Readings in Money and Banking Part 7

That the service rendered to the commerce of the world by establishing a normal price for each metal in terms of the other, and thus creating and maintaining a par-of-exchange between gold countries and silver countries, is worth far more than its cost, seems to me beyond a rational doubt. It would, in my view, be as reasonable to doubt whether London Bridge repays the expense of its erection and repair. Were the cost of this bimetallic service, whatever it is, properly a.s.sessed upon and collected from each commercial nation of the world by turns, according to the proportion in which it derives advantage therefrom, I think it might safely be said that no one of these nations would sustain a single other charge which so fully justified itself in the return it made, whether that other charge were for works of construction, for the administration of justice, or for any other strictly necessary purpose.

But there is no a.s.surance that the cost of the bimetallic system will be thus equitably a.s.sessed. If the whole charge of erecting and repairing London Bridge were thrown upon the merchants of the two or three streets nearest thereto, while yet the whole population were allowed to use the bridge, free of toll, there would not unnaturally arise a strong sense of injustice on the part of those who bore this burden for the public benefit; it might even become a question whether the undoubted advantages derived by them from the use of the bridge repaid the disproportionate expense which it caused them. If the maintenance of the bimetallic system involves a certain burden on the nations which sustain it, as I am disposed to think is the case, it fairly becomes a question whether those individual nations are compensated for bearing the whole expense of the service by their share of the advantages resulting therefrom to the trade and industry of the world.

That England could well have afforded, throughout the present century, to maintain this system for her own benefit, whatever it cost, even though other nations profited by it in greater or less degree, is clear as the light. That France, a country of far less extended international trade, has been compensated for bearing so large a part as she has done of the burden of maintaining a par-of-exchange for the commerce of the world, by her share of the resulting advantages, I make no question; but it must be admitted to be fairly a matter of dispute.

On such a point it is evidence of no small value that the French people themselves and the French statesmen, though singularly acute and sagacious in matters of finance, have apparently not doubted that the bimetallic system was for the interest of their country. Certain of the French political economists--MM. Chevalier, Leva.s.seur, Bonnet, Mannequin, Leroy Beaulieu--from their theory of the subject have held that France lost by her policy in this respect; but the financiers of that remarkable nation held firmly to the "double standard" from 1785 to 1874. And though France at the latter date restricted her silver coinage, and two years later stopped it altogether, it was not done as the result of any change of views. Partly it was from deference to her monetary allies, Belgium and Switzerland, but chiefly because the demonetization of silver by Germany and the sale of the discarded metal of that empire brought a sudden strain upon the bimetallic system which threatened to break it violently down. Hence France closed her mints to silver, but not with any confession that her policy had been erroneous under the conditions previously existing; not from any desire to abandon that policy should the future offer conditions which would admit the resumption of bimetallism. It was the declaration of M. Leon Say, the French Minister of Finance, the President of the International Monetary Conference of 1878, that France, in suspending the coinage of silver, had taken no step towards the single gold standard, but had placed herself in a position to await events, a position which she would not leave till good reasons for action should appear, and then most probably to re-enter on the system of the double standard....

The objection that the stock of the dearer metal in the bimetallic States must, if the drain be indefinitely continued, become after a while exhausted, and that the system will then lose all its efficiency in holding the two metals together, is unquestionably valid; but an altogether unreasonable weight has been a.s.signed to it in the discussion of bimetallism as a scheme of practical statesmanship.

If we look at almost any treatise written from the monometallic point of view, we shall find that it is taken as conclusive against that scheme, that conditions of supply and demand can be a.s.sumed for the two metals separately which would result in the complete exhaustion of the dearer metal, and the consequent loss of all virtue in the bimetallic scheme.

The bimetallist is confronted with a series of adverse conditions, taken each at its maximum and piled one above the other without the least regard to the modesty of nature, or the experience of the past; and is then challenged to say whether the system he proposes could be maintained under such circ.u.mstances. If he is candid enough to admit that bimetallism would fail there, it is taken for granted that the whole question is disposed of.

