SOME ASPECTS OF THE MONETARY USE OF SILVER

.THIS IS AN ORIGINAL MANUSCRIPT [IT MAY NOT.BE COPIED WITHOUT THE AUTHOR’S PERMISSION

Approved:

Approved:

Dean Graduate School

SOME ASPECTS OF THE MONETARY USE OF SILVER

THESIS

Presented to the Faculty of the Graduate School of The University of Texas in Partial Fulfillment of the Requirements

For the Degree of

DOCTOR OR PHILOSOPHY

3y

Richard Joseph Gonzalez, B. A., M. A.

(San Antonio, Texas)

Austin, Texas

June, 1934

360899

PREFACE

The recent dramatic decline in the price of silver to its lowest point in history has again focussed attention on the monetary use of *the precious metals. The relative merits of silver and gold as standards of value is a question upon which there has been intermittent discussion from the earliest time to the present day. Xenophon expressed the opinion that silver is more stable in value than gold; in the Middle Ages, Oresme and Gresham formulated a law to explain why both gold and silver could not be kept in circulation at the same time; and today the monetary use of the precious metals is still the subject for considerable discussion. It would seem that in view of these many centuries of discussion, all questions relating to the precious metals should have been settled; unfortunately, such is not the case. Indeed, since 1870 difference of opinion regarding the silver question seem to have increased rather than diminished.

The silver question caused much discussion in this country during the major depressions of the past sixty years. In the seventies and nineties, the silver question was the subject of great debate, and during the present depression the controversy over bimetallism has again been revived. The recurrence of proposals for bimetallism in periods of prolonged depression is an interesting phenomenon. Of course, bimetallism is proposed during periods of depression because it is a means

of inflation. But the proponents of bimetallism do not content themselves with saying that bimetallism is desirable because it would raise prices; they also claim many other advantages for the double standard. In fact, the real reason for bimetallism, that it will raise prices, is often disguised by a number of theoretical arguments attempting to show that bimetallism is better than gold monometallism as a standard of value. The validity of these arguments still remains unsettled after many years of discussion. It will be the purpose of this study to analyze and determine the validity of the arguments made for bimetallism and for other methods of increasing the monetary use of silver.

One reason why the questions pertaining to the monetary use of the precious metals have remained in an unsettled state is that the use of statistical evidence to support or criticize the various arguments for bimetallism has been the exception rather than the rule. In the following pages a different approach to the subject is attempted. It will be my purpose to consider the theoretical arguments advanced for bimetallism by means of statistical analysis. In so far as possible, the statistical method is used both in tracing the history of the monetary use of silver and gold and in analyzing the theoretical arguments for the greater monetary use of silver.

Part I presents the historical material regarding the relations of silver and gold, and here the use of statistical methods is limited. Nevertheless, certain information regarding the production, demand, and ratio of value of the precious metals which serves to throw light upon the issues under consideration can be presented quantitatively. Chapter I discusses the use of the precious metals for monetary purposes from early times to the discovery of America. The movements of the ratio of value between the precious metals in this period are instructive in that they represent the relation between the precious metals at a time when both were freely used for monetary purposes. In Chapter II the production, demand, and ratio of value of silver and gold from 1492 to 1870 are considered. Here again we have a period in which the relation between the precious metals was practically undisturbed by currency legislation, and so the evidence of this period regarding the ratio answers definitely the question whether bimetallism can keep the ratio of value between the precious metals stable. Chapter 111 describes the change from bimetallism to the gold standard in the period 1870-1914 and explains why this change took place. The validity of the statement that currency legislation alone was responsible for the depreciation of silver is also considered. The various international monetary conferences are discussed from the standpoint of the evidence they give on the opinion of the time regarding the two standards - bimetallism and gold monometallism. Chapter IV continues the history of silver from 1914 to 1933. The

repercussions which the phenomenal rise in the price of silver during the World War has had upon the monetary use of silver are pointed out, and the reasons for the recent fall in the price of silver are considered. Part II is devoted primarily to a consideration of some of the theoretical arguments which are advanced for the increased monetary use of silver. Chapter V, however, after stating the theoretical arguments advanced for the greater use of silver, considers the popular arguments which are frequently heard in favor of silver. Chapter VI is an analysis of the relative stability of value under a bimetallic standard and a gold standard. The argument that the joint supply of two metals is more stable than the supply of either metal alone is considered in the light of the actual production of the precious metals in the past. The relative stability of value of gold and silver from 1833 to 1930 is also measured by statistical methods. In Chapter VII the well-known theory of Professor Cassel concerning the relation between the quantity of gold and the price level is stated and criticized, and the general argument that there is a scarcity of gold is subjected to analysis® The different arguments advanced during periods of depression for the increased monetary use of silver are considered in Chapter VIII. The effect of the fall in the price of silver upon trade with silver-using nations and upon the people of the Orient who hoard silver is discussed, and the reaction of

a greater monetary use of silver upon prices is studied. In Chapter IX the various methods proposed for increasing the monetary use of silver are considered. Certain theoretical and practical difficulties and objections which stand in the way of the adoption and success of the different proposals are pointed out. Chapter Xis devoted to a summary of the conclusions of the entire study.

I wish to acknowledge the generous assistance of Professors E. T. Miller, C. E. Ayres, C. A. Wiley, L. S. Reed, and E. L. Dodd in the preparation of this study. Acknowledgement is especially due to Dr. E. T. Miller for reading and criticizing the manuscript several times. Dr. Reed, Dr. Wiley, and Dr. Ayres have also read the preliminary drafts of the various chapters and offered constructive criticisms. lam indebted to Dr. Dodd and Dr. Wiley for suggestions on some of the statistical problems involved in the study.

Richard J. Gonzalez

Austin, Texas, April 16, 1934•

CONTENTS

PART I THE HISTORY OP THE MONETARY USE OF THE PRECIOUS METALS

CHAPTER I THE EARLY USE OP SILVER AS MONEY

Page

A. How the Precious Metals Came to be Used as Money • 4

B. The Minting of Gold and Silver Coins ....... 5

C. The Ratio of Value Between Silver and Gold .... 6

D. The Production and Ratio of Value of the Precious Metals in the Middle Ages • •••••••••• 10

CHAPTER II BIMETALLISM, 1493-1870

A. Introduction ••••••••••• 13

B. The Production of Gold 14

C. The Production of Silver . . ...... 17

D. The Ratio of Value Between the Precious Metals • • 19

E. The failure of Great Britain’s Effort to Maintain a Bimetallic System • 28

F. The Experience of Prance -An Alternating Standard 30

G. An Analysis of the Claims Made for Bimetallism in the Light of Historical Evidence ...... 31

CHAPTER 111 THE CHANGE TO THE GOLD STANDARD, 1870-1914

A. The Production and Ratio of Value of the Precious Metals • 38

B. The Preference for Gold in England • • • 40

CHAPTER 111 (continued)

Page C. The Abandonment of Bimetallism in the United States 42

D. The Attitude Toward Silver in Europe 44

E. The German Monetary Reform •••«•••••••• 46

F* The Closing of the Mints to Silver in Other European Countries . . 48

G. The Relation Between the Closing of the Mints to Silver and the Depreciation of Silver 49

H. Further Changes to Gold in the Nineties • • • • • 52

I. The International Monetary Conferences •••••• 55

CHAPTER IV THE COURSE OF SILVER SINCE THE BEGINNING OF THE WORLD WAR

A. The Rise in the Price of Silver During the War • • 60

B. The Depreciation of Silver in 1920 . 62

C» The Source and Influence of "Other Supplies" on the Silver Market »•••••••» 63

D. The Sale of Silver by the Indian Government • « • 65

E. The Fall in the Price of Silver Since 1929 . . • . 67

F» The Explanation of the Depression in Terms of Factors Concerning Gold and Silver 70

PART II THEORETICAL ASPECTS OF THE MONETARY USE OF SILVER AND GOLD

CHAPTER V THE ARGUMENTS ADVANCED FOR THE GREATER MONETARY USE OF SILVER

A. The Silver Question During Periods of Depression 73

B# The Theoretical Arguments for the Use of Silver • 74

C» The Popular Arguments for Silver • • • 76

CHAPTER VI THE STABILITY OF VALUE UNDER BIMETALLISM AND GOLD MONOMETALLISM

Page A. The Fluctuations in the Value of Gold • ••«•• 85

B. The Stability in the Production of the Two Metals Considered as a Mass Compared with the Stability in the Production of Each Metal Separately • • • 91

C. The Fluctuations in the Value of Silver Compared with the Fluctuations in the Value of Gold • • • 100

D. The Relation Between the Quantity of the Money Metal and Prices 106

CHAPTER VII THE "SCARCITY" OF GOLD

A. The "Three Per Cent Estimate" by Professor Cassel 114

B. The Scarcity of Gold as an Explanation of the Depression • • • 120

C. The Rate of Increase in Gold Stocks Since 1913 • • 123

D* The Increased Efficiency in the Use of Gold * • • 124

E. The Question of the Maldistribution of Gold • • • 127

CHAPTER VIII AN ANALYSIS OF THE ARGUMENTS ADVANCED DURING PERIODS OF DEPRESSION FOR THE INCREASED USE OF SILVER

A. The Silver Question as a "Depression Issue” • . • 134

B. The Price Level and Debtor-Creditor Relations • • 136

C. Rising Prices as a Stimulus to Industry and Trade 141

D. The Price of Silver and Trade with the Orient • • 144

E. The Loss to Silver Hoarders as a Result of the Depreciation of Silver ••••••••••••• 147

F* Other Reasons Given for an Increase in the Price of Silver ••*••••••••••• 150

CHAPTER IX METHODS PROPOSED FOR INCREASING THE USE OF SILVER

Page A# A Greater Use of Silver for Subsidiary Coinage . • 157

B. The Use of Silver as Part of the Metallic Reserve 160

C. Bimetallism - The Proposals and the Difficulties Which Stand in the Way of their Adoption • • • • 162

D. Symmetalism . . 171

CHAPTER X CONCLUSIONS

A. Summary of Conclusions • . • • 175

Page APPENDIX - STABILITY OF PRODUCTIC® OF THE PRECIOUS METALS 183

BIBLIOGRAPHY 187

TABLES

Page I. Ratio of Gold and Silver, 1670 8.C.-565 A.D. . 7

11. The Ratio Between Gold and Silver, 1300-1500 • . 12

111. Production of Gold and Silver in the World Since the Discovery of America 15

IV. Ratio of Silver to Gold, 1501-1930 . 20

V. Highest Premium on the Paris Bourse for Gold and Silver, 1815-70 ...... 32

VI. The Supply of and Demand for Silver, 1920-1930 • 67

VII. Wholesale Prices and the Value of Gold in England 87

VIII. Secular Changes in the Value of Gold •••••• 89

IX. Actual and Normal Production of the Precious Metals, 1851-1930 94

X. The Value of Gold and Silver, 1833-1930 • • ♦ • 101

XI. Rate of Increase in the Production of Gold and Silver for Selected Periods ••••••••• 107

XII. The Relation of Money in Circulation and Bank Deposits to Monetary Gold in the United States 111

XIII. Relation Between the Physical Volume of Production, The Stock of Monetary Gold, and Prices in England and the United States •••••••» 124

XIV, Gold Reserves of Central Banks and Governments, 1913 and 1929 . . 129

XV. Gold Reserves of Central Banks and Governments, 1900, 1913, and 1929 131

XVI* Exports From the United States ••••>•••• 146

PART I THE HISTORY OF THE MONETARY USE OF THE PRECIOUS METALS

CHAPTER I THE EARLY USE OF SILVER AS MONEY

The use of silver and gold for monetary purposes continues to the present day, even in countries with a single gold standard. But whereas silver is now relegated by many nations to the role of subsidiary coinage, it once held equal rank with gold. In the view of the ancients, the two precious metals were equally entitled to serve as material for coins. One authority on the precious metals states that by the sixteenth century B. C. bars and disks of gold and silver were already circulating in a legal ratio of value as a medium of exchange and standard of value. 1 It is recorded in the book of Genesis that Abraham weighed out to Ephron four hundred shekels of silver, current money with the merchants, in payment for a field.

The discovery and use of silver for monetary purposes, however, came after that of gold and copper, for these latter metals are found in a pure state, 2 whereas silver is found under less favorable conditions. The white metal occurs in the pure state in only relatively small quantities, and is found mostly in combination with chlorine, lead, sulphur, arsenic, and antimony. Its production usually requires an advanced knowledge of metallurgy, since it is more difficult than the mining of gold and copper. The belief that silver was not discovered until after gold is supported not only by theoretical considerations but also by historical evidence. This is illustrated by the case of the Aztecs of Mexico:

When the Spanish conquerors reckoned up their great tale of treasures found in the royal palace, whilst the gold amounted to the large sum of pesos de oro 16200 lbs., the ‘silver and silver vessels only weighed the small sum of 500 marks. Yet this was in a country that is now known as the richest silverproducing region that the world has ever seen. We thus find a people in a highly advanced state of civilization • . • who were scarcely able to make the slightest use of silver, with which almost every crevice in their native hills was charged. We may thus with safety rest in the conclusion that silver only comes into use at a stage always and probably much later than gold.s

The difficulty in producing silver initially doubtless explains why at an early stage (about 1400 8.C.) silver had a greater value than gold in Egypt.s Afterwards, as the production of silver increased, it became equal in value with gold, and then gradually it became much less valuable. By 1000 B. C. a great fall had been caused in the value of silver relative to gold in the countries of the eastern Mediterranean by the abundant silver of Spain. From the Eighteenth Dynasty in Egypt, and in Asia through the Chaldean Empire and down through the Persian kings, there was a customary ratio of gold to silver of 1:13

In spite of the fact that gold was discovered long before other metals were known to man, silver also came to be highly esteemed, probably because it has many properties similar to those of golds Hie beauty, durability, malleability, and portability of silver made it nearly as well adapted as gold for primitive use in ornaments and utensils, as a mark of distinction. We do not know when or where the first use of the precious metals as commonly exchangeable money arose, but it doubtless developed from this primitive use of gold and silver as marks of distinction. 8 At first gold and silver were used to effect transactions according to some measure of length or weight.

The metals, although especially preferred in all exchanges, passed as merchandise and were weighed at each transaction. . . But earlier than weighing measures of length were used, taken from the human body, the length of a finger, hand, arm, or foot. Gold was first passed by measurement of the part of a quill containing gold dust (as among the Aztecs of Mexico), or of a small rod of gold, a portion of which about an inch long was regarded as the equivalent of an ox or cow. This rude system gave way to more precise methods of weight, starting with grains of wheat, barley, and the like as units.

The method of weighing the precious metals at each transaction was so inconvenient that the next step in the evolution of money was inevitable, though it took centuries to develop. This was the minting of the precious metals into coins. "The first attempts to secure confidence in pieces of metallic money came from private individuals, bankers, goldsmiths, or great merchants who imprinted on the metals their particular mark. It was in the nature of a guaranty that the weight and fineness were as represented. Such private guaranties, however, were good only within a relatively small area, so it was not long before a better method was devised - the minting of coins by governments. The earliest known coins were struck in Lydia in the seventh century B. and thereafter the minting of coins spread rapidly to other countries.

