the value of money uniform, and average prices the same in all countries using the same standard.
The gold which thus flows from one country to another does not go, of course, without a return of other commodities in exchange. The operation will be clearer if stated in its converse form.
Since prices and money values are complementary terms, one rising as the other falls, and vice versa, a rise in the value of money means lower prices, on the average, in that country. People will buy in the cheapest market, and if prices are lower in one country than in others, they will buy in that country in preference to others; the balance of trade, as it is called, will be in their favour; gold will be sent in payment for the commodities bought: it will increase the money supply and raise prices there, and at the same time it will lower those of the country from which it goes until prices in the two are again on a level.
It must not be supposed, however, as it evidently has been by some, that the operation of this law in regulating prices and making them uniform as between different countries at the same time, has any effect whatever on prices and money values as between two different periods.
An increase or decrease of money value may go on simultaneously in all countries, and no flow of gold be caused; the value of gold would continue to be the same in all countries, yet might be much higher or lower at the end than at the beginning of the period.
To illustrate: the different countries may be compared to several tanks connected at the bottom by pipes, and containing water, the level of which, representing money value, is continually fluctuating with the amounts of water added to or drawn from each of the tanks. If the water rises higher in one tank than in others, a flow will set in from the higher to the lower until all are again on a level; but if the cause of the rise in the one tank continues, or if the cause extends to all the other tanks, the level in all the tanks may be greatly changed.
So the continued preponderance of the forces in one direction, operating either to decrease or increase money value in one country alone or in all together, will raise or lower that value in all the countries which are connected by the use of the common money metal, under a free coinage system. Thus the large discoveries of gold in one country will by this means gradually spread themselves over all gold-using countries. The country where the gold is discovered, is, of course, the richer by the amount discovered, and is none the poorer because of its flow to other countries, for such country receives the same value of other commodities in exchange for the gold.
Through the medium of gold, therefore, general prices are maintained at the same level approximately in all gold-standard countries.
The great defect of the system is, that, because of this mutual bond, no one country can adjust the volume of its money to the demand so as to maintain prices constant. Only by an agreement faithfully carried out by all, or by most of the leading countries, would this be possible. There is no such agreement now existing, nor any likelihood of the leading nations agreeing to do this, and the value of money in all gold-standard countries is the resultant of all the various forces that act upon its supply and demand, with no intelligent attempt to control either; it is, in fact, the foot-ball of politics, selfish interests, and chance.
Neither the annual supply of gold nor the total amount used as money is the principal factor in determining its value. It cannot be doubted that if all the nations now using the gold system were to abandon it, the value of the metal would be but a fraction of its present value, and on the other hand, if all the nations now using silver and paper, in whole or in part, as money, were to change to the gold standard, its value would be increased to many fold what it is now. The legislation, therefore, of all countries is the great factor determining coin value, not alone in the country legislating, but also in all other countries using gold and silver as a basis for their system. The factor next in importance is the extent to which credit is used in the place of money. The total production of gold is so small beyond the amount used in the arts and sciences that it would require a great change in its value, and years of time, for any increased production due to higher value to affect materially the quantity of gold coin in use. The production of gold depends more on chance, and less on its labour cost, than the production of almost any other commodity; and though it would be, and is, stimulated somewhat by a higher value, there is no such certainty of its increased production being commensurate with the increased labour expended on it as there is in the case of most commodities.
The Silver Standard.
When the money system of a country is based on silver, and that metal has free and unlimited coinage in the mints, as gold has in countries using the gold standard, the same laws apply as in the case of gold. Exactly the same forces operate to affect the volume and value of the money except that the production of silver, its use by other nations, etc., are the factors, instead of gold supply and use. The coin and the bullion are equal in value, weight for weight, and Gresham's law applies the same as it does to gold to regulate the flow of silver from one silver-standard country to another.
In some silver-standard countries, however, the coinage is not free and unlimited, the government purchasing the silver at its market rate and coining it in such quantities as it sees fit. In this case the bullion value does not coincide with the coinage value: the latter depends entirely on the amount that is coined, relative to the demand for money, and is independent of the bullion value of the silver. The coin will be of higher value than the bullion, and will not be exported to other countries, as the bullion is equally valuable for that purpose and less costly. It is evident that the value of money is just as dependent on chance,—that is, on a variety of causes too intricate and uncertain to be controlled,—in the case of the silver standard with free coinage as in the case of gold; but as some of the forces acting on silver are different from those acting on gold, one standard may be much more stable than the other.
Bi-metallism.
The theory of bi-metallism—a money founded upon both gold and silver coin—is based upon the fact, before stated, that the value of each of these metals is really determined by the value of the money, as a whole, of which they form a part—their use for money purposes being so much greater than their other uses as to be the determining factor. If all nations, or a sufficient number of the leading ones, agree to coin both gold and silver in any amounts presented, and at the same ratio, the values of each relative to the other will be fixed at that ratio. No other market could be found for either metal at a higher ratio. The plan requires, of necessity, free coinage of both metals by several nations and in the same ratio. If the ratio differs in different countries, or if there are too few countries that are party to the agreement, the operation of Gresham's law will separate the two metals, and cause each to seek the country where it is worth the most as measured in the other. The supply of each metal is independent of the other, and their values, therefore, can only be kept the same by a control and adjustment of the demand thereto.