Now, human inst.i.tutions are not to be judged of, and approved or disapproved, by such methods. The folly of reasoning like this would be seen at once were it applied to ordinary political matters. No government on earth could stand against one-fourth or one-tenth of the elements of hostility which might conceivably be arrayed against it.

Mankind do not, therefore, refuse to form governments.

Bimetallism is a political inst.i.tution for practical ends, and is ent.i.tled to be judged with reference to reasonable probabilities. It may claim the benefit of the chance that adverse conditions will be offset by conditions favourable, and that the adverse conditions will not prove so severe at the start as they may be conceived, and that their force will be more quickly spent than might be feared.

It would be perfectly legitimate ground on which to establish European bimetallism, that the French system, with so little of support from other States, pa.s.sed within a quarter of a century through the three successive shocks of the gold discoveries of Siberia, the gold discoveries of California, and the gold discoveries of Australia, and yet was not brought to the ground.

With Germany, France, and England joined in a monetary union, no changes reasonably to be antic.i.p.ated in the conditions of supply of the one metal or the other would succeed in moving the market ratio far apart from the mint ratio thus supported by maintaining over so wide a surface a legal equivalence between the two metals in payment of debts.

And, moreover, while bimetallism is ent.i.tled to be judged like any other political inst.i.tution, with reference to the reasonable probabilities of the future, the allowance which requires to be made for error and extraneous force is less than in most political inst.i.tutions, inasmuch as the failure of bimetallism involves no disaster to industry or society.

When an engineer designs a bridge which is intended to sustain a weight of eighty tons, he introduces a "factor of safety," say three or five, and makes the bridge strong enough to bear two hundred and forty or four hundred tons. The greater the calamity which would result from the breaking down of the bridge--the deeper the chasm which it spans, the swifter the torrent below--the larger the factor of safety. With many political inst.i.tutions, likewise, the consequences of failure would be so disastrous that the statesman seeks to introduce a high factor of safety; but in the case of bimetallism no catastrophe whatever is to be antic.i.p.ated, even in the event of failure. At the worst, after the drain of the dearer metal, in consequence of changes in the conditions of supply, is completed, the bimetallic country is simply in the same position with the countries of the single standard using the cheapened metal. While the process of subst.i.tution is going on, it sells the dearer metal at a premium; when the process is over, it is no worse off than it would have been had it originally selected as its sole money of full legal-tender power the metal which it has bought at a discount, and which other countries, perhaps its immediate neighbours, are still using. It is not the case of a country seeking to reject the cheapening metal, and to supply its place with the metal which is continually becoming scarcer and dearer.... There is all the difference, in the two cases, between going down hill and going up hill.

Not only is no catastrophe involved in the failure of bimetallism through the exhaustion of the dearer metal, but it is always in the power of the Government to arrest the drain at any point without shock.

Thus, in 1874, France and her monetary allies, seeing the prospect of a considerable drain of gold through the importation of the discarded and cheapened silver of Germany, and having decided, whether wisely or unwisely, not to prevent that drain, restricted the coinage of silver without repealing or suspending the law which made gold and silver legal tender indifferently at a fixed ratio. Two years later, finding that the forces operating to lower the value of silver were powerful and persistent, the coinage of silver was peremptorily stopped.

Can one point to any sign that France has suffered any special injury to her trade and production from this act?...

We now have to note ... that every additional State which joins the bimetallic group, having the same mint ratio between gold and silver, does not only share the cost or the burden with those already in the system, but diminishes the aggregate cost or burden to be borne, and this, not in a slight, but in an important degree, so that should the monetary league become general, the total cost or burden to be divided among the many allies would be inappreciable; while, should the system come to embrace all commercial States, there would, in theory, be no burden at all to be borne by any one.

Thus let us suppose the commercial world to be divided into sixteen States, A to P, inclusive, the first six having the single gold standard, four, G to J, the so-called double standard of gold and silver, say at 15-1/2:1; the remaining six States having the single standard of silver, thus:

A, B, C, D, E, F (G, H, I, J), K, L, M, N, O, P.

It is evident that in the case of a change in the conditions of supply tending to cheapen silver relatively to gold, the new silver would pa.s.s into the countries of the double standard, G to J, be there exchanged for gold at the rate of 15-1/2: 1, with some small premium as the profit of the transaction, and the gold would go to the gold countries, A to F, in settlement of trade balances.