Even in ancient times the ratio of value between gold and silver fluctuated, although then it was probably much more subject to the influence of custom than is the case now. Nevertheless, attempts were made to set a legal ratio of value for the two metals. As has already been mentioned, an instance in which gold and silver in the form of bars and disks exchanged at a legal ratio of value is known as early as 1600 B. C., or 900 years before the minting of coins in Lydia. The ratio between the two metals varied in different places and at different times, according to the conditions of production of the metals

and the preference of the people for one metal or the other. In Greece, for example, gold was valued less highly than in Babylon, where a ratio of 1:13 1/3 existed for several centuries. The ratio between gold and silver about 400 B. C. was 1:12, and until the time of Alexander the Great it fluctuated between 1:13 1/3 and Ixll-i* * The fluctuations which occurred from 1670 B. C. to 565 A. D. are given in the table oak page eight. These fluctuations in the ratio of silver to gold caused disturbances in the monetary systems of countries which tried to circulate the two metals at a fixed legal ratio. Thus even in early times the impracticability of bimetedlism showed itself under the operation of Gresham’s law. As a result of these fluctuations in the value of the two metals, first one and then the other was at a premium, so that one metal usually predominated in trade.

Usually one of the two metals has predominated in trade, either by law or by custom. From this metal were minted the coins which represented the relatively stable unit of value. The coins of the other metal were frequently, like subsidiary coins of copper and other base alloys, supported at a higher or lower nominal value in relation to the principal monetary unit by means of the power of payment given them by the State. Such overvaluation at times appeared in gold coins, but in the main silver served in the position of credit money, which was issued sometimes in small coins with restricted legal-tender power, and sometimes without such restrictions. In the latter case, however, the legal ratio always proved unworkable as a result of the enormous issue of the cheaper metal, which became the customary medium of exchange and standard of value in ordinary trade, while gold maintained a higher exchange valued 3

In the Assyrian and Babylonian kingdoms silver was the ruling medium of exchange, although like gold, only in the form of bars and disksIn Persia, under Darius, there existed an official gold standard, only the king having the right to make gold coins with a legally fixed value, while subsidiary silver coins could be struck by states and cities* In some parts of the country, namely Syria, silver money always remained well liked, and under Alexander the Great there occurred a change to a silver The European Greeks seem to have preferred silver, which was abundantly supplied from the mines of Laurium. From the time of Pericles to Alexander (465-356 B. C.), the Greeks maintained a gold circulation alongside a silver standard by not establishing any legal ratio between them, but by exchanging a fixed unit of silver for a varying value of gold as the market ratio fluctuated. The state formed the gold ingot and guaranteed

its weight and fineness, but did not fix its ratio. This was in effect a single silver standard with gold in a subsidiary position, a decided contrast with the bimetallic standard which was attempted in the Greek cities under Persian dominance. At that time an effort was made to circulate gold and silver units at a conventional ratio, but one or the other was ever at a premium. “After coins came in, a considerable change in the market ratio upset the system, forcing demonetization and recoinage. In the decadence of Persia the kings tried to hold to the time-honored ratio of 1:13 1/3, after the market ratio had fallen. As a consequence, silver was exported and only gold remained.”

In Rome, silver and copper coins served as a medium of exchange. There were also some gold coins, but these were constantly being altered in weight and fineness. In the days of the Republic, the legal ratio according to which gold and silver coins were minted was 1:11.91. The market ratio at times varied considerably, as during the reign of Ceasar, when it fell to 1:8.9. The coinage regulations for the first centuries of the Empire show fluctuations in the ratio between 1:11.3 and 1:12.2. 18 After various fluctuations in the weight of the gold pieces under Sulla, Pompey, Julius Ceasar, and others, Constantine finally fixed the weight of the aureus or solidus at four scruples in 312 A.D. and so it remained until the final downfall of the Empire of the East in 1453.

The solidus was divided into thirds or tremisses. When the barbarian conquerors of the Roman Empire began to coin silver they took as their model the gold tremisses♦ For centuries from this time on silver formed the staple currency of Western Europe, and the silver penny of 24 grains virtually became the unit of account. 19

For the Middle Ages the data in regard to the ratio of the precious metals are few and uncertain. Soetbeer finds for the Carolingian period a normal ratio of gold to silver of 1:12, and concludes that upon the whole, w it may be said that the ratio between gold and silver was in European countries, between the ninth and the sixteenth centuries, somewhere from 1:12 to 1:10.20

Prom the seventh until about the thirteenth century a monetary hiatus existed in Europe. Just before and for some time after the fall of the Roman Empire there was an extraordinary diminution in the supply of the precious metals. Silver production recovered more quickly than gold from the low level reached in the three centuries before the Carolingian period. Lexis estimates the annual production of silver in

Europe in the eighth and ninth centuries at about 1,000,000 silver marks ( a silver mark equals 1/180 kilogram of silver), in the tenth and eleventh at about 2,000,000, in the twelfth and the first half of the thirteenth at 3,000,000, and from 1250 to 1550 at 5,000,000 silver marks. 21 There was no considerable increase in the production of the precious metals, other than that already noted above in the case of silver, in the period 1300-1492, although the demand for gold and silver as a medium of exchange increased greatly due to a marked expansion of commerce which began in the fourteenth century. The chief characteristic of the period was a constant change in the ratio of gold to silver.

There was nothing like an equal and generally recognized ratio of value between gold and silver at any one single point of time. At one and the same date a ratio of 7 or 8 to 1 prevailed in the Moorish parts of Spain and 12 to 1 in the Christian parts (the kingdom of Castile). Similarly, at a later period, in 1474, the ratio in England was 11.15, in Germany 11.12, and in Erance 11.00, in Italy 10.58, and in Spain 9.82. The natural result of such a state of chaos, if it had been permitted to work itself out unhindered, would have been arbitrage transaction. 22

Actually, in spite of frantic efforts on the part of ruler after ruler, arbitrage transactions did occur, though in some countries the export of gold and silver was forbidden on pain of death. The different ratios in different countries led the money changers to export undervalued coins and to leave only inferior money in circulation, an action which constantly upset the coinage systems of the various countries.

Some of the variations in the ratio of silver to gold are shown in the following table.

ILexis, "Doppelwahrung,” Sandworterbuch der Staatswissense haft en, Dritte Auflage, 111 Band, p. 557* Money, Credit and Prices, Vol. I, p. 89. 3Helfferich, Money, Vol. I, p. 82. Siculus attributes the discovery of silver in Spain

to an accidental burning of a forest in the Pyrenees* ’’Since there are on them (the Pyrenees) many forests dense with trees, they say that in ancient times the whole mountain region was completely burned by some shepherds having cast away a firebrand. Then, since the fire kept burning on for many days continuously, the surface of the earth was burned and the mountains from the circumstance were called Pyrenaean (scorched). and the surface of the burnt region flowed with much silver, and since the natural ore had been smelted, there ensued many lava-like streams of pure silver. But inasmuch as the natives did not understand the use of it, the Phoenicians trading with them, and having learned about the occurence, bought the silver for some small return in other wares.” Ridgeway, Origin of Currency and Weight Standards, p. 99* 5Tb id., p. 59. 6 Laughlin, op. cit.. p. 89.

7 T J ! Idem. BKemp, 8 Kemp, The Precious Metals as Money, p. 11. sLaughlin,$Laughlin, op. cit., pp. 43-44.

IQlbid., pp. 47-48. llßidgeway, op. cit., p. 293.

12 Helfferich, op* cit., p. 50, "Doppelwahrung, M op. cit.ssB. "Moistens hat das eine dor beiden Metalle gesetzlich Oder tatsachlich im

Verkehr die Vorherrschaft behauptet. Aus diesem wurden die Munzen geprSgt, welch die relativ feste Werteinheit darstellen sollten, und die Munzen aus dem anderen Metall wurden dann haufig ebenso wie die aus geringhaltigen Billon oder Kupfer mit Hilfe der ihnen vom Staate zuerkannten Zahlungskraft zu einer mehr Oder weniger erhohten Kominalwerte an Jene Hauptmu'nzen angelehnt. Solche Überwert/ung sind zuweilen auch bei Goldmunzen vorgekommen, in der Regel, aber diente das Silber zur Darstellung des Kreditgeldes, das teils als Scheidemunze mit beschrankter Zahlungskraft, teils aber auch ohne solche Beschrankung ausgeben wurde. Im letzteren Faile aber erwies sich das gesetzliche Wertverhaltnis bei massenhafter Ausgabe des unterwertigen Geldes immer als wirkungslos, indem dieses im gewohnlichen Verkehr das allgemein gebrauchliche Umlaufsmittel und Wertmaz wurde, die Goldmunzen aber einen erhohten Kurswert erhielten." 14Lexis, o Silber und Silberwahrun^, H Handworterbuch der Staatswissenschaften, VII Band, p. 502♦ IFaid.Tp. 555: 16 Laughlin, op* cit*, p. 91.

ILaughlin, 1 Laughlin, Money, Credit and Prices, Vol. I, pp. 95-96.

17 Ibid., p. 90. ferich, op. cit., p. 50.

19 Ridgeway, op. cit., pp. 384-385. 2Ogoetbeer, Materials Towards the Elucidation of Economic Conditions Affecting the Precious Metals and the Question of Standards, U.S. Sen. Exec. Documents, 50th Cong, Ist Session, Mo. 34, p, 108. However, ”In isolated cases considerable departures in both directions from these limits are proved to have taken place - roughly between 1:8 and 1:13.6.” Helfferich, cit., p. 50. Del Mar states that the Arabian ratio of silver to gold (6-j-:l) was adopted in England during the seventh century and lasted without substantial variation until 878. Del Mar, History of Monetary Systems, p. 58.

21Relff erich, op. cite, p. 85. 22Shaw, History of the Currency. p. 16.

History of the Currency* p. 40.

Egypt; During the thirteenth to 1670 B.C.)s At one time silver seventeenth dynasties (3000- was more valuable than gold; toward 1000 B. C. it was about equal to gold; later it~was less valuable than gold. From the eighteenth and nineteenth dyrasties (1670-1269 B.C.) to about 731 there was a custom- ary ratio .......... 1S13 1/3 Chaldean Empire (4000-731 B.C.): In Asia, since 1670-1269, down to Darius (521-485) and the Persian kings • . 1:13 1/3 Greece: Pheidon of Argos (660 B.C,) . . . . .... 1:15 Phidias (465-429) and Pericles . . . . . 1:14-15 In Attica (440) ............ . .... 1:14 In Sicily ............... 1:12-15 First of the fourth century ....... . .... 1:12 Lycurgus ............... ..... 1:11 1/2 Philip of Macedon (359-336) ....... . .... 1:12 1/2 On the Euxine (because of nearness to Ural mines) 1:10 1/10 Alexander the Great (336-323) (because of gold booty brought from the East) . . . * . i , , . 4 Also, Thracian gold mines lowered value of gold. After Alexander the Great (to 300 B. C.) . .... 1:12 Ptolomy Soter (189) under the Romans . * . . . . .1:121/2 Rome: In the seventh century B.C. the mines of Koricum lowered the local value of gold. In the fourth century B.C., in Etruria and Sicily . 1:15 Time of Lex Flaminia (217 B.C.) . . . • . • ® ® ® ® 1:11.91 Sulla (87-78) and to J. Caesar ...... ® ® ® ® 1:11.91 J. Caesar (59-44) booty from Gaul lowered local value of gold ........... ® ® ® > 1: 8.93 Augustus (31-14 B.C.) ........... 1:11.91 Kero (54-68 A.D.) ............. • ® ♦ 1:10.31 Trojan (98-117 A.D.) ........... • ® • 1: 9.375 These latter ratios were only mint ratios when coins began to be debased. From Severus to Diocletian (193-284) changes in the ratio had driven out gold. From Diocletian (284-305) to Constantine (323-37) • 1S13 8/9 1:14 2/5 Theodosius (422) ............. • ® • © 1:18 Justinian (527-65), Eastern Empire • . • • e ® © ® 1:15 The Eastern Empire kept its coinage system during the barbarian invasions and down to its fall in 1453.

Table I Ratio of Gold and Silver, 1670 B.C. - 565 A. D. 1

Year 1252 Italy (Florence) 10.75 France England Germany (ratio of mint ordinances ) Spain 1257 9.29 1296 11.10 1305 10.88 1324 13.62 1338 12.61 1344 12.59 1344 11.04 1345 11.04 1346 11.11 11.57 1347 10.91 1351 12.3 1353 11.15 1361 12.00 1375 10.77 12.4 1386 10.76 1391 10.74 1399 11.16 1402 10.58 1406 10.66 1411 12.00 1412 10.33 1417 10.67 1421 10.29 1422 10.16 1427 9.00 1432 10.87 5.822 1435 12.32 1447 11.44 1455 12.2 1456 11.77 1460 9.33 1462 9.37 1464 11.42 11.15 9.824 1471 10.58 1475 10.41 1480 10.83 10.87 1485 10.46 1486 10.98 1488 11.83 1497 10.01 1500 10.975

Table II The Ratio Between Gold and Silver in Europe ? 1300-1500 1

CHAPTER II BIMETALLISM, 1493-1870

The discovery of America resulted in a flow of the precious metals to Europe,which corrected the fall of prices there but did not dispose of the problems arising from the use of bimetallism. The attempt to keep both gold and silver in circulation was continued by all the European nations, though without much success, as we shall see* The mint ratio between the two metals was continually being changed in an effort to keep both metals in circulation, but the lack of uniformity in the ratio adopted by different mints and the fluctuations in the market value of the metals made bimetallism practically impossible. Throughout this period, the monetary system, while theoretically a bimetallic one, was actually an alternating system. By a bimetallic system is meant one in which gold and silver coins circulate at a ratio fixed by law, and have equal legal tender power. If, even though the law provides for bimetallism, first one metal and then the other constitutes almost the entire circulation, then the system can best be described by calling it an alternating standard. The explanation of the breakdown of the bimetallic system into an alternating one is to be found in the changes in the ratio of value between gold and silver. Before taking up this question, however, it is necessary to discuss the production of the precious metals, for that is one of the factors determining the ratio of value®

The most widely accepted figures on the production of the precious metals since 1493 are those of Soetbeer up to 1885, and those of the Director of the Mint since then. These figures, given in Table 111, reveal several distinct periods in the production of gold and silver. Helfferich divided the movements in gold production into seven periods: 1493-1680, 1681-1760, 1761-1820, 1821-1847, 1848-1870, 1871-1890, and 1891 to the present day. The periods for the movements in silver production, which do not coincide with those for gold, are as follows: 1493-1620, 1621-1680, 1681-1810, 1811-1830, 1831 to the present With the aid of Table 111 these movements in the production of the precious metals can be traced briefly.

From 1493 to 1680 the production of gold showed a gradual and almost uninterrupted increase. Toward the end of the seventeenth century some gold deposits much richer than any previously existing were discovered in Brazil > resulting in a sudden and large swing upward in gold production for the period 1681-1760. From 1761 onward the production in Brazil began to decline as rapidly as it had at first increased; so that gold production declined from 1761 to 1820. From 1821 to 1847 gold production again moved upward, almost entirely as a result of greatly increased production in Russia. With the discovery of rich gold mines in California in 1848 and in Australia in 1851 gold production entered a new phase. The aggregate production from

iDirector of the Mint, Report, 1931, p. 242. The figures up to 1885 are from Dr. Soetbeer’s works. With regard to these figures, Soetbeer states! "One ought neither to overestimate nor to underestimate these statistics - on the one hand, not to demand more from them than, with the best wishes of their author, they can possibly give, and, on the other hand, not to throw overboard their results with exaggerated mistrust, because of their inevitable gaps and imperfections." Soetbeer, op. cit., p. 79.