Where silver and gold are both coined freely at a fixed ratio, if the supply of gold decreases, a portion of the demand for that metal—it being more valuable than silver—would be immediately transferred to silver, raising the latter and lowering the former value, and thus keeping their values at the same ratio. This, however, would not necessarily keep the value of the money constant as regards general commodities, and prices would still fluctuate. The variations would be spread over both metals, and, as shown by Jevons and others, would probably be more frequent, though less extensive.
Theoretically, therefore, a bi-metallic standard is little if at all better than a single standard. Whether it would be better or worse than gold or than silver would depend altogether on the conditions at any particular time, and it is therefore as much the victim of chance as either of the metals alone, so far as providing a money of stable value is concerned.
As already stated, no nation is now using a bi-metallic standard. Countries like France and the United States, which nominally have the double standard, have long since restricted or stopped the coinage of silver and are really on a gold basis, their silver coins being at par with gold and worth much more than their bullion value.
Prior to about the year 1873 these nations, as well as several others, coined silver as well as gold in any amount presented, and all nations using coin were practically on a bi-metallic basis, the ratio between gold and silver values having been maintained at 15½ to 1 (the coinage ratio in Europe) for many years within narrow limits. The United States had adopted the ratio of 15.988 to 1 long before this time, and as a result the silver had all left this country in obedience to Gresham's law, as it was worth more relative to gold in Europe.
About the date above mentioned there was a great change in the coinage laws of several countries. Germany changed to a gold basis, selling a large stock of silver; France and other nations also practically changed to a gold basis by stopping the coinage of silver. As a result of this the relative values of silver and gold changed considerably. The demand for gold increased, and the demand for silver decreased. Silver fell gradually in value relative to gold, and this effect was further affected by large discoveries and greater production of silver.
The United States also stopped the free coinage of silver at about the same time as the other countries, but this had no immediate effect on the relative values of the two metals, for this country was at that time, and for several years afterward, using an inconvertible paper money—no coin of either kind being in circulation. It had, however, a large subsequent effect; for when the United States returned to a specie basis, if the coinage of silver had not been stopped, silver would have been coined in preference to gold, being the cheaper, and this country would have been on a silver rather than on a gold basis.
Paper Money.
Paper money differs radically from coin in one respect. Its circulation is confined to the country of issue. It may indeed be confined to a small part of such country—as in the case of some of the old bank-notes—when the solvency of the issuing power is unknown or uncertain. This, however, may be regarded as an abnormal case.
When issued by the Government or by authorized banks whose solvency is unquestioned, it is accepted as freely as coin, and if not so accepted, cannot be considered good money. We shall consider only the case where it is generally accepted.
Being usually a promise to pay coin, on demand, it can, in one sense, be considered honest only when the promise is kept. If the issues are excessive,—that is, if by increasing the volume of the money as a whole its value is lowered so that the coin is worth more in some other country than as a part of that money system,—the coin will leave the country, as has been explained in regard to gold. The paper simply acts as so much gold or silver would act if added to the currency, forcing out a certain amount of coin. Where both metals are used with the paper, the one to go would depend on which was worth the most, relatively, in other countries. If the issues of paper are continued long enough, all the coin will leave the country, and, if still continued, the value of the money will sink below that of the coin, as the paper will not leave the country, but will accumulate, lowering the value with each new issue. The system will then have changed to an inconvertible paper system, the value of the money being no longer dependent on the value of the coin on which it is based, and no longer affected by changes of money value in other countries, but determined wholly by the amount issued, relative to the demands of business in the country of issue.
If the issues continue in excess of demand, the value will lower, even to the point of utter worthlessness; but if properly controlled and limited, the value of the money can be maintained at any point desired far more readily and easily than in the case of a convertible paper and coin system, since many variable forces are excluded when the convertibility is dropped.
The amount of paper money that can be kept at par with coin under a convertible system bears no fixed relation to the amount of the coin. By a proper control of the volume of paper issues their value can be kept equal to coin value, with almost no coin in circulation, or in reserve. An excessive issue of the paper will cause coin to be exported, but this export may be checked, and an import produced by withdrawing some of the paper.
Some control, therefore, may be exercised over the value of money under a convertible system, to make such value constant, but this is evidently limited. If the value of the money is falling, the decline can be checked, and its value made to rise, by withdrawing some of the paper issues; but this will cause an importation of coin, partly offsetting the reduction and checking such rise, and when all the paper has been withdrawn, the power of control by this method ceases. If the money value is rising, an increase of paper issues will stop such rise, but it will cause the exportation of coin; and when all the coin has been exported, the money will cease to be convertible, and the system will have changed to an inconvertible one,—the money still possessing the same qualifications as a measure of value that it possessed in the former case. The only difference is, that in the convertible system the money value is partly determined by the natural causes affecting the supply of coin, partly by the laws and conditions of business in foreign countries, and partly by the legislation at home, restricting the coinage or the issue of paper; while in the inconvertible system it is determined wholly by the control of the issues relative to the demand for money.
This difference may constitute either a merit or a defect, according as the control is intelligent and honest or otherwise.
The disastrous consequences that have resulted at various times from the use of inconvertible paper money, have, in every case, been due to a lack of proper control and to excessive issues, caused generally by the want of a reliable gauge by which to determine the amount that should be issued, and by a misunderstanding of the principles involved.
