§ 1. Objections to a Double Standard.
Though the qualities necessary to fit any commodity for being used as
money are rarely united in any considerable perfection, there are two
commodities which possess them in an eminent and nearly an equal
degree—the two precious metals, as they are called—gold and silver. Some
nations have accordingly attempted to compose their circulating medium of
these two metals indiscriminately.
There is an obvious convenience in making use of the more costly metal for
larger payments, and the cheaper one for smaller; and the only question
relates to the mode in which this can best be done. The mode most
frequently adopted has been to establish between the two metals a fixed
proportion [to decide by law, for example, that sixteen grains of silver
should be equivalent to one grain of gold]; and it being left free to
every one who has a [dollar] to pay, either to pay it in the one metal or
in the other.
If [their] natural or cost values always continued to bear the same ratio
to one another, the arrangement would be unobjectionable. This, however,
is far from being the fact. Gold and silver, though the least variable in
value of all commodities, are not invariable, and do not always vary
simultaneously. Silver, for example, was lowered in permanent value more
than gold by the discovery of the American mines; and those small
variations of value which take place occasionally do not affect both
metals alike. Suppose such a variation to take place—the value of the two
metals relatively to one another no longer agreeing with their rated
proportion—one or other of them will now be rated below its bullion value,
and there will be a profit to be made by melting it.
Suppose, for example, that gold rises in value relatively to silver, so
that the quantity of gold in a sovereign is now worth more than the
quantity of silver in twenty shillings. Two consequences will ensue. No
debtor will any longer find it his interest to pay in gold. He will always
pay in silver, because twenty shillings are a legal tender for a debt of
one pound, and he can procure silver convertible into twenty shillings for
less gold than that contained in a sovereign. The other consequence will
be that, unless a sovereign can be sold for more than twenty shillings,
all the sovereigns will be melted, since as bullion they will purchase a
greater number of shillings than they exchange for as coin. The converse
of all this would happen if silver, instead of gold, were the metal which
had risen in comparative value. A sovereign would not now be worth so much
as twenty shillings, and whoever had a pound to pay would prefer paying it
by a sovereign; while the silver coins would be collected for the purpose
of being melted, and sold as bullion for gold at their real value—that is,
above the legal valuation. The money of the community, therefore, would
never really consist of both metals, but of the one only which, at the
particular time, best suited the interest of debtors; and the standard of
the currency would be constantly liable to change from the one metal to
the other, at a loss, on each change, of the expense of coinage on the
metal which fell out of use.
This is the operation by which is carried into effect the law of
Sir Thomas Gresham (a merchant of the time of Elizabeth) to the
purport that “money of less value drives out money of more value,”
where both are legal payments among individuals. A celebrated
instance is that where the clipped coins of England were received
by the state on equal terms with new and perfect coin before 1695.
They hanged men and women, but they did not prevent the operation
of Gresham’s law and the disappearance of the perfect coins. When
the state refused the clipped coins at legal value, by no longer
receiving them in payment of taxes, the trouble ceased.(234)
Jevons gives a striking illustration of the same law: “At the time
of the treaty of 1858 between Great Britain, the United States,
and Japan, which partially opened up the last country to European
traders, a very curious system of currency existed in Japan. The
most valuable Japanese coin was the kobang, consisting of a thin
oval disk of gold about two inches long, and one and a quarter
inch wide, weighing two hundred grains, and ornamented in a very
primitive manner. It was passing current in the towns of Japan for
four silver itzebus, but was worth in English money about 18_s._
5_d._, whereas the silver itzebu was equal only to about 1_s._
4_d._ [four itzebus being worth in English money 5_s._ 4_d._]. The
earliest European traders enjoyed a rare opportunity for making
profit. By buying up the kobangs at the native rating they trebled
their money, until the natives, perceiving what was being done,
withdrew from circulation the remainder of the gold.”(235)
It appears, therefore, that the value of money is liable to more frequent
fluctuations when both metals are a legal tender at a fixed valuation than
when the exclusive standard of the currency is either gold or silver.
Instead of being only affected by variations in the cost of production of
one metal, it is subject to derangement from those of two. The particular
kind of variation to which a currency is rendered more liable by having
two legal standards is a fall of value, or what is commonly called a
depreciation, since practically that one of the two metals will always be
the standard of which the real has fallen below the rated value. If the
tendency of the metals be to rise in value, all payments will be made in
the one which has risen least; and, if to fall, then in that which has
fallen most.