1851 to 1870 furnished very nearly as much gold as the preceding 250 years (1600-1850). Gold production began to decline in the seventies and reached its lowest point in 1883. Then it increased gradually in 1883-1890, more rapidly from 1891-1896, and very rapidly from 1897 to the World War. Between 1896 and 1906 gold production was almost exactly doubled, as a result of the discoveries in the Canadian KI ondyke and in Alaska and the Witwatersrand fields of South Africa. Gold production reached a peak of 22,737,520 fine ounces in 1915, and then declined to 15,451,945 ounces in 1922. From 1924 to 1930 production remained fairly stable, changing from 19,031,001 fine ounces at the beginning to 20,160,355 ounces at the end of the period. Since the nineties, there has been an unexpected increase in gold production in the older lands from which gold was obtained, chiefly as a result of technological progress in gold mining and refining. 2

The more recent preponderance of the production of gold from mines has disproved the theory advanced, principally by the Viennese geologist Edward Suess, and widely held that, for geological reasons, the mining of gold had no future, and that, therefore, as soon as the alluvial deposits became exhausted an uninterrupted process of decrease in gold production would necessarily set in. Suess’s theory depended on the estimate that the largest part of gold supplies - which he put at no less than 9/10ths - is derived from alluvial deposits which contain an exceptional, but rapidly exhaustible, wealth of gold. As our knowledge of the earth’s surface widens, the less likely becomes the discovery of new and rich alluvial deposits. The mining of gold would then not be a substitute because of the uncertain and sparse distribution of gold in rock-formations. It followed, therefore, that gold production would gradually cease. If ever a theory was effectively disposed of by events, this has been so with the theory of Suess. The known alluvial deposits are practically entirely exhausted

and yet the production of gold stands at a considerably higher level than before. Technical progress has overcome what seemed to be a law of nature.$

As a result of wider geographical and geological knowledge and of progress in metallurgy, the production of silver, like that of gold, has increased very greatly, particularly since 1850. From 1493-1620 there was an increase in the production of silver even more extraordinary than in the case of gold. Up to 1530 this increase was due to European mining, and thereafter American production took the lead. The mines of Potosi in Bolivia supplied more than one-half of the total silver production of the world from 1545 to 1620. The production of silver increased about nine-fold in the period 1493-1620. Thus, though gold production also increased during this period, the proportion of the Joint product (by weight) which gold constituted changed from 11 per cent in 1493-1520 to only 2 per cent in 1701-1720.4 In the period 1621-1680 silver production declined due to a fall in the output of the Potosi mines. At the same time, gold production increased slightly. From 1681 to 1810 silver production increased slowly till 1760 and rapidly thereafter, so that the annual average production in 1801-1810 was more than double that in 1661-1680 (28,746,922 as compared with 10,834,550 fine ounces). During the first part of this period silver production lagged behind the increase in gold production, but after 1760 the output of gold was declining while silver production was increasing

rapidly. In the period 1811-1830 silver production declined greatly, largely as a result of wars in Mexico and South America. This also caused a decrease in the production of gold at the same time.

For the past century (since 1830) the trend of silver production has been upward, with but few interruptions. This trend is indicated by the following figures for the production in fine ounces for certain periods and years: 1821-1830 - 14,807,000; 1851-1855 - 28,488,597; 1866-1870 - 43,051,583; 1881-1885 - 92,003,944; 1907 - 184,206,984; 1912 - 1929 - 260,970,029. In the sixties the mining of silver in the United States, which had been unimportant up to that time, began to develop very rapidly. From the second half of the seventies to 1896 the United States held first place among silver producing countries. In the eighties the production of silver was increased as a result of discoveries in Australia. But a great deal of the increase in the output of silver since 1850 has been due to improvements in metallurgy rather than to discoveries of new mines.

Improvements in metallurgical technique have contributed even more than in the recent rises in gold production to these brilliant developments in the production of silver. The substantial decreases in costs of production which they brought about have made the working up of inferior ores more and more profitable, notwithstanding -and this must be emphasised- the drop by more than one-half which has taken place in the price of silver from the beginning of the seventies, and as ores with a small silver content are extensively found, the sole practical limit to expansion in silver production is set by the price which can be obtained for the metal,®

From 1912 to 1922 the production of silver fluctuated between 171 and 210 million fine ounces, after which it began to increase again. Since 1930 the output of silver has declined considerably as the result of the fall in the price of silver and in the price of the non-ferrous metals in connection with which it is mined. Final estimates by the Bureau of Mines place the world production of silver in 1932 at 160 million

With these figures on the production of the precious metals in mind, we can now turn to a consideration of the ratib of value between silver and gold since 1493. Here again the most widely accepted estimates are those of Soetbeer and the United States mint, which estimates are reproduced on the following page. The most obvious conclusion from the figures is that there has been a steady trend toward a higher ratio between silver and gold, that is, a fall in the value of silver relative to gold. This becomes clearer when we glance at the average ratio for the first period in each century (from 1500 on): 10.75, 12.25, 15.27, 15.61, 36.30. From 1501-1710 there was an uninterrupted rise in the average ratio from 10.75 to 15.27. From. 1710-1870 the average ratio fluctuated between a minimum of 14.56 and a maximum of 15.83. Since 1870 silver has continued to depreciate, except during the period 1916-1925.

From this brief survey of the movement of the ratio of value between silver and gold two questions become apparent: (1) Why has the general trend been toward a decrease in the value of silver relative to gold? (2) Why was the ratio relatively stable from 1710-1870? It is to be expected that the answers to these questions will be found in the relation between the supply of and the demand for the precious metals. Before proceeding to a more detailed consideration of the supply and demands it may be well to point out certain interesting facts on the side of the supply of the precious metals which may throw some light on the two questions stated above. Looking at the production of the precious metals in 1493-1520 and 1701-1720, we find that the average annual gold output increased 121 per cent (from 186,470 to 412,163 fine ounces) while the average annual silver production increased 656 per cent (from 1,511,050 to 11,432,540 fine ounces). Between 1866- 1870 and 1926-1930 the average annual production increased 215 per cent in the case of gold and 495 per cent for silver. Similarly, comparing the two periods 1493-1520 and 1926-1930, we find that the average annual production has increased approximately 106 times in the case of gold (19,763,366 £ u* 186,470) and 169 in the case of silver (255,075,972 11,511,050). If the demand for silver had remained in the same proportion to the demand for gold since 1493 this change in supply would explain a depreciation of silver (a rise in the ratio of silver to gold) for the periods 1493-1710, 1866-1930, and 1493-1930, Actually, such depreciation of silver did occur, the average ratio changing from 10.75 to 15.27 in the first period and from 15,55 to 39.26 in the second period. We do not say that the

entire change in the ratio of silver to gold in these periods has been due to changes in but only that there is reason for believing that changes in the supply of the precious metals would have caused silver to depreciate relative to gold even if all other factors had remained the same® From 1710 to 1870 the ratio of silver to gold remained relatively stable, although gold production increased more rapidly than silver production - the average production in 1866-1870 was 15.2 greater than in 1701-1720 in the case of gold and 3.77 for silver. In spite of this, the ratio of silver to gold changed from 15.27 to 15.55. In this period, then, we will have to look primarily to changes in demand to explain the stability of the ratio.

A closer analysis of the conditions of demand and supply of the precious metals for the different periods in the fluctuations of the ratio shows more clearly why silver has depreciated during certain periods and remained stable at others® Immediately after 1493 there was a slight tendency toward a depreciation of gold, due to the fact that more gold than silver was being derived from the new world. With the discovery of the silver mines of Mexico and Potosi, silver production far out-distanced gold, a circumstance which throws light on the gradual fall in the relative value of silver between 1540 and 1620® That the ratio did not change more was due to the fact that silver met the most important monetary needs of the time to a much larger degree than gold® These needs were caused

by the extension of the use of metallic money to the lower levels of the economic organization (which had hitherto existed under conditions of ’‘natural” economy) where silver was much more useful than gold to effect transactions*® During the seventeenth century the average ratio of silver to gold changed rapidly from ll»80 at the beginning to 15*00 at the end, although gold production was increasing and silver production decreasing throughout this period. "How little production, unaided by other factors, is capable of giving a decisive turn to the ratio of value of the two metals is seen with special clearness from this period (1620-1700) during which silver depreciated by nearly 20 per cent whilst its production was falling off slowly and whilst the production of gold was rising." 9 This fall in the value of silver may be explained as an after-effect of the earlier change in the production of gold and silver, and in terms of a change in demand®

It may be alleged that the effect of the former great changes in the production of the precious metals did not produce their effect before this date, and that the real cause of the fall of silver between 1621 and 1650 must still be sought in the great influx of silver that took place after 1545 from Peru, Potosi, and Mexico® We are not disposed to deny entirely that such a postponed effect may be traced. Yet the chief cause in the great and permanent rise in the value of gold after 1620 must still be sought in the increased demand for gold that then took place, an increase of demand which far exceeded the fresh supply coming from the mines of New Grenada and Chile. The cause of the increased demand is to be found primarily in the continuous wars in Europe, which, as is well known, caused gold to be in request. Next, it is to be found in the growth of international trade in the

seventeenth century, which, notwithstanding the entending use of bills of exchange, yet created the need for shipments of coin. Obviously, gold, both intrinsically and because of the common prohibition of coin shipments, was a better medium than silver.10

From 1700 to about 1780 silver rose in value relative to gold. One reason for this is to be found in the increase in the share of gold in the joint product of the two metals from 3.5 per cent by weight in 1701-1720 to 4.4 per cent in 1741- 1760. The fact that the Spanish piaster became the coin in use for many international transactions, and the continuous and large flow of silver to the East are contributing factors which helped to improve the position of silver relative to gold® 11 From 1780 to 1850 the ratio of silver to gold again rose, changing from an average of 14*64 at the beginning to 15.83 at the end of the period® One reason for this change was the increased productiveness of the Mexican silver mines up to 1810® M The silver tide again set in strongly from Mexico by 1760, and by 1781-1800 reached its highest annual average value.At the same time there was a decrease in the production of gold in Brazil, so that the amount of the joint product by weight constituted by gold fell from 3.1 per cent for 1761-1780 to 1.9 per cent in 1801-1810. The wars that lasted until 1815 and the demand for gold when England resumed specie payments on a gold basis also tended to cause a higher value of gold.

From 1820 to 1850 the ratio of silver to gold was relatively stable, although the proportion of the joint production (by weight) which gold constituted increased from 3 per cent in 1821-1830 to 6.6 per cent in 1841-1850. This situation was probably the result of an increase in the demand for gold and the lag which occurs between changes in the production and changes in the value of the metals. Helfferich thinks that the fact of greatest importance was the vast development of international trading, in which trade the English gold sovereign occupied, in ever increasing degree, the position previously held by the Spanish silver piastre. Professor Laughlin is inclined to stress the latter factor.

The effect of a new supply is obviously slow in bringing about a decline in value as the existing stock becomes larger. It is not with the annual production but with the total supply that any demand is compared. It requires some time, therefore, for even a large annual production of the precious metals to be absorbed into a large existing stock. Hence, as years pass, the total stock becomes greater and greater, and the greater the lag in the changes of value. That is, the fall in the value of gold and silver must always follow, and not be contemporary with, even large annual additions to the supply® 14

From 1852-1867 the ratio of value changed in favor of silver, as a result of the great change brought about in the production of the precious metals by the discovery of the Californian and Australian gold fields. V/hereas in earlier times two-thirds of the value of the total product came from silver and only one-third from gold, the proportion after 1850 was exactly reversed. At the same time, the shipment of silver to India rose considerably, so that there was a general expectation of an inevitable depreciation of gold. To a certain extent, gold did depreciate, and the price of silver increased, but the change in the ratio between the two metals was relatively small® Soetbeer states that it was the monetary system of the Latin Union which kept gold from depreciating much more. ’’That the price of silver did not rise considerably higher was the result, as is well known, of the double standard - or, better, the alternate standard - of the Latin Union.lt should be added, however, that this stabilizing influence of the bimetallic system was possible only because the people of France and other countries of the Latin Union were willing to let gold coins replace silver coins, and would not have occurred if there had been a preference for silver coins. The closing of the mints of the Latin Union countries to silver later showed that there was a preference for gold, so that the stability of the ratio of silver to gold between 1852-1867, while apparently due to the bimetallic system, was really due to an increased demand for gold. Thus the fact that there has been a secular downward trend in the value of silver, as well as the relative stability of the ratio from 1720-1870, is explained by the changes in the relation between the supply of and demand for gold and silver. The changes in the ratio since 1870 have been so different in degree from those which previously had taken place as to mark a new period in the relation between silver and gold. For that reason, the movement of the ratio since 1870 will be taken up in the next two chapters rather than in this chapter.

Throughout the period 1493-1816 both gold and silver were employed in European commerce without any idea of restricting the tender of one or the other metal. This same condition held practically up to 1850, for England was the only important commercial nation which adopted the gold standard before that year. Furthermore, European bimetallism may be said to have started before the discovery of America. The minting of the gold florin of Florence in 1252 marked the reintroduction of gold into the coinage of Western nations, and so ended the period in which silver was virtually the only medium of exchange. By 1344 gold coinage had become sufficiently important that th® fourteenth century may be taken as a starting point for bimetallism (in the sense that both metals served as a medium of exchange, but not in the sense of a "bimetallic system’’) in The currencies of the trading nations of Europe were all unconsciously bimetallic.

The developments in the monetary systems of different countries since the fourteenth century have been carefully studied by many monetary experts, and they have found that efforts to keep both metals in circulation were futile. That such was the case was recognised in England as early as 1698, as is evidenced by the following proposal of the Commissioners of Trade for a single silver standard:

Fox' it being impossible that more than one metal should be the true measure of commerce; and the world by common consent and convenience having settled that measure in silver, gold as well as other metals is to be looked upon as a commodity which, varying in its price as other commodities do, its value will always be changeable; and the fixing of its value in any country, so that it cannot be readily accomodated to the course it has in other neighboring countries, will be always prejudicial to the country which does so. 1?

Toward the end of the seventeenth century, however, gold began to replace silver in circulation and to win greater favor in England. Although a double standard system was formally introduced in 1717-1718, the legal ratio was too favorable to gold, so that from 1701-1816 gold was coined to the value of over 90 million pounds sterling as against only £.908,200 of silver.-® ”The common people had become accustomed to the use of the Gold Coins; and the reason, which induced them still to prefer them, was, perhaps, the convenience of making large payments in coins of that metal.

It is to be noted, however, that it was entirely within the power of the English people to fix the ratio against gold; but their preference for gold was shown in fact by the absence of such action. Of course, when silver, the money of small or ordinary transactions, disappeared, the inconvenience was felt bv everyone; but no steps were taken to give up g01d, 20

When in 1771, due to a fall in the value of silver, the gold currency was threatened by the export of gold, action was taknn to preserve the gold coins. An act providing for this was passed in 1774 and continued to 1783, at which time it was allowed to expire. When the situation occurred in the second half of the nineties, the act was revived and continued to 1816.