While paper money, though a promise to pay coin, cannot, in one sense, be called honest, unless the promise is kept; in a larger sense the test of its honesty is its invariability of value.
John Stuart Mill says of inconvertible paper money:—
"In the case supposed, the functions of money are performed by a thing which derives its power of performing them solely from convention; but convention is quite sufficient to confer the power; since nothing more is needful to make a person accept anything as money, and even at any arbitrary value, than the persuasion that it will be taken from them on the same terms by others. The only question is, what determines the value of such a currency; since it cannot be, as in the case of gold and silver (or paper exchangeable for them at pleasure), the cost of production. We have seen, however, that even in the case of metallic currency, the immediate agency in determining its value is its quantity. If the quantity, instead of depending on the ordinary mercantile motives of profit and loss, could be arbitrarily fixed by authority, the value would depend on the fiat of that authority, not on the cost of production.
"The quantity of a paper currency not convertible into the metals at the option of the holder can be arbitrarily fixed; especially if the issuer is the sovereign power of the State. The value, therefore, of such a currency is entirely arbitrary."
Prof. F. A. Walker, in his "Money, Trade, and Industry," observes, p. 210:—
"After looking at this subject from every side, I am at a loss to conceive of a single argument which can be advanced to support the assertion of the economists, that paper money cannot perform this function of measuring values, so-called. On the contrary, it appears to me clear beyond a doubt, that just so long and just so far as paper money obtains and retains currency as the popular medium of exchange, so far and so long it does and must act as the value denominator or common denominator in exchange. And I see no reason to believe that in this single respect, hard money, so-called, possesses any advantage over issues of any other form or substance which secure the degree of general acceptance which is necessary to constitute them money."
He says, further, on p. 214:—
"Such money, so long as its popular acceptance remains undiminished, performs the office of a standard of deferred payments well or ill, according as its amount is regulated."
Paper money is a real economy over gold and silver. Its use substitutes for those coins, that involve much labour in their production, a money of slight labour cost, which, under proper control, performs the functions of money even better than the coin.
If, in any country possessed of the gold basis system, the gold product was wholly deposited in vaults, and paper certificates issued therefor to the amount of the deposits, such certificates, if in proper form and denominations, would answer all the requirements of a circulating medium even better than the gold, and their value would be exactly the same as that of the gold they replaced. By this method,—in a measure, the English system,—the country saves the wear and tear, besides considerable loss of gold, and is better served. The gold thus deposited, except a comparatively small amount shipped abroad at times, would never be called for: its sole purpose would be to regulate by its scarcity the amount of the paper money issued; beyond this purpose, it might as well be iron or lead as gold, or might as well have remained in the mines, from which it was dug at the expense of so much labour, as to be in the vaults.
It would be difficult to conceive of a method of controlling money volume and value more expensive, more clumsy, and more inefficient than this; for, it is to be noted, the control in no way adjusts the volume of money to the demand, so as to maintain a stable value, but merely adjusts the value to that ruling in other countries,—a matter, as we shall see later, of no importance whatever.
CHAPTER IV.
STABILITY OF GOLD AND SILVER VALUES.
Gold-Standard Prices.
Having considered theoretically the limitations and possible merits and defects of the money systems now in use, we shall next consider in how far the money under such systems conforms in practice to the chief requirement,—stability of value.
Economic writers do not claim that either gold or silver is, or has been, of invariable value; but many of them do claim that gold is more nearly invariable than any other commodity, and that it is sufficiently so for money purposes, the changes in value being slight and covering long periods of time, so that from year to year they are almost imperceptible. Other writers claim that silver has been, of recent years at least, more stable in value than gold, and is therefore a better measure of value.
The merits of these claims can be tested, in the same way that the stability of value of any commodity can be tested, by a comparison of the average purchasing power of each metal at different times.
Prof. F. A. Walker, in the work already cited, observes, regarding money value under the gold standard as tested by average prices:—
"Not to speak of the enhancement, many fold, of the value of money through the Silver Famine of the Middle Ages, or of the sudden and extensive decline which has been referred to as taking place between 1570 and 1640, it is estimated by Professor Jevons that the value of gold fell 46 per cent. between 1789 and 1809, that from 1809 to 1849 it rose 145 per cent., while between 1849 and 1874 it fell again at least 20 per cent."
Coming down to more recent times, we have more full and accurate data, and there have been several careful compilations and averages of prices made in different countries. The report of the Finance Committee of the United States Senate, 52d Congress, on "Wholesale Prices, Wages, and Transportation," known as the "Aldrich Report," is doubtless the most accurate and complete examination of prices in this country from 1840 to 1892 that has ever been made. This report also gives for comparison the tables of Soetbeer and Sauerbeck (two of the most distinguished European statisticians), and the table of the Economist (London) as to foreign prices, all reduced to the same basis, and to United States money units in gold.
In order to facilitate comparison of these data, the tables have been platted as diagrams in Plate 1. All the tables were prepared by taking the prices of a selected list of commodities for the year 1860 as 100, and calculating the variations in the price of each commodity from the price of that year as a percentage of rise or fall. The average of these percentages for each year represents, therefore, average prices for that year, as compared with 1860, and it is these averages which are platted in the diagrams.