While liable to “more frequent fluctuations,” prices do not follow
the _extreme_ fluctuations of both metals, as some suppose, and as
is shown by the following diagram.(236) A represents the line of
the value of gold, and B of silver, relatively to some third
commodity represented by the horizontal line. Superposing these
curves, C would show the line of _extreme_ variations, while since
prices would follow the metal which _falls_ in value, D would show
the actual course of variations. While the fluctuations are more
frequent in D, they are less extreme than in C.
[Illustration.]
Chart showing the line of prices under a double standard.
§ 2. The use of the two metals as money, and the management of Subsidiary
Coins.
The plan of a double standard is still occasionally brought forward by
here and there a writer or orator as a great improvement in currency.
It is probable that, with most of its adherents, its chief merit is its
tendency to a sort of depreciation, there being at all times abundance of
supporters for any mode, either open or covert, of lowering the standard.
[But] the advantage without the disadvantages of a double standard seems
to be best obtained by those nations with whom one only of the two metals
is a legal tender, but the other also is coined, and allowed to pass for
whatever value the market assigns to it.
When this plan is adopted, it is naturally the more costly metal which is
left to be bought and sold as an article of commerce. But nations which,
like England, adopt the more costly of the two as their standard, resort
to a different expedient for retaining them both in circulation, namely
(1), to make silver a legal tender, but only for small payments. In
England no one can be compelled to receive silver in payment for a larger
amount than forty shillings. With this regulation there is necessarily
combined another, namely (2), that silver coin should be rated, in
comparison with gold, somewhat above its intrinsic value; that there
should not be, in twenty shillings, as much silver as is worth a
sovereign; for, if there were, a very slight turn of the market in its
favor would make it worth more than a sovereign, and it would be
profitable to melt the silver coin. The overvaluation of the silver coin
creates an inducement to buy silver and send it to the mint to be coined,
since it is given back at a higher value than properly belongs to it;
this, however, has been guarded against (3) by limiting the quantity of
the silver coinage, which is not left, like that of gold, to the
discretion of individuals, but is determined by the Government, and
restricted to the amount supposed to be required for small payments. The
only precaution necessary is, not to put so high a valuation upon the
silver as to hold out a strong temptation to private coining.
§ 3. The experience of the United States with a double standard from 1792
to 1883.
The experience of the United States with a double standard,
extending as it does from 1792 to 1873 without a break, and from
1878 to the present time, is a most valuable source of instruction
in regard to the practical working of bimetallism. While we have
nominally had a double standard, in reality we have either had one
alone, or been in a transition from one to the other standard; and
the history of our coinage strikingly illustrates the truth that
the natural values of the two metals, in spite of all legislation,
so vary relatively to each other that a constant ratio can not be
maintained for any length of time; and that “the poor money drives
out the good,” according to Gresham’s statement. For clearness,
the period may be divided, in accordance with the changes of
legislation, into four divisions:
I. 1792-1834. Transition from gold to silver.
II. 1834-1853. Transition from silver to gold.
III. 1853-1878. Single gold currency (except 1862-1879, the paper
period).
IV. 1878-1884. Transition from gold to silver.
I. With the establishment of the mint, Hamilton agreed upon the
use of both gold and silver in our money, at a ratio of 15 to 1:
that is, that the amount of pure silver in a dollar should be
fifteen times the weight of gold in a dollar. So, while the
various Spanish dollars then in circulation in the United States
seemed to contain on the average about 371-¼ grains of pure
silver, and since Hamilton believed the relative market value of
gold and silver to be about 1 to 15, he put 1/15 of 371-¼ grains,
or 24-¾ grains of pure gold, into the gold dollar. It was the best
possible example of the bimetallic system to be found, and the
mint ratio was intended to conform to the market ratio. If this
conformity could have been maintained, there would have been no
disturbance. But a cause was already in operation affecting the
supply of one of the metals—silver—wholly independent of
legislation, and without correspondingly affecting gold.
Two periods of production of silver, in which the production of
silver was great relatively to gold, stand out prominently in the
history of that metal. (1) One was the enormous yield from the
mines of the New World, continuing from 1545 to about 1640, and
(2) the only other period of great production at all comparable
with it (that is, as regards the production of silver relatively
to gold) was that lasting from 1780 to 1820, due to the richness
of the Mexican silver-mines. The first period of ninety-five years
was longer than the second, which was only forty years; yet while
about forty-seven times as much silver as gold was produced on an
average during the first period, the average annual amount of
silver produced relatively to gold was probably a little greater
from 1780 to 1820. The effect of the first period in lowering the
relation of silver to gold is well recognized in the history of
the precious metals (see Chart X for the fall in the value of
silver relatively to gold); that the effect of the second period
on the value of silver has not been greater than was actually
caused—it has not been small—is explicable only by the laws of the
value of money. If you let the same amount of water into a small
reservoir which you let into a large one, the level of the former
will be raised more than the level of the latter. The great
production of the first period was added to a very small existing
stock of silver; that of the second period was added to a stock
increased by the great previous production just mentioned. The
smallness of the annual product relatively to the total quantity
existing in the world requires some time, even for a production of
silver forty-seven times greater than the gold production, to take
its effect on the value of the total silver stock in existence.
