The History of Currency, 1252 to 1896 Part 15

[Sidenote: FREE TRADE IN THE PRECIOUS METALS]

Standing so early and so almost completely alone as it does, this Act evinces an unexampled prescience and boldness. It doubtless reflects the commercial traditions of Holland, but that it should have been at a single stroke transferred to England at a time when she was so economically different and distant from Holland, needs make us pause in admiration. The only parallel to it, if any, would arise if France should suddenly, and by a single enactment, adopt to the full the Free Trade policy of England. As a matter of fact this Act of 1663 proved itself for a long time, and through many oscillations, impossible of execution, and far into the eighteenth century the British Government meddled, by legislation and proclamation, with the export of the precious metals, and with the tariff of the coins, as will be seen immediately. It was not till 1780 that a similar Act was pa.s.sed for Ireland.

In 1803 the Lords of the Treasury were by statute authorised to grant licences for the exportation of silver bullion without any such certificate or doc.u.ment whatsoever as had been required by the statute of 6 and 7 Wm. III. c. 17, sect. 5.

It was almost a century after this action of England that France followed in the same path. By a proclamation of 7th October 1755, permission was given to the free commerce in precious metals and in foreign monies. But in the case of France, as in that of England, the enactment was not immediately nor fully realisable. The exportation of the national specie was still forbidden, and more than once the State found itself obliged to return to the question of the tariffing of its coinage.

It is this vacillation--a vacillation, however, which must in every instance be attributed to sheer State necessity--which makes it impossible to trace in detail and point by point the fall of so much of the Mercantile System as concerned the regulating of international movements of metals. The _practice_ of the commercial world was doubtless in advance of the legislator's standpoint, as indicated by such detached references, and was effectual in completing the revolution silently and under the surface, whether by the aid or in spite of laws and proclamations. The same had been the case, e.g., with the old usury laws.

When effected there are two highly important results which stand as the outcome of this change in the theory of international commerce.

1. The perception of a right theory of international balances opened the way to the separation of finance or currency phenomena pure and simple, and so prepared the ground for a scientific conception and treatment of them. In one direction this treatment resulted in the evolution of a theory and practice of a monometallic system--one, i.e., in which a single metal was made the legal tender, and a second or third metal bound to it in a hard-and-fast, subordinate relationship, so that they could not by their oscillations injuriously affect the tenderable metal.

In another direction the same scientific conception and treatment resulted in the evolution (and after a time the practice) of a bimetallic theory. Modern currency history hinges on the antagonism of these two systems.

[Sidenote: FUNCTION OF DISCOUNTS IN MODERN SYSTEM]

This statement of the case will serve to show the enormous difference between nineteenth-century currency situations and problems and those of mediaeval and seventeenth-century Europe. To-day the point at issue is between definitely and scientifically conceived rival theories, and the _practical_ difficulty before the world is how to provide, not so much a permanent ratio, as a permanent rate of international settlement between countries using different monetary systems, between silver-using and gold-using countries. In the seventeenth century there was no conception of theory at all, and the practical difficulty was how to frustrate the operations of the bullionist and arbitragist and politicians, and the depletion of national treasure due to their activity, and based on a difference of ratio prevailing in different countries.

2. The second practical outcome of the revolution was the development of the modern system of control of the flow of gold balances, viz. by means of the bank rate and the arbitrage transactions depending thereon, and on interest and discount rates generally.

The modern theory of international trade does not say that between two particular countries, or at any one particular point of time there is an equivalence of exchange, but that between a circle of commercially interconnected countries, and over a certain cycle of time or operations, there is an equivalence of exchange of goods and services.

Movements of currency in the most elementary form a.s.sist the process, as far as immediate settlements are concerned; bills of exchange a.s.sist it when there is need of deferred payments, as, for instance, when a country imports steadily all the year round, but has only one export time, say after harvest; and, finally, bank and discount rates a.s.sist the process by providing currency media at times and places which would otherwise be unable to attract a supply. Over the whole circle of completed operations there is equilibrium of exchange, and the machinery by which that equilibrium is accomplished is currency in the widest sense. The index or indicator and safety-valve of the whole is the rate of interest. On these bank rates are based the operations of the modern bullion dealers or arbitragists, which serve to equalise or economise the distribution of the precious metals all over the world.

