Chapter I: Bimetallism Simplified

BY GEORGE H. LEPPER.

The "free-silver delusion" is not dead, nor will it die unless the McKinley administration shall give it its quietus by providing the country with a sound and popular system of bimetallism. Even the most sanguine of the Republican leaders must admit that the prospect of accomplishing this task by international agreement is not so encouraging as to make the tentative consideration of other plans, not requiring concerted action, unnecessary or useless. The purpose of this article is to present such a plan, and to contrast it with those which have already been tried, or have thus far been proposed.

That the financial policy we have pursued since 1878, the year of the Bland-Allison Act, has been absurd and ruinous hardly admits of two opinions. Secretary Carlisle, in his letter of September 16th last, gave authoritative utterance to what had long been tacitly understood. He said, "If the time shall ever come when the parity of the present silver dollars and silver certificates cannot be otherwise maintained, they will be received by the government in exchange for gold." In other words, the vast stores of silver purchased by the United States under the laws of 1878 and 1890 are a dead asset of the Treasury, and cannot be utilized for purposes of redemption until sixteen ounces of silver shall again be equivalent to one of gold, or until they are re-sold in the open market for gold. To render this treasure available for ultimate redemptions thus becomes a prime condition of our problem.

There is a growing disposition in certain influential quarters to evade the difficulties in the way of international bimetallism by taking the government out of the banking business, and relegating the matter of currency issues more and more to the banks. Whatever may be said in behalf of this course, it is certainly not popular with the masses, who, justly or ignorantly, have come to look upon national banks as favored objects of legislation, and in league with syndicates and trusts. But, aside from this, the real core of the trouble is not removed. We but shift the burden of responsibility. The ultimate fund for redemption remains limited to the one metal as beforehand can serve the banks even less efficiently, for the more divided the responsibility the larger the proportion of gold required for reserve purposes.

International bimetallism at the contemplated ratio of 16 to 1, and bimetallism by independent action at the same ratio, although opposing issues in the late campaign, are founded upon the same errors and misconceptions. Both assume that monetization creates a commercial demand for the metals, thereby enhancing their values; that the use of gold and silver as money substances has been one of choice with us instead of necessity; and that legal-tender laws create value.

It may be going too far to say that monetization creates no demand, but whatever demand it may be supposed to create is not a commercial one. In the latter sense the word signifies both an actual purchase, or the exchange of one thing for another, and a permanent withdrawal from the market of the thing bought. The act of coinage is certainly not a purchase, for, directly or indirectly, it aims to restore to the offerer of the bullion not something else, but the _precise thing received_; nor is the metal retired from the market, since it is actually or virtually, though in an altered form, immediately restored thereto. The whole process is merely one of bailment. It would therefore seem incumbent upon those affirming the efficacy of monetization to raise the price of the metal to show by scientific analysis just how, why, and to what extent it does so. The fact that from 1792 to 1873, with free coinage at a very close approximation to the market value, not once did the legal and commercial ratios coincide, and that the change of the former from 15 to 1 to 16 to 1 in 1834 had no perceptible effect on the market, seems to be conclusive proof that the general belief that free coinage at a fixed ratio appreciates the over-valued metal is delusive.

It is important to inquire into the grounds upon which the use of silver and gold is founded, for if we have _chosen_ them for that purpose there is an implication that other substances might have served the same object almost, if not quite, as well. Such is not the case. Silver and gold are absolutely unique in possessing the qualities indispensable for money, and not only nature, but immemorial custom and deep-rooted prejudice combine to compel their use in the exchanges irrespective, and even despite, of legislation. Monetization, therefore, cannot, for this further reason, add to, or take away from, their respective values, because the exchangeability that monetization is supposed to give them is a natural quality and not the creature of law. But so much more is this true of gold than of silver, that the dependence of modern commerce, and, through it, modern civilization, upon it is almost absolute. If, therefore, free coinage at a ratio unfair to gold were attempted, gold would cease to be offered at the mints, but it would nevertheless continue in use in final settlements, especially in transactions of some magnitude, thus preventing its decline in value.