The list of commodities selected by the Senate Committee embraces 223 articles for the years subsequent to 1860. Prior to that time the number was less, varying from 85 to 223, according as data were to be had.
Dr. Soetbeer's table shows prices in the port of Hamburg, Germany, of 100 commodities, mostly raw materials, joined with the export prices of 14 commodities (manufactures) in England, from 1851 to 1891.
Mr. Sauerbeck's table shows English prices of 56 commodities from 1846 to 1891.
The Economist table also shows English prices of twenty-two commodities from 1860 to 1892.
The discrepancies between these different authorities, as shown by the variations in the lines of the four diagrams, call for a few words of explanation.
It would naturally be expected that some differences in average prices would exist between different countries, and part of the discrepancies may be accounted for in this way, since there are included in all the tables, among other commodities, such as wood and coal, of which the prices might vary considerably in different countries independently of one another.
Several changes in the tariff in this country during the last fifty years would account for some discrepancies between United States prices and the others. Furthermore, the method by which these tables were in the main prepared, that of taking simple averages of the percentage of rise or fall in price, thus giving to each commodity the same weight in the result, regardless of its importance in commerce, is open to serious objection, and doubtless accounts for many of the discrepancies that exist. For example, the great rise in prices during the period of our civil war, as shown in the Economist and the United States tables, above those shown in the other two tables, is doubtless due to the fact that in the Economist table, four out of the twenty-two commodities in the list are either raw cotton or cotton manufactures, and the great rise in price of cotton during the war (a rise of from 300 to 400 per cent.) is given an undue importance in the result. The same cause may affect the United States table, to some extent, but a more potent factor in this table is the circumstance that this country, during the period, was using an inconvertible paper money in which all prices were expressed, while gold was a commodity subject to speculation, and the price of which was much affected thereby; and, in reducing currency prices to gold prices, for this table a somewhat abnormal result is produced.
The Economist list, it must be said, contains too few commodities to be a reliable index of all.
The United States list is sufficiently large, but the articles selected may be open to some criticism.
The lists of Mr. Sauerbeck and Dr. Soetbeer are preferable, but all are open to the objection, above noted, of not giving a weight to each commodity in proportion to its importance, and none of them can therefore be regarded as anything but approximations to the truth. They embrace, however, the best information on the subject extant.
The United States Committee did, in fact, endeavour to balance their own list in accordance with the relative importance of the articles in another table, but the result is not wholly satisfactory, as the weighting of the averages was done by groups of articles instead of individually for each. It represents, however, probably the most accurate information as to the purchasing power of gold in this country from 1840 to 1892 that can be obtained, and as such has been platted in Plate 2, in a reverse form; that is, assuming that the 223 articles of the list, weighted according to their importance, fairly represent all commodities, and that therefore their value as a whole is constant (since the values of all commodities cannot rise or fall simultaneously). The diagram shows the relative values of gold for the different years as a percentage on the value of 1860 taken at 100. In other words, it shows the relative average purchasing power of gold in this country in the different years.
With these explanations of the diagrams, and the limitations of the tables from which they were platted, we can proceed to consider their points of resemblance and what they teach.
It is evident from all of them that a great decline in average prices has been going on, almost continuously, since 1873, in the various commercial countries. This is a fact conceded by all students of prices.
What is equally apparent, however, but does not seem to be so generally appreciated, is the violent fluctuation in prices, or in the value of gold, from one year to another, amounting in many instances to from 5 to 10 per cent. in a single year, and, during the war, to much more. Doubtless if the tables had shown the fluctuation of prices by months or days, instead of the averages for each year, a much greater variation in the value of gold would have been apparent at times, and within a shorter period than a year. Furthermore, the prices of staple commodities (and most of the commodities in all the tables are staples), while representing correctly the character of the changes in price of all commodities, would naturally not vary as much as the prices of many more speculative articles of commerce. It is probable, therefore, that gold has varied in value to a greater extent, and within shorter periods, than is shown by the diagrams.
It would be impossible to trace all the various causes that have produced these changes in money value, but a few of the more prominent ones may be indicated as showing their great variety and force.
From 1840 to 1849 a great decline in prices is noticeable, similar to the decline that we know has been going on in the last twenty years. This is doubtless due in both cases mainly to increasing demand for money, caused by growing population and expanding commerce, and which the supply of gold and silver or substitutes therefor did not keep pace with. From 1850 to 1857 prices generally rose, owing to the increased gold production in Australia and California, aided doubtless by the increased use of credit which rising prices always stimulates. The collapse of this credit in the panic of 1857 sent prices down again. The slow recovery from this condition was greatly enhanced by the breaking out of the Civil War, during which thousands of men were destroying instead of producing, thus raising the prices of nearly all commodities by decreasing the supply and increasing the demand relative to gold, while meantime the demand for gold was lessened by the use of paper money in this country. The disbanding of the armies at the close of the war, and the return of labour to productive enterprises, lowered prices rapidly during 1867, 1868, and 1869. From this depression they recovered almost as rapidly in the era of development from 1869 to 1872, the large production of silver from the Nevada and other discoveries during that period assisting greatly in this recovery, and the usual extension of credit at such times also contributing. This credit collapsed in the panic of 1873, and the demonetization of silver by several European nations about the same time prevented any increased production of silver from affecting the decline which then set in, and which has with one or two reactions been continuous ever since.
