Chapter VII: Section I: of Act XVII of 1835. This Act had also authorized (2)

¹³⁴ Normal only if 15½ to 1 be taken as the normal ratio between gold
and silver, which was the case for nearly seventy years.

[pg 71] normal parity, and the dislocation it caused was so great and so disorderly (Chart II) that no one knew where it would stop.

The rupee-sterling exchange was in reality a reflection of the gold-silver exchange. When, therefore, it is said that the rupee-sterling before 1873 was stable at 1 _s_. 10½ _d_., it merely meant that the gold-silver exchange before 1873 was stable at the ratio of 1 to 15½; and that the rupee-sterling exchange was dislocated after 1873 meant that the gold-silver exchange lost its old moorings. The question which therefore arises is why was the ratio of exchange between gold and silver disturbed after 1873, as it never was before that year? Two factors have been appealed to as affording a sufficient explanation of what then appeared as a strange phenomenon. One was the demonetization of silver as the standard money medium by the principal countries of the world. This movement in favour of demonetization of silver was the outcome of an innocent agitation for uniformity of weights, measures, and coinages. In so far as the agitation was aimed at such uniformity it was in every way beneficial. But it also exemplifies how the pursuit of good sometimes leaves behind a legacy of evils. At the Great Exhibition held in London in 1851 the great difficulty of comparing the different exhibits owing to the differences of weights, measures, and coinages as between the countries of their origin and other countries was amply demonstrated to the representatives of the different nations assembled at that exhibition.¹³⁵ The question of international uniformity in weights, measures, and coins was discussed by the various scientific assemblies gathered at this exhibition, and although nothing tangible came out of it, the question was not allowed to be dropped: it was taken up at the Brussels International Statistical Congress held two years after. Opinion had so far advanced that the next Statistical Congress, held at Paris, issued a declaration, which was confirmed by the Vienna Statistical Congress of 1859, strongly urging the necessity of bringing about the desired [pg 72] uniformity in the weights, measures, and coinages of different countries.¹³⁶ Encouraged by the action of England, which had made in 1862 the metric system of weights and measures optional, the 1863 International Statistical Congress of Berlin resolved to invite the different Governments “to send to a special Congress delegates authorized to consider and report what should be the relative weights in the … gold and silver coins, and to arrange the details by which the monetary systems of the different countries might be fixed, upon a single unit decimally subdivided.”¹³⁷ The significance of this Congress can hardly be overlooked. It made a departure. At the former Congresses the question debated was largely one of uniformity in weights and measures. But at this Congress “that phase of it was subordinated to uniform coinage and was well-nigh laid aside.”¹³⁸ Though the resolution was a departure it should not have been fraught with serious consequences if the reform had been confined to the question of uniformity of coinage. But there occurred a circumstance which extended its application to the question of currency. When this agitation for uniform coinage grew apace the French quite naturally wished that their coinage system, which had already been extended over the area comprised by the Latin Union, should be taken as a model to be copied by other countries outside the Union in the interest of uniformity. With this end in view the French Government approached the British Government of the time, but was told in reply that the British Government could not consider the suggestion until France adopted the single gold standard.¹³⁹ Far from being taken aback, the French Government, then so anxious to cultivate the goodwill of England, proved so complacent that it felt no compunction in conceding to the British the pre-requisite it demanded, and indeed went so far out of the way, when the Conference met in Paris in [pg 73] 1867, that it actually manœuvred¹⁴⁰ the Assembly into passing a resolution “that for uniform international coinage it was necessary that gold alone should be the principal currency of the world.” So much importance was attached to the question of uniformity of coinage that those who passed the resolution seemed not to have noticed what sacrifice they were called upon to make for its achievement. Perhaps it would be more correct to say that they did not know that they were affecting by their decision the currency system of the world. All they thought they were doing at the time was to promote uniformity of coinage and nothing more.¹⁴¹ But whatever the extenuating circumstances, the result was disastrous, for when the resolution came to be acted upon by the different countries assembled, the real end of the Conference, namely uniformity of coinage, was completely lost sight of, and the proposed means eventually became the virtual end.

¹³⁵ _Report of the Royal Commission on International Coinage_, 1868,
p.v.