The effect of this process was beginning to be felt soon after the
United States decided on a double standard. For this reason the
value of silver was declining about 1800, and, although the annual
silver product fell off seriously after 1820, the value of silver
continued to decline even after that time, because the increased
production, dating back to 1780, was just beginning to make itself
felt. Thus we have the phenomenon—which seems very difficult for
some persons to understand—of a falling off in the annual
production of silver, accompanied by a decrease in its value
relatively to gold.
This diminishing value of silver began to affect the coinage of
the United States as early as 1811, and by 1820 the disappearance
of gold was everywhere commented upon. The process by which this
result is produced is a simple one, and is adopted as soon as a
margin of profit is seen arising from a divergence between the
mint and market ratios. In 1820 the market ratio of gold to silver
was 1 to 15.7—that is, the amount of gold in a dollar (24-¾
grains) would exchange for 15.7 times as many grains of silver in
the market, in the form of bullion; while at the mint, in the form
of coin, it would exchange for only 15 times as many grains of
silver. A broker having 1,000 gold dollars could buy with them in
the market silver bullion enough (1,000 × 15.7 grains) to have
coined, when presented at the mint, 1,000 dollars in silver
pieces, and yet have left over as a profit by the operation 700
grains of silver. So long as this can be done, silver (the
cheapest money) will be presented at the mint, and gold (the
dearest money) will become an article of merchandise too valuable
to be used as money when the cheaper silver is legally as good.
The best money, therefore, disappears from circulation, as it did
in the United States before 1820, owing to the fall in the value
of silver. It is to be said, that it has been seriously urged by
some writers that silver did not fall, but that gold rose, in
value, owing to the demand of England for resumption in 1819.(237)
Chronology kills this view; for the change in the value of silver
began too early to have been due to English measures, even if
conclusive reasons have not been given above why silver should
naturally have fallen in value.
[Illustration.]
Chart X. Chart showing the Changes in the Relative Values of Gold
and Silver from 1501 to 1880. From 1501 to 1680 a space is
allotted to each 20 years; from 1681 to 1871, to each 10 years;
from 1876 to 1880, to each year.
II. The change in the relative values of gold and silver finally
forced the United States to change their mint ratio in 1834. Two
courses were open to us: (1) either to increase the quantity of
silver in the dollar until the dollar of silver was intrinsically
worth the gold in the gold dollar; or (2) debase the gold
dollar-piece until it was reduced in value proportionate to the
depreciation of silver since 1792. The latter expedient, without
any seeming regard to the effect on contracts and the integrity of
our monetary standard, was adopted: 6.589 per cent was taken out
of the gold dollar, leaving it containing 23.22 grains of pure
gold; and as the silver dollar remained unchanged (371-¼ grains)
the mint ratio established was 1 to 15.988, or, as commonly
stated, 1 to 16. Did this correspond with the market ratio then
existing? No. Having seen the former steady fall in silver, and
believing that it would continue, Congress hoped to anticipate any
further fall by making the mint ratio of gold to silver a little
larger than the market ratio. This was done by establishing the
mint ratio of 1 to 15.988, while the market ratio in 1834 was 1 to
15.73. Here, again, appeared the difficulty arising from the
attempt to balance a ratio on a movable fulcrum. It will be seen
that the act of 1834 set at work forces for another change in the
coinage—forces of a similar kind, but working in exactly the
opposite direction to those previous to 1834. A dollar of gold
coin would now exchange for more grains of silver at the mint
(15.98) than it would in the form of bullion in the market
(15.73). Therefore it would be more profitable to put gold into
coin than exchange it as bullion. Gold was sent to the mint, while
silver began to be withdrawn from circulation, silver now being
more valuable as bullion than as coin. By 1840 a silver dollar was
worth 102 cents in gold.(238) This movement, which was displacing
silver with gold, received a surprising and unexpected impetus by
the gold discoveries of California and Australia in 1849, before
mentioned, and made gold less valuable relatively to silver, by
lowering the value of gold. Here, again, was another natural
cause, independent of legislation, and not to be foreseen,
altering the value of one of the precious metals, and in exactly
the opposite direction from that in the previous period, when
silver was lowered by the increase from the Mexican mines. In 1853
a silver dollar was worth 104 cents in gold (i.e., of a gold
dollar containing 23.22 grains); but, some years before, all
silver dollars had disappeared from use, and only gold was in
circulation. For a large part of this period we had in reality a
single standard of gold, the other metal not being able to stay in
the currency.