It will be seen at a glance, therefore, that they fulfil, in an automatic and perfectly natural manner, all that was vainly attempted to be accomplished by the repressive savage action of the State, and the interfering unscientific handling of the Mint and coinage rates. It is in this feature that the great distinction between the modern and the seventeenth-century world consists. Such a difference can only be based upon, and have arisen from, a true theory of international trade. But the process of development which alone made it possible--the development of modern banking, the invention of paper currency media, the breaking down of international trade restrictions, all the mechanical and scientific inventions which have resulted in the binding of the world together in one whole as far as commerce is concerned,--all this would comprise in brief the essential features of the complete commercial development of two centuries or more, and how far they are related as cause or effect it would be hard to say.

In this secondary period, therefore, the separate history of each individual state gradually loses its distinct or isolated importance, as far as mere Mint edicts are concerned. As a consequence the bimetallic action which we have hitherto sought in the history of each individual currency must now increasingly be sought in the wider field of the world currency, that congeries or completed whole of currency of which each national system now forms only a part, and that not an independent part.

France.

In this third period the first change which France made in her silver monies was in 1674, when she for a time coined 4-sol. pieces of a quality below that of the _ecus blancs_ by more than a fifth. A great outcry was made by the Mint officers and mercantile community against this money as implying a debas.e.m.e.nt.

In 1679 there was a noticeable quant.i.ty of Spanish _pistoles_ and large _ecus d'or_ in circulation, and as a remedy it was ordered that they should be recoined into _louis d'or_ and _louis d'argent,_ the King offering to forego the seignorage as an inducement to bring them to the Mint. In 1686, however, the louis d'or itself was raised from 10 livres to 11 livres 10 sols., and the ratio thus changed to 15-1/2. This being found greatly in excess, in the following year it was lowered to 11 livres 5 sols. (a ratio of 15-1/4). In 1689 both silver and gold were again raised, the _louis d'or_ to 11 livres 12 sols. and the _louis d'argent_ to 3 livres 2 sols., but almost immediately a general recoinage was resolved upon. In this great operation, effected towards the close of 1689, the weight and standard of the previous coinage was exactly retained, but the louis d'or was issued at 12 livres 10 sols.

and the louis d'argent at 3 livres 6 sols. Only two years later again the standard had to be altered, and the value of 1693 somewhat raised.

It will give some slight idea of the sapping of the coinage that the pieces which in 1691 were minted at 12 livres 10 sols. were, in 1693, called in at a valuation of 11 livres 14 sols. The new species of 1693 were issued at 13 livres and 3 livres 8 sols. respectively.

[Sidenote: FRANCE: THE REFORM OF 1726]

Ten years later a third recoinage was ordered, the louis d'or being issued at 15 livres, and the louis d'argent at 4 livres. By 1709 these species had sunk in equivalence to 12 livres 15 sols. and 3 livres 8 sols. respectively. In that same year, however, their issue value was raised to 20 livres and 5 livres. This extraordinary and arbitrary action was greatly to the detriment of French commerce, and the idea was entertained of gradually reinducing the standard of 14 livres and 3 livres 10 sols. This was ordered by proclamation of 30th September 1713, which was to continue in force till 1715. In the latter year a reformation of the coinage was again undertaken, the reformed species rising to 20 livres and 5 livres, and the worn species remaining at 16 livres and 4 livres. From this latter date up to 1721 the operations of the financier John Law wrought great disasters in the monies. At the time of the erection of the bank, 2nd May 1716, there were four species of _louis d'or_ and three of _louis d'argent_. By 1720 the former had grown to forty in number and the latter to ten. (For the disorders of the period of John Law, see the account of French monetary system, Appendix VI.) It was to remedy this disorder that the great edict of 1726 was enacted. This edict, which formed the basis of the French currency system almost up to the days of the Revolution, prescribed the minting of louis d'or at a tale of 30 to the mark, and issued at a value of 20 livres; and of silver ecus at 8-3/10 to the mark and issued at 5 livres--divisional coins in proportion. The legal ratio was therefore 14-5/8. All foreign coins and the ancient species of gold and silver were decried, and ordered to be brought in for reminting. All the prohibitive regulations of an old regime against cutting and export, etc., were re-enacted with severest penalties. But as the rate at which the Mint was ordered to take in the old coinage did not represent the commercial value at the moment, the old coins were not brought in, and up to as late as 1749 the recoinage had not been accomplished, although the Mint prices had been at different times advanced on the whole a matter of 30 per cent. or more. In 1759 the want of currency had become so great that the King sent his plate to the Mint, and numbers of private individuals followed his example, receiving in reimburs.e.m.e.nt part payment at the rate of 861 livres 5 sols. 10 den. for the mark of fine gold, and of 59 livres 5 sols. 10 den. for the mark of fine silver.