¹³⁶ Cf. Russell, H. B., _International Monetary Conferences_, 1898,
pp. 18–25.

¹³⁷ Quoted by Russell, op. cit., p. 25.

¹³⁸ Russell, loc. cit.

¹³⁹ Cf. evidence of Prof. Foxwell, Q. 23,876, Royal Commission on
Agricultural Depression in England, 1892.

¹⁴⁰ For which cf. Russell, op. cit., p. 46.

¹⁴¹ An honourable exception must be made in the case of Dr. Mees, the
representative of Holland, who drew attention to the harm likely
to result from this resolution.

The ball once set rolling, the work of demonetizing silver began to grow apace. First in the field was Germany. Having vanquished France in the war of 1870, she utilized the war indemnity in the reform of her chaotic currency¹⁴² by hastening to adopt a gold currency for the United Empire of Germany. The law of December 4, 1871, authorized the change, with the mark as the unit of currency. Silver was demonetized by this enactment; but the existing silver coins continued to be legal tender, though their further coinage was stopped, along with the new gold coins at the legal ratio of 15½ to 1. This full legal-tender power of the silver coins was taken away from them by the law of June 9, 1873, which reduced them to the position of a subsidiary currency.¹⁴³ This policy was immediately copied by other [pg 74] countries of Germanic culture.¹⁴⁴ In 1872 Norway, Sweden, and Denmark formed a Scandinavian Monetary Union, analogous to the Latin Monetary Union, by which they agreed to demonetize silver as was done by Germany. This treaty, which established a gold standard and reduced the existing silver currency to a subsidiary status, was ratified by Sweden and Denmark in 1873 and by Norway in 1875. Holland also followed the same course. Till 1872 she had a pure silver standard. In that year she closed her Mint to the free coinage of silver, although the old silver money continued to be legal tender to any amount. In 1875 she went a step further and opened her Mints to the free coinage of gold. Her policy differed from that of the Germanic countries in that she only suspended the free coinage of silver, while the latter had demonetized it. Even the Latin Union was unable to resist this tide against silver. As a consequence of this exclusion of silver, the Latin Union, enlarged as it was by additional members, naturally desired to take precautionary measures against being flooded by the influx of this depreciated silver. Nor was this fear unfounded, for the silver tendered for coinage at the Belgian Mint in 1873 was three times greater than what was tendered in 1871. Rather than be embarrassed, Belgium, by the law of December 8, 1873, suspended the free coinage of her silver five-franc pieces. This action of Belgium forced the hands of the other members of the Union to adopt similar measures. The delegates of the Union met in Paris in January, 1874, and

¹⁴² For a history of the movement for the unification of German
currency prior to 1870, cf. H. P. Willis, “The Vienna Monetary
Treaty of 1857,” in the _Journal of Political Economy_, Vol. IV,
p. 187 _et seq_.

¹⁴³ For the text of the Laws, _see_ Appendix to _History of
Bimetallism_, by Prof. J. L. Laughlin, New York, 1886,

¹⁴⁴ Cf. _Report of the Committee on the Depreciation of Silver_, 1876,
p. xxix.

“agreed to a treaty supplementary to that originally framed in
1865, and determined on withdrawing from individuals the full
power of free coinage by limiting to a moderate sum the silver
five-franc pieces which should be coined by each State of the
Union during the year 1874.”¹⁴⁵

¹⁴⁵ Laughlin, op. cit., p. 155.

The respective quotas fixed for 1874 were slightly increased [pg 75] in 1875, but were reduced in 1876.¹⁴⁶ But the actual coinage did not even reach these small quotas. So greatly was the Union perturbed by the silver situation that during 1877 the coinage of silver five-franc pieces was, with the exception of Italy,¹⁴⁷ entirely suspended. This action was, however, only a preliminary to the Treaty of November 5, 1878, by which the Latin Union agreed to close its Mints to the free coinage of silver till further action. Though at first _sine die_, the closure proved in the end perpetual.¹⁴⁸ Simultaneously with the precautionary measures of the Latin Union, Russia suspended, in 1876, the free coinage of silver except to such an amount as was necessary for the purposes of her trade with China,¹⁴⁹ and the Imperial Decree of November 22, 1878, directed that all customs duties above 5 roubles and 15 copecks should be payable in gold.¹⁵⁰ Austria in like manner suspended the free coinage of silver in 1879.¹⁵¹

