Chapter IV: Towards a Gold Standard (1)

The establishment of stable monetary conditions was naturally enough dependent upon the restoration of a common standard of value. Plain as was the aim, its accomplishment was by no means an easy matter. Two ways seemed at first to be open for carrying it out in practice. One was to adopt a common metal as currency, and since all important countries of the world had gone over to the gold standard it meant the silver-standard countries should abandon their standard in favour of gold. The other was to let the gold and silver standard countries keep to their currencies and to establish between them a fixed ratio of exchange so as to make the two metals into a common standard of value.

The history of the agitation for the reform of the Indian currency is a history of these two movements. The movement for the introduction of a gold standard was, however, the first to occupy the field. The failure of the notification of 1868 may be said to have marked the failure of a policy, but the movement for a gold currency in India started in the sixties was not altogether stamped out of the country. That the movement still had life in it is shown by the fact that it was revived four years later by Sir R. Temple, when he became the Finance Minister of India, in a memorandum¹⁹⁷ dated May 15, 1872. The important particular in which he differed from his predecessors consisted in the fact that while they all aimed to make the British sovereign the principal [pg 119] unit of the gold currency in India, he desired to give that place to the Indian gold coin, the “mohur.” Why his predecessors did not do the same when the problem of correctly rating the sovereign was said to have baffled them so much is a little surprising when it is recalled that the Indian Mints had been since long past issuing the “mohur,” which, as it was possible to rate it correctly, could as well have been made the principal unit of the gold currency in India. That they did not can only be explained on the assumption that they were anxious to kill two birds with one stone. The adoption of the sovereign, besides supporting a gold currency in India, was also calculated to promote the movement of international uniformity of coinage then in vogue. The utility of the “mohur” was in this respect comparatively inferior to that of the sovereign. But when Sir Richard Temple came upon the scene the prospect of some universal coin being internationally adopted seemed to be fast vanishing. At all events the Report of the English Commission on International Coinage, presided over by Lord Halifax, had pronounced adversely as to any change in the standard of the English sovereign. Untrammelled by any considerations for such a wider issue, Sir R. Temple was free to recommend the adoption of the “mohur” as the unit of currency in place of the sovereign.¹⁹⁸

¹⁹⁷ Printed as Appendix I, No. 12, to the _Report of the Indian
Currency Committee_ of 1898.

¹⁹⁸ Nevertheless, he said, “I would not object to make the sovereign a
legal tender for 10 rupees and 4 annas. But, the sovereign being
worth 10 rupees and a fraction over, there might be some slight
trouble of calculation in changing it for silver, and this would
be a drawback in respect of the use of the sovereign as currency
in India. And if this objection were urged, I would not press for
the sovereign being declared legal tender. But we should
continue, under any circumstances, to receive the sovereign in our
Treasuries at the present rating.”

“We have,” he wrote, “gold pieces representing fifteen, ten and
five rupees respectively; and believed to represent these
several sums very correctly, as regards the relative value of
gold and silver … that … we should take the first opportunity to
declare the gold coins legal tender to unlimited amount; that
gold pieces should continue to bear the fixed relation to the
rupee; that for a time it might be necessary to permit the rupee
to remain legal [pg 120] tender to an unlimited amount, which
would involve temporarily the difficulty of a double standard;
that the transition period of double standard should be as short
as possible, silver being reduced to a token coinage, and being
made legal tender up to a small amount only; and that gold
should be ultimately the one legal standard.”

He proposed the ratio of 10 rupees tor 120 grs. of standard i.e. 110 grs. of fine gold,¹⁹⁹ but he did not share the temerity of Sir Charles Trevelyan.²⁰⁰ So intent was he on the project of a gold currency that he was prepared to alter the ratio so as to make it favourable to gold. The question of ratio, he observed, was one which

¹⁹⁹ This was a ratio of 15: 1, which was a slight undervaluation of
gold.

²⁰⁰ _Supra_, Chap. I.

“the Government of India ought to be able to determine. These
are questions which have been determined by every nation that
has adopted a gold currency. No doubt it is a difficult and
important problem, but it cannot be insoluble, and it ought to
be solved.”

Such in outline was the first proposal for a gold currency. It was projected before the fall in the value of silver had commenced, and was therefore more a culmination of the past policy than a remedy against the ensuing depreciation of silver. In that consisted, probably, the chief strength of the proposal. It was in good time to avoid the cost of hauling up the currency which later on proved so very deterrent and caused the defeat of so many other projects. Besides, it cannot be said that at the time the memorandum was presented the Government was not warned of the impending crisis; for the wave of demonetizing silver had already commenced two years before.²⁰¹ But, for some reason not known to the public, no action was taken on the proposal. [pg 121]

²⁰¹ Lord Northbrook, who was the Viceroy of India when this proposal
was made, in his evidence before the I.C.C. of 1898, Q. 8,447,
suggested that the reason for his not adopting it then was that
“that was a time when gold was appreciating, and it was impossible
to do.” This is, of course, historically untrue except on the
hypothesis that the proposal came for consideration long after it
was submitted.