The closing of the London Mint to silver in the year 1798 was the first’demonetization’ of silver. On its purely formal side, this step amounted to the closing to silver of a large and important area of use, and it may, therefore, be considered as being in the nature of an artificial restriction, by way of currency legislation, of the demand for silver. • • The step taken, although of a formal nature, denoted an epoch-making change in English currency. In actual practice, however, it merely continued existing conditions. • The existing state of affairs was consolidated by the closing of the Mint to silver, because it conformed to the needs of commerce, and because public opinion agreed that the replacement of a gold circulation by a silver circulation would be detrimental to the interests of English trade. • The fact that at the end of th* eighteenth century the depreciation of silver made it possible for this metal to find an outlet by it being turned into coin at the English Mint was an automatic effect of the working of the existing double standard, but it was not in essence the result of an actual market demand for silver as a medium of payment. The legislative act which brought about the cessation of the coinage of silver did not, therefore, restrict artificially any actually existing demand for silver. On the contrary, it was simply the expression of the fact that English trade had no use for the increasing quantities of silver. Legislation was thus not the real cause of the permanent contraction of the use of silver in English trade, and of the consequences of such contraction upon the ratio between the values of silver and gold. It would be more correct to say that legislation was but the instrument which gave effect to the requirements of commerce, whereas previously the only way in which expression could be given to these requirements was by changes in the ratio of value of gold and silver coins.

The experience of other countries attempting to keep both gold and silver in circulation has been the same as that of England. By an act of 1803 France established a full-fledged bimetallic system (although the law stated that the silver franc constituted the monetary unit), in which gold and silver coins were given unlimited legal tender power. 22 Although no ratio was expressed, the provisions for the coinage of silver and gold francs established a ratio of 15f:l. Due to changes ¥ in the market ratio, however, the actual standard of prices and current means of payment changed from one to the other metal* This is shown by the figures of the coinage of the two metals by the French Mint. From 1820 to 1850, when the market ratio remained below 15£, the total silver coinage amounted to £127,458,222, while that of gold reached only £19,333,854. When the ratio was in favor of gold, 1850-1866, the total silver coinage dropped to £1,315,532, while gold coinage rose to £292,416,951.1n the former period, the figures of the export of gold from France show that the gold coins which were melted down exceeded by a considerable amount the number coined. In the latter period the larger part of the French silver currency in circulation was swallowed up by the large export of silver in 1852-1864 and by the industrial use of silver.^ 4

To 1850 debtors paid in silver; prices were expressed in silver. From 1852 to 1866, because of the early effects of the gold discoveries and the fall of gold, the situation was exactly reversed when gold took the place of silver. The so-called double standard in fact meant an alternating substitution of a single standard of one metal for a single standard of the other. There could be only one end to this process. After 1866 silver began slowly to decline in value, and to return to France. As soon as gold in its turn began to escape, the final choice between gold and silver had to be met. Then it was disclosed that France had no wish to give up g01d.”25

Similar evidence exists for the United States and other countries that have tried bimetallism, and it has led one writer to say that "the modern theory of bimetallism is almost the only instance in history of a theory growing not out of practice, but of the failure of practice; resting not on data verified, but on data falsified and censure marked®To a considerable extent, this statement seems to be borne out by an analysis of the claims of bimetallists in the light of these events* In the first place, let us consider the argument that bimetallism exerts a leveling influence upon the ratio between gold and silver. It has been asserted that bimetallism (particularly the French double standard) secured a stable ratio of value between gold and silver coins, and that only the abolition of the free coinage of silver by Germany and the Latin Union made the depreciation of silver possible. Particular emphasis is laid upon the fact that the great change in the relative production of the precious metals after 1850 did not affect the ratio of value much* On these points the evidence is as follows: (1) The ratio of value of gold and silver was not kept absolutely stable by the French system; (2) certain special conditions made it possible for the ratio of value of silver and gold to remain relatively stable in spite of the great increase in gold production after 1850; (3) wide fluctuations in the ratio have occurred at times when bimetallism existed*

That the French standard failed to keep the ratio of gold to silver stable is proved by the existence of a premium on gold from 1815 to 1850 and on silver from 1851-1870. Table T below gives the figures for the highest premium paid on the Paris

Bourse for 20-franc gold pieces to 1850. The premium for gold bars was usually somewhat higher than the premium on coins.

This premium for gold persisted in spite of the legal provisions for a double standard, and its course signifies how the market ratio of silver and gold departed from the legal value. From 1829 to 1850 the premium on coins remained throughout at a noticeably high point, seldom sinking below 5-6 per mille, and going above 1 per cent quite often. If it is objected that

the maximum premium may not represent the normal state of affairs, it can be pointed out that from 1820 to 1847 the premium on gold was nearly always as much as 1 per cent. 27 That the market ratio departed from the mint ratio is also proved by the figures for the coinage of gold and silver by the French mint, which figures have been given above®

It seems remarkable that particularly the French double standard should be credited with this effect (securing a stable ratio of value between silver and gold coins)* From 1717 to 1798 a double standard system existed in England, but although in those days England occupied a much more important position in international money matters andin the trade in precious metals than did France during the operation of its double standard, no one thought of ascribing to the English double standard a similar effect upon the ratio of value between the precious metals. The truth is that during the whole time the English double standard system lasted, the ratio of value in the open market was much more favorable to silver than the English Statutory law. There can be no doubt of this. In this case, therefore, the system of the double standard did not have the effect ascribed to it. If, then, during the existence of the French double standard the market ratio corresponded to the legal ratio, the lesson to be drawn from the English double standard sufficed to show that the alleged effect was not necessarily a consequence of the

The experience between 1850 and 1860 is often pointed out as definite proof that bimetallism will maintain the ratio of value between gold and silver stable in spite of great fluctuations in the production of the metals® There is, of course, no doubt that the French monetary situation did exert a leveling influence on the ratio at the time of the great increase in the output of gold at the middle of the nineteenth century. But this was due not so much to the fact that France theoretically had a bimetallic standard as to the fact that her circulation consisted almost entirely of silver, and that people were willing to give this silver up in return for gold. This stabilizing effect is not one which the double standard, as such, exercises under all conditions. If it had been the production of silver instead of gold that increased phenomonally, then the French bimetallic system, filled with silver coins and poor in gold, would have been quite unable to exercise any influence over the effects of these circumstances upon the ratio of value of the two metals. It was largely accidental that the automatic effects of the double standard in 1850 coincided with the desires of the business community.

Were the automatic effects of the double standard were contrary to the interests of commerce, regard for their counterbalancing or equalising action on the ratio of value subsisting between the precious metals nowhere deterred the legislature from abolishing the double standard. Thus in England in the year 1798, when the double standard threatened to substitute a silver for a gold circulation, the double standard was abolished by the suspension of the coinage of silver, At a later date in France, when a fresh set-back in the price of silver occurred, and the operation of the double standard threatened to stifle the newly established gold circulation, similar action was taken.

It has already “been pointed out that from 1501 to 1710 the value of silver relative to gold declined considerably. This was not due to any arbitrary act of legislatures, since there were no restrictions upon the legal tender of the two metals. If such a depreciation in the value of silver could occur in the sixteenth and seventeenth centuries, it would appear that such a fall in silver could also occur in the nineteenth century, irrespective of currency legislation® It is also worth repeating here that the closing of the mints of the various countries to silver during the nineteenth century did not constitute an arbitrary restriction of the demand for silver. Such legislation merely reflected the change in demand for the two metals on the part of the business community®

Two other important advantages claimed for bimetallism are the stabilization of exchange rates with silver standard countries and the greater stability of prices under a bimetallic standard® The first named advantage, however, will not always be achieved by a bimetallic standard. Since such a standard almost inevitably becomes an alternating standard, it cannot be said that during periods in which gold predominates in the bimetallic standard much greater stability in exchange rates with silver standard countries could be expected. As regards the argument of greater stability, it is hard to say whether the evidence of the period 1493-1870 lends any support. 3o The theory is that greater stability will result from (1) the greater mass in the means of payment, and (2) the compensatory action of bimetallism, by which the dear metal is displaced by the cheap metal. Obviously, not both of these effects can be

true. If there is a compensatory action resulting in an alternating standard, then the means of payment will not be increased. Furthermore, the alternations in the medium of exchange resulting from the compensatory action of bimetallism have disadvantages for the business community. That a general change has taken place from a bimetallic to a monometallic standard would seem to indicate that the business community considers the disadvantages of an alternating medium of exchange greater than the advantages due to greater stability of the price level as a result of the compensatory action of bimetallism. History has shown that the compensatory action of bimetallism will not always be allowed to operate, because gold and silver are not regarded as equal for monetary purposes.

Bimetallism was based on the erroneous assumption that gold and silver were equally homogeneous for standard and monetary purposes. * • Unfortunately for this supposition, gold and silver have not been regarded by the world as equally desirable for monetary uses. That theory has overlooked the actual working of human nature. The judgment, or, if you please, the prejudices, of the classes engaged in trade and commerce have in fact set a different valuation on silver from that on g01d. 32

The theory of bimetallism is a recent development which has grown as the actual practice of bimetallism has decreased, "There was no conception of a theory of bimetallism in 1803$ nor any conception of a bimetallic function to be performed for the good of the human race by bimetallic France."'^ 3 The actual practice of bimetallism up to the nineteeth century

was to change the mint ratio when market conditions changed. There was no theory as to the desirability or practicability of maintaining a fixed ratio between the two metals and having full-valued coins of both.^ 4 Furthermore, there was no theory as to the greater stability of prices under a bimetallic than under a monometallic System. It would seem, since the theory of bimetallism has been developed after the evidence of how bimetallism operated was available, that the arguments for bimetallism and the historical data should agree. Actually, the historical data for the period 1493-1870 cast considerable doubt upon the validity of the arguments for bimetallism.

erich, Money, Vol. I, p® 87 ff®

2por an extended, discussion of the movements in the production of the precious metals see Soetbeer, Materials Towards the Elucidation of Economic Conditions Affecting the Precious Metals , Part I, and Helfferich, Money, Vol. I, pp. 87-107.

op. cit^. p. 96. 4 See Table lII* p. 15. The other remarks about the trend of gold and silver production are also based on the figures in Table Illi

®Helfferich, op, cit., p. 106,

and Financial Chronicle, 1933, Vol. 136, p. 3442.

I The figures to 1885 are from Soetbeer, Materials Toward the Elucidation of Economic Conditions Affecting the Precious Metals, p. 110 ff. Averages from 1885 and yearly ratios from 1870 are from the Report, Director of the Mint, 1931, p. 128. The ratios given are averages for the years shown in the table.

7 Shaw, History of the Currency, p. 65.

B Helfferich, op. cites p. 116. 9lbid., p. 110.

lOsoetbeer, op. cite * p. 111. Hlbid., p. 112. op. cit., p. 108.

l^Helff erich, op. cit. > p. 129. op. cit*« pp® 109-110®

ISSoetbeer, op. cite> p. 114.

op* cit., p. 13.

The Silver Pound, pp, 252-253. 18 Helfferich, op, cit,. p. 120® Coins of the Realm, p. 88. 20 Laughlin, op. cit., p. 151.

Helfferich, op. cit., pp. 121-122.

g§Laughlin, op. cit.* pp. 171-172. 23Shaw, op. cit.» p. 100. 24nelfferich, op. cit., p. 130, p. 136. op. cit. $ p. 177.

26 Shaw, op* cit,, p. xi.

27Royal Commission on Gold and Silver, Report, p. 62* erich, op® cit®, p® 194.

29Ibid., p. 137.

question of the relative stability of prices under the two standards, bimetallism and gold monometallism, is condidered at greater length in Chapter VI. SlLexis, “Doppelwahrung, n op® cit®» p. 565®

32 Laughlin, op, cit 9, pp, 455-456, 33Shaw, op. cit., p. xi.

34 Giffen, “The Old Bimetallism and the Hew,” Gold Standard Defense Association, p« 50®

Period Gold (Fine Ounces] Silver Ounces) Percentage of Production By Weight Gold Silver By Value Gold Silver 1493-1520 186,470 1,511,050 11.0 89.0 66.4 33.6 1521-1544 230,194 2,899,930 7.4 92.6 55.9 44a 1545-1560 273,596 10,017,940 2.7 97.3 30.4 69.6 1561-1580 219,906 9,628,925 2.2 97.8 26.7 73.3 1581-1600 237,267 13,467,635 1.7 98.3 22.0 78.0 1601-1620 273,918 13,467,635 2.0 98.0 24.4 75.6 1621-1640 266,845 12,654,249 2.1 97.9 25.2 72.3 1641-1660 281,955 11,776,545 2.3 97.7 27.7 72.3 1661-1680 297,709 10,834,550 2.7 97.3 30.5 69.5 1681-1700 346,095 10,992,085 3a 96.9 33.5 66.5 1701-1720 412,163 11,432,540 3.5 96.5 36.6 73.4 1721-1740 613,422 13,863,080 4.2 95.8 41.4 58.6 1741-1760 791,211 17,140,612 4.4 95,6 42.5 57.5 1761-1780 665,066 20,985,591 3.1 96.9 33.7 66.3 1781-1800 571,948 28,261,779 2.0 98.0 24.4 75.6 1801-1810 571,563 28,746,922 1.9 98.1 24a 75.9 1811-1820 367,957 17,385,755 2.1 97.9 25.3 74.7 1821-1830 457,044 14,807,004 3.0 97.0 33.0 67.0 1831-1840 625,791 19,175,867 3.3 96.7 35.2 64.8 1841-1850 1,760,502 25,090,342 6.6 93.4 52.9 47.1 1851-1855 6,410,324 28,488,597 18.4 81.6 78.3 21.7 1856-1860 6,486,262 29,095,428 18.2 81.8 78.1 21.9 1861-1865 5,949,582 35,401,972 14.4 85.6 72.9 27.1 1866-1870 6,270,086 43,051,583 12.7 87.3 70.0 30.0 1871-1875 5,591,014 63,317,014 8.1 91.9 58.5 41.5 1876-1880 5,543,110 78,775,602 6.6 93.4 53.0 47.0 1881-1885 4,794,755 92,003,944 5.0 95.0 45.5 54.5 1886-1890 5,461,282 108,911,431 4.8 95.2 44.5 55.5 1891-1895 7,882,565 157,581,147 4.8 95.2 44.4 55.6 1896-1900 12,448,940 165,693,304 7.0 93.0 54.6 45.4 1901-1905 15,606,730 167,995,408 8.5 91.5 59,8 40.2 1906-1910 20,975,575 197,251,516 9.6 90.4 63.0 37.0 1911-1915 22,259,309 202,474,938 10.0 90.0 63.8 36.2 1916-1920 18,963,791 184,646,538 9.3 90.7 62•0 38.0 1921-1925 17,454,889 222,361,844 7.3 92.7 55.9 ■ 44.1 1926-1930 19.763.366 255.075*972 7.1 92.9 55.2 44.8

Table III Production of Gold and Silver in the World Since the Discovery America (The figures are annual averages for the several periods) 1