This latter tariff underwent no change until 1771, when, under the pretext of the changes which foreign coinage tariffs had undergone, those terms were fixed respectively at 709 livres and 48 livres 9 sols.

In this resume the mention of billon money has been generally avoided, as unduly complicating the subject. But in the legislative action of France in the eighteenth century there is one act which necessitates a momentary departure from this standpoint.

In 1738 the Government of the United Provinces diminished the value of their _sols._ by one-half. The French Government fearing that this diminution would lead to an immense influx of such sols. decided to follow suit. By a decree of August 1st of the same year, 1738, it was ordered that the _Douzains_ and pieces of thirty deniers should have course only for eighteen deniers. The important point to notice in connection with this is that, in order to mitigate the effect of this reduction, the same decree limited the tender of such billon money. It was ordered that in payments up to 400 livres not more than 10 livres should be tenderable in billon, and for payments of more than 400 livres not more than 1/40 of the total. The restriction was ineffectual in preventing either the import of foreign billon specie or the operations of billonage or arbitrage, based on the differentiated value of the various kinds of billon circulating. This is quite evident from the preamble of the edict of the following October, 1738, which attempted the calling in of the 30-denier pieces, in order to put a stop to the process.

[Sidenote: FRANCE: THE REFORM OF 1785]

Such a failure is quite in keeping with all previous experience as recorded in these pages, and deserves no special reference. The point to note is rather the gradual evolution and adoption of the idea of limiting the tender of the lower species, so as to contract their action on the main species of the currency. This idea forms the complement of the idea of an agio, involved in the issue of fractional coins on a lower standard or basis than that of the greater specie. The one idea was--in long, over-long, periods i.e.--impracticable without the other; but together, when finally evolved, thoroughly seized and put in practice, they formed the main basis of the truest modern currency system.

To return to the pure gold and silver species. The basis of 1726 remained at law unaltered until 1785. The edict of the 30th October of that year commanded a recoinage; no change was made in the silver coinage, which remained according to the tariff of May 1773, namely, 52 livres 9 sols. 2 den. to the mark fine. By the alteration of the tariff of gold, however, to 828 livres 12 sols. to the mark fine, the ratio of 14-5/8, which had nominally prevailed since 1726, was altered to the memorable 15-1/2. The reason was explicitly stated to be the increase in the value of gold during several preceding years--an increase which had banished or detained gold from the French Mint and even from France.

Writing in 1785, the minister, Calonne, who proposed and executed the recoinage in that year, spoke thus:--

"In 1726 the legal ratio was fixed in France at 14 marks 5 oz. of silver, to a mark of gold, and that which proves with how much sagacity this point was seized is the fact that during a long course of years France retained in her circulating medium a sufficiently large proportion of each metal. Nevertheless, her gold gradually became less common, and for some years this scarcity has rapidly increased, and this precisely because its legal value has always remained the same, while its metallic value has increased from year to year."

He estimated the amount of livres in _louis d'or_ existing in the country at the time of the recoinage, 1785, as 650 million livres, which amounted to only a half of the total coinage (1300 million livres) of the period 1726-85. What seems to have determined Calonne to adopt 15-1/2 was the fact that Spain had the legal ratio of 16, and that there was a probability that, in future, gold would rise in value. As for the market price, he admits that it was only 15.08-15.12 in 1785. The recoinage, therefore, brought a profit of 7,255,216 livres to the King's purse, and a profit of 21,600,000 livres to the holders of the old _louis d'or_.

[Sidenote: FRANCE: CALONNE'S POLICY IN 1785]

His policy was severely criticised in a report made in 1790 to the National a.s.sembly, which proposed a silver standard, with an authorised circulation of gold coins at the ratio of 14-7/9 and the abolition of seigniorage. It is well known that this was nearer to the market rate.

Calonne's ratio, therefore, must be regarded as arbitrary and designing.