In the light of the facts, shown by these diagrams, any claim for even approximate stability of value for gold, or for the money as a whole on the gold basis, under the systems now in use, is preposterous. Moreover, the change has been, of late years, of the worst kind,—an increase of money value. If it were steady, its effects could be calculated and discounted to some extent, but caused, as it is, by a variety of forces of varying strengths, the increase is at some times wholly nullified, or even turned to a decrease, by extensions of credit, while again it is doubled in effect by the withdrawal of such credit.
The reason for this great decline in prices, or the increased value of gold, is not far to seek when we consider the relative strengths of the forces acting on gold value. Population, wealth, and diversity of occupations have all increased greatly over the whole civilized world, requiring a much greater amount of money to do the business of the world. There has been, to be sure, as an offset to this, a considerable increase of banking facilities and some greater use of credit paper in its various forms; but all these were in large use prior to 1873, and their increase can hardly have been so great as to meet the demands of growing commerce. Furthermore, of the other forces tending to raise the value of gold, the annual product of that metal has not increased materially, though the demand for it for other than money purposes has increased largely, leaving a less increment to neutralize the waste and to increase the supply of it. And lastly, many countries, as we have seen, about the year 1873 so changed their monetary laws as to use a much greater amount of gold, and a less amount of silver or paper. The United States alone, it is estimated, now uses about $600,000,000 of gold coin, while in 1873 it used practically none.
The effects of this increase in the value of money have been—as the effects of falling prices always are—detrimental and disastrous in all gold-standard countries, to an extent that cannot be measured. Offset at times by increased use of credit, enterprise and industry have been able to rise to a success that an honest money would make their normal condition, only to be dashed down again by the collapse of credit with nothing to take its place.
Silver-Standard Prices.
There is a quite prevalent belief that the value of silver has fallen greatly since 1872. This is a natural sequence to the belief that gold has been stable in value, as the gold price of silver has declined from $1.32 per ounce in 1872, to $0.82 per ounce in 1892 (and since then the decline has been much more). This fall of about 38 per cent. must be deducted from the rise of from 24 to 41 per cent. (according to the different authorities) in the value of gold, in order to show the true change in the value or purchasing power of silver. It is evident, therefore, that the value of silver has been much more nearly constant than that of gold.
This is confirmed by the statement of Mr. David A. Wells, in his work on "Recent Economic Changes," p. 236. There, Mr. Wells remarks:—
"In exclusively silver-using countries, like India and Mexico, the decline in the value of silver has not appreciably affected its purchasing power in respect to all domestic products and services; but the silver of such countries will not exchange for the same amount of gold as formerly, and it might be supposed that, owing to this change in the relative value of the two metals, the silver of India, Mexico, and other like countries would purchase correspondingly less of the commodities of foreign countries which are produced and sold on a gold basis. But the people of such countries have not thus far been sensible of any losses to themselves thereby accruing, for the reason that the gold prices of such foreign commodities as they are in the habit of buying have declined in a greater ratio since 1873 than has the silver which constitutes their standard of prices."
He also says, in an article in The Forum for October, 1893: "Testimony was given to the recent British Commission on Indian currency, that within the last twenty years half of the silver prices of commodities in India have risen and the other half fallen."
In Plate 2, the dotted line shows the variations in the value of silver since 1872. This diagram is platted from calculations of the percentage of decline in the gold price of silver, taking the price of 1872 as 100 (this was also practically its price from 1840 to 1872, since the ratio of 15½ of silver to 1 of gold was maintained within narrow limits during that time), and deducting these percentages of decline from the percentage of increase in gold value.
In considering the relative constancy in the value of gold and silver, the lines representing each should be compared with the level price line of these metals in 1872. It will be noted that while silver has kept closer to this line than has gold, and on the average has varied but little from it, yet the fluctuations in the value of silver from year to year are quite as marked as in the case of gold.
It will also be noticed that prior to 1872, under a bi-metallic standard, both metals, while maintaining a constant relation to each other, fluctuated in value quite as extensively as either alone has done since.
The facts here shown as to the experience of this and other countries for the past fifty years, bear out the theoretical conclusions before stated, that the value of money, under any of the systems that have been used, is subject to violent fluctuations from year to year, due to a great variety of causes which are entirely beyond control, and that neither silver nor gold singly, nor both combined, has ever proved a reliable standard of value.
CHAPTER V.
CRITICISM OF SOME GOLD-STANDARD
ARGUMENTS.
Before proceeding with the main line of this argument, we will digress to notice some of the arguments put forth in support of the stability of the value of gold by those who cannot but recognize the great fall in general prices.
While such writers do not deny the truth of the fundamental principles we have already considered, they either forget or ignore them.
Notable among such writers is Mr. David A. Wells, and as his views may be taken as representative of many others, some statements from his article in The Forum for October, 1893, previously mentioned, are here selected for criticism.