The second plan for the introduction of a gold currency was that of Colonel J. T. Smith, the able Mint Master of India. His plan was avowedly a remedy for the falling exchange.²⁰² The plan was set forth in the first essay in his brochure, _Silver and the Indian Exchanges_,²⁰³ and may be described in his own words as follows:—

²⁰² He had previously taken part in the agitation for the introduction
of a gold standard in India during the sixties with the sovereign
as the unit. But that was as an advocate of the movement for
uniformity of international coinage. Cf. his _Remarks on a Gold
Currency for India and Proposal of Measures for the Introduction
of the British Sovereign_, etc., etc., London, 1868.

²⁰³ London, Effingham Wilson, 1876.

“6. Although it cannot be denied that the difficulty of
effecting this object of restoring the Indian exchange to its
normal condition is much greater now than it would have been
some years ago, owing to the decline which has already taken
place, yet there seems to be sufficient ground for belief that,
even now, if decided measures were adopted, it would not be too
late to restore the currency to its former value for home
(India) payments; and that, too, without any shock or
disturbance; the principal step being that of putting a stop to
the coinage of silver on private account, at the same time
taking measures to discourage the importation, or at the least
the circulation, of foreign-made silver coins, and opening the
Mints for the receipt of gold bullion for coinage.

“7. To explain how this would operate, I must observe that …

“8. … the internal trade of the Empire of India has increased
and is increasing …

“9. Whatever may be the cause, the internal trade of India has,
ever since the beginning of this century, required constant and
steady additions to her currency, averaging during the last
thirty-eight years upwards of five millions of pounds sterling
per annum in value. Besides this, the returns show that the
balance of imports over exports of gold bullion, during the same
period, exceeded an average of two and a half millions sterling
annually, having been, during the last twenty years, more than
four millions per annum.

“10. Such being the case, it appears to be a necessary
consequence that, if the supply of rupees were put a stop to,
[pg 122] the remainder must increase in local value, as compared
with commodities, till they resumed the position which they held
on a par with gold, at the rate of 10 rupees to a sovereign, for
the fifteen years previous to 1870.

“11. After that point had been attained, it would be the
interest of merchants to take gold into the Indian Mints for
coinage; and they would do so, indeed, before the attainment of
this improvement of the exchanges, owing to the premium or
‘batta’ which would at first be obtained for the gold coins.

“12. By this means gold would gradually be brought into India;
and, as it has been shown that an addition to the circulating
medium of at least five million sterling per annum is necessary,
and no more silver coins being admitted [into the currency], it
would slowly accumulate there. …

“13, The proposal therefore is that, after due notice, the
coinage of silver on behalf of private individuals and advances
upon silver bullion should be suspended; that part of the Act 23
of 1870, which makes it incumbent on the Government to receive
and coin it, being repealed; the Government retaining in their
own hands the power of replenishing the silver currency whenever
they may deem it expedient. That gold bullion should be
received by the Government at the mint rate of 38 rupees 14
annas per standard ounce, and coined into sovereigns and
half-sovereigns (representing 38 rupees 15 annas), or ten or
five rupee-pieces of the same value, which should be declared
legal tender, but not demandable, the present silver rupees
continuing to be legal tender, as before.”²⁰⁴

²⁰⁴ This was calculated to make the rupee-sterling exchange 2s. gold.
The average rupee-sterling exchange in 1876 was about 1s. 9·645d.
This would have placed a small premium on gold which would have no
doubt soon disappeared owing to the appreciation of the rupee
consequent upon the stoppage of its coinage.

At the time the Smith plan was presented the fall of silver had made itself felt so that a considerable support in favour of the plan was forthcoming. The support of the trading community was embodied in the resolution, dated July 15, 1876, of the Bengal Chamber of Commerce, which urged “that it was expedient, in view of any ultimate measures that the Government may adopt, that Clause 19 of Act XXIII of 1870, making it obligatory on the Mints [pg 123] in India to receive all silver tendered for coinage, and also Section II, Clause (_b_) of Act III of 1871, making it obligatory on the Currency Department to issue notes against silver bullion sent in, be temporarily suspended, at the discretion of Government, and that during each such suspension or till further notice it be not lawful to import coined rupees from any foreign port.” A similar feeling was voiced by the Calcutta Trades Association. By this time the fall of exchange had also commenced to tell upon the finances of the Government of India, so much so that Sir William Muir, in his Financial Statement for 1876–77, was led to observe:—

“The sudden depreciation of silver and the consequent
enhancement of charge to the Government of India in laying down
yearly the sum required in England of about fifteen millions
sterling, without doubt cast a grave shadow on the future. In
truth, it may be said that the danger, from whatever point of
view considered, is the gravest which has yet threatened the
finances of India. War, famine, and drought have often
inflicted losses on the Exchequer far greater than the charge
which threatens us in the present year. But such calamities
pass away; the loss is limited; and when it has been provided
for, the finances are again on sure and stable ground. This is
not the case with the present cause of anxiety. Its immediate
effects are serious enough. … But that which adds significance
to it is that the end cannot be seen; the future is involved in
uncertainty.”²⁰⁵

²⁰⁵ P. 93.