III. After our previous experience, the impossibility of retaining
both metals in the coinage together, on equal terms, now came to
be generally recognized, and was accepted by Congress in the
legislation of 1853. This act made no further changes intended to
adapt the mint to the market ratios, but remained satisfied with
the gold circulation. But hitherto no regard had been paid to the
principles on which a subsidiary coinage is based, as explained by
Mr. Mill in the last section (§ 2). The act of 1853, while
acquiescing in the single gold standard, had for its purpose the
readjustment of the subsidiary coins, which, together with silver
dollar-pieces, had all gone out of circulation. Before this, two
halves, four quarters, or ten dimes contained the same quantity of
pure silver as the dollar-piece (371-¼ grains); therefore, when it
became profitable to withdraw the dollar-pieces and substitute
gold, it gave exactly the same profit to withdraw two halves or
four quarters in silver. For this reason all the subsidiary silver
had gone out of circulation, and there was no “small change” in
the country. The legislation of 1853 rectified this error: (1) by
reducing the quantity of pure silver in a dollar’s worth of
subsidiary coin to 345.6 grains. By making so much less an amount
of silver equal to a dollar of small coins, it was more valuable
in that shape than as bullion, and there was no reason for melting
it, or withdrawing it (since even if gold and silver changed
considerably in their relative values, 345.6 grains of silver
could not easily rise sufficiently to become equal in value to a
gold dollar, when 371-¼ grains were worth only 104 cents of the
gold dollar); (2) this over-valuation of silver in subsidiary coin
would cause a great flow of silver to the mint, since silver would
be more valuable in subsidiary coin than as bullion; but this was
prevented by the provision (section 4 of the act of 1853) that the
amount or the small coinage should be limited according to the
discretion of the Secretary of the Treasury; and, (3) in order
that the overvalued small coinage might not be used for purposes
other than for effecting change, its legal-tender power was
restricted to payments not exceeding five dollars. This system, a
single gold standard for large, and silver for small, payments,
continued without question, and with great convenience, until the
days of the war, when paper money (1862-1879) drove out (by its
cheapness, again) both gold and silver. Paper was far cheaper than
the cheapest of the two metals.
[Illustration.]
Relative values of gold and silver, by months, in 1876.
The mere fact that the silver dollar-piece had not circulated
since even long before 1853 led the authorities to drop out the
provisions for the coinage of silver dollars and in 1873 remove it
from the list of legal coins (at the ratio of 1 to 15.98, the
obsolete ratio fixed as far back as 1834). This is what is known
as the “demonetization” of silver. It had no effect on the
circulation of silver dollars, since none were in use, and had not
been for more than twenty-five years. There had been no desire up
to this time to use silver, since it was more expensive than gold;
indeed, it is somewhat humiliating to our sense of national honor
to reflect that it was not until silver fell so surprisingly in
value (in 1876) that the agitation for its use in the coinage
arose. When a silver dollar was worth 104 cents, no one wanted it
as a means of liquidating debts; when it came to be worth 86
cents, it was capable of serving debtors even better than the then
appreciating greenbacks. Thus, while from 1853 (and even before)
we had legally two standards, of both gold and silver, but really
only one, that of gold, from 1873 to 1878 we had both legally and
really only one standard, that of gold.
It might be here added, that I have spoken of the silver dollar as
containing 371-¼ grains of pure silver. Of course, alloy is mixed
with the pure silver, sufficient, in 1792, to make the original
dollar weigh 416 grains in all, its “standard” weight. In 1837 the
amount of alloy was changed from 1/12 to 1/10 of the standard
weight, which (as the 371-¼ grains of pure silver were unchanged)
gave the total weight of the dollar as 412-½ grains, whence the
familiar name assigned to this piece. In 1873, moreover, the mint
was permitted to put its stamp and devices—to what was not money
at all, but a “coined ingot”—on 378 grains of pure silver (420
grains, standard), known as the “trade-dollar.” It was intended by
this means to make United States silver more serviceable in the
Asiatic trade. Oriental nations care almost exclusively for silver
in payments. The Mexican silver dollar contained 377-¼ grains of
pure silver; the Japanese yen, 374-4/10; and the United States
dollar, 371-¼. By making the “trade-dollar” slightly heavier than
any coin used in the Eastern world, it would give our silver a new
market; and the United States Government was simply asked to
certify to the fineness and weight by coining it, provided the
owners of silver paid the expenses of coinage. Inadvertently the
trade-dollar was included in the list of coins in the act of 1873
which were legal tender for payments of five dollars, but, when
this was discovered, it was repealed in 1876. So that the
trade-dollar was not a legal coin, in any sense (although it
contained more silver than the 412-½-grains dollar). They ceased
to be coined in 1878, to which time there had been made
$35,959,360.