¹⁴⁶ The quotas fixed at the Conferences for the several members of the
Union were:—

_In Millions of Francs._

──────────────────────────────────────────────────────────────────
1874. 1875. 1876.
──────────────────────────────────────────────────────────────────
France 60 75 54
Belgium 12 50 36
Italy 40 15 10
Switzerland 8 10 7
Greece — — 3
⸺ ⸺ ⸺
120 150 110
──────────────────────────────────────────────────────────────────

In 1874 Italy was allotted an extra 20 million francs. _Ibid_., p.
155.

¹⁴⁷ She was allowed to coin 10 millions of them.

¹⁴⁸ _Ibid_., p. 158.

¹⁴⁹ _Report of the Directors of the Mint_, Washington, 1893, p. 23.

¹⁵⁰ Cf. P. Willis, “Monetary Reform in Russia,” in the _Journal of
Political Economy_, Vol. V, p. 291.

¹⁵¹ Cf. F. Wieser, “Resumption of Specie Payment in Austria-Hungary,”
in _Journal of Political Economy_, Vol. I, pp. 380–7.

On the other side of the Atlantic an important event had taken place in the United States. In 1870 that Government resolved to consolidate the Mint laws, which had not been revised since 1837, in a comprehensive statute. Since the legislation of 1853 the silver dollar was the only coin which the United States Mints coined freely. But in the new consolidated Mint Statute of 1873 the silver dollar was deleted from the list of coins to be issued from the Mint, [pg 76] so that it virtually amounted to suspension of the free coinage of silver in the United States.¹⁵² The silver dollars previously coined continued to circulate as full legal tender, but that power was taken away by the law of June, 1874, which declared that “the silver coins of the United States shall be a legal tender at their nominal value for any amount not exceeding five dollars in any one payment.”

¹⁵² This measure was the subject of a strange controversy. The gold
men argued that it was deliberately adopted, while the silver men
decried it as a surreptitious act due to a “combination of
rascally contrivance and rascally connivance.” Prof. Laughlin has
well cleared the mystery surrounding this Act. He shows by
reference to debates in Congress on the legislation of 1853 that
Congress knew that by refusing to alter the ratio between gold and
silver it was placing the country on a gold standard. Too much
consideration, he thinks, has been wasted on the Act of 1873,
which merely took legal notice of the consequences of the Act of
1853. Cf. his _History of Bimetallism_, pp. 80 and 93–95.

The other factor appealed to in explanation of the dislocation of the relative values of gold and silver was the great increase in the production of silver as compared to gold.

TABLE IX

_Relative Production of Gold and Silver (Ounces)_

────────────────────────────────────────────────────────────────────────────────────── Total Production. Annual Average Index Number for Production Average Annual Period Production. ──────────────────────────────────────────────────────────────────────────── Gold. Silver. Gold. Silver. Gold. Silver. ────────────────────────────────────────────────────────────────────────────────────── 1493–1600 24,266,820 734,125,960 224,693 6,797,463 100 100 ────────────────────────────────────────────────────────────────────────────────────── 1601–1700 29,330,445 1,197,073,100 293,304 11,970,731 130·5 176·1 ────────────────────────────────────────────────────────────────────────────────────── 1701–1800 61,088,215 1,833,672,035 610,882 18,336,720 271·8 269·7 ────────────────────────────────────────────────────────────────────────────────────── 1801–1840 20,488,552 801,155,495 512,217 20,028,887 227·9 293·1 ────────────────────────────────────────────────────────────────────────────────────── 1841–1870 143,186,294 931,091,326 4,772,876 31,038,378 2,124·1 456·6 ────────────────────────────────────────────────────────────────────────────────────── 1871–1890 106,950,802 1,715,039,955 5,347,545 85,751,998 2,375·4 1,261·5 ──────────────────────────────────────────────────────────────────────────────────────