In the face of such a situation nothing would have been more natural than to expect the Government precipitating into some kind of action to save itself, if not others, from an impending calamity. On the contrary, the Government not only failed to take any initiative, but showed, when pressed by the Bengal Chamber of Commerce to act upon the foregoing resolution, a surprising degree of academic somnolence only to be expected from an uninterested spectator. No doubt the proposal of the Bengal Chamber was defective in that it did not suggest the opening of the Indian Mints to the coinage of gold. The Government of India was sharp [pg 124] enough to fasten upon this defect. It made plain to the Chamber that if it had proposed the free coinage of gold

“such a recommendation would not have been open to the
objections that appear fatal, _in limine_, to the adoption of
the resolution actually adopted … viz. to close the Mints
temporarily to the free coinage of the one metal into
legal-tender money, without simultaneously opening them to the
free coinage of the other into legal-tender money.”

Did it, then, adopt the proposal of Colonel Smith, which contained such a recommendation? Not at all! Why did it not, then, adopt a remedy to which it saw no objections? The reason was that it had arrived at a different diagnosis of the causes of the monetary disturbances. To the Government the possibilities of explaining “the disturbance in the equilibrium of the precious metals” seemed to be many and varied.²⁰⁶ (1) The value of gold being unchanged, the value of silver had fallen; (2) the value of silver being unchanged, the value of gold had risen; (3) the value of gold had risen, and the value of silver had fallen; (4) the value of both metals had risen, but the value of gold more than that of silver; (5) the value of both metals had fallen, but the value of silver more than that of gold. In the midst of such possibilities, marked more by pedantry than logic, the Government warned the currency reformers that

“the character of the remedies indicated, if the disturbance is
found to be due to a rise in the value of gold, will obviously
differ from what would be suitable in the case of a fall in the
value of silver.”²⁰⁷

²⁰⁶ Cf. The Resolution of the Government of India relating to the
Depreciation in the Value of Silver, dated September 22, 1876,
par. 6. Commons Paper 449 of 1893.

²⁰⁷ _Ibid_.

Out of these possibilities what seemed to it to be proven was that “gold had risen in value since March, 1872,”²⁰⁸ and therefore if any reform was to be effected it should fall upon the gold-standard countries to undertake it. Situated as the Government of India then was, it could have suffered [pg 125] itself without incurring much blame to be hurried into some kind of currency reform that promised to bring relief. To have refused to allow the exigencies of a crisis to rule its decisions on such a momentous issue as the reform of currency, need not imply a spirit of obstinacy. On the other hand, it bespeaks a spirit of caution which no reader of that illuminating despatch of October 13, 1876, conveying to the Secretary of State its decision to wait and watch, can fail to admire. But it is hardly possible to speak in a similar commendatory manner of the underlying attitude of the Government of India. Whether it is possible to hold that gold had appreciated but that silver had not depreciated may be left for logicians to decide upon. But for a silver-standard country to refuse to undertake the reform of her currency system on the plea that it was gold that had appreciated was no doubt a tactical error. In military matters there is probably such a thing as depending on a position; but in currency matters there cannot be such a thing. The reason is that in the former strength sometimes lies in the weakness of the other. But in the case of the latter the weakness of one becomes the weakness of all. There can be no doubt, therefore, that the Government, in discarding its responsibility to do the needful in the matter, committed the same kind of mistake as a man who, in the words of Prof. Nicholson,²⁰⁹ “should suppose that the ship cannot sink because there is no leak in the particular cabin in which he happens to sleep.”

²⁰⁸ _Ibid._, par. 16.

²⁰⁹ _Money and Monetary Problems_, 1895, p. 90.

That the attitude of inaction was unwise was soon brought home to the Government of India. Within a short space of two years it was obliged to reconsider the position taken in 1876. In a despatch dated November 9, 1878,²¹⁰ the Government of India observed:—

²¹⁰ P.P., C. 4868 of 1886, p. 18.

“6. It was to have been expected that a subject so encompassed
with difficulties should not receive any early settlement, and
it was probably the wisest, as it was certainly the most natural
course, to allow further time to elapse before attempting any
final solution of the grave problem it [pg 126] involved. The
improvement that took place in the value of silver in the year
1877 favoured this policy of inaction; and it is only now, when
a fresh fall has brought down the rupee to a value hardly
greater than that which it had in July, 1876, that the serious
nature of the risk which our existing currency law entails on us
is once more forced on our attention by its practical effects on
the Home remittances.

“21. The uncertainty that has now for some years prevailed with
reference to the value of silver, and the consequent
disturbances in the exchange, have … been causes of continued
financial difficulty to the Government … and it is not possible
to doubt that similar results must have been produced by these
disturbances in the trade transactions of the country, or that
investments of foreign capital in India, either for trading or
other purposes, must have been very seriously interfered with by
their influence.

“23. Such we hold to be a true statement of the present
difficulties and prospective risks of maintaining the existing
Currency Law, and we feel assured that they have not been in any
way overstated. It remains for us to inquire whether any
practical remedy could be devised that should not be open to
serious objections, or the risks attending the adoption of which
should not be so great as to prohibit it. We feel most fully
the heavy responsibility that will rest on us in dealing with
the currency of India; but it is plain that the responsibility
for doing nothing is no less great. Whether the law is left as
it is, or whether it is changed, the result will be equally due
to our action, and we cannot, if we would, avoid facing this
grave question.