In the beginning of that article, as well as in his work, "Recent Economic Changes," he clearly recognizes and states that there has been a great and universal decline in the prices of a variety of commodities within the last thirty years. He claims, however, that such a general fall of prices does not prove that the value of gold has increased, for the reason that, as he endeavours to show, such fall in prices was caused by lowered labour cost of production, due to improved machinery, better methods, greater division of labour, etc. All these facts may be freely admitted; the error lies in supposing that it makes any difference what the cause is. Since value is a relation, it will be altered by a change in either of the terms between which that relation exists, and it is immaterial whether a day's labour produces more commodities in general, and the same amount of gold, or a less amount of gold, and the same amount of commodities in general, as compared with some former period. The value of gold, other things being the same, is greater in both cases. The fact remains that if gold exchanges for more commodities in general than formerly, its value has risen. It is not clear what Mr. Wells' conception of value is, on which his arguments are based. He, however, seems to regard the labour that a commodity will purchase as the measure of its value, since he says, in the magazine article: "And then, in respect to the one thing that is everywhere purchased and sold for money to a greater extent than any other, namely labour, there can be no question that its price measured in gold has increased in a marked degree everywhere in the civilized world during the last quarter of a century."
"Measured by the price of labour, therefore, gold has unquestionably depreciated; and can anybody suggest a better measure for testing the issue?"
The fallacy of using labour in any form as a test of value was pointed out in the chapter on value. That the labour a commodity will purchase is not in any way a standard of value, as between two different periods, has been shown by almost every economist from Ricardo down to the present time.
The above quotations, in connection with the following from the same article, bring to light an important phase of the subject, which it may be well to make clear. Mr. Wells remarks:—
"A decline in prices, by reason of an impairment of the ability of the people of any country to purchase and consume, through poverty or pestilence or by reason of the misapplication of labour and capital, i.e. waste, ... is certainly an evil. But a decline in prices caused by greater economy and effectiveness in manufacture and greater skill and economy in distribution, in place of being a calamity, is a blessing and a benefit to all mankind."
With growing knowledge, and the advancement of the arts and sciences, there is a continual improvement in methods of production and distribution, enabling the same amount of labour to produce and distribute to consumers a far greater amount of commodities in general than it formerly could. This has been conclusively shown in detail by a mass of statistics in Mr. Wells' book. The question arises, to whom should this increased product properly belong?
For the purpose of this inquiry the community may be considered as divided into three separate classes, according to the source from which their principal income is derived; viz.—
(1) Labourers,—including all whose income is principally derived from their work, of hand or brain, whether as wages, salaries, or products directly created.
(2) Employers of labour,—including all whose income is mainly derived from investments of capital directly in productive enterprises in the widest sense of the term,—those who take the risks of business incident to the doing of the work of the community.
(3) Money lenders,—those whose income is derived from interest on loans; who, not wishing to take the risks and cares of active business, prefer to loan their capital to others who will do so, accepting as their share of the profits a definite amount as interest.
The incomes of many people are derived, of course, from all three of these sources, but they may be considered as belonging to the class determined by their greatest revenue.
It is evident that labourers should have a share of the increased product that greater skill, improved methods, machinery, etc., create; since labour is the direct cause of such increase, and not only the greater skill but the improved methods are due to labour.
Equally evident is it that the capitalist who has taken the risks of business and whose wealth and enterprise have contributed to the results, should also share in the increased product.
But all considerations of justice and equity forbid that those who, declining to take any risk themselves, prefer to loan their capital to others at a fixed compensation, should receive any share of the increased product which labourers and employers may succeed in creating, beyond such fixed compensation. Justice is satisfied when to them is returned the value they loaned with the interest agreed upon for its use.
It must not be forgotten that what is really loaned is capital,—commodities in general,—not money; the money is only a medium for effecting the transfer, and a measure of the capital transferred. What should be returned, therefore, in repayment of a loan is the same amount of commodities in general that was borrowed,—the same value.
It is not meant that bond-holders and money-lenders should be entitled to no share in the generally bettered condition of mankind due to lowered labour cost of producing commodities. They should, and in the long run would, receive their full share, through the higher rate of interest that increased general profits would bring if money value were constant, and by this means would obtain a just share, determined by open competition and not an unjust share, determined by the insidious device of a varying measure. It is meant, however, that the money-lender is entitled to no share in any increased productiveness of labour during the lifetime of his loan, beyond the interest stated. He gets his share of such increased productiveness through the higher interest he will subsequently receive in re-loaning his capital.
If prices of commodities have declined while wages have increased, as Mr. Wells claims, it shows that the labourer, on the whole, has received some share of the increased production, since his wages will buy more of commodities in general than formerly. Whether the employer of labour has also received a share is more difficult to determine; but it is absolutely certain, if prices have fallen, that the money-lender, who is entitled to no share at all, aside from interest, has also received a share, and a very large one in many cases; since the money returned to him in discharge of a debt will purchase a much larger amount of commodities in general than it would when it was loaned; and this share has evidently been drawn from what should have gone to one or both of the other classes, and they are wronged to that extent.
While the labourer may, or may not, have received the share to which he was entitled during the last twenty years, it seems highly probable, from Mr. Wells' statistics and arguments, that it is the employer of labour—who as a rule is the borrower—who has been injured most by the fall of prices.
One of the great aims and endeavours of mankind is to produce the largest amount of commodities possible, with the least labour,—or to lower the labour cost of commodities. It is this lowered labour cost, which is "a blessing and benefit to all mankind," not lowered prices. The two are not the same, nor have they any real connection. Lowered labour cost depends solely on the improvement in skill, methods, machinery, etc., which will go on as well with prices constant on the average, as with falling prices,—in fact, even better,—and the product will then be distributed honestly; while with falling prices the distribution is dishonest.