Practically, the latter recommendation of the committee's paper of 1790 had been conceded in the decree of 30th October 1785, as the seigniorage was by it allowed to be no more than the net cost of reminting.

By this celebrated edict of Calonne's, which also enacted a recoinage, the right of seigniorage was practically finally relinquished for France. Fixity was given to silver as the princ.i.p.al money, and a definite ratio was established at which gold was to circulate by its side. In these, its chief points or characteristics, it formed the exact model for the later Act of Republican France, which is ignorantly looked upon as having created the bimetallic system. The Act of 7 Germinal an XI. did but re-enact and perpetuate the edict of 1785.

It is important to reaffirm and emphasise this point, as quite wild and blind estimates have been formed of the later action of Republican France. In merest fact, that later action created no new order, it inst.i.tuted no new idea, it did not even promulgate its own theory.

[Sidenote: FRANCE: CURRENCY LEGISLATION AT REVOLUTION]

Republican France began her reform of the currency in a very temporary and opportunist manner by issuing a ma.s.s of inferior monies of 15 and 30 sous pieces to form the basis of the a.s.signats, and to replace the gold and silver which had almost entirely disappeared from circulation.

In the decree of 16 Vendemiere an II. (7th October 1793), however, the question of standard was approached, and decided in a remarkable manner.

The monetary unit was decreed to consist of the hundredth part of a kilogram, named _grave_, represented (1) by a piece of silver 9/10 fine and weighing 10 grms., (2) by a piece of gold of the same weight and standard, to be current at 15 times the value of the silver piece.

This decree remained a dead letter, and two years later the _franc_ was definitively adopted as the base of the French system. As determined by the two laws of 28 Thermidor an III. (15th August 1795), that system was based upon the silver franc (weighing 5 grms. 9/10 fine). A gold coinage was ordained, of the same fineness, in a piece of 10 grms. weight, but the ratio of value of the gold to the unit franc was not fixed. This was exactly the monetary system which Mirabeau had counselled in his memoirs to the a.s.sembly in 1790. The silver _5-franc_ pieces prescribed under this system found acceptance, the bronze pieces were refused and had to be withdrawn, and as to the gold piece, its issue was not even attempted. Two years later the "Directoire" p.r.o.nounced in favour of maintaining the 10-grm. piece of gold, but demanded the fixation of its value, proposing a ratio of 16:1. In opposition to this scheme, Prieur submitted to the "Council of the Five Hundred" a project adopting the silver and gold coinage, as already determined as above, but leaving the value of the gold piece to fluctuate according to the market, its value being declared twice annually by public announcement. After being materially altered in the "Council of the Five Hundred," this scheme was definitively rejected by the "Council of Senators," and for several years the question of the monetary system of the Republic was allowed to slumber. When, in the year X., the consideration of the subject was resumed, it was at the instigation of the Consuls. At their desire the Minister of Finance, Gaudin, laid before the Council of State a scheme in which he proposed the issue of 20 and 40-franc gold pieces, of a value based on the ratio enunciated in the edict of 1785, namely, 15-1/2. He was, at the same time, careful to explain that silver remained the basis of the currency, and that the gold money could be reissued if a different market compelled a change in the ratio. In his report to the Consuls, Gaudin admits that the commercial ratio had for a long time been under 15. The decisive point which led him to maintain the ratio established in 1785 was, that to change the _status quo_ by the adoption of 15 as a ratio would occasion great loss to the holder of gold coins, and that there was no sufficient reason for so great a change.

The Financial Committee of the Council of State at first rejected the scheme, preferring that of Prieur, already described, but on an inquest, ordered by the First Consul, who insisted on pressing the matter to a conclusion, M. Gaudin carried his propositions through the Council of State, but with the important difference that the reference to any future change in the ratio of gold to the basis of silver was tacitly dropped. These propositions became the foundation of the law of 7-17 Germinal an XI. (28th March 1803), on which the monetary system of Republican France was finally built.

The _expose des motifs_ of this law speaks of the gold coins in these words:--

"The gold pieces up to the present in circulation are the pieces of 24 and 48 livres tournois. Article 6 of this law subst.i.tutes in their place pieces of 20 and 40 francs. The adoption of the decimal system necessitates this change, which brings all parts of the system into accord. It is on the same consideration that the standard is fixed at 9/10, like that of silver."