“24. To obtain fixity of exchange by the adoption of a gold
standard, and the substitution of a gold for a silver currency
through the direct action of the Government, has, we think, been
conclusively shown to be impracticable by the despatch of the
Government of India of October last, and this plan therefore
calls for no further notice. The increase in the weight of the
rupee, also noticed in that despatch, is equally undeserving of
attention, as, in fact, it would give no security for the
future, and would entail a heavy charge without accomplishing
the essential point to be aimed at. There remains the simpler,
and first proposed suggestion, the limitation of the coinage of
silver, which, though rejected in 1876 by the Government of
India … appears to us to call now for a closer examination. [pg
127]

“25. This suggestion in its main features is, that the Coinage
Act shall be so far modified as to withdraw the free right of
the public to take silver bullion to the Mint for coinage, and
either to suspend it entirely in future, or limit it for a time.

“26. It is obviously an essential part of any such scheme, if it
is to have the effect of fixing the exchange value of the rupee,
that the power of obtaining that coin in future shall be
regulated in some manner by a gold payment, and that the
relation between sterling and rupee currency shall thus be fixed
irrespective of the fluctuations in the relative value of the
metals of which the coins are formed.

“27. It is not, on the other hand, an essential part of such a
plan that any particular relation of value should be thus fixed
at two shillings … or at any smaller or larger proportion. All
that is necessary is that the rate, being once fixed, shall
remain for the future unchanged. …

“33. Probably the most important question is … whether or not it
is practicable to maintain a silver coinage as the principal
element in our currency, with a very limited gold coinage, or
without a legal-tender gold coinage at all. The Government of
India, in its despatch of 1876, expressed an opinion adverse to
the possibility of maintaining such a system. … On a full
reconsideration of this point, we are led to take the opposite
view, and to think that such a system would be perfectly
practicable and would lead to no material difficulty. It is
true that there is no country in which such a condition of
things actually exists. But those countries, and there are many
of them, in which an inconvertible paper currency exists or has
existed, give proof that the far greater anomaly of a currency
devoid of any intrinsic value whatever is capable of performing
the work of a metallic currency satisfactorily, and of
maintaining its local exchange value, so long as an excessive
issue is only guarded against.

“37. [Such] instances [as the British shilling and the French
five franc piece] seem to show that neither in the way of
surreptitious coinage, nor of discredit from depreciation of
intrinsic value, is it probable that there would be any serious
difficulty in keeping the rupee in circulation at its present
weight, at a nominal value of two shillings, with a gold
standard and a partial gold coinage.

“46. We are thus led to the general conclusion that it will be
practicable, without present injury to the community [pg 128] as
a whole, or risk of future difficulties, to adopt a gold
standard, while retaining the present silver currency of India,
and that we may thereby in the future fully protect ourselves
from the very real and serious dangers impending over us so long
as the present system is maintained. We consequently desire to
recommend to Her Majesty’s Government the adoption of such a
change at the earliest moment possible, and we shall proceed to
explain, in all necessary detail, the measures by which we
advise that it should be effected.

“50. It has to be borne in mind that it is not the object of our
action to force on India a gold currency, or to displace the
silver currency, but rather to avoid such a result, or to check
the tendency in that direction, so far as it can be done
consistently with the adoption of the gold standard. We are
consequently led to the conclusion that, while we give certain
facilities for the introduction of gold coins into India, we
should not yet go so far as to declare them a general legal
tender; and that we should, at the same time, make provision for
the coining of silver, without limit as to quantity, but on
terms that will give no advantage to the introduction of silver
in relation to gold.

“51. These objects we propose to attain as follows:— We first
take power to receive British or British Indian gold coin in
payment for any demands of the Government, at rates to be fixed
from time to time by the Government, till the exchange has
settled itself sufficiently to enable us to fix the rupee value
in relation to the pound sterling, permanently at two shillings.
Simultaneously with this, the seignorage on the coining of
silver would be raised to such a rate as would virtually make
the cost of a rupee, to persons importing bullion, equal in
amount to the value given to the rupee in comparison with the
gold coins above spoken of. We should thus obtain a self-acting
system under which silver would be admitted for coinage, at the
fixed gold rate, as the wants of the country required; while a
certain limited scope would be given for the introduction and
use of gold coin, so far as it was found convenient or
profitable.”