The rapidity with which this subst.i.tution of silver for gold will go forward will depend, first, on the force of the natural causes operating to cheapen silver, and, secondly, on the force of the commercial causes operating to maintain or advance the value of gold. The length of time during which the drain of the dearer metal can be sustained without exhaustion will (given the rate of movement) depend solely on the stock of that metal existing in the bimetallic States jointly when the drain begins.

But chief among the commercial causes operating to maintain or advance the value of gold is the exclusive power with which gold is invested by law to pay debts within States A to F; while the stock of the dearer metal available to sustain the drain described is made up, not of all the gold in the sixteen States A to P, or in the ten States A to J, but only of the gold in the four bimetallic States, G to J.

Hence we see that for every gold State which adopts the "double standard" the amount of gold available, in the case of a cheapening of silver, to meet the drain of the dearer metal (on which the virtue of the bimetallic system depends) is increased; while the demand for gold in preference to silver at 15-1/2:1 (the only cause which threatens the stability of the bimetallic system) is, in just so far, diminished. On the other hand, every silver State that adopts the "double standard"

strengthens the bimetallic system in the case of a cheapening of gold.

Let us suppose the sixteen commercial States to be divided as four gold States, eight gold and silver States, and four silver States, as follows:

A, B, C, D (E, F, G, H, I, J, K, L), M, N, O, F.

We see that the bimetallic system is now not twice as strong merely as in the case first a.s.sumed, but many times as strong, since not only is the amount of the dearer metal (whichever that may at the time be) subject to drain greatly increased, but the demand for that metal, in preference to silver at 15-1/2:1, now comes from four countries only, instead of six, as formerly. The transfer of still another State from each of the two single-standard groups would vastly increase the stability of the bimetallic system, A, B, C (D, E, F, G, H, I, J, K, L, M), N, O, P. Not only would the base of the system be broadened by bringing the dearer metal of ten States, D to M, under tribute in the event of changes operating on the supply of either to affect its value; but the force of the causes threatening the equilibrium of the system would be reduced, since the demand for the dearer metal would now come from only three States: A, B, C, in the case of a cheapening of silver relatively to gold; N, O, P, in the case of a cheapening of gold relatively to silver.

Bring still another State from each group into the monetary union, and the danger of a breaking down of the system, under any change in the conditions of supply which it would be reasonable to antic.i.p.ate, almost disappears.

A, B (C, D, E, F, G, H, I, J, K, L, M, N), O, P. Twelve States now supply the dearer metal; only two States will take it in preference to the other at the ratio of the mint. Those two States--whether A, B, or O, P--can not take the dearer metal indefinitely. They will soon be surfeited. A further increase of money in them would only be followed by a fall in its value, which would soon proceed so far as to bring the metals together again. What the one metal would tend to lose in value through increase of supply, the other would tend to lose through diminution of demand.

This is the Modern Bimetallic Scheme advocated by Wolowski and Cernuschi in France, Malou and de Laveleye in Belgium, Mees and Vrolik in Holland, Schneider in Germany, Haupt in Austria, Seyd and the Liverpool writers in England, Horton, Nourse, and George Walker in the United States.

It differs widely from the plan of the so-called "double standard,"

which was p.r.o.nounced impracticable by Locke, Adam Smith, and Ricardo.

Not the smallest presumption against the reasonableness of this scheme is created by the fact that eminent economists of the past century, and of the first half of the present, declared in favour of the single standard, whether of gold or of silver. Those writers contemplated a condition of international relations in which anything like general and permanent concert of action, in establishing and maintaining a ratio between the metals in the coinage, would have been wholly beyond reasonable expectation....

A general or universal system of bimetallism would involve no machinery, no international accounts, no detail whatever. The simple agreement of governments to coin at a certain ratio would be sufficient for all the objects that have been discussed. If unification of coinage, ident.i.ty of moneypieces, and mutual acceptance of coins by the several nations forming such a monetary league, were to be added, some machinery for the redemption of worn pieces might require to be brought into existence; but this is not a necessary feature of successful bimetallism, which would be entirely compatible with the retention by each State of its own devices and denominations, and with the exchange of moneys as at present effected....