Period Ratio Year Ratio Year Ratio 1501-1520 10.75 1871 15.57 1901 34.68 1521-1540 11.25 1872 15.63 1902 39.15 1541-1560 11.30 1873 15.93 1903 38.10 1561-1580 11.50 1874 16.16 1904 35.70 1581-1600 11.80 V 1875 16.64 1905 33.87 1601-1620 12.25 1876 17.75 1906 30.54 1621-1640 14.00 1877 17.20 1907 31.24 1641-1660 14.50 1878 17.92 1908 38.64 1661-1680 15.00 1879 18.39 1909 39.74 1681-1700 15.00 1880 18.05 1910 38.22 1701-1710 15.27 1881 18.25 1911 38.33 1711-1720 15.15 1882 18.20 1912 33.62 1721-1730 15.09 1883 18.64 1913 34.19 1731-1740 15.07 1884 18.61 1914 37.37 1741-1750 14.93 1885 19.41 1915 39.84 1751-1760 14.56 1886 20.78 1916 30.11 1761-1770 14.81 1887 21.10 1917 23.09 1771-1780 14.64 1888 22.00 1918 19.84 1781-1790 14.76 1889 22.10 1919 16.53 1791-1800 15.42 1890 19.75 1920 15.31 1801-1810 15.61 1891 20.92 1921 25.60 1811-1820 15.51 1892 23.72 1922 27.41 1821-1830 15.80 1893 26.49 1923 29.52 1831-1840 15.75 1894 32.56 1924 27.76 1841-1850 15.83 1895 31.60 1925 29.38 1851-1855 15.41 1896 30.59 1926 32.88 1856-1860 15.30 1897 34.20 1927 36.22 1861-1865 15.40 1898 35.03 1928 35.26 1866-1870 15.55 1899 34.36 1929 38.54 1871-1875 1876-1880 1881-1885 1886-1890 1891-1895 1896-1900 1901-1905 1906-1910 1911-1915 1916-1920 1921-1925 1926-1930 15.97 17.81 18.63 21.15 27.06 33.50 36.30 35.68 36.67 20.98 27.93 1900 33.33 1930 53.38

Table IV Ratio of Silver to Gold, 1501-1930 1

I 02 P ’H 02 S > 02 H P •H p CO a p o ri 02 1 SI •H W <5 CiQ© OS-OrdO CM CM CM tO pH tO H rH H H P 0) s PM C 0) H CM tO UO <D t- CO Ch O CO <0<0<0y2<000)t0<0i> 02 co co CO CO CO CO 00 co co CO -H H H H H H H H H H H $5 CD ■P 02 ri HI ri H L O CO P PM «H 2 •H * ® CO Ch CM CM tD O tO JO IO ID ■P 02 02 P a> PM 34 bO H CM H CM CM tO CM CM CM Pl • 5-1 02KM 02 'djo Pi ID 34 •H P O ® M ri o e* LQ IO ID IQ <O ID <O ID m CD J Pi 00 <20 co co co CO co co co co 32 HHHHHHHHIHH p * © p fl p ri o o w t* 1 r“i rH HO HQ LO IO UQ LQ IQ IO nJ H nJ S •H «»ee * » • « • fl H ri H CM H H H H H H H H H H H H H CQ H H K H P P H » O PM O 0 s dj PM «W M)ri S3 rH to H ID co CO o> O H CM tQ tO CD j> CO O> O fl «H tO tO tO tO tQ tO tO H IP p p cococococococococdcocococooococoooco 44 < H H H H H H H HI H H H H H H H H H H ri 02 H -P 02 <DP H PrH M O P ri IS •H S 02 P g Ph 3 H U 2 IP IO CM p< P H g •H ® * • ® M* IO ID O O A UO CM CM H H «D 0> tO O> O H ID f HI H H CM p 02 02 0) P CM H £ «» p M x{ PM ao •H 02 •» CJ A «2 -P •H *h pa p ri 02 to co CO O> O H CM to to CO r- CO 02 O H CM ri HH H H H CM CM CMCMCMCMCMCMCM CMtOtOtO 0234 COCOCOCOOOC0OOCOCOCOCOCOOOCDCOCOOOCO HQ HHHHHHHHHHHHHHHHHHH <0

Table V Highest Premium on the Paris Bourse for Gold and Silver, 1815-70*

CHAPTER III THE CHANGE TO THE GOLD STANDARD, 1870-1914

In the last thirty years of the nineteenth century there occurred some extraordinary developments in the monetary systems of the world and in the relation between the precious metals. In this period there was a general change from bimetallism to gold monometallism, and, at the same time, a great fall in the price of silver. The fact that both these events occurred at the same time has led many bimetallists to conclude that the former event was the cause of the latter, ignoring the possibility that both might be the result of the same thing, namely, a preference for gold.

The ratio between silver and gold, as has already been noted, was relatively stable from 1711 to 1870, the average ratio for the ten year periods in this interval never rising above 15.83 and never falling below 14.56. In contrast to this we have a change in the ratio from 15.57 in 1870 to 33.33 in 1900, and from an average of 15.55 for 1866-1870 to 36.30 for 1901-1905. During this period the relation between the production of the two metals did change somewhat, as the figures below indicate, but the change is not considered

Period Gold Production Silver Production Percentage of (Fine Ounces) (Fine Ounces) Production by wt. ; \ Gold Silver 1866-1870 6,270,086 43,051,12.7 87.3 1901-1905 15,606,730 167,995,408 8.5 91.5

sufficient to explain the fall in the price of silver. For the entire period 1871-1900 the production consisted of

5,331,412,210 ounces of silver and 208,608,330 ounces of gold, giving a ratio of production of It should be noted, however, that in 1851*1870 silver production was only about 5.4 times that of gold, and that the demand for the two metals was such as to keep the ratio stable in that period. Furthermore, silver production in 1896-1900 was nearly four times as great as the average production from Nevertheless, there appears to be some justification for believing that part of the change in the ratio of value between silver and gold must be explained in terms of demand, and, as a matter of fact, a significant change in the demand for the precious metals did take place between 1870 and 1900.

This change in demand for silver and gold was expressed by the monetary legislation of the period# We have already noted that a preference for gold had led to the suspension of the free coinage of silver in England, and then to the adoption of the gold standard by that nation in 1816# The bimetallic view is that w it was the law, and the law alone, which drove silver out# ”2 it is said that if England had been in the actual enjoyment of metallic money of both gold and silver from 1798 to 1816 (instead of under the rule of inconvertible paper money), ”it would have been, to speak mildly, much harder for Lord Liverpool and the elder Peel to carry the demonetization,” This statement implies that Lord Liverpool

established the gold standard in spite of the wishes of the country. As a matter of fact, Lord Liverpool did not have any prejudice against silver or bias for gold, as his writings show* Judging from the preamble of the Act of 1816$ its main object was to protect the silver currency of England:

Whereas the silver coins of the realm have by long use and other circumstances been greatly diminished in number and deteriorated in value so as not to be sufficient for the payments required in dealings under the value of current gold coins, by reason whereof a great quantity of light and counterfeit silver coin and foreign coin has been introduced into circulation within this realm, and the evils resulting therefrom can only be remedied by a new coinage of silver money, etc. 3

That Lord Liverpool recognized the preference of the people for gold and the difficulty of maintaining bimetallism is shown by the following statements:

After the recoinage, gold coins passed in payment at a higher value than that at which they were still rated in the Mint indenture, or than the relative value of gold to silver at that time would justify; not, however, by the authority of Government, but by the general consent of the people® And whereas at various times heretofore the coins of this realm of gold and silver have been usually a legal tender for payment of any amount, and great inconvenience has arisen from both these precious metals being concurrently the standard measure of value and equivalent of property, it is expedient that the gold coin made according to the indentures of the Mint should henceforth be the sole stanard measure of value and legal tender for payment without any limitation of amount, and that the silver coin shall be legal tender to a limited amount only for the facility of exchange and

In order to provide the country with an adequate supply of small silver coins, the Act of 1816 made silver legal tender only for sums of 40 shillings or less. That the act was not designed to drive silver out arbitrarily is proved by the clause providing for free coinage of silver, A proclamation was to be issued declaring that all persons might bring silver to the Mint to be coined, though with a reservation that Parliament might withdraw this right if silver became too plentiful. 4 That the proclamation which would have enabled people to bring silver to the Mint was never issued is only further proof that there was no decided sentiment in favor of the free coinage of silver.

For some time after England adopted the gold standard no other important nation followed its example, though even in bimetallic countries there was a predominating excess of one or the other precious metal. The economic progress in the thirties and forties of the nineteeth century rendered a larger employment of gold currency desirable for the countries of Europe, but the small gold production up to the middle of the century did not permit of any transition to the gold Then came the enormous increase in the production of gold resulting from the discoveries in California and Austalia, a circumstance not only making possible an extension of the gold standard but also disturbing currency systems in such a way as to call for revision. Wherever the double standard existed silver was so completely displaced by gold as to result in a serious lack of silver coins for everyday transactions

This effect showed itself first in the United States, since the ratio here overvalued gold even more than did the French ratio. As a result, the United States was the first important country to follow England in reducing silver to the position of subsidiary coinage. In the Act of February 21, 1853, the fineness coins of a half-dollar and less was reduced, and these coins were made legal tender only for amounts up to five dollars. By this measure bimetallism was modified but not entirely abandoned, for the silver dollar remained a full legal tender coin with unlimited coinage (although no mention was made of the silver-dollar piece in the Act, previous acts authorizing its coinage were not repealed). 3 Actually, the United States was practically on a gold standard from 1834, for the ratio of approximately 16 to 1 adopted by the Coinage Act of June 28, 1834 had resulted in the disappearance of much of the silver currency. (From 1792 to 1834 the ratio of 15 to 1 had resulted in the circulation of silver only.) The United States did not complete its transition to the gold standard until 1873, when the Act of February 12, a measure for codifying coinage laws, omitted the dollar of 412-j- grains of standard silver grains fine) from the list of coins authorized. This was merely an acceptance of the disappearance of the silver-dollar pieces from circulation. The Act of 1873 definitely declared the gold dollar of 25.8 grains, 9/10ths fine, to be the unit of value.

It was not until the fall in the price of silver in 1876 made the coinage of silver profitable that bimetallism became an issue in the United States* Then the omission of the coinage of silver dollars from the Act of 1873 was termed the "Crime of 1873". Such a description of the act is, to say the least, inaccurate in its implication that there was a design against silver. When the Act of 1873 was passed silver was not being brought to the mint for coinage, and therefore no provision was made for its coinage. It is unlikely that the framers of the bill foresaw that silver coinage would be profitable in the future and acted deliberately to forestall such a possibility, nevertheless, the advocates of silver made use of Just such arguments to secure a partial restoration of the coinage of silver* This was brought about in the Bland-Allison Act of 1878, which called for the coinage of from 2 to 4 million dollars of silver monthly. As a result of this act the United States was on what is known as a "limping-standard" from 1879-1890. In 1890 the Sherman Act provided for the purchase of 4,500,000 ounces of silver a month, but at the same time stated that silver should be kept at par with gold. In 1893 the silver purchase act of

1890 was repealed as a result of an uprising of public opinion, which attributed the panic of 1893 to the silver legislation. The political struggle for silver came to a climax in the presidential campaign of 1896 between Bryan and McKinley. The election of McKinley was followed by the passage of an act known as the Gold Standard Act of 1900. This act really did not provide anything new, but merely stated that the standard unit of value should be the dollar consisting of 25,8 grains of gold nine-tenths fine, and that all forms of money should be kept at par with this unit. The silver dollar remained full legal tender, but it is not freely coined.

The ’Trane countries” also found it necessary to reduce the fineness of their silver coins in the sixties in order to keep them in circulation* The fineness of silver coins was reduced to 8/10ths by Switzerland in 1860 and to 0.835 by Italy in 1862 and France in 1864* To secure uniformity in the coinage which was used in common by France, Italy, Belgium, and Switzerland, the Latin Monetary Union was formed on December 23, 1865. 9 The immediate cause of the formation of the Union, therefore, was the desire for uniformity of token coins, and not a wish to maintain bimetallism* At the first meeting of the Union, Belgium and Switzerland strongly urged the adoption of a single gold standard. Italy supported this stand, but France avoided the issued France thought that a uniform international coinage might be brought about by an extension of the

Latin Union and invited the more important nations to join it. When this failed the French government called a Conference in 1867 for an international exchange of views on the question of a world unit of coinage. Almost complete unanimity of opinion was reached in regard to the question of a standard. With the exception of Holland, all the countries voted for a single gold standard. The negotiations preceding the decision left no doubt that states already in possession of a gold standard would not depart from it under any circumstances, and that countries which envisaged the reform of their currency would adopt the gold standard.

This important international exchange of views on the question of a standard is a permanent record of the tendencies of that time, which were fully in favour of the gold standard. Attempts were subsequently made to minimize the importance of this exchange of views. It was asserted that the Paris Conference had not decided in favour of the gold standard, but only in favour of arriving at a universal unit of a currency based on a gold standard, and that only when there appeared to be no prospect of unanimity did the Paris Conference vote in favour of the gold standard. It cannot, therefore, so it is asserted, be concluded from this decision that, at that time, the tide flowed strongly in favour of the gold standard. This line of argument altogether ignores the course taken by the negotiations before the decision was arrived at. These negotiations show clearly that the representatives of the individual states did not regard the gold standard simply as a means to the end of a universal union, but as the best and most perfect system of currency. They were in fact willing, quite irrespective of any question of the possible establishment of a universal union, to preserve the gold standard wherever it was in existence, and to consider its introduction where it had not yet been established. 10

After this conference of 1867 France "began to consider a change to the gold standard. A few months before the conference a monetary commission had voted 5 to 3 for the retention of bimetallism; after the conference a new currency commission was appointed. This commission made a thorough investigation and ultimately recommended the adoption of the single gold standard, or at least the restriction of the coinage and legal tender of silver 5-franc pieces. The officials of the Bank of France, and the Finance Minister, however, favored the double standard, and succeeded in referring the question back for reconsideration to a new committee, the Conseil Superiur. Once more the decision was in favor of the gold standard, by a vote of 17 to 6, 1 but this decision came in July, 1870, at which time the war with Germany made it impossible for any, definite action to be taken. Thus it happened that Germany introduced the gold standard before France did.

In 1871 Russia and Austria-Hungary were using depreciated paper money, so Germany no longer derived any advantage from the silver standard in her trade with Eastern Europe* At the same time the most urgent need existed for establishing some sort of order in the currency. Both for reasons of her internal circulation and because of the course of international events, Germany considered it highly desirable that the reform in the currency should establish a gold circulation. This reform, which involved withdrawing from circulation most of the large quantity of silver and substituting gold for it, was made

possible by the French indemnity of five billion marks paid in 1871 and 1872. On December 4, 1871, the law relating to the minting of Reich gold coins was promulgated. The currency reform was completed in all essential parts by the Act of July 9, 1873, which proclaimed formal acceptance of the gold

The German currency reform greatly increased the demand for gold and at the same time made large stocks of silver avail able* In two years gold to the amount of a billion marks or £50,000,000 was acquired and coined. 14 Gold could not be obtained from France and Italy because they were using inconvertible paper money. With nothing to meet the sudden demand for gold, the price of gold in terms of silver was quickly forced up. Furthermore, the price of silver was threatened by the stock of six million kilograms made available by the German reform at a time when the annual production was about two million kilograms. Silver production was increasing rapidly in the seventies, making the outlook even more unfavorable. As a result of all these factors, silver-using countries were threatened with a depreciation of their currency and countries with a bimetallic standard were in danger of having silver displace gold. The only way to avoid these results was to suspend the free coinage of silver, and that was what happened.