Suppose, then, that such a law, national or international, should go into effect to-day, would anyone be so fatuous as to part with his gold until the effect of the law could be discerned? If the governments at the same time should exercise the same good sense, they would retain their gold and disburse their silver, but such conduct would defeat the very object of the law. If, on the other hand, they should release their gold, retaining their silver, they would give fresh point to the oft-proved saying, "The fool and his money are soon parted." A _bona-fide_ attempt on the part of one or more powers to change the market ratio of the metals could result only in transferring government gold to private coffers, and in a general fall to the silver basis with all its attendant evils. Meanwhile the gold would continue its functions as money in new transactions, but at its market value, never by any chance reaching the public treasuries except on the same basis. The inconvenience of transacting business with a metal some thirty times as heavy, value for value, as that to which they had been accustomed would, without further reason, speedily induce the governments to a restoration of the gold standard at any cost.

As for the legal-tender quality, it cannot be denied that governments here possess a peculiar power which individuals cannot exert; but that fact does not make the exercise of that power morally right. The quality of legal tender infused into the debased dollar cannot but add temporarily to its exchangeable value in a degree gradually diminishing with the exhaustion of the accumulated credits. When, however, the last debtor in the series is reached, and there is no longer a Peter to rob for the sake of Paul, the fraudulent coin must inevitably sink to the value it had as bullion prior to the act that created it.

Upon such fallacies as these it is sought to erect the elaborate superstructure of the civilized world's monetary system! Some of the more advanced thinkers among the self-styled bimetallists, realizing that some deference must be paid to the lessons of experience, which offers not a solitary instance of the concurrent use of the two metals under a fixed ratio, argue that, even so, the chief blessing of bimetallism--a less variable standard--will have been secured in the automatic oscillation from one circulation to the other. If this oscillatory feature is the object sought, the adoption of a ratio of 16 to 1, or thereabouts, would certainly not secure it, but one almost identical with the market ratio would be imperative. Not once in the history of our country did this alternation occur, although from 1792 to 1873 we were upon the double standard. It is true that in 1834 the circulation changed from silver to gold, but that was due not to the automatic effect of that system, but to an actual change of the legal ratio from 15 to 1 to 16 to 1. But if the legal ratio is now made to conform to the market one, what becomes of our present silver coins? Must they be called in and be replaced by the new? If so the convenience of our subsidiary coinage will be sacrificed, for a silver dollar twice its present size would be intolerable.

The obstacles in the way of international bimetallism need not be enumerated here. The proceedings at the Brussels monetary conference in 1892, though they accomplished little besides, certainly served to make these difficulties plain. The primary object is to make silver coins and gold coins continuously interchangeable in trade at a ratio approximating as closely as possible to 16 to 1, and the discussion of the means to accomplish this has apparently narrowed down to one proposition to be answered by a simple yes or no: Shall the free coinage of gold and silver at the ratio of 1 to 16 be restored? It will not do to insert any other ratio (except, perhaps, 1 to 15 or 1 to 15-1/2), because if a ratio closely approximating the commercial one is contemplated, each nation might decide the question for itself, and an international agreement would be superfluous. All the civilized nations have their own established ratios of coinage varying from 15 to 15-1/2 or 16 of silver to 1 of gold, and whichever of these should prevail the result could not but be a serious matter to those nations obliged to reform their coinage in accordance therewith. Neither horn of the dilemma presented by the plan of a fixed ratio is practicable; the convenient one of 16 to 1 is impossible, and the commercial one would necessitate recoinages and make the coins prohibitively cumbrous. The choice of an intermediate ratio would be a virtual relinquishment of the principle itself, for how would that ratio be arrived at if not by mere guess? There are no data to guide us, nor is there any formulated rule by which the desired ratio may be determined. Besides, the intermediate ratio would still remain open to the objections advanced against the higher ratio, both in requiring recoinage and in unduly enlarging the coins.

The inevitable result of free coinage at a fixed ratio is to expel the undervalued metal from circulation. There can be but one way to prevent this, and that is by a system of sliding scale whereby scrupulous fidelity to the state of the market from day to day may be preserved. Diurnal recoinages are of course out of the question, but the thing is nevertheless both easy and practicable.