It is important to keep clearly in mind the distinction between capital and money. That Mr. Wells has not always done so, the following quotation will show:—
"Nobody, furthermore, has ever yet risen to explain the motive which has impelled the sellers of merchandise all over the world, during the last thirty years, to take lower prices for their goods in the face of an unexampled abundance of capital and low rate of interest, except upon the issue of the struggle between supply and demand."
Capital is accumulated wealth devoted to the production of more wealth; money is merely a medium for the exchange and transfer of wealth: they are not synonymous terms. An abundance of capital may exist with a small amount of money (relative to the demand) and consequent low prices, or with a large amount of money and high prices: they have no connection.
The rate of interest, also, has nothing to do with the question. Interest is determined by the amount of capital seeking investment in loans, relative to the demand, and in a time of relative contraction of the volume of money, and consequent falling prices, will, as a rule, be low, since there is less inducement for men to borrow capital to engage in business, and more men wishing to lend. The risks of business are much increased at such a time, and the profits much lessened, and as the rate of interest is determined by the profits of business in general, it will be low also. Mr. Wells, indeed, has recognized this fact elsewhere in his writings, but has evidently forgotten it in the above quotation.
The accumulation of money in banks in times of depression indicates not too much money, but a general belief that its value is rising, or a fear that it will rise; testifying, if to anything, to too little money, in fact. Men do not hold a thing that brings no income unless they expect to profit by its rise.
As to the main point of the above quotation, certainly men accept lower prices for merchandise because of the issue between supply and demand, but the supply of money is as much involved in the calculation as the supply of merchandise. Men accept lower prices—that is less gold—for commodities in general, because gold has increased in value. Mr. Wells further says:—
"No one has ever named a single commodity that has notably declined in price within the last thirty years, and satisfactorily proved, or even attempted to prove, that its decline was due to the appreciation of gold."
No one, of course, could prove by the decline in price of a single commodity that money or gold had appreciated; but when a writer admits, as Mr. Wells has done so clearly, that prices in general have fallen, no proof is needed; the statements are but different ways of saying the same thing.
That in order to establish the appreciation of money it is necessary to show that all commodities have fallen in price, or that the price experiences of different commodities had harmonized in their decline, as Mr. Wells implies, is manifestly absurd. Even if average prices were constant, there would be continual fluctuations of individual prices, some rising, others falling, and these continue the same with an increasing money value, so that some prices might not alter at all, or might rise even with a rising money value, but others again would decline in a greater degree than if the money value were constant. If the average purchasing power of money is greater, then its value is greater, whatever be the cause.
So much space has been devoted to a criticism of this article because the opinions expressed in it seem to be fundamental and dangerous errors. Moreover, they are given added weight by the reputation and prominence of the author, while they are more or less representative of the arguments of other defenders of the gold standard.
Either Mr. Wells is mistaken in his conception of value, and of the standard by which it is measured, or Ricardo, John Stuart Mill, and all other authorities on Political Economy are mistaken in supposing that the value of a commodity is its general purchasing power.
CHAPTER VI.
FOREIGN COMMERCE.
It is claimed by many writers that international trade is carried on upon a gold basis, and that it is necessary, therefore, if a country is to maintain and increase such trade, that it should have its money based upon gold, since its "balance of trade" must be paid in gold.
The idea of foreign trade involved in such statements is a relic of the old "mercantile theory" that the great object of any country was to export as much as possible of its products and receive in return the largest possible amount of gold and silver,—to get gold, in fact, at any hazard. This theory was buried, a century ago, under the weight of Adam Smith's arguments, and every economist since then has helped to bury it deeper; but its ghost still stalks and appears now and again in the form of such statements as the above, and in the common expressions "the balance of trade is against the country," or "the balance of trade is in favour of the country," meaning that gold is being exported or imported, and implying that the one is an injury or the other a benefit to the country.
From a mercantile point of view, there is some justification for these expressions, and for the satisfaction felt at a condition of things requiring the import of gold. As before stated, the value of gold is inversely as general prices in gold-standard countries, and the import of gold means a lowering of its value and a general rise of prices,—which, of course, is what merchants like to have happen; and the export of gold means a fall in prices,—which they dread.
Under a monetary system which maintained prices constant, on the average, the export or import of gold would be of no more importance than the export or import of corn or silk.
From an economic standpoint the term balance of trade is a misnomer, and is misleading. Equally misleading and erroneous is the idea that gold or silver is in any way necessary to foreign commerce, or that in consequence of a money being based on one of these metals such trade will be in any way enhanced.
International trade is an exchange of commodities; not, to be sure, a direct barter, but an indirect one. One country exports those commodities which it can produce the cheapest, in exchange for those of other countries that are either not produced at all in the first country, or can be produced only at a greater cost than by import. The immediate force impelling to the export and import of commodities is, in all cases, a difference in their values in the two countries. This is no less true of gold than of other commodities, for gold will never move from one country to another except it be of lower value in the exporting than in the importing country, no matter how much the one may be owing the other. The expressions "balance of trade in favour of," or "against a country," means only that gold is at that time of higher value in one than in another country, by an amount above the cost of shipment, and is being exported or imported because there is a profit in so doing; but this furnishes no criterion whatever of the prosperity of a country. It frequently happens that gold moves for a considerable time from one country to another because of large production of gold in the exporting country. That cannot be considered a bad condition of business or unfortunate for the exporting country, unless the commodities received in exchange are useless, or are wasted. At other times it frequently happens that a country is importing gold, giving in exchange not only other commodities, but promises to pay back the value received, in the shape of bonds and stocks—running in debt, in fact. This may be a good or a bad thing for the country, as for an individual, according as the value received is profitably used or not. It certainly is no sure indication of real prosperity.