Sweden, Norway and Denmark, by an agreement of December 18, 1872, decided to abandon the silver standard and introduce the gold standard. In Holland, the mint was closed to the coinage of silver by a law of May 21, 1873. The members of the Latin Union also took measures to protect themselves against silver. In 1873 Belgium authorized the limitation or suspension ¥ of coinage of silver 5-franc pieces, and France limited their coinage by administrative order. The problem of currency reform by the Latin Union, a problem which naturally did not receive much attention during the Franc©-Prussian War, was revived by the depreciation of silver in the third quarter of 1873, when the coinage of silver at the mints of the members of the Latin Union became a profitable operation.A sudden change to a predominating silver circulation seemed imminent, and as the Latin Union had no intention of letting its gold escape, it became necessary to close the mints of the Union to silver. On January 31, 1874, the Union limited the coinage of silver 5-franc pieces, thus abolishing the double standard. The 5-franc pieces were still legal tender in unlimited amounts, but they were no longer freely coined. "The Union was held together against its will by the difficult problem of keeping at par by redemption the excessive amount of silver coins which (including the 5-franc pieces) were in fact now token coins." Inability to get rid of the overvalued silver already coined thus brought about a continuation of the Union, resulting in a limping gold standard, in spite of the fact that all the

members of the Union would have been glad to adopt the single gold standard. The Latin Union finally ceased to exist on December 31, 1926. Belgium had already issued a decree putting herself on the gold standard and out of the Union. Somewhat later, on July 25, 1928, France formally designated the gold franc as its monetary unit.

The acts of Germany and of the Latin Union in the seventies are held responsible for the fall in the price of silver by bimetallists, who attach little importance to the increase in silver production which occurred at that time. It is obvious, however, that both these factors must have affected the price of silver. The Select Committee appointed by the House of Commons to report upon the causes of the depreciation of silver put the matter fairly in the following statement:

It will be observed that two sets of causes have been simultaneously in operation. The increased production of the newly-discovered mines, and the surplus silver thrown on the market by Germany, have affected the supply. At the same time the decreased amounts required for India, and the decreased purchases of silver by the members of the Latin Union, have affected the demand. A serious fall in the price of silver was therefore inevitable.lB

out When it is pointed/that the closing of the mints of the Latin Union to silver was the result of the fall in the price of silver, the bimetallists answer that the initial fall was due to Germany’s action. They admit that the exclusion of silver from the mints was not simply the cause of the depreciation of the metal, but also the result of it, yet they maintain that

all this was a vicious circle: legislation brought about a depreciation of silver which in turn caused further legislation hostile to silver. What is overlooked is that the currency legislation of the seventies, like that in England when the gold standard was adopted there, was brought about by public opinion. For the largest part of modern commerce gold is much more convenient than silver. Consequently, the new gold which became available after 1850 was readily accepted for monetary purposes by countries which had previously made great use of silver. This increased supply of a more useful medium of exchange had the effect of reducing the demand for the less useful medium of exchange,silver, and set free supplies of the latter, causing a tendency toward the depreciation of silver. This result was foreseen before the depreciation of silver actually occurred, as the following statement made by Soetbeer on July 15, 1869, shows: “However paradoxical it may at first appear, it is to a large extent proved that, taking it on the whole and over a long period, the exceptional rise in the production of gold must have a larger effect on the price of silver than on the price of gold itself.

That gold was preferred in business and that no need existed for further supplies of silver in the seventies is shown by the experience of Germany.

After the Bank of Prussia -that is, the Reichsbank- had begun paying in gold, German traders, etc., continually brought large amounts of silver coins to the Reichsbank to be exchanged for gold coins. From the middle of 1875

to the middle of 1879, German trade disposed of about 735 million marks of silver money to the Reichsbank and took out of it about 695 million marks of gold coin. In this case, in which commerce was unhampered and could provision itself in accordance with its requirements from the stock of metal at the central bank, it became obvious that not only was there no further commercial demand for silver, but that in fact the supply of silver in circulation exceeded the

The same thing is illustrated by the acquiesence with which V France permitted gold to become the predominating metal in the currency, and the resistance which it showed to silver when that metal threatened to displace gold in the seventies* "in the face of the pressure from silver, it was not desired to give up the gold circulation* Public opinion, especially in commercial and industrial circles, demanded the suspension of the coinage of silver. Although at that time the Minister of Finance of France was a supporter of the double standard, the government was compelled to close the mint to silver. France and the other members of the Latin Union could have kept the ratio of value between silver and gold from fluctuating as much as it did if they had given up their gold circulation. That they did not do so shows that they were not willing to pay this price in order to gain stability in the ratio between the precious metals. In view of these facts it seems fair to conclude that instead of currency legislation being the sole cause of the depreciation of silver, the actual sequence of events was as follows:

Gold is better suited to the needs of modern commerce, and is accordingly the more favoured of the two metals

as a medium of currency. Increased supplies of gold thus easily found an outlet in a more widespread use of gold currency, and in turn substantially restricted the field of demand for silver currency in European countries. The silver circulation had now to be kept within the limits set by the altered demand, and this necessitated the suspension of the free coinage of silver and the transition to the gold standard. The force of circumstances was felt first in countries on the silver standard. In countries on the double standard it was felt as soon as the change in supply and demand on the^ silver market brought a flood of silver to their mints. 22

The wholesale abolition of the silver standard and the double standard in the seventies marked the triumph of gold over silver for monetary purposes* Since that time the tendency in monetary reform has been toward the adoption of the gold standard or some variant thereof* Austria-Hungary and Russia, though nominally on the silver standard, were not faced with the problem of suspending the free coinage of silver in the seventies because they had inconvertible paper money. In both countries the end of the period of inconvertible paper money Was marked by the adoption of the gold standard. In Austria- Hungary the question of closing the mint to silver arose in 1879, when the paper money was found to be at par as a result of the fall in the value of silver.’ It was decided to • suspend the free coinage of silver, but not until August 2, 1892, was the gold standard formally adopted. Russia had a somewhat similar experience. In 1893 the free coinage of silver was stopped and in 1896 the change to the gold standard was made. In Spain, the free coinage of silver was abolished in 1878, but the free coinage of gold was never adopted. Thus

practically the whole of Europe attained an effective gold standard before the close of the nineteeth century.

The change to the gold standard was also taking place outside of Europe. The continued depreciation of silver upset the exchange rates between those countries siill using silver and the chief commercial nations on the gold standard, and so caused a desire for monetary reform. The increase in the output of gold in the nineties made a transition to the gold standard possible for other countries and resulted in another series of movements against silver. In 1892 the Government of India expressed its opinion to the British Government that it was desirable to close the Indian mints to the free coinage of silver and take measures for the adoption of the gold standard. The Herschell Commission appointed to investigate the matter approved these suggestions, and on June 20, 1893, the Indian Government closed its mint to the free coinage of silver, but retained the right to coin silver on its own account. In January, 1898, the rupee was fixed at Is. 4 5/32d® by having the secretary of state in London offer to sell transfers on Calcutta, Madras and Bombay at this rate. 24 Thus India established a gold-exchange standard. The Fowler Committee of 1898 reported in favor of making the British sovereign a legal tender and a current coin in India, and in favor of the unrestricted coinage of gold. Following the advice of the committee, the sovereign was made a legal tender in India in 1899 at 15 rupees to the sovereign.

Shortly before this, on March 26, 1897, Japan had passed an act adopting a gold standard. Similar measures settled other Eastern currencies on a gold basis. The countries of Latin America, which had lapsed from silver currencies into inconvertible paper, adopted gold as a standard when they emerged from the confusion of paper money. Hone thought of reverting to silver. Mexico, the most important of the Latin American countries, reorganized her currency on a gold basis in 1904-1905 as a result of the recommendations of the Commission on International Exchange appointed by the United States. Here again it was the desire to secure stability in the exchange rates with gold standard countries that led to the change from silver. Other countries which had adopted the gold-exchange standard before the war were Ceylon, Siam, Java f and the Dutch East Indies, the Strait Settlements and the Federated Malay States, the Philippines, Nicaragua, Panama, Argentina, and Brazil. The principal countries and dependencies using the silver standard in 1914 were China, Hongkong, French Indo-China, Persia, Morocco, Abyssinia, and such Central American countries as Salvador and

This second series of movements against silver resulted in a further fall in the price of silver. The average ratio of silver to gold changed from 21.15 in 1886-1890 to 27.06 from 1891-1895 and to 36.67 in the period 1911-1915. The closing

of the Indian mint to silver had a particularly depressing effect upon the price of silver. Just before this event silver was quoted at 37-J-d. on the London market, and within a week after the closing of the mint silver was down to The repeal of the Sherman silver purchase act in the United States also acted adversely op silver, so that the average ratio changed from 26.49 in 1893 to 32,56 in 1894. Silver continued to depreciate in spite of the fact that its production did not increase nearly as muah as did the production of gold. The annual average/production of gold increased from 7,882,565 ounces in 1891-1895 to 22,259,309 ounces in 1911-1915, whereas the average production of silver only changed from 157,581,147 to 202,474,938 ounces. By 1914, however, the average ratio of silver to gold had risen to 37.37, and in 1915 it was 39,84.

Several attempts were made in this country to stem the tide of depreciation of silver. The silver purchase acts, though they may have had some influence upon the price of silver, eventually were repealed as the result of public opinion against a continuation of silver purchases when they were endangering the financial structure of the country. The various international conferences called by the President (at the request of Congress) to consider the relations between gold and silver proved equally futile as far as any permanent benefits for silver were concerned. The Conference of 1878 failed to accomplish anything in spite of the fact that many of the

delegates were favorable to bimetallism. The members of the British delegation were highly favorable in their personal views to bimetallism, although they were instructed not to compromise the position of England as a gold standard nation. The French delegates did little to encourage the American delegates, for France considered the conference inopportune. Germany, which would have been against bimetallism because of her recent change to the gold standard, was not represented at the Conference. Only the delegates of Belgium, Norway, Sweden, and Switzerland supported the single gold in spite of these favorable circumstances, no decision was reached on the proposal of the American delegates for an international agreement giving silver free coinage and equality of tender with gold. The conference closed with the statement that it was useless to discuss an international ratio and that while it was necessary for the world to maintain the currency of silver, the choice and treatment of each metal must be left to the particular monetary situation of each separate state. In 1881 another conference was called by the United States and France, and once again bimetallism failed to gain any ground, although it had such advocates as M, Henri Cernuschi of France and Mr. Dana Horton of the United States. A conference of an informal nature was held in Paris in 1889 in connection with the exposition, but this meeting failed to arrive at any practical decision.

The last of the international conferences on silver during this period was held at Brussels in 1892 at the invitation of the United States. At this conference it hecame apparent that no agreement favorable to silver could be reached. The British delegation was instructed not to compromise England’s position, although several members were favorable to bimetallism. Sir Rivers Wilson, speaking for Sir Charles Freemantle and himself, made the following statement:

Our faith is that of the school of monometallism pure and simple. We do not admit that any other system than the single gold standard would be applicable in our

The position of Germany was stated by Count Alvensleben as follows: "Germany, being satisfied with its monetary system, has no intention of modifying its basis." The attitude of France was almost as unfavorable toward silver as that of Germany* M. Tirard, delegate from France, said:

France under present circumstances has no cause to complain of her monetary situation, and she does not complain* * * If we ceased to coin silver, simultaneously with the other states of the Latin Union, it was because we were face to face with a continuously increasing volume of silver* We have ceased to coin it and think that our course was perfectly right. Why should France permit the free coinage of silver when she is already provided with it? 51

The conference was also informed that France had one of the largest holdings of silver, and was consequently much interested in the monetary question. "But this enormous quantity of silver which France already owns imposes upon her the greatest prudence, and she will not accept any proposal except upon the condition that this stock of depreciated metal should not be increased,

or, supposing that it were increased, that it should not be without very serious compensation.” 32 The United States, Holland, and Belgium favored bimetallism but were unable to bring about a satisfactory conclusion to the conference. The conference suspended its work on December 17, 1892, proposing to meet again on May 30, 1893, if their respective governments ¥ approved. Owing to the general conviction that nothing could be achieved, the conference did not reassemble.

In looking over this period of transition from bimetallism to gold monometallism we have found that the legislative acts which brought about this change were the result and expression of the wants of the business community. Some writers have pointea out that the gold standard has inarched hand in hand with the improvement of living standards, and that it is the result of man’s need of a higher and more stable unit of value. 33 Whatever the reason, the change has taken place. That this transition to the gold standard has been attended with difficulties is not denied. It seems probable that part of the general decline in prices between 1870 and 1890 was due to a too rapid adoption of the gold standard over a considerable part of the civilized world rather than to the gold standard itself. Governments were prone to modify their currency system without regard to the reaction of such a step on the world markets for the precious metals, and therefore in the currency systems of their

74 neighbors. The appreciation in the value of gold was only temporary, however, as was demonstrated by the rise in prices from 1896 to 1913. The world was well on the way toward a satisfactory functioning of the gold standard when the World War occurred and disrupted the monetary systems of practically all nations. *

figures given here on the production and the ratio of value of the precious metals are based on Table I, p. 7• 2Walker, International Bimetallism, pp. 80-81.

The History of Money in the British Empire and the United States, p. 136.

4lbid., p. 137. erich, Money, Vol. I, p. 133.

6 Laughlin states that by this act the United States abandoned in law the double standard* Money, Credit and Prices, Vol. I, p. 238. In view of the fact that free coinage of the silver dollar was not restricted, it seems better to say that the system was modified rather than abandoned. As Laughlin points out, however, the silver dollar was not being coined and had not been in circulation for many years as it was worth 104 cents in gold. During the period 1834-1873 only some eight million silver dollar pieces were coined, and these were employed almost exclusively for trade with Eastern Asia.

7 Laughlin, op. cit., p. 242*

erich, op* cit., p. 140* See also Willis, History of the La,tin Union, Ch* Vt y Laughlin 9 op. cit ♦ t p. 185.

10 Helfferich, op* cit., p. 144.

llWalker, op, cit., p» 166 l^Helff erich, op, cit., p. 149.

13Ibid., p. 159. The Gold Standard in Theory and Practice, p. 69. 15 Helfferich, op. cit., p. 168.

16willis, os,, cit., p. 114 ff.

op, cit., p. 190, p. 194. 18 Walker, op. cit., p. 180.

op. cit., p. 190.

20 Ibid., p. 191. 21 Ibid., p. 179.

22ibid,* p. 191. 23Rawtrey, op. cit., p. 71.

op, cit., p. 342.

op. cit. > p. 73. Changes in the Monetary Use of Silver Since 1914, Department of Commerce Trade Information Bulletin Ko, 140, P. 2.

Modern Currency Ref omit p. 38.

28<alker, op. cit., pp, 191-194. 29Shaw, History of the Currency, p. 279.

■ “Proceedings, Brussels Monetary Conference, 1893, n. 113. 31 Ibid.. pp. 203-205.