The history of the production of the precious metals in modern times begins from the year 1493, a date which marks the discovery of the American continent. Reviewing the results of the production from 1493 to 1893, a period in all of 400 years, we find that during the first hundred years the [pg 77] production of gold and silver rises at a uniform rate of progression. Assuming the annual average production of each during the first century (1493–1600) in the modern history of their production to be 100, it will be seen that in the next century (1601–1700) the index number for the production of gold rises to 130 and that of silver to 176. This rate of progression is also kept up in the succeeding century (1700–1800), during which the figure for both gold and silver approximates to 270, and continues without much disturbance up to 1840, when the respective index numbers stood at 228 for gold and 293 for silver. From this point onwards the relative production of the two metals underwent a complete revolution. During the next thirty years (1841–70) the production of gold reached unprecedented heights, while that of silver lagged behind, relatively speaking. The index number for silver production advanced only to 450, but that for gold went up to 2,124. This revolution was followed by a counter-revolution, as a result of which the position as it stood at the end of 1870 was well-nigh reversed. The production of gold received a sudden check, and though it had increased enormously between 1840–70 it remained stationary between 1870–93. On the other hand, the production of silver, which was steady between 1841–70, increased threefold between 1870–93, so that the index number for its average annual production during the latter period stood at 1,260.

In the controversy which arose over the reasons which brought about this dislocation and decline in the value of silver in terms of gold, there were parties to whom one of these two factors was a sufficient cause. One side argued that had suspension or demonetization of silver not taken place its value could never have fallen. This position was vehemently challenged by the other side, which believed in the over-supply of silver as the primary cause of its depreciation. Now was the argument from relative over-supply sufficient to account for the fall in the gold value of silver? On the face of it the explanation has the plausibility of a simple proposition. It is one of the elementary theorems of political economy that the value of a thing varies inversely [pg 78] with its supply, and if the supply of silver had largely increased, what could be more natural than that its value in terms of gold should fall? The following were the relevant facts which formed the basis of the argument:—

TABLE X

_Gold and Silver_¹⁵³
_Relative Production and Relative Value_

──────────────────────────────────────────────────────────────────────────────── Correlation Ratio of Ratio between Relative Production of Production and (by Value Index Relative Value. Weight) of Index Number ──────────────────────── of Gold Gold Number for Relative Relative Period. to to for the the Production Value Silver. Silver. Ratio of Ratio of of As 1 As 1 Production. of Silver. Silver. Grain Grain Value. Falls - Falls to: to: Rises + - Rises + ──────────────────────────────────────────────────────────────────────────────── 1681–1700 31·8 14·95 100 100 — — ──────────────────────────────────────────────────────────────────────────────── 1701–1720 27·7 15·21 87 101·7 −13 −1·7 ──────────────────────────────────────────────────────────────────────────────── 1721–1740 22·6 15·10 71 101 −29 −1·0 ──────────────────────────────────────────────────────────────────────────────── 1741–1760 21·7 14·70 67 98·3 −33 +1·7 ──────────────────────────────────────────────────────────────────────────────── 1761–1780 31·5 14·40 99 96·3 −1 +3·7 ──────────────────────────────────────────────────────────────────────────────── 1781–1800 49·4 15·08 155·6 100·8 +55·6 −.8 ──────────────────────────────────────────────────────────────────────────────── 1801–1810 50·3 15·67 158·0 104·8 +58·0 −4·8 ──────────────────────────────────────────────────────────────────────────────── 1811–1820 47·2 15·68 148·0 104·9 +48·0 −4·9 ──────────────────────────────────────────────────────────────────────────────── 1821–1830 32·4 15·82 101·9 105·8 +1·9 −5·8 ──────────────────────────────────────────────────────────────────────────────── 1831–1840 29·4 15·77 92·4 105·4 −7·6 −5·4 ──────────────────────────────────────────────────────────────────────────────── 1841–1850 14·2 15·81 44·6 105·8 −55·4 −5·8 ──────────────────────────────────────────────────────────────────────────────── 1851–1855 4·4 15·45 13·8 103·3 −86·2 −3·3 ──────────────────────────────────────────────────────────────────────────────── 1856–1860 4·5 15·28 14·0 102·2 −86·0 −2·2 ──────────────────────────────────────────────────────────────────────────────── 1861–1865 5·9 15·42 18·55 103·1 −81·5 −3·1 ──────────────────────────────────────────────────────────────────────────────── 1866–1870 6·9 15·52 21·7 103·8 −78·3 −3·8 ──────────────────────────────────────────────────────────────────────────────── 1871–1875 11·3 16·10 35·5 107·6 −64·5 −7·6 ──────────────────────────────────────────────────────────────────────────────── 1876–1880 13·2 17·79 41·5 119·0 −58·5 −19·0 ──────────────────────────────────────────────────────────────────────────────── 1881–1886 17·3 18·81 54·4 125·8 −45·6 −25·8 ──────────────────────────────────────────────────────────────────────────────── 1886–1890 19·9 20·98 62·6 140·3 −37·4 −40·3 ──────────────────────────────────────────────────────────────────────────────── 1891–1895 20·0 26·75 62·9 178·9 −37·1 −78·9 ────────────────────────────────────────────────────────────────────────────────