FOOTNOTES:

[15] Francis A. Walker. _Money in Its Relations to Trade and Industry_, pp. 164-176; 178-182. Henry Holt & Company. New York. 1889.

CHAPTER VII

THE SILVER QUESTION IN THE UNITED STATES

[16]Such was the singular combination of events after the peace of 1865 that almost at the moment when a million citizens were turned from organised destruction to pursuit of peaceful industry, the avenues of American employment and production were widened in a degree unprecedented in the history of trade. Within eight years after Lee's surrender, the railway mileage of the United States was literally doubled. Only a fraction of this increase belonged to the transcontinental lines which linked the two oceans in 1869. Quite aside from the 1,800 miles of the Pacific railways, upwards of 30,000 miles of track were laid in the United States between 1865 and 1873. Four noteworthy economic developments accompanied this extension of the transportation system. A fertile interior domain, hitherto untouched, was opened up to industry. With the rush of population to these Western districts, not only did the disbanded army resume production without industrial overcrowding such as followed the Napoleonic wars, but provision was made for three or four hundred thousand immigrants annually. European capital in enormous volume was drawn upon to provide the means for this development. Finally, the United States rose from the position of a second- or third-cla.s.s commercial State to the first rank among agricultural producers and exporters. Each of these several phenomena had its special influence on the period.

Not less immediately connected with this opening up and settlement of our agricultural West was still another phenomenon, of peculiar interest to the study of the ensuing period. The average price of grain had advanced with great rapidity during the Civil War. In 1867, the price of wheat, even on the Chicago market, reached the remarkable level of $2.85 per bushel; nor was this price very greatly above the annual maximum of the period. In a large degree, this advance resulted from inflation of the American currency. But the upward movement was world-wide; in 1867 and 1868 the average price, even in England, was close to the equivalent of two dollars a bushel. That any such abnormal market could be maintained in the face of the new American supplies was at least improbable. The increase in cereal production was twice as rapid as the country's increase in population; the United States became therefore the leading figure in the world's export markets; and this was certain to have important influence on prices.

As in America, so in Europe, production received immediate stimulus.

While American capital was opening up the Mississippi Valley, European capital was similarly busy along the fertile river basins of the Dnieper and the Danube. The Russian railway system grew during this period from something like 2,000 miles to upwards of 13,000. In Austria-Hungary the percentage of increase was almost equally large. All of these new transportation lines, like our own new Granger railways, were at once engaged in carrying to the seaboard supplies of grain which never before had reached an export market. The problem of an earlier generation had been how to feed the constantly increasing population; a wholly new problem was presently to arise, based on the question how to find a ready and profitable market for the year's output of breadstuffs.

Prices, in short, which rose almost continuously throughout the world during the period of slack production from 1858 to 1873, receded almost as continuously in the ensuing generation. Nowhere was this phenomenon destined to have more immediate importance, economically, socially, and politically, than in the United States.

The opinion is more or less widely held that the decline in prices, notably of grain, has resulted from legislation on the currency. Without for the present arguing that proposition, it may be affirmed with entire safety that a good share of the period's currency legislation has resulted from the decline in the price of grain. The fall in wheat has been the typical argument for arbitrary increase of the silver or paper currency in almost every Congressional debate since 1872. What is perhaps even more significant, the division in almost every Congressional vote upon these subjects has been, not political but geographical--the commercial East against the agricultural West.