IV. In February, 1878, an indiscreet and unreasonable movement
induced Congress to authorize the recoinage of the silver
dollar-piece at the obsolete ratio of 1834 (1 to 15.98), while the
market ratio was 1 to 17.87. So extraordinary a reversal of all
sound principles and such blindness to our previous experience
could be explained only by a desire to force this country to use a
silver coinage only, and had its origin with the owners of
silver-mines, aided by the desires of debtors for a cheap unit in
which to absolve themselves from their indebtedness. There was no
pretense of setting up a double standard about it; for it was
evident to the most ignorant that so great a disproportion between
the mint and market ratios must inevitably lead to the
disappearance of gold entirely. This would happen, if owners could
bring their silver freely, in any amounts, to the mint for coinage
(“Free Coinage”), and so exchange silver against gold coin for the
purpose of withdrawing gold, since gold would exchange for less as
coin than as bullion. This immediate result was prevented by a
provision in the law, which prevented the “free coinage” of
silver, and required the Government itself to buy silver and coin
at least $2,000,000 in silver each month. This retarded, but will
not ultimately prevent, the change from the present gold to a
single silver standard. At the rate of $24,000,000 a year, it is
only a question of time when the Treasury will be obliged to pay
out, for its regular disbursements on the public debt, silver in
such amounts as will drive gold out of circulation. In February,
1884, it was feared that this was already at hand, and was
practically reached in the August following. Unless a repeal of
the law is reached very soon, the uncomfortable spectacle will be
seen of a gradual disarrangement of prices, and consequently of
trade, arising from a change of the standard.
In order that the alternate movements of silver and gold to the
mint for coinage may be seen, there is appended a statement of the
coinage(239) during the above periods, which well shows the
effects of Gresham’s law.
Ratio in the mint and in Period. Gold coinage. Silver dollars
the market. coined.
1:15 (silver lower in 1792-1834 $11,825,890 $36,275,077
market)
1:15.98 (gold lower in 1834-1853 224,965,730 42,936,294
market)
1:15.98 (gold lower in 1853-1873 544,864,921 5,538,948
market)
Single gold standard. 1873-1878 166,253,816 ........
1:15.98 (silver lower, 1878-1883 354,019,865 147,255,899
but no free coinage)
From this it will be seen that there has been an enforced coinage
by the Treasury, of almost twice as many silver dollars since 1878
as were coined in all the history of the mint before, since the
establishment of the Government.
It may, perhaps, be asked why the silver dollar of 412-½ grains,
being worth intrinsically only from 86 to 89 cents, does not
depreciate to that value. The Government buys the silver, owns the
coin, and holds all that it can not induce the public to receive
voluntarily; so that but a part of the total coinage is out of the
Treasury. And most of the coins issued are returned for deposit
and silver certificates received in return. There being no free
coinage, and no greater amount in circulation than satisfies the
demand for change, instead of small bills, the dollar-pieces will
circulate at their full value, on the principle of subsidiary
coin, even though overvalued. And the silver certificates
practically go through a process of constant redemption by being
received for customs dues equally with gold. When they become too
great in quantity to be needed for such purposes, then we may look
for the depreciation with good reason.(240)
There are, then, the following kinds of legal tender in the United
States in 1884: (1) Gold coins (if not below tolerance); (2) the
silver dollar of 412-½ grains; (3) United States notes (except for
customs and interest on the public debt); (4) subsidiary silver
coinage, to the amount of five dollars; and (5) minor coins, to
the amount of twenty-five cents.
The question of a double standard has provoked no little vehement
discussion and has called forth a considerable literature since
the fall of silver in 1876. A body of opinion exists, best
represented in this country by F. A. Walker and S. D. Horton, that
the relative values of gold and silver may be kept unchanged, in
spite of all natural causes, by the force of law, which, provided
that enough countries join in the plan, shall fix the ratio of
exchange in the coinage for all great commercial countries, and by
this means keep the coinage ratio equivalent to the bullion ratio.
The difficulty with this scheme, even if it were wholly
sufficient, has thus far been in the obstacles to international
agreement. After several international monetary conferences, in
1867, 1878, and 1881, the project seems now to have been
practically abandoned by all except the most sanguine. (For a
fuller list of authorities on bimetallism, see Appendix I.)