« p» 49. 23 Elliston, ’’The Silver Problem,» Foreign Affairs. Vol. 9, p. 442. * ””

34 Hawtrey, op, c i t., p. 77.

CHAPTER IV THE COURSE OF SILVER SINCE THE BEGINNING OF THE WORLD WAR

The World War temporarily upset the trend in the ratio of value between silver and gold* Silver suddenly began to rise in price in a spectacular fashion. In January, 1920, silver reached a price of $1.4075 per fine ounce, a rate corresponding to a ratio of value of 14*7:1 between silver and gold, a ratio which had not obtained since 1880. This increase in the price of silver was the more striking in contrast with the relative stability of the price of silver from 1894 to 1915, during which time the average annual price of silver on the London market ranged between 24d. and 30d. per standard ounce. The rise of the price of silver from 1915 to 1920 is to be explained in terms of two factors: (1) the fall in the value of gold, and (2) the changes in the supply of and demand for silver. The fall in the value of gold tended to raise the prices of all commodities, including silver* But part of the change in the price of silver was due not to a fall in the value of gold but to a rise in the value of silver as a result of the conditions of demand for and supply of the white metal, annual The production of silver dropped from an/average of 202,474,938 ounces in 1911-1915 to 184,646,538 ounces in 1916-1920, but it remained at the same proportion of the joint product of the precious metals by weight since the production of gold also declined. The decline in the production of silver was due to

the Mexican revolution, which severely curtailed production. In part, this decrease in Mexican production was counteracted by an increased production of silver in the United States. 2

The increase in the demand for silver was another important factor which contributed to the phenomenal rise in its price during the war. This *demand came from two sources: the belligerent countries and the Orient. The first decided rise in the price of silver occurred as a result of the large demand by European nations in order to increase their coinage of silver currency. The British Treasury alone took more than £3,000,000 sterling of silver in 1915. The French government also bought silver in an attempt to increase its metallic The most important source of the great demand for silver, however, was the Orient. European nations imported large quantities of goods from India and China, particularly after the entrance of the United States into the war. Since they did not wish to give up gold in payment for these goods, silver was chosen as the medium of payment. Net imports of silver into India during the war period were as follows (in thousands of ounces) : 1914-15, 55,766; 1915-16, 32,932; 1916-17, 92,193; 1917-18, 74,531; 1918-19, 237, 028; 1919-20, 96,941. These imports constituted the following percentages of the world’s production of silver: 1914-15, 1915-16, 17%j 1916-17, 53%; 1917-18, 40%; 1918-19, 112%. 4 The peak

of the demand from China came somewhat later than in the case of India, as is indicated by the figures for the shipment of silver from the United States to China (000 omitted): 1917 - $50,023; 1918 - $202,503; 1919 - $181,671; 1920 - $83,438. 5 Active speculation accentuated the upward movement in the price of silver® As a result of the increase in the price of silver a number of countries had to prohibit the melting down of silver coins and to prohibit or restrict the export of silver.

The most important steps to control the price and movements of silver were undertaken by England and the United States in 1918. In order to make a larger quantity of silver available to Congress passed the Pittman Act authorizing the sale of $350,000,000 of the silver stocks kept as reserve against silver certificates® At the same time the two governments fixed a maximum price for silver of an ounce in Hew York and in London. In May, 1919, the maximum limit on the price of silver was abolished and the United States removed its prohibition on the export of the white metal. Immediately a strong demand for silver for India and China set in and forced the price up at a rapid rate. By November, 1919, the New York quotation for silver reached This bullion brought the/value of the silver dollar above its nominal value for a short time.

The fall in the price of silver in 1920 was even more rapid and spectacular than the rise had been. The demand from the

East fell off, and the supply was increased by the offer of silver which had been withdrawn from circulation in Europe and the sales of silver by the United States. This combination of circumstances quickly depressed the price of silver.® The price of silver on the New York market dropped from $1.4075 in January, 1920 to on December 10, 1920. A reaction V occurred which carried the price of silver back to at the end of 1922. The average ratio of silver to gold in 1922 was 27.41, which was an improvement for silver over the average of 36.67 in 1911-1915. This relative improvement in the position of silver was not to last long, however, for the great rise in the value of silver brought about a result which was to affect silver seriously over a long period of time. This was the reduction in the fineness of silver coins on the part of most of the nations of the world.

This movement for the reduction of the fineness of silver coins is ordinarily considered to have been started by Great Britain, but actually Holland preceded Great Britain in this measure, having reduced the fineness of the piece from 0.945 to 0.720 by a law of November 27, On March 31, 1920, an act was passed by Parliament authorizing the reduction in the fineness of the silver coins of Great Britain from 0.925 to 0.500. In the same year Prance discontinued the coinage of silver, and later she began to demonetize silver

coins. Other countries all over the world also lowered the proportion of silver bullion in their coins. Practically every important nation which has silver coins in circulation has reduced their fineness since the war. In addition, the demand for silver was diminished in a number of European countries by the decreased proportionate use of silver in reserves and by the use of paper and base metal substitutes for silver coins. The consequence of these various factors has been not only that the demand, and very likely the permanent demand, for silver has decreased, but also that a great deal of silver has been made available for disposal by various mints. The sales of silver from these sources, called ’’other supplies,” have been a depressing factor on the silver market. Therefore, in spite of the purchase of silver by the United States and Germany, the average annual ratio of silver to gold declined from 192 u to 1923. In 1924 the price of silver improved somewhat, cniefly as a result of a decrease in ’’other supplies,” but from 1925 to 1931 the dominant feature of the silver market was the increase in the total supply and the drop in price.

Besides the factors named above, two other factors have influenced the price of silver. These are the production of silver and the sales by the governments of British India and French Indo-China. The production of silver recovered sharply between 1921 and 1923, rising from 171,300,000 fine ounces to 246 million fine ounces. From 1923 through 1930 this high level of production was maintained, the trend being slightly

upward until 1929, when 261,700,000 ounces were mined. Gold production did not increase quite as rapidly, so the proportion of the joint product of the precious metals (by weight) constituted by silver rose from 90.37% in 1911-1920 to 92.48% in 1921-1930. The most severe blow to the price of silver came not from increased production, however, but from the sales of silver by the Indian Government.

The gold-exchange standard had been considerably upset during the war, so in 1925 a Royal Commission on Indian Currency and Finance (the Young Commission) was appointed to examine the Indian currency problem anew. In 1926 this commission reported that the gold-exchange standard had been a failure, and proposed a gold-bullion standard: ”We propose that an obligation should be imposed by the statute on the currency authority to buy and sell gold without limit at rates determined with reference to a fixed gold parity of the rupee, but in quantities of not less than 400 fine ounces, no limitation being imposed as to the purpose for which the gold is required." The commission suggested that in a transition period of ten years the amount of silver in the reserve should be reduced from 85 crores to 25 croresThere was a sharp decline in the price of silver when the Young Commission made its report, but during the next two years the price was fairly stable at about 10 per cent below the former level. In the spring of 1929 there was another break in the silver market following heavy sales by

the Indian Government* Thereafter the decline continued with but few interruptions until February 16, 1931, when silver was quoted on the Uew York market at 25f/.$ From 1927 through 1930 the Indian Government sold about 100 million ounces of silver* The silver reserve of India, however, instead of decreasing, rose from 85 crores in 1926 to over 120 crores at the end of 1930, or 95 crores in excess of the amount recommended by the commission as the ultimate maximum. • This excess represents over 300 million ounces potentially ready for the market, and has had as much, or a more*important, influence upon the price of silver as the actual sales by the Indian Government* The future for silver is also clouded by the existence of other stocks of silver, as those of French Indo- China and Siam, which countries began to dispose of their surplus silver in 1929 and 1931 respectively, and of France, which has disposed of only part of its demonetized silver. H

The situation with respect to the supply of and demand for silver in 1920-1930 is shown in Table VI, which is based on estimates by Mr. Joseph The average for these eleven years is 269 million ounces for supply and 262 million for demand. Since 1930 production has fallen off, but the

2 The London Economist. 1931, Vol. 112, p. 662. 2 Provisional•

price continued its downward course until 1931 and has remained at a low level since then. At the close of 1933 silver was worth only slightly more than 28/ an ounce (in terms of gold), 12 in spite of the decline in production indicated by the following estimates of Messers Handy and Harman (millions of ounces): 1930 - 248.7; 1931 - 192.7; 1932 - 160.6; 1933 - 163. The decline in the price of silver from 1926 to 1931 in spite of a relatively constant output of the white metal, and the failure of the price to improve with the decrease in production has led to the statement that the economic law of supply and demand has been fundamentally disturbed in this case. It is said that to attribute the drastic drop in the price of silver to overproduction is absurd in the light of the fact

that production remained relatively stable to 1930 and then But if the demand for silver has permanently decreased, and such seems to be the case, there is overproduction unless the output is reduced to the same extent as the demand. "As regards any other commodity, no one would seriously say that it is the duty of those who consume that commodity to ■» maintain their consumption in order to maintain production.” 3 One reason why such violent fluctuations occur in the price of silver is that the production and demand are comparatively inelastic. The demand for silver for coinage purposes is independent of the price of silver, and the imports of silver into India and China depend only to a slight extent upon price. The inelasticity in the supply of silver results from its production in connection with lead, copper and zinc ores. Thus production remained approximately constant from 1926- 1930 in spite of a considerable decline in price. Since 1930 production of silver has declined, but this has probably been due as much or more to the fall in the price of zinc, copper and lead as it has been to the fall in the price of silver. These metals in connection with which silver is mined have considerable commercial utility, and as long as they are in demand silver will be produced in large quantities. Also, the attempt of the Mexican government to keep silver mines open to prevent unemployment has kept production in Mexico from declining as much as might be expected in view of the

fact that about two-thirds of the silver production of Mexico is from straight silver ores. Under these circumstances it is evident that silver may continue at a low price for a long time unless the demand increases. One thing that might increase the demand for silver is the discovery of some new industrial use for it, or of a process which will prevent silver from tarnishing. Because of the small proportion of silver used in industrial arts, however, there is little likelihood of such discoveries affecting very much the demand (and therefore the price) for silver.

The demand for silver for monetary purposes and for hoarding also offers but little hope of improvement. It is likely that the monetary demand for silver will continue to decline unless an international agreement to prevent such development is achieved.

There is at the present time a general movement on the part of the nations of the world to debase or demonetize their coins. And, moreover, it is quite probable that some countries which have thus far preserved the quantity and quality of their silver coins may decide to imitate their economical neighbors.^- 8

Even the demand for silver from India and China, which held up fairly well to 1931, has “been falling off recently. These countries ordinarily import 75 per cent of the newly mined silver, but in 1932 their imports only amounted to about 35 per cent of the total world production. The consumption of India and China decreased from nearly 220 million ounces in

1928 and 1929 to about 50 million ounces in 1932 and to a minus quantity in Unless the demand from the Orient improves considerably the market will have to contend not only with a current excess of production but also with the offerings of stocks which have been held for speculation, which holdings are estimated at over 175 million ounces in Uew York and over 20 million ounces in London. All in all, therefore, the outlook for silver for the past few years has been rather dark as far as the ordinary demand factors are concerned. As a result, a number of proposals have been made within recent years which would increase the demand for silver. That these proposals are made in the form of plans to improve world economic conditions does not obscure the fact that they would immediately and certainly increase the demand for silver even if they failed to bring about the promised improvement in economic conditions.

Since 1929 it has been repeatedly asserted that the decline in the price of silver is responsible for the world economic crisis, and that it has reduced the purchasing power of India and China. It is argued that there is a scarcity of gold which must be compensated for by the use of silver as money if the world is to recover from the present depression. These and other claims made for bimetallism and other plans to increase the use of silver, coming at a time of world wide depression, are fast gaining acceptance and support. In the preceding survey of the history of the monetary use of the precious metals certain facts have appeared which indicate the weakness of bimetallism, in view of which it might be expected that no one would advocate that system any longer. But apparently distance lends enchantment to bimetallism; the faults of the system are overlooked and its supposed virtues alone are pictured to the public. With complete disregard for the result of past experience with bimetallism, the advocates of the double standard have revived all the theoretical arguments for their scheme. It becomes necessary, in order to complete the study of the relations of the precious metals, to consider these theoretical arguments for silver.

erich, Money, Vol* I, p. 255.

2 Leong, Silver, p. 60. York Times Magazine, Sept. 16, 1917. The Price of Silver, International Financial Conference, 1920, Paper No. XIV, p. 7.

Money, Credit and Prices, Vol, I, p. 132,

The Price of Silver, Department of Commerce Trade Information Bulletin Ko. 682, p. 15. Changes in the Monetary Use of Silver Since 1914, Trade Information Bulletin No. 140, p s 35. An analysis of the changes in the content of silver coins of different countries is given in this bulletin, pp. 30-46.

op. cit., p. 373. A crore is 10 million rupees, and the rupee is a silver coin of 0.374 ounce, 0,9165 fine.

"Silver - Its International Aspects?" Foreign Policy Reports, Vol. VII, #l3, p. 242. Leavens, "Silver and the Business Depression," Harvard Business Review, Vol. IX, p. 331. 11Leong, op. cit a , p. 5, p. 9. 12Slightly different estimates are given by Handy and Harman in their annual review of the silver market. See Bratter, "Silver - Some Fundamentals," Journal of Political Economy, Vol. 39', p. 325 ff.

13 Handy and Harman, Review of the Silver Market for 1933, quoted in the Hew York Times, January 8, 1934. lmproving World Trade Conditions, p. 13.

15 Arendtz, The Way Out of the Depression, p. 19. lsSir Arthur Salter, "The Silver Problem," Political Science Quarterly, Vol. XLVI, p. 321.

17 Stewart, ’’Silver-Its International Aspects,” or, cit., p. 255, op. cit., p. 28,

19 Handy and Harman, Review of the Silver Market for 1933.

— - “■ — — • — Supply— ---------Demand- Year Prod. Demone- Total India- Arts Coinage Total Total tization China Stocks 1920 173 44 217 119 45 40 204 — 1921 171 41 212 96 53 69 218 76 1922 210 50 260 120 58 56 234 70 1923 246 41 fe87 180 55 57 292 72 1924 239 4 243 123 53 71 247 113 1925 245 6 251 180 59 17 256 119 1926 254 2 256 176 57 31 264 175 1927 254 25 279 187 58 47 292 174 1928 258 71 329 210 - 53 21 284 — 1929 262 53 315 197 60 36 293 1930 2 241 71 312 231 50 16 297

Table VI The Supply of and Demand for Silver, 1920-1930 1 (Millions of fine ounces)

PART II THEORETICAL ASPECTS OF THE MONETARY USE OF SILVER AND GOLD

CHAPTER V THE ARGUMENTS ADVANCED FOR THE GREATER MONETARY USE OP SILVER

During each of the major depressions which this country has experienced since 1873 one of the plans suggested to improve economic conditions has been the increased use of silver for monetary purposes. The issue of bimetallism was argued heatedly in the seventies and continued to stir the country for a generation. In the nineties the issue again flared up, reaching its culmination in 1896 with Bryan’s campaign for the Presidency on a platform calling for the free coinage of silver. The discoveries of gold in Alaska and South Africa during the nineties greatly increased the supply of the yellow metal and helped still the clamor for bimetallism. The rise in prices following 1897 was the main thing which destroyed the issue of bimetallism. With the passage of the Gold Standard Act of 1900 it was thought that the silver issue had been disposed of permanently in this country. Until recently it seemed that this expectation would be fulfilled, but now the silver question is again engaging the attention of the country.