Such was the scheme outlined by the Government of India. The reason why it rejected the Smith plan, although it was simple, economical, and secure, was because it contemplated a demand by India on the world’s dwindling stock of gold. Now, in the circumstances then existing, [pg 129] this was a fatal defect, and the powers that be had already decided that at all cost India must be kept out of what was called the “scramble for gold.” Therefore, to have proposed an effective gold standard was to have courted defeat. A mild and diluted edition of a gold standard such as was proposed by the Government was all that stood any chance of success. But even this timid attempt did not fare well at the hands of the Committee²¹¹ appointed jointly by the Secretary of State and the Chancellor of the Exchequer to examine and report upon the proposals. The members of the Committee were “unanimously of opinion that they cannot recommend them for the sanction of Her Majesty’s Government.”²¹² The reasons which led to the rejection of the proposals we are not permitted to know. Although the Report of the Committee was made public, the proceedings have never seen the light of day. Indeed, there has been a most stern and obstinate refusal on the part of the officials to allow a peep into them. Why they should be regarded as confidential after a lapse of nearly half a century it is difficult to imagine. Enough, however, was revealed by Sir Robert Giffen, who was a member of this Committee, in evidence before the Indian Currency Committee of 1898²¹³ for us to know the contents of this closely guarded document. It seems that the Committee declared against the proposals because it thought they wore calculated to make the Indian currency a “managed” currency. At the time when the Committee delivered its opinion the current prejudice was unanimously against such a system. All acknowledged writers on currency were pronounced opponents of an artificially regulated system.²¹⁴ A naturally automatic currency was their ideal. In addition to being misled by [pg 130] this prejudice, the Committee felt convinced that the situation would soon ease itself by the natural working of economic forces without necessitating a reform of the Indian currency. This conviction on the part of the Committee was founded on the high authority of the late Mr. Walter Bagehot²¹⁵ that the disturbance could not but be temporary. His argument was that the depreciation would encourage exports from India, and discourage imports, and the unfavourable balance of trade thus brought about would induce a flow of silver to India, tending to raise its price. He was also of opinion that increased demand for silver would also arise from outside India. He argued that the reduction of demand caused by the demonetization of silver by some countries would be more than compensated for by the adoption of silver by other countries then on a paper basis for their impending resumptions of specie payment.

²¹¹ It was composed of Louis Mallet, Edward Stanhope, T. L. Seccombe,
R. E. Welby, T. H. Farrer, R. Giffen, and A. J. Balfour.

²¹² For Report of the Committee, _see_ Commons Paper C. 4868 of 1886,
p. 26.

²¹³ Q. 10,025–50.

²¹⁴ So novel was the idea at the time that the United States Monetary
Commission, 1876, was surprised when some of the witnesses
expressed themselves in favour of regulating the principal
metallic unit of account in the currency system of a country by
Governmental agency. _See_ 44 Congress 2nd Session Senate
Document, No. 703, pp. 47–48.

²¹⁵ Cf. his _Some Articles on the Depreciation of Silver, and on
Topics connected with it_, London, 1877, pp. 10, 65, and 80; also
his evidence before the _Select Committee on the Depreciation of
Silver_, Lords Paper 178 of 1876, Q. 1,361–1,450.

Whatever might be said with regard to the Committee’s preference of a natural to an artificial system of currency, there can be no doubt that in turning down the proposals of the Government, in the hope that silver would recover, it was grossly deceived. The basic assumptions on which the Committee was led to act failed to come true. To the surprise of everybody India refused to absorb this “white dirt.” Indeed, it was one of the puzzles of the time to know why, if silver had fallen so much in Europe, it did not go to India in larger quantities. Many blamed the Secretary of State for the sale of his Council Bills.²¹⁶ These bills, it was said, presented an alternative mode of remittance so much better as to prevent the sending of silver to India, and thereby caused a diminution in the demand for it. That this was not a correct view is obvious.²¹⁷ Silver could not have [pg 131] gone to India more than it did even if Council Bills had been abolished. Council Bills must be regarded as ordinary trade bills drawn against services and commodities, and could not be said to have competed with the transmission of bullion in any special manner different to that attributable to the trade bills. The only bearing the Council Bills may be said to have had upon the issue in question lies in the fact that to the extent they figured in the transactions they prevented India from buying other commodities. But there was nothing to prevent her residual buying power left over after paying for the Council Bills from being utilized in the purchase of silver in preference to other commodities. That this buying power would be used in purchasing silver because it was depreciated in Europe was theoretically an unsound assumption on the part of Mr. Bagehot. The deciding factor which could have caused such a diversion of this residual buying power to the purchase of silver was whether it was _appreciated in India_. Only on that condition could there have been a flow of it to India. But as matters then stood, it was the opinion of Prof. Pierson²¹⁸ that when the general depreciation of silver commenced all over the world, it had been forestalled in that part of the globe. India was already glutted with silver. Under ordinary circumstances India would have sent back a large portion of its silver to Europe. But the general depreciation prevented her from doing so; and now there were two opposing forces, one tending to produce an export of silver from India to Europe and the other tending to produce an export of silver from Europe to India; and, although the latter was the stronger of the two, the former was sufficiently powerful to prevent any considerable quantity of silver from being exported from Europe to India. If the Committee was, deceived in one part of its assumptions, it was also disappointed in others. Far from resuming specie payments in terms of silver, as Mr. Bagehot expected the countries then on paper basis to do, they one and all demonetized [pg 132] silver to the great disappointment of all those who adhered to the policy of “wait and see.”

²¹⁶ This argument was prominently put forth in the _Report_ (pp.
xxx-xxxv) _of the Select Committee on the Depreciation of Silver_,
1876; and also by Monometallic Members of the Gold and Silver
Commission, 1886. Cf. pp. 77–79 of the Final Report, Part II.