The operations of foreign trade create a great number of claims and obligations on the part of citizens of one country against, as well as in favour of, the citizens of all others. These claims consist of drafts, bills of exchange, letters of credit, etc., and are expressed in every kind of money that exists, whether based on gold or silver, or simply inconvertible paper. Through the medium of foreign exchange banks these claims are offset against each other and cancelled. Between two countries having the same monetary standard there exists what is called the par of exchange; that is, the ratio between the weights of gold or silver in their respective units. The actual rate of exchange—that is, the price which will be paid in one money for claims expressed in another—seldom conforms to this nominal par. The bills of exchange, etc., representing claims of the exporters of one country against the importers of another may be regarded as a sort of commodity, and subject to the law of supply and demand. If one country, A., has more claims against another, B., than B. has against A., then the demand will be stronger for those which are fewer, and the price will rise, and vice versa.
The prices of exchange cannot vary from the par of exchange between gold-standard countries much more than the cost of shipment of gold; for if they do, it will become profitable to export or import gold, and this will create new claims balancing the others. The variation of exchange rates within these limits is quite sufficient, however, to cause the actual exchange rate, and not the nominal one, to be reckoned on by those engaged in foreign trade.
There exists, and always has existed, an actual exchange rate between the money units of all countries, or between the claims expressed therein, no matter what the money was based on; although there cannot be a par of exchange except between moneys based on the same metal. These actual rates are continually varying, even between countries like England and Australia, which not only use the same standard, but a common unit, and there is, therefore, no difference in the practical working of exchange between countries having the same standard and those having different ones.
The inference to be drawn from these facts and theories is, that it would make no difference in the foreign trade of any country if it did not possess an ounce of gold or of silver, or whether its money was based on gold or was inconvertible paper; if the country produces commodities that other countries want, and wants some that other countries produce, the commerce will continue.
If the money of either country is fluctuating in value, relative to the other, to any great extent, it may introduce some uncertainty that will hamper and inconvenience trade,—though to a less extent than a variable money would in its own country, as there are means by which such fluctuations can be guarded against; but unless the changes are sudden and violent, no inconvenience will be experienced, as the actual exchange rates are more or less always fluctuating.
In support of these statements, and as showing that they are borne out by practical experience, the following quotations are given from Mr. Wells' "Recent Economic Changes," in reference to trade between a silver and a gold standard country when the relative values of the two metals were changing quite rapidly. He says, p. 239:—
"Mr. Lord, a director of the Manchester (England) Chamber of Commerce, testified before the Commission on the Depression of Trade, in 1886, that 'So far as India was concerned, it is not necessary to run any risk at all from the uncertainties of exchange.' Mr. Blythell (representing the Bombay Chamber of Commerce) testified before the same commission, ... 'There is no difficulty in negotiating any transaction for shipping goods to India and in securing exchange.'"
Mr. Wells says: "Thus from returns officially presented to the British Gold and Silver Commission, 1886, it was established that the trade of Great Britain with India since 1874 had relatively grown faster than with any foreign country 'except the United States and perhaps Holland.'" He also says, of Mexican exchange, p. 241: "The fluctuations in the price of silver since 1873—Mexican exchange having varied in New York in recent years from 114 to 140—would seem, necessarily, to have been a disturbing factor of no little importance in the trade between United States and Mexico; but the official statistics of the trade between the two countries since 1873 (notoriously undervalued) fail to show that any serious interruption has occurred."
During this period, Mexico had a silver standard, while the United States had inconvertible paper for nearly six years of it, and a gold standard for the remaining period.
Mr. Wells further states:—
"In forming any opinion in respect to this problem, it is important to steadily keep in mind the fact that international trade is trade in commodities and not in money; and that the precious metals come in only for the settlement of balances.... The trade between England and India is an exchange of service for service. Its character would not be altered if India should adopt the gold standard to-morrow, or if she should, like Russia, adopt an irredeemable paper currency, or, like China, buy and sell by weight instead of tale.... Unless all the postulates of political economy are false—unless we are entirely mistaken in supposing that men in their individual capacity, and hence in their aggregate capacity as nations, are seeking the most satisfaction with the least labour, we must assume that India, England, and America produce and sell their goods to one another for the most they can get in other goods, regardless of the kind of money that their neighbours use or that they themselves use."
From the time of the Civil War until 1879, this country, though nominally on a gold and silver basis, was actually using a depreciated paper money. No serious inconvenience was experienced in our foreign trade during the greater part of this time; when the currency was most fluctuating, it doubtless did disturb all business, both foreign and domestic, but this was due to its great and sudden changes, and may be regarded as abnormal, and unlikely under a proper system again to occur.
Walter Bagehot, in his work, "A Universal Money," observes:—