Let us assume that gold only has hitherto been used as money, that 25.8 grains thereof have been taken to be one dollar, and that it is now desired to supplement it with the use of silver. Our proposition will necessarily take this form: If one dollar is equal to 25.8 grains of gold, it must be equal to as many grains of silver as 25.8 grains of gold will buy in the open market. Here we must remember that what is true to-day may not be true to-morrow or a year hence. So many grains of gold may to-day be worth 412-1/2 grains of silver, to-morrow they may be worth but 400, and next day, 420. By _fixing the amount_ of silver in the dollar we thus utter through these coins a new falsehood each day. _Constant values, not constant weights, is what we are driving at; so in lieu of the silver coin we must substitute a promise to pay a gold dollar, or a gold dollar's worth of silver, whatever the state of the market._ This is what I designate _natural bimetallism_. The silver dollar and fractional pieces as we now have them may nevertheless continue in circulation, for the promise can be written into them by legislation to redeem them, upon surrender, in the same manner as the paper promises. It is possible that Hamilton and his successors in office prior to 1837 may have thought of this expedient, but discarded it as not then feasible. We must remember, however, that they had serious practical difficulties to contend with, which are now happily removed. The advantages of the telegraph, the cable, the improved means of transportation, and our admirable system of market quotations, enable us now with certainty and ease to determine daily what any given thing is worth in terms of any other.

In order to make my plan as clear as possible, I shall run the risk of seeming elementary by following through, step by step, a typical transaction under it: Let us fancy that the reader, bearing a nugget of gold in his left hand and another of silver in his right, and desiring to convert them into money, repairs to the Philadelphia mint. He applies there to the proper clerk, who, for simplicity's sake, we will suppose performs all the operations. The clerk weighs and assays the two pieces of metal, and finds the gold one to contain 25,800 grains of standard gold, worth precisely $1,000, which are counted out in bills. A similar operation reveals that the lump of silver weighs 35,500 grains, but the clerk is now observed to consult a table before saying, "The market equivalent of a gold dollar is to-day 710 grains, consequently your 35,500 grains are worth $50;" and he then proceeds to count out the money in bills precisely like those given in payment for the gold. Upon examining these at his leisure the reader discovers imprinted thereon a contract running as follows: "This note entitles the bearer on demand to [the denomination of the bill] dollars in gold or to the market equivalent thereof in silver."

In the course of time, say five years hence, these identical notes, by the accidents of trade, have come into my hands, and I desire to have them redeemed. Applying to the United States Treasury I find I am granted the privilege of taking payment in silver, in gold, or partly in one and the balance in the other. For the purposes of our illustration, however, we will adhere to the figures already used. In exchange for the $1,000, then, I receive back precisely the weight of gold originally given for them. For the $50 I receive six pieces of silver of different sizes, which I notice are arranged upon a decimal scale of grains. They contain respectively 30,000, 5,000, 1,000, 500, 100, and 50 grains; in all 36,650 grains, or 1,150 grains in excess of the original quantity. Upon inquiry I learn that this excess is not due to any mistake by the clerk, but that since the first transaction silver has fallen so that 733 grains are now commercially equal to 25.8 grains of gold, and that the government has simply redeemed my notes at par. After this first experience I have many subsequent transactions with the mint and with the Treasury. At the former I find that I have the choice of notes, gold coin, or silver coin. At first I reject the silver coins as being under weight, but upon its being explained that they are purposely made light for the sake of convenience, and that they are by general law redeemable in the same manner as the notes, I no longer object to them. At the Treasury, on the other hand, I am sometimes, though rarely, informed that the government is exercising the option reserved in its contract; that it is paying exclusively in gold, or exclusively in silver, or partly in one and partly in the other. These occasional disappointments, however, never affect the integrity of the money I have in hand, for whether redeemed in gold or silver, everyone knows that it will be redeemed at its _face value_, and it accordingly passes unquestioned.

Upon several occasions I present bonds of the government for redemption, some of them issued previous to the inauguration of the new system, and others issued afterward. In either case I find that the same system of redemption prevails as in the example of the notes. Treasury notes, silver coins, and silver certificates--one and all I discover are also redeemable like the new notes or convertible into them, so that I need never concern myself about any matter save their genuineness.

Gold certificates and greenbacks must, of course, be redeemed as their special contract requires, but, once redeemed, they must reissue in the new bimetallic notes which I have described. Thus a very simple method is provided whereby this form of currency may be transmuted into another without contracting the circulation.