²¹⁷ Cf. evidence of Professor Marshall before the Gold and Silver
Commission, 1886, Q. 10,164~76.

²¹⁸ Cf. his reply to the Circular of the Gold and Silver Commission,
1886. Second Report, App. VII (1), p. 254.

The falsification by India and other countries of such anticipations led to a change in the angle of vision of most of the European countries who had theretofore shown no inclination to do anything by way of reducing the chaotic currencies to some kind of order. They were advised by eminent authorities not to hurry. Jevons said²¹⁹:—

²¹⁹ Op. cit., p. 354.

“We only need a little patience and a little common sense to
surmount the practical difficulties. Within the next few years
good harvests in India will, in all probability, enable that
country to buy up all our surplus silver, as it has been in the
habit of doing, with rare exceptions, since the time of Pliny. …
In future years any amount of silver could be got rid of without
loss, if it be sold gradually and cautiously.”

When, however, it was found that the waiting period would be more painful if not longer than what it pleased the proverbial peasant to undergo, in order to let the stream run dry so as to permit of his fording it without wetting his feet, there grew up an agitation in Europe to undertake the necessary reform to prevent the depreciation of silver.

Far from being sentimental, the agitation was real and derived its force from the evils which arose out of the existing currency conditions. The monetary condition of most of these countries was very unhealthy. Their schemes of an effective gold standard with silver as token currency were arrested in the midst of their progress. Germany, when she demonetized silver, had retained her silver thalers as full legal tender at the old ratio with gold, only to get time to be rid of them to the extent necessary to reduce them to a truly subsidiary position. But, before she could do so, her policy of demonetization had commenced to tell upon the value of silver, and the continued fall thereof compelled Germany to retain the thalers as legal tender at their old value, despite the fact that their metallic value was fast sinking. Precisely the same was the result of the action of the Latin Union on their system of currency. They had [pg 133] stopped their further coinage of the silver five-franc pieces; but they could do nothing with those that were already coined except to permit them to circulate at the old mint par, although the metallic par continued to change with changes in the market values of gold and silver. The United States was also involved in similar evils, although they arose from choice rather than from necessity. Yielding to an agitation of the silver men, it passed in 1878 a law called the Bland Allison Act, requiring the Secretary of the Treasury to purchase and coin each month not less than $2,000,000 and not more than $4,000,000 worth of silver bullion into standard silver dollars, which were to be full legal tender for all debts public and private, “except where otherwise expressly stipulated in the contract.”²²⁰ As the metallic value of these dollars fell with every fall, while their legal value remained as before, they became, like the thalers and the francs, overvalued coins. It is clear²²¹ that when the stock of a country’s currency is not equally good for all purposes it is relatively speaking in an unsatisfactory condition. Though good for internal purposes, these coins were useless for international payments. Besides making the whole currency system unstable and top-heavy, they could not be made to serve the purpose of banking reserves, which it is the _prime_ function of a metallic currency to perform in modern times. The possibilities they opened for illicit coinage were immense. But what made their existence such a source of menace was the fact that a large proportion of the total metallic money of these countries was of this sort. The figures given by Ottomar Haupt (see p. 134) prove sufficiently the difficulties that these countries had to face in regulating and controlling such a mass of token currency.

²²⁰ _Report of the Monetary Commission of the Indianapolis
Convention_, Chicago, 1898, pp. 138–145.

²²¹ Cf. the speech of Prof. Pierson, Delegate of the Netherlands at
the International Monetary Conference of 1881, _Report of the
Delegates of the United States_, Cincinnati, 1881, pp. 77–84.

If a gold-standard country like England had escaped these difficulties it was only to meet others equally embarrassing. As has been pointed out before, the continued fall of prices, the reflex part of the appreciation of gold, [pg 134]

TABLE XXIII

_Distribution of the Stock of Money in Different
Countries_²²²

──────────────────────────────────────────────────────────────────────────────────── Monetary Circulation at the _Beginning_ of 1892. Countries ────────────────────────────────────────────────────────────────────────── Gold. Silver. Uncovered Fractional Billon Notes Currency. Money. ──────────────────────────────────────────────────────────────────────────────────── Austria 65,000,000 197,000,00 601,000,000 40,000,000 14,000,000 fl. ──────────────────────────────────────────────────────────────────────────────────── England £ 118,000,000 — 10,000,000 26,000,000 1,900,000 ──────────────────────────────────────────────────────────────────────────────────── France 3,900,000,000 3,200,000,000 572,000,000 280,000,000 280,000,000 fr. ──────────────────────────────────────────────────────────────────────────────────── Germany 2,500,000,000 430,000,000 450,000,000 457,000,000 57,000,000 m. ──────────────────────────────────────────────────────────────────────────────────── Holland 64,000,000 135,000,000 98,000,000 7,600,000 1,800,000 fl. ──────────────────────────────────────────────────────────────────────────────────── Italy li. 485,000,000 81,000,000 847,000,000 150,000,000 75,000,000 ──────────────────────────────────────────────────────────────────────────────────── Russia £ 59,500,000 — 51,200,000 8,200,000 1,000,000 ──────────────────────────────────────────────────────────────────────────────────── Spain 160,000,000 646,000,000 548,000,000 190,000,000 157,000,000 pes. ──────────────────────────────────────────────────────────────────────────────────── U.S.A 671,000,000 458,000,000 419,000,000 77,000,000 18,000,000 doll. ────────────────────────────────────────────────────────────────────────────────────

²²² The figures are as given by Ottomar Haupt (London: Effingham,
Wilson & Co., 1892, p. 160.)