The facts thus presented led to two conclusions. The first is that the supposed enormous increase in the relative production of silver was an assumption which had no foundation [pg 79] in reality. On the contrary, glance at the figures for relative production discloses the curious fact that since the beginning of the eighteenth century silver, instead of rising, has been falling in proportion. With the exception of the first quarter of the nineteenth century, silver had formed, throughout the two centuries covered by the table, a diminishing proportion as compared with gold.¹⁵⁴ Indeed, never was the proportion of silver so low as it was in the latter half of the nineteenth century, and even when after 1873 it began to grow it did not reach half the magnitude it had reached in the beginning of the eighteenth century. The second conclusion which these facts were claimed to sustain was that the value of silver in terms of gold did not move in sympathy with its supply relative to that of gold. According to theory, the value of silver should have been rising because the relative volume of its production had been diminishing. On the other hand, a closer examination of the figures of relative values and relative productions, as given in the foregoing table, instead of showing any close correlation (_see_ Chart III) between them, pointed to the contrary. Instead of supply and value being inverse in proportion, it showed that as its supply was falling there was also a fall in its value. Such being the facts of history, it was contended that they gave no support to those who rested their case on over-supply rather than on demonetization as a sufficient explanation for the depreciation of silver.

¹⁵³ The table is based on figures of M. de Foville of the French Mint,
as given by Mr. F. B. Forbes in _The Bimetallist_ of July, 1897,
pp. 125–28.

¹⁵⁴ In view of this, it is a matter of some surprise that such an
eminent economist as Prof. W. Lexis should have ceased to be
bimetallist on the ground that the enormous increase of silver
militated against the establishment of a permanently high ratio
with gold. Cf. his essay on “The Present Monetary Situation,” in
the _Economic Studies of the American Economic Association_, 1896,
Vol. I, No. 4, pp. 273–77. The habit of measuring the production
of silver in terms of value is no doubt largely responsible for
this quite unfounded notion.