The great desideratum is to make our vast stores of silver available for ultimate redemptions, and this, natural bimetallism effectually accomplishes. Our gold reserve would therefore cease to be indispensable to the preservation of our national credit just as soon as the greenbacks and gold certificates were converted into the bimetallic notes or cancelled. But there need be no fear that the gold reserve would ever become depleted. By removing all danger of the debasement of our money, by insuring the parity of every dollar of our currency with gold, and by permanently retiring the greenbacks, we destroy the incentive to hoard gold, cause its return to the reserve, relieve it of half the burden it formerly had to sustain, and reduce to a minimum the tendency to withdrawals. The copious supply of gold thus secured would enable the Treasurer to waive his option to pay in silver whenever the customer preferred gold, thereby enabling merchants to use the less cumbrous metal for foreign shipments. Indeed, it is entirely probable that the new notes would be preferred to gold in international as well as in domestic exchanges.

An advantage of especial importance is that the metals can be concurrently used. The oscillation from one to the other, even if it be admitted that it would provide us always with the better of them under whatever changes may occur, is certainly not to be preferred to the constant and equal use of both. The unlimited coinage of the two metals upon a plan so equitable, recognizing as it does their precise market relations from day to day, would enable us to view with indifference the fluctuations of the market, however great, and to whatever cause due. Incidental to this advantage, and second only to it in importance, would be the establishment of a par of exchange simultaneously with the gold-and with the silver-using countries by allowing customs duties to be paid in silver bullion at market prices, or in gold.

It may be contended that under the plan here proposed the government might lose by a continued decline in silver, and that the silver it already has would remain depreciated far below the price the government paid for it. I frankly admit this. But is it reasonable to suppose that silver will continue to decline? The probabilities are that in the succeeding twenty years the production of gold will increase more rapidly in proportion than silver; and it also seems that whereas processes for extracting and refining silver have well-nigh reached their limit of economy, the new processes for treating gold are rapidly improving. Nor must it be forgotten that should such a decline occur the mint deposits are from day to day keeping pace with the withdrawals, the losses on the latter thus being counterbalanced by concurrent gains, and interest-bearing debts being constantly transmuted into non-interest bearing currency. It is equally clear that the utilization of a dead asset, as the government stock of silver now is, is a distinct gain, and will permanently dispense with the future issue of bonds for the repletion of the gold reserve. As for the silver purchased by the government under the Acts of 1878 and 1890 having become depreciated, the fact is there whether we choose to recognize or ignore it. There is no better way for palliating that loss than to make that silver immediately available for the payment of the nation's debts.

Allied to the question of the costliness of the system is that of its tendency toward, or freedom from, speculative disturbances. So long as payment solely in gold was compulsory, speculators had a fertile field for their operations. By giving the Treasurer the option of payment in silver or gold, however, raids upon either metal can be met by paying exclusively in the other until the proper equilibrium is restored. If a real difficulty should still be found to exist in practice, a slight mint charge would effectually put an end to it. In any event, natural bimetallism is much less open to criticism on this score than the existing system, or than that of the fixed ratio.

The pieces of silver with which redemptions are to be made are in no sense to be regarded as money. They are distinctly merchandise, possessing a commercial value precisely equivalent to the number of money units received or surrendered therefor, and when the notes have been redeemed, and the commercial equivalent has been given therefor, the government's responsibility ends. The government assumes no obligation to maintain silver bullion at a given ratio to gold, but it does assume to make each unit of money the equal of 25.8 grains of gold. In other words, the fluctuations in the value of silver are confined to it in its bullion shape, and cannot enter into its form as money. The idea that paper currency must be redeemed in gold, _as money_, or silver, as money, is erroneous. It is redeemed in those metals because they have value as _merchandise_. In domestic transactions this fact is often lost sight of, but it becomes manifest in international exchanges when the metallic money passes strictly on its merits as bullion, and without regard to the stamp it bears. For these reasons the Treasury should not be understood as guaranteeing the weight or fineness of the metal, except in its immediate transactions, although to facilitate its ready acceptance between reputable merchants, the affixing of the government's seal upon the pieces would be a very proper practice.

Nor is there any mechanical difficulty in the way of the operation of the plan. The silver could be fashioned into pieces of different sizes graduated upon a decimal scale of grains, with the smallest piece containing fifty grains, being somewhat larger than the current dime. By limiting redemptions, then, to fifty dollars and multiples thereof, our pieces will in every conceivable instance enable us to make the exchange, or redemption, to the accuracy of a single grain on each dollar, which is certainly sufficiently close for all practical purposes.