[pg 135] had produced a depression in the trade and industry of the country never known before in its history. Apart from this, the monetary disturbances affected the yield on capital investment, the mainstay of so many of her people, by reducing the field for its employment. Said the American Commission:—

“Within twenty years, from 1877 to 1897, it could probably be
correctly stated that the power of money to earn dividends was
reduced to one-half, or in nearly that proportion. That
reduction of the earning power of capital affected injuriously
everybody who depended upon investments for a living. It
affected also the profits and enterprises of the captains of
industry and the kings of finance. In England and in France the
price of Government securities rose to a point which made it no
longer possible for the man of small means to invest in them and
acquire an adequate support during his declining years.”²²³

²²³ Report on the Introduction of the Gold-exchange Standard into
China and other Silver-using Countries by the Commission on
International Exchange, 58th Congress, 2nd Session, House of
Representatives Document, No. 144, Washington, 1903, p. 101.

It is, of course, open to doubt whether the conclusion drawn is the right one. But the fact remains that owing to monetary disturbances the field for the investment of English capital had become considerably restricted. And, as a way of getting a living, capital investment was an important resource to the English people.

To mend such a situation there were convened one after another three International Monetary Conferences to establish a bimetallic par between gold and silver. The first International Monetary Conference was convened at Paris in the year 1878 at the invitation of the United States. The second met at the same place in 1881 at the joint call of France and the United States. The third and the last assembled by the wish of the United States in Brussels during the year 1892.

From the gravity of the situation nothing could have been more natural than to expect these Conferences to fructify into an agreement upon the consummation of the project for which they were called into being. But, far from reaching any agreement, the deliberations of these Conferences proved [pg 136] to be entirely futile. Only the second Conference showed any sign of agreement. The first and the third marked a strong deviation in the opposite direction. The advance, if any, that was made, as a result of these deliberations, was summed up in the pious opinion that it was necessary to retain and enlarge the monetary use of silver. But so weak on the whole was the response that practice failed to testify as to the sincerity of this solemn declaration.

The reasons for the failure of these Conferences to reach a bimetallic agreement have not been properly understood. One cannot read the debates on bimetallism at these Conferences without observing that the opposing parties approached the subject with different objectives. To one the principal objective was the maintenance of a stable ratio of exchange between gold and silver irrespective of the question whether one or both remained in circulation; to the other it was the maintenance of the two metals in concurrent circulation. As a consequence of this difference in the lines of their approach an agreement on a bimetallic project became wellnigh impossible.

The workability of bimetallism in the sense of maintaining a stable ratio between gold and silver is necessarily an indefinite proposition. None the less, it cannot be said, if the debates at these Conferences are taken as a guide, that the possibility of a successful bimetallic system in the stable-ratio sense of the term had been denied by the majority of economic theorists, or by the Governments who met at these Conferences. On the other hand, the Conference of 1881, the most important of the three, was remarkable by its confession regarding the workability of the system. All Governments, barring a few minor ones, were in favour of it. Even the British Government, in consenting to bring into operation the silver clause of the Bank Charter Act, must be said to have given its word of approval.

But what did bimetallism promise, as a piece of mechanism, to maintain the two metals in concurrent circulation? The bimetallists used to cite the example of France in support of the stability of the double standard. But was there a concurrent circulation of the two metals [pg 137] in France under the bimetallic system? Far from it. For, although it was a virtue of the system that changes in the production of the two metals made no appreciable variations in the fixed ratio of exchange, yet the slightest of such as did occur were sufficient to effect the greatest revolution in the relative circulation of the two metals, as the following table clearly brings out:—

TABLE XXIV

_Mintage of Gold and Silver in France_²²⁴

──────────────────────────────────────────────────────────────────
Gold. Silver.
Period. ─────────────────────────────── Ratio of of
Million Million Value.
Francs. Francs.
──────────────────────────────────────────────────────────────────
1803 to 1820 868 1,091 1 : 15·58
──────────────────────────────────────────────────────────────────
1821 to 1847 301 2,778 1 : 15·80
──────────────────────────────────────────────────────────────────
1848 to 1852 448 543 1 : 15·67
──────────────────────────────────────────────────────────────────
1853 to 1856 1,795 102 1 : 15·35
──────────────────────────────────────────────────────────────────
1857 to 1866 3,516 55 1 : 15·33
──────────────────────────────────────────────────────────────────
1867 to 1873 876 587 1 : 15·62
──────────────────────────────────────────────────────────────────

²²⁴ Table submitted to the Paris International Monetary Conference of
1881 by M. Pierson, Delegate for the Netherlands.