Apart from such minor points, the issue was considerably narrowed by the peculiarity of the events of the twenty years preceding and following the year 1873.¹⁵⁵ Compare, it was said, the period commencing with 1848 and ending [pg 80] with the year 1870 with the period following 1870, and there emerges the arresting fact that these two periods, though they have been the opposite of each other with reference to the relative values of the two metals, were alike with reference to the changes in their relative supply. The period between 1870 and 1893 on the side of relative production was marked by the preponderance of silver. The period between 1848 and 1870 is an exact parallel to the above period with respect to changes in the relative supply of the two precious metals, only in this case it was gold that had increased in volume. Now, if it is over-supply that governed the value relations of the two metals in the second period (1870–93) the same should be true of their value relations in the first period (1848–70). Was there, then, a disturbance in the relative values of the two metals in the first period anything like what took place in the second period? It was insisted that the disturbance in the ratios of production of the two metals in the first period was enormously greater than that which occurred in the second period. Indeed, comparatively speaking, the disturbance in the second period was nothing to speak of. And yet their relative (value during the first period was well-nigh constant at the ratio of 1 to 15½, while in the second it fluctuated between 16·10 and 26·75. Those who argued that the value of silver fell after 1873 because of its over-supply were thus faced with the problem as to why the value of gold did not fall when its supply had become so abundant before 1873. The whole controversy was therefore centred into the question as to what could have made this difference in the two situations? If the colossal increase in the production of gold in the first period did not raise the value of silver by more than 2 per cent., how was it that a comparatively insignificant rise in the relative production of silver in the second period led to such an enormous rise in the price of gold? What was the controlling influence present in the one case which was absent in the other? Those who held that it was demonetization of silver that was responsible for its depreciation argued that, though alike in every way, the two periods differed in one important [pg 81] particular. What distinguished them was the fact that in the former it was a common practice to define the standard money of a country as a certain quantity of gold _or_ a certain quantity of silver. Prior to 1803 the two metals were rated differently in different countries,¹⁵⁶ but since that date the rating of 1 to 15½ became more uniform, with the result that the monetary standard throughout that period was either 1 gr. of gold or 15½ grs. of silver. On the other hand, during the second period, the “_or_” which characterized the first period was deleted by the silver-demonetizing and suspending decrees. In other words, the first period was characterized by the prevalence of bimetallism under which the two metals could be used interchangeably at a fixed given ratio. In the second period they could not be so used owing to the fact that the fixed ratio necessary for interchange had been abrogated. Now, could the existence or non-existence of a fixed ratio be said to be such a powerful influence as to make the whole difference that set the two periods in such marked contrast? That this was the factor which made the whole difference was the view of the bimetallists. It was said that, by virtue of the monetary system prevalent during the first period, gold and silver were rendered substitutes and were regarded as “one commodity of two different strengths.” So related, the conditions of supply had no effect upon their ratio of exchange, as would have been the case in respect of a commodity without a substitute. In the case of commodities which are substitutes, the relative scarcity of one can give it no greater value in terms of the other than that defined by their ratio of exchange, because by reason of the freedom of substitution the scarcity can be made good by the abundance of the other. On the other hand, the relative abundance of one can not depreciate its value in terms of the other below the ratio of exchange, because its superfluity can be absorbed by the void created in consequence of a paucity of the other. So long as they remain substitutes with a fixed ratio of substitution, nothing originating in demand or supply could disturb their [pg 82] ratio. The two being one commodity, whatever changes take place in the demand or supply of either system beyond the needs of commerce express themselves in the price level exactly as though one of them alone was the money medium; but their ratio of exchange will be preserved intact in any case.

¹⁵⁵ Cf. H. S. Foxwell, “Bimetallism: Its Meaning and Aims,” in _The
(Oxford) Economic Review_ (1893), Vol. III, p. 302.

¹⁵⁶ For these ratios, _see_ Appendix, Table B, to _A Colloquy on
Currency_, by H. H. Gibbs.

In support of this was cited the authority of Jevons, who said:¹⁵⁷

“Whenever different commodities are thus applicable to the same
purposes their conditions of demand and exchange are not
independent. Their mutual ratio of exchange cannot vary much
for it will be closely defined by the ratio of their utilities.
Beef and mutton differ so slightly that people eat them almost
indifferently. But the wholesale price of mutton, on an average,
exceeds that of beef in the ratio of 9 to 8, and we must
therefore conclude that people generally esteem mutton more than
beef in this proportion, otherwise they would not buy the dear
meat. … So long as the equation of utility holds true, the ratio
of exchange between mutton and beef will not diverge from that
of 8 to 9. If the supply of beef falls off people will not pay
a higher price for it, but will eat more mutton; and if the
supply of mutton falls off, they will eat more beef. … We must,
in fact, treat beef and mutton as one commodity of two different
strengths—just as gold at 18 carats and gold at 20 carats are
hardly considered as two but rather as one commodity, of which
twenty parts of one are equivalent to eighteen of the other.