AGITATION FOR SILVER AND THE Pa.s.sAGE OF THE BLAND BILL

[17]In the summer session of 1876, several bills had been introduced, providing for increased silver coinage and for remonetization of the silver dollar. None of these propositions came to anything; they were chiefly remarkable from the fact that they first gave vogue to the theory of the "crime of 1873"--a theory which a.s.sumed that the dropping of the silver dollar from the list of coins in the statutes of that year was the outcome of a conspiracy which carried its legislation through in secret. The entire baselessness of this a.s.sertion has been demonstrated often enough and in convincing detail; this very provision regarding the silver dollar was a subject of public discussion in the House, and met with no serious opposition. The a.s.sertion in itself is so patently absurd that I shall not pause to discuss it. The truth is that silver in 1873, and during a generation before that date, was worth more to its owner in the form of bullion than in the form of coin. In 1872 the silver requisite to coin a dollar at the established ratio was worth $1.02. For years, therefore, n.o.body thought of bringing his silver to the mint for coinage; he sold it in the commercial markets. The total silver-dollar coinage of the United States, between 1789 and 1873, was barely eight million dollars, and when, in 1873, the law provided that except for the so-called trade dollar coined for export, "no deposit of silver for other coinage shall be received," no one had interest enough in the matter to offer criticism.

But in 1874 and 1875 came one of those curious coincidences which render possible for all time conflicting theories of an economic event.

Germany, having adopted the gold standard of currency in July, 1873, began to sell its old silver coin as bullion. At exactly the same time, Mackay and Fair, in the heart of the Nevada Mountains, were opening up the Great Bonanza. The Pacific Coast was in fact going wild over the rise in mining shares while the East was financially and industrially paralysed.

The statute dropping the silver dollar from this country's coinage list was enacted February 12, 1873; the German law for retirement of silver coinage was adopted July 9, 1873; and a year later the news of the rich Nevada "ore-finds" became public property. Between the German sales and the sales at Nevada City, the price of silver yielded. In 1874, for the first time in a generation, 412-1/2 grains of standard silver would have been worth more when coined into a legal-tender dollar than when sold in the bullion market. The motive of the mining interest in the free-silver coinage agitation of 1876 and 1877 was not mysterious.

The motive of the anti-Administration party in Congress was somewhat different. There is not the slightest question that the silver-coinage movement, in the agricultural West particularly, had the same origin and the same following as the paper inflation movement of a few years before. Mr. Bland himself, the author of the silver bill, declared that the question was presented as between what he called "honest resumption"

with silver coinage, "or on the other hand a forced unlimited inflation of paper money." In the heat of debate on the silver bill, the same statesman declared in Congress that if his coinage plan could not be pa.s.sed, he was "in favour of issuing paper money enough to stuff down the bondholders until they are sick." The point of these remarks lies in their frank a.s.sumption that the free-silver sentiment and the fiat-money sentiment were interchangeable.

So much, then, for the origin and nature of the silver movement. The Bland Bill pa.s.sed the House on November 5, 1877, under the previous question and without debate, by a vote of 164 to 34, and the resumption operations of the Government came to an instant halt. The market price of silver then was such that the legal-tender dollar of the Act would have been worth intrinsically less than ninety cents. Foreign subscribers to our resumption bonds suspected instantly that payment of the Government debt in a depreciated coin was planned by Congress; their suspicions were confirmed by a resolution introduced December 6th by Stanley Matthews, Mr. Sherman's own successor in the Senate, and pa.s.sed by both houses. The resolution explicitly declared that in the opinion of Congress, all the bonds of the United States, "issued or authorized to be issued," were payable in the silver dollars of the Bland Law. The extraordinary character of this resolution may be judged from the fact that it was proposed and pa.s.sed in both houses while the Coinage Act was still pending, and while, therefore, there was not in existence the coin which was duly declared a legal tender for settlement with public creditors. To the conservative portion of the public, the resolution seemed a piece of financial lunacy; to the Treasury, it was not only embarra.s.sing but humiliating. Hardly a month before, in his annual report to Congress, the Secretary had repeated his official statement, previously made to bond subscribers, that payment of the bonds in gold might safely be antic.i.p.ated. The publication of this statement in New York and London had been followed by greatly increased subscriptions to the bonds, in payment of which gold was required by the Government. The Matthews resolution amounted, so far as Congress was concerned, to repudiation of a formal bargain of which the Government had already obtained the fruits. The debate was such as might have been expected on a measure of the sort. It centred repeatedly on denunciation of Government bond investors. Foreign subscribers were treated with especial scorn; indeed, our foreign customers in general were not spared. It was this debate which drew forth Senator Matthews's somewhat celebrated query: "What have we got to do with abroad?"--a remark which was perhaps as typical of the session's deliberations as any utterance made from the floor of Congress.