In contrast to the national banking system, the bonds could be retired without derangement to our finances, the metals forming a basis upon which our outstanding currency could directly rest--thus obviating the extravagant features of that system and stripping us of the impediment of an immense debt. And not only this: the encouragement natural bimetallism would hold out to owners of bullion of both kinds would cause our national vaults to be filled to overflowing with the sinews of war, and make us the best equipped nation on the earth for a prolonged struggle, should such a struggle come.

By providing a means for the remonetization of silver at the market rate we are doing its friends a greater kindness than they ask. Free coinage on seemingly more favorable terms would result in immediate overproduction and a glutted market, from which condition it would be most difficult to escape. If there be any merit in the contention that a "demand" for the metal is what is needed, and that that demand will enhance its price, so much the better, for in that case not only will the condition of the silver industry improve, but the government itself will be benefited by the enhancement in the value of the metal it already holds and may hereafter acquire. The example set by the United States would be gladly imitated by other nations, and the use of silver as a basis for money would speedily rival that of gold.

Viewed as an experiment the trial of it would be inexpensive and without peril, while congressional debates pending its consideration would give no cause for apprehension or disturbance to business, since the gold standard would not be jeopardized. But why should it be regarded as experimental when the most elementary and most familiar business principles are followed?

The question may be raised whether the preservation of the gold standard is desirable, since, it is claimed, it is gradually appreciating in value. To this it may be said that the peril of the gold standard does not consist in the fact that it is rising, but that it has been hitherto accompanied by the non-use of silver in final redemptions. That an appreciating dollar is necessarily an evil is, moreover, fairly debatable. During the period from 1864-1872 (which our Democratic friends delight to laud as the most prosperous in our history), although we were nominally on a bimetallic basis, contracts were made on that of the greenback, which rose during that time an average of ten per cent per annum, to wit: from 49.2 cents in 1864, to 89 cents in 1872. In other words the debtor who borrowed $492.00 in 1864 was obliged, eight years later, to pay his creditor $890.00 of like purchasing power as he had received, in addition to a considerably higher interest than now current. I do not wish to be considered as standing sponsor for the rising dollar, but it is a pertinent question to ask those who decry the gold standard for this reason, why the same cause did not have the same effect in each instance.

The objection may be made that I would make of a silver mere commodity, but the point is not well taken, inasmuch as the mint offerings are transmuted into paper currency, which is virtually making silver, money; moreover, the silver itself is retained in its present form of subsidiary coinage. Silver is not a moral being possessed of rights and sensitive to insults; it is a mere thing whose function it is to serve us in any way we may deem most conducive to our interests. If under the system of natural bimetallism it does this best, the question as to its money or commodity character is vain. Moreover, under Gresham's law, one metal under the fixed ratio is not only "reduced to a commodity," but is absolutely expelled from circulation and as a basis for circulation; and we have also seen that in the last analysis both silver and gold are commodities under any system of specie payments.

Under a republican form of government, where frequent and extreme changes from one policy to another must be guarded against, that policy should be adopted which most nearly conforms to justice, and which the sense of the largest majority commends. What proposition, then, could be fairer and more apt to commend itself to the general intelligence than that the metals should be monetized at their commercial values from day to day, or what policy more likely to remain unaffected by the mutations of parties and politics?

In conclusion let me sum up the salient points: We have seen (1) that the chief weakness of the present system is the non-availability of silver for final redemptions; (2) that "currency reform" is inadequate because of its unpopularity and in failing to increase the primary basis of money by the addition of silver; and (3) that the principle of the fixed ratio is fallacious and impracticable. On the other hand, we have discovered Natural Bimetallism to be the application of the principles of everyday business to that business which underlies all others,--national finance,--and that the advantages resulting therefrom are: It dispenses with the necessity of an international agreement with its attendant uncertainties, perils, and delays, and at the same time points out the way to a sound and permanent home policy upon which all our factions could unite. It practically restores to silver its unlimited coinage at its just market rate, injects a healthy stimulus into the languishing silver industry, preserves our admirable system of subsidiary coinage, and utilizes both metals as companion pillars of our national credit. It coaxes gold to the mint, keeps it there, and does away permanently with bond issues. It provides for the retirement of the greenbacks, supplies their place with currency equally sound but less hazardous, and insures the absolute parity of every dollar in circulation with every other, and with gold. In fine, as every true principle must, and as only a true principle can, it answers every condition of the problem to which it applies, and commends itself as the best, if not the only, way out of our financial embarrassments.