“It is upon this principle that we must explain, in harmony with
Cairnes’ views, the extraordinary permanence of the ratio of
exchange of gold and silver, which from the commencement of the
eighteenth century up to recent years never diverged much from
15 to 1. That this fixedness of ratio did not depend entirely
upon the amount or cost of production is proved by the very
slight effect of the Australian and Californian gold
discoveries, which never raised the gold price of silver more
than about 4⅔ per cent., and failed to have more than a
permanent effect of 1½ per cent. This permanence of relative
values may have been partially due to the fact that gold and
silver can be employed for [pg 83] exactly the same purposes,
but that the superior brilliancy of gold occasions it to be
preferred, unless it be about 15 or 15½ times as costly as
silver. Much more probably, however, the explanation of the fact
is to be found in the fixed ratio of 15½ to 1, according to
which these metals are exchanged in the currency of France and
some other continental countries. The French Currency Law of the
year XI established an artificial¹⁵⁸ equation—

Utility of gold = 15½ × utility of silver

[pg 84] and it is probably not without some reason that Wolowski
and other recent French economists attributed to this law of
replacement an important effect in preventing disturbance in the
relations of gold and silver.”

¹⁵⁷ _Theory of Political Economy_, 4th ed., 1911, pp. 134–36.

¹⁵⁸ It is this artificiality of the bimetallic system which
unfortunately befogs the minds of some people and prejudices those
of others. Some do not understand why the price determination of
two commodities used as money should be so different from the
price determination of any other two commodities as to be governed
by a ratio fixed by law. Others are puzzled as to why, if gold and
silver are a pair of substitutes, should they require a legal
ratio while other pairs of substitutes circulate without a legal
ratio, merely on the basis of the ratio of their utility. These
difficulties are well explained away by Prof. Fisher thus:

“… two forms of money differ from a random pair of
commodities in being substitutes. Two substitutes proper
are regarded by the consumer as a single commodity. Thus
lumping together of the two commodities reduces the number
of demand conditions, but does not introduce any
indeterminateness into the problem because the missing
conditions are at once supplied by a _fixed ratio of
substitution_. Thus if ten pounds of cane sugar serve the
same purpose as eleven pounds of beet-root sugar, their
fixed ratio of substitution is ten to eleven. … In these
cases the fixed ratio is based on the relative capacities
of the two commodities to fill a common need, and is quite
antecedent to their prices. … The substitution ratio is
fixed by nature, and in turn fixes the price ratio.

“In the single case of money, however, there is no fixed
ratio of substitution. … We have here to deal not with
relative sweetening power, nor relative nourishing power,
nor with any other capacity to satisfy wants—no capacity
inherent in the metals and independent of their prices.
We have instead to deal only with relative _purchasing
power_. We do not reckon a utility in the metal itself,
but in the commodities it will buy. We assign their
respective desirabilities or utilities to the sugars …
before we know their prices, but we must inquire the
relative circulating value of gold and silver before we
can know at what ratio we ourselves prize them. To us the
ratio of substitution is incidentally the price ratio.
The case of the two forms of money is unique. They are
substitutes, but have no natural ratio of substitution,
dependent on consumers’ preferences.

“The foregoing considerations … are overlooked by those
who imagine that a fixed legal ratio is merely
superimposed upon a system of supply and demand already
determinate, and who seek to prove thereby that such a
ratio is foredoomed to failure … the … analogy … is
unsound. … Gold and silver … are not completely analogous
even to two substitutes, because for two forms of money
there is no consumers’ natural ratio of substitution.
There seems, therefore, room for an artificial ratio.
…”—_Purchasing Power of Money_. 1911. pp. 376–77.

But granting that before 1873 the ratio was preserved owing to the compensatory action of the bimetallic law, can it be said that it would have been maintained after 1873 if the law had not been suspended? To give an uncompromising affirmative as the bimetallists did is to suppose that bimetallism can work under all conditions. As a matter of fact, though it is workable under certain conditions it is not workable under other conditions. These conditions are well described by Prof. Fisher.¹⁵⁹ The question under bimetallism is whether the market ratio between gold and silver bullion will always be the same as the legal ratio between gold and silver coins freely minted and possessing unlimited legal-tender power. Now supposing the supply of silver bullion has increased relatively to that of gold bullion, the result will obviously be a divergence in the mint and the market ratio. Will the compensatory action of the bimetallic law restore the equilibrium? It may succeed in [pg 85] doing it or it may not. If the increase in the supply of silver bullion and the decrease in that of gold bullion are such that a decrease in that of silver caused by its inflow into the currency and an increase in that of gold caused by its outflow from currency can restore then to their old levels as bullion, bimetallism would succeed; in other words, the market ratio of the two bullions would tend to return to the mint ratio. But if the increase in the supply of silver bullion and the decrease in that of gold is such that the outflow of silver bullion into currency reduces the level of the silver bullion to the old level, but the outflow of gold bullion from currency does not suffice to raise the level of the gold bullion to the old level, or if the outflow of gold from currency raises the level of the gold bullion to the old level, but the inflow of silver into currency does not result in the reduction of the level of silver bullion to its old level, bimetallism must fail; in other words, the market ratio of the two bullions will remain diverted from the mint ratio legally established between their coins.