Not a word is said as to the ratio, and much more stress is laid upon the suppression of billon money and on the abolition of seigniorage, as of greater importance and benefit to the nation's interests. By this law of Germinal XI. the monetary unit of the French system was declared to be the silver franc, weighing 5 grms. of 9/10 standard. By the side of this franc and its multiples, were to be issued gold pieces of 20 and 40 francs, valued on a basis ratio of 15-1/2 to the silver.

[Sidenote: FRANCE: THE REFORM OF 1803]

It will be seen at a glance from the course of this previous history that this law inst.i.tuted no new principle, or theory, or system in French currency. The decimal system was adopted in place of the old system of livres tournois, seigniorage was abolished, and fixation of value given to the unit money, and billon money discontinued. But in matter of standard and system there was not even innovation. The system of Republican France, as established by this law, was no more and no less bimetallic than in 1785, or than in 1610, or in the days of Francis I. Theories as such did not occupy the mind of the legislator, and of any conception of a bimetallic theory or system such as we have learned to know there is no trace. The First Consul found at hand the two metals which had formed the currency of his country for centuries. The problem of their regulation was the same which had been faced by his predecessors for centuries, and he settled it in the same practical untheoretic way.

It was only gradually that in its totality of coins the French monetary system was made to conform to the metric system thus established. The old gold coins of 12, 24, and 48 livres were not suppressed until June 1829, the actual extinction of billon money was only accomplished in 1845, and the recoinage of the inferior monies in 1852-56. But such are mere matters of detail and apart from the subject.

The experience of France under this new regime is, therefore, in no wise different _in kind_ from such experience as has been described for the preceding centuries. It is not until the broaching of a bimetallic theory as such, and until the expression of that theory, as a theory, in the formation of the Latin Union, that anything like a special significance attaches to the monetary system and experience of France in the nineteenth century, any more, e.g., than in the seventeenth. The main difference in the situation was not that France had changed her system, and that her experience was henceforth different and of different signification, but that England had changed hers, and that the brunt of the fluctuations of the precious metals about a fixed ratio was left to be borne by a smaller area. The influence and the instance is, therefore, more telling in degree, but in no way different in kind.

The second idea which is commonly entertained with regard to the action of France during this later period, viz. that her action secured for the world at large a fixed and steady ratio, is equally--indeed, still more--fallacious. At no point of time during the present century has the actual market ratio, dependent on the commercial value of silver, corresponded with the French ratio of 15-1/2, and at no point of time has France been free from the disastrous influence of that want of correspondence between the legal and the commercial ratio. The opposite notion, which prevails and finds expression in the ephemeral bimetallic literature of to-day, is simply due to ignorance. From 1815 England has been withdrawn from this action of a bimetallic law, and the modern insular pamphleteer has before his eyes no sign of its workings in his own country. He therefore a.s.sumes an universality of such experience, and attributes it to the French legislative ratio. It is in no polemic spirit, but simply in the interest of science that this particular misapplication of history to the squaring of a theory is to be branded.

The plainest facts of history are thereby absolutely misrepresented, and the a.s.sumption of cause and effect is so far from being true that the repose of the English currency history in the nineteenth century is to be attributed to the _absence_ of a bimetallic system; to its despite rather than its presence and influence. To instance only by France for the moment.

[Sidenote: FRANCE: COURSE OF THE RATIO]

The course of the actual or market ratio has been already stated in the table (_supra_, pp. 157-59). In the graphic representation of this (_opposite_) the legal ratio of 15-1/2 is represented by the fixed line _x.y._, the actual ratio by the fluctuating black line _z_. At no point do these lines coincide. After three years of fluctuations, 1803-06, now above and now below, the ratio sinks persistently below for seven years, 1807-13, touching the lowest point (a ratio of 16.24) in 1813. For the succeeding five or six years, 1813-19, the ratio was as consistently above the legal rate, though with less violence and width of divergence.

From the latter year, 1819, up to 1850, its course was undeviatingly below 15-1/2, then from 1851-67--the period, i.e., of the great gold outputs of Australia and America--as undeviatingly above. From the last-named date until the close of the bimetallic system in France, and, indeed, up to our own days, the course of the commercial ratio has been again unbrokenly below the 15-1/2 ratio, and, as is too well known, with an ever-increasing enormity of divergence.