In mitigation of this the bimetallists had nothing to offer. There were, no doubt, such schemes as the one proposed by Prof. Marshall, consisting of paper based on a linked bar of gold and silver in certain fixed proportions,²²⁵ having the object of converting this “either-metallism” into double-metallism. But such schemes apart, the free-mintage-cum-fixed-ratio plan of bimetallism gave no guarantee against alternation in the circulation. Indeed, under that plan the alternation is the very soul of the mechanism which keeps the ratio from being disturbed. The only thing the [pg 138] bimetallists could say in mitigation of this was that²²⁶ the alternation in currency would confine itself to bank reserves and would not be extended to the pockets of the people. This was only an eyewash,²²⁷ for how could the banks arrange their reserves except in conformity with the prejudices of the people? Even international agreement to use gold and silver at a fixed ratio was no guarantee that this concurrent circulation would be maintained. Stability of ratio did depend to a large extent upon an international agreement, for, although it could be maintained by the action of one nation, the deviations of the ratio in that case would probably be greater. But mere international agreement has no virtue of itself to prevent one metal driving out the other. To suppose that Gresham’s Law is powerless under international agreement is a gross mistake. Gresham’s Law is governed by the relative production of the two metals to the total currency needs of the moment. Supposing the production of one metal relatively to the other was so enormous as to more than suffice for the currency needs, how could international agreement prevent the former from driving the latter entirely out of circulation? On the other hand, international agreement, far from discouraging, would encourage the process.

²²⁵ Cf. _Contemporary Review_ for March, 1887. It is interesting to
note that essentially the same plan was suggested 115 years before
Prof Marshall by James Stewart when his advice was sought by the
East India Company as to the method of reforming the then chaotic
currency of Bengal. He refrained from pressing it upon the
Company because he thought “mankind were not all philosophers.”
Cf. his _Principles of Money as applied to the Present State of
the Coin of Bengal_ (2nd Edition, 1772), pp. 8–11; cf. also
William Ward, _On Monetary Derangements, in a Letter addressed to
the Proprietors of Bank Stock_, London, 1840, p. 8.

²²⁶ Cf. Prof. Foxwell, _Oxford Economic Review_, 1893, Vol. III, p.
297.

²²⁷ Cf. the reply by Prof. Cannan, _ibid._, p. 457.

In adopting bimetallism, therefore, the nations had to make a choice between a stable ratio and a concurrent circulation, for there might arise a situation in which there was a stable ratio but no concurrent circulation of both the metals. If the Conferences broke down, it was not because they did not recognize the possibility which was unanimously upheld by such an impartial tribunal as the Gold and Silver Commission of 1886 of a stable ratio being maintained under a bimetallic regime. They broke down because the bimetallic system did not guarantee the concurrent circulation of the two metals. However, it is certain the impossibility of concurrent circulation could not have been such a drawback if the immediate effect of bimetallism would have been a flow of gold into circulation. But as matters [pg 139] then stood the immediate effect would have been to bring silver into circulation. It was this more than anything else which scared away most of the nations from the adoption of the bimetallic system. Now, it is a curious thing that nations which had assembled together to wring about a stable ratio between gold and silver should have rejected a system which gave a promise of such a stability on the comparatively less significant ground that it had the effect of altering the composition of the circulation from gold to silver. But the fact must be recognized that at the time the question of reconstituting the bimetallic system was agitating the public mind, in most of the European countries gold and silver had ceased to be regarded as equally good for currency purposes. The superiority of gold to silver as a carrier of large value in small bulk was coming more and more to be appreciated in the latter part of the nineteenth century, and no plan of stabilization which did not provide for the unhindered circulation of gold was likely to meet with common approval. This prejudice was in no way confined to a gold-standard country like England. The closing of the Mints by the Latin Union is proof positive of the change in the attitude of the bimetallic countries. As Jevons argued²²⁸:—

²²⁸ _Money and Mechanism of Exchange_, 1890, p. 1423.

“So long … as its operation resulted in substituting a beautiful
coinage of napoleons, half-napoleons, and five-franc pieces in
gold for the old heavy silver écus, there was no complaint, and
the French people admired the action of their compensatory
system. But when [after 1873] it became evident that the heavy
silver currency was coming back again … the matter assumed a
different form.”

So great was the prejudice in favour of gold that the interests of the chief Powers in the various Conferences, it may be truly said, waxed and waned with the changes in the volume of their gold reserves.²²⁹ In 1878 the United States took the lead in calling the Conference because the [pg 140] working of the Bland Allison Act checked the inflow of gold necessary for its cash payments. Germany was indifferent because she had enough gold and was confident of selling off her demonetized silver without loss. In 1881 France and Germany showed more anxiety for reform because the former had lost all her gold and the latter was unable to palm off her silver. By 1892 none was so poorly supplied with gold as was the United States, largely as a result of a reckless policy which did her harm without doing good to anyone else, and she was therefore left alone to support the cause of silver.

²²⁹ Cf. _The Report of the Indian Delegates to the International
Monetary Conference of_ 1881, C. 3229 of 1882, p. 7; also Russell,
op. cit., pp. 374–5.