¹⁵⁹ _Elementary Principles of Economics_, 1912, pp. 228–29. In the
illustrations given by Prof. Fisher he appears, although he does
not mean it, to make the success or failure of bimetallism hang
upon the question whether or not the two metals are maintained in
circulation. For in illustration which he gives to show the
failure of bimetallism—Fig. 14 (b)—his film _f_ shows gold to be
entirely thrown out of circulation; while in the illustration he
gives to show the success of bimetallism—Fig. 15 (b)—his film _f_
shows gold to be only partially thrown out of circulation. But
there seems to be no reason to suppose that there cannot be a
third possibility, namely, that while the position of the film _f_
is as in Fig. 14 (b) the level of the gold bullion and silver
bullion may be as in Fig. 15 (b)—a possibility in which
bimetallism succeeds although one of the two metals is entirely
pushed out of circulation. For the success of bimetallism it is
not necessary that both the metals should remain in circulation.
Its success depends upon whether or not the compensatory action
succeeds in restoring the relative values of the two bullions to
that legally established between the two coins. If it succeeds in
achieving that, the ratio would be preserved even if the
compensatory action drives one metal entirely out of circulation.

Under which of these two possibilities could the circumstances arising after 1873 have fallen? That is a question about which no one can say anything definitely. Even Jevons, who admitted the success of the bimetallic law in the earlier period, was not very sanguine about its success in the latter period. It was he who observed¹⁶⁰

“that the question of bimetallism is one which does not admit of
any precise and simple answer. It is essentially an
indeterminate problem. It involves several variable quantities
and many constant quantities, the latter being either
inaccurately known or, in many cases, altogether unknown. …”

¹⁶⁰ _Investigations_, etc. (ed. Foxwell), p. 317.

None the less, it is certain that the divergence between the mint ratio and the market ratio under a bimetallic system must be smaller than may be the case where there is no bimetallic system. Whenever the market ratio diverges from the mint ratio the compensatory action under the bimetallic law tends to restore the equilibrium, and even where it fails in restoring it, it does succeed in abridging the [pg 86] gulf between the two ratios. That being the case, it is safe to argue that had there been no demonetization of silver after 1873 the ratio between gold and silver would have probably been preserved as it was during the monetary disturbances of the earlier period. At any rate, this much is certain, that the market ratio between the two metals could not have diverged from the mint ratio to the extent it actually did.¹⁶¹

¹⁶¹ Fisher, _Purchasing Power of Money_, 1911, pp. 134–35.

It is therefore a sad commentary on the monetary legislation of the seventies that if it did not actually help to create, for no purpose, a problem unknown before, it certainly helped to make worse a bad situation. Prior to 1870 not all countries had a common currency. There were India and countries of Western Europe which were exclusively on a silver basis, and others, like England and Portugal, which were exclusively on a gold basis, and yet none of them felt the want of a common standard of value in their mutual dealings. So long as there existed the fixed-ratio system in France and the Latin Union the problem was really provided for, for under it the two metals behaved as one and thereby furnished a common standard, although all countries did not use the same metal as their standard money. It was therefore a matter of comparative indifference to most countries which metal they used so long as there was some one country which used either at a certain defined ratio. With the destruction of this fixed ratio what was thus a matter of comparative indifference became a matter of supreme concern. Every country which had before enjoyed the benefits of a common international standard without having a common currency was faced with a crisis in which the choice lay between sacrificing its currency to securing a common standard or hugging its currency and foregoing the benefits of a common standard. That exigencies of a common standard ultimately led to its accomplishment was as it should have been, but it was not a fact before a great deal of harm and some heavy burdens had brought home to people what the want of it really meant to them. [pg 87]