The arguments for and against the increased monetary use of silver now are the same as those of the past* It would seem that by now some consensus of opinion should have been arrived at regarding the validity or falsity of these arguments But such is not the case, Bimetallists and monometallists argue without definitely proving their own contentions or

disproving those of their opponents, and the public, instead of being enlightened, is only bewildered. This unfortunate state of affairs is due in large part to the failure to consider the available statistical data. The statistical evidence available from past experience with bimetallism has already been examined in the first part of this study. In analyzing the theoretical arguments for silver a greater use of quantitative data and statistical methods is possible. The following chapters of this study are devoted to an analysis of the theoretical arguments for the greater monetary use of silver.

One of the most important arguments of the silver advocates has to do with the relative stability of prices under bimetallism and under gold monometallism. It is argued first that gold has been an unstable standard of value. Much is made of the fluctuations in the value of gold, and of the harmful effects of these fluctuations. Then it is said that bimetallism would furnish a more stable standard of value. The theory of bimetallism rests upon the assumption that where there are two sources of supply, each equally likely to fluctuate in quantity, the Joint supply should be more stable than either supply considered by itself, 1 Ordinarily the discussions of stability merely develop this point. In the next chapter a statistical consideration of this issue will be made.

Another argument is that the quantity of monetary gold, is not sufficient to carry on the business of the world at the customary price level. There is said to be a scarcity of gold, and it is suggested that silver be used to compensate for this deficiency in the world’s stock of money metal. Tn many cases, however, the methods proposed for the monetary use of silver would far more than compensate for the deficiency said to exist in the supply of the standard money metal. It is also said that there is maldistribution of the stock of gold, and to this maldistribution is attributed a large measure of responsibility for the fall in prices in recent years. These questions of the scarcity and maldistribution of gold will be considered in Chapter VII,

As may be suspected from the fact that the silver question becomes an issue during periods of prolonged depression, many of its advocates look upon silver as a way of restoring prosperity. 2 The scarcity of gold is held to be a cause of the consequently, it is expected that the increased use of silver for monetary purposes will improve conditions. The remonetization of silver, it is contended, would raise prices, reduce the burden of debts, and stimulate industry and trade. This would also result in a higher price for silver, which it is said would mean that India and China could buy more from other countries. Some writers say that the division of the world into countries using gold and countries using

silver is the principal cause of the present economic crisis. Zi According to an Associated Press dispatch of February 20, 1931, a sub-committee of the Senate Foreign Relations Committee held the low price of silver to be the chief cause of the decline in trade between the United States and the Orient and South America. It is said that the stabilization of exchange rates and the increase in trade between gold-using and silver-using countries would be among the important benefits of bimetallism. These issues will be considered in Chapter VIII.

There are various methods proposed for increasing the monetary use of silver. They range from the increased use of silver as subsidiary coinage to bimetallism at 16 to 1. Some proposals would increase the use of silver without abolishing the gold standard; others would make some combination of silver and gold the standard of value. These different methods proposed for increasing the monetary use of silver will be discussed in Chapter IX.

In contrast with the economic arguments (mentioned above) for the increased use of silver, stand the popular arguments for silver. The above mentioned arguments are logical appeals based upon economic theory; the popular arguments obviously appeal to the emotions and prejudices of the people. For example, during the nineties the bimetallists spoke of silver as the money of the people and gold as the money of the rich." The Act of 1873 which discontinued the free coinage of silver dollars was called the "Crime of 1873," and was held by some writers to be the principal cause of the depression of 1873. 6

The fact that both silver and gold have been used as money for centuries is also used as an argument for the remonetization of silver. Senator has recently stated that ”Uo monetary system can in the future be considered sound and efficient which does not restore to millions of people the money which they have used for three thousand years.”'' In this country, a sentimental appeal for the use of silver is made by referring to the silver dollar as the ”dollar of our daddies,” the implication being that what was good enough for our ancestors should be good enough for us. It might just as reasonably be argued that we should give up aeroplanes and automobiles and return to the covered wagons used by our forefathers. Some advocates of silver even go so far as to say that it was intended by God and nature that silver and gold should exchange in the ratio of 16 to 1.8 Some of them have held that the two metals existed in the earth in this ratio. An Associated Press dispatch of February 16, 1932, reported that Russel F. Collins, of Seattle, Washington, in an address before a silver convention in Denver, Colorado, declared that miners returning from the mountains invariably bring in from thirteen to fourteen ounces of silver to one of gold.

The conclusion that silver advocates want to draw from these statements that the ’’natural” ratio of production of silver to gold is about 16 to 1 is that the ratio of value should be approximately the same* This obviously overlooks? for one thing, the influence of demand upon price. It has already been pointed out how little production, unaided by other factors, is capable of giving a decisive turn to the ratio of value between the precious metals. This is shown with special clearness in the period 1621-1720, during which silver depreciated by nearly 20 per cent although its production was falling off and the production of gold was increasing.o Ho one thinks of attempting to explain the exchange ratio of wheat and corn, for example, merely on the basis of their ratio of production, but many writers have used just such reasoning in arguing that silver should exchange at a higher ratio of value to gold than it does. It is quite true that these people usually propose to increase the demand for silver by remonetizing it, but even this need not necessarily result in silver and gold exchanging in the same ratio of value as their ratio of production. It is also argued that gold and silver should exchange on the same basis as their ratio of production because they are so similar in their physical properties and are interchangeable in use to a large extent, 10 Wheat and corn are also interchangeable in use to a considerable extent, and yet they do not exchange on the same basis as their ratio of production. It is said that the ratio of production of silver to gold has never exceeded 14 to 1 and therefore that it is not unreasonable to expect the ratio of value to be about the same. A glance at the figures in Table 111 and Table IV in Chapter 11, will show that the ratio of value does not always correspond to the ratio of production. In the period 1851-1875 the ratio of value of silver to gold was about to 1 although the ratio of production was 6 to 1. This shows that a low ratio of production of silver to gold does not necessarily mean a low ratio of value between the two metals.

Another popular argument is that the international bankers fight bimetallism because it will be hard for them to control both metals. The smaller a currency’s base, the bimetallists contend, the easier it is to control. ~~ It is claimed that international bankers control the monetary stock of gold and use this control against the interests of the public. It may be asked, "Why would it be harder to control both metals than to control gold alone?" The answer probably would be that gold and silver together are worth more than gold alone, and so harder to acquire and control. But in so far as

necessary for monetary purposes, there can be no doubt that bankers would not find great difficulty in purchasing silver. Gold is acquired by banks to fulfill legal reserve requirements and not from any sinister motive to oppress the public. The same would hold true in the case of silver. If silver were allowed or required as part of the reserves to be held by banks, then banks would hold silver just as they now hold gold. Furthermore, to prove that international bankers control the monetary stock of gold it is necessary to prove that they control the treasuries and central banks of the most important nations of the world, for these are the chief holders of the world f s monetary gold stocks. In this country, for example, the total gold stock at the end of 1930 was $4,593,488,000, of which $4,255,109,000 was held by the Treasury and the Federal Reserve Banks. The same concentration of gold stocks in central banks and government treasuries exists in other countries, as the following figures indicates

An attempt is made to impress the public with the scarcity of gold and the ease of controlling its supply by stating the cubic volume of the world’s monetary gold stock. One silver advocate l3 writing in 1894 stated that a cube twenty-two feet on each side would contain all the monetary gold, and then said that this cube could be put in the Chicago wheat pit without seriously interfering with the business of the traders. In 1930 it would have taken 29,195 cubic feet, or a cube approximately thirty-one feet on each side to hold all the monetary gold, but even this would no doubt be considered small by the advocates of silver. The mere fact that gold is not bulky should not stand in the way of its use as money. Indeed, the very fact that gold possesses high value per unit of weight was one of the things which led to its use as money, for a desirable quality of money is portability. According to an Associated Press writer, estimates show that fifteen billion ounces of silver have been mined in the world since the discovery of America, and that this amount could be compressed into a cube of 115 feet. 14 (Of course, not all of this would be available for monetary purposes.) Some of the advocates of silver apparently think that the larger volume of silver and gold would make it much more difficult for the international bankers to control the monetary sypply of silver and gold than the supply of gold alone. But if it is merely

the volume of the money metal which is important, then it would probably be better to use iron and copper instead of silver and gold or together with them for monetary purposes.

Many of these arguments, no doubt, are inspired by silver producers. This is not necessarily a condemnation, for quite often individuals fallvinto the belief that the public interest coincides with their interest, Mo doubt many producers of silver sincerely believe that the increased monetary use of silver would improve the economic condition of the world, but at the same time they know certainly that this would benefit them directly and quickly. The strong political appeal of the silver question in this country is due, in part at least, to the existence of many mines and the production of large amounts of silver here. Although silver mining is not an important industry for the country as a whole, it is important in several of our sparsely fettled states, and there is some pressure on the Senators from those states to do something to increase the profits of the silver mining industry.ls Another reason why there is considerable agitation for governmental action in favor of silver in the United States is that American interests control a great many silver mines outside of the United States. In 1929 American interests controlled 66 per cent of the mine production and 72,8 per cent of the refined silver production in the world.'- The owners of silver mines no doubt feel that the decreased monetary use of silver is

unfair to them. At the time of the demonetization of silver it was said to be unfair to strike down the privilege of silver mine owners and confer a monopoly on gold mine owners. J ' The fact that the remonetization of silver would benefit silver producers gives rise to an argument sometimes used against silver. The advocacy of silver is said to be inspired by the greed of the silver barons, and consequently to be devoid of merit* If the increased use of silver would really benefit the world, however, the fact that the producers of silver would profit directly should not be allowed to stand in the way of the adoption of measures designed to promote the greater use of silver.

The question of the monetary use of the precious metals should be decided not on the basis of popular arguments but on the basis of a logical analysis of the merits of the different plans for using the precious metals. If the advantates of bimetallism over gold monometallism outweigh its disadvantates, then it would seem to be desirable to change to that standard, Fortunately, the advantages claimed for bimetallism can be analyzed before introducing the standard. One method of analysis is to consider how bimetallism has operated in the past, and that has been done in the preceding chapters. The other method is a statistical analysis of the reasons given for the greater monetary use of silver. This latter method of approach will be used in the chapters to follow.

“Commission on International Exchange, The Stability of Exchange, 1903, p. 467.

The Way Out Of The Depression, and Pearson, Prices, p* 115,

Duarte, La Crisis Mundial, p. 3. Coin *s Financial Series, Ho. 7, June, 1895, p. 68.

ier, Our Silver Coinage and Its Relation to Debts * 7Commercial and Financial Chronicle, Vol. 134, p, 3727. Uncle Bible, pp. 144-145.

9 See Chapter 11, p, 23, supra* lOWalker, Money in Its Relation to Trade and Industry, p. 143. The same idea is also expressed in the following statement: ’’The qualities of the two royal metals show that their Maker intended them to be used alike as far as coinage is concerned. They resemble each other so closely in the qualities that fit them for coinage that there can be no doubt that the Creator intended and wishes them to be used alike; that it is God’s

10(continued) law that if gold is freely coined silver should he,*’ Converse, op. c i t., p. 145. UHowell, Civilized Money, p. 202. See alap Harvey, Coin’s Financial School Up-to-Date, p. 171. "It (gold) is small in hulk, and is owned and controlled by the few and rich. They are not only able to corner it, but their selfishness inclines them to do so. In fact, it is now cornered."

ISpirector of the Mint, Report, 1931, p. 234.

12 Harvey, Coin *s Pinencial School. His calculations follow: A cubic foot of cast gold weighs 19,258 ounces, and so contains 9,243,840 grains of gold (an ounce contains 480 grains). At 23.22 grains of gold to the dollar, there are $398,098 in a cubic foot of gold. The outside estimate of the total gold supply was placed at $3,900 million, and this could be obtained in 9,796 cubic feet. 14 Cranmer, ’’Silver Has Played Ivlany Roles Throughout the Years,” The San Antonio Express, January 7, 1934.

15” The Revival of Bimetallism,” The Annalist, 1933, p. 631. ISLeong, Silver, pp. 66-71.

Dear Dollars and Cheap Commodities, p. 10. ISBrackejrridge, An Address, p. 10.

In central banks and government treasuries Total United States . . . $4,255,109 $4,593,488 France . . . . . . 2,105,363 2,105,363 Great Britain • , . 718,422 718,422 Germany • • . . . . 527,799 543,494 Spain . . . . . . . 470,531 470,743 Total (all countries) 8,938,488 "Director of the Mint, Report, 1931, p. 234. 11,522,579

Monetary Gold Stocks at the End of (Thousands of dollars)

CHAPTER VI THE STABILITY OF VALUE UNDER BIMETALLISM AND GOLD MONOMETALLISM

Whether gold and silver together would furnish a more stable standard of value than gold alone is one of the important issues between bimetallists and gold monometallists. Bimetallists claim that a standard based upon gold and silver would be more stable than one based upon either metal alone, and say that this would be one of the greatest advantages of bimetallism for the public. The question of the stability of the standard is important and deserves careful consideration. At first glance it might seem that changes in prices are not important because they affect both incomes and expenditures the same way and therefore do not injure anyone. A closer inspection of the results of changing prices, however, will show that they are important. If we disregard debtor-creditor relation, fluctuations in the value of the standard might be a matter of indifference provided that all prices change at the same rate and to the same degree. But when, as actually happens, prices change at varying rates and to different degrees, fluctuations in the value of the standard mean changes in the distribution of wealth and income, changes which cannot be passed over lightly. Furthermore, a stable standard of value, one in which the purchasing power of the unit would remain the same, is also required if justice is to be obtained in the relations between debtors and creditors. Changes in the value of the money standard result in the debtor paying back either more or less in terms of purchasing power than he borrowed.

Such being the case, it is to be expected that much would be made of the fluctuations in the value of gold by the critics of the gold standard. It is said that the value of gold has never been even approximately stable for more than a few years.l The hardships inflicted upon receivers of fixed incomes by changes in the value of gold are illustrated by the cases of widows and orphans. 2 The small saver who deposits his money at interest in a given year and waits until it has doubled may find, it is pointed out, not only that his thrift is not rewarded but also that it may even be penalized if the price level has more than doubled. It should be stated, in order to avoid a false impression, that many of the most striking examples of the instability of gold are drawn from the war period, during which most countries were off the gold standard (not because they were forced off it, but because they chose to abandon it). In fact, most of the extreme fluctuations in the value of gold have occurred as the result of wars - especially the Napoleonic Wars, the Civil War, and the World War. Furthermore, the instrument generally used to measure the fluctuations in the value of gold is the index number of wholesale prices, which shows greater fluctuations than would an index of general prices. Since a great deal of the money spent by consumers goes for the payment of rents, personal services, and commodities at retail prices, 3 there is reason for believing that

the fluctuations in the value of gold are overstated by measuring them in terms of a wholesale index number. Snyder 1 s index of general prices from 1875 to 1914 shows an annual average fluctuation in the value of gold of approximately two per The index number of wholesale prices is commonly used to measure fluctuations in the value of gold because other index numbers have not been computed for as long a period, so in the following pages this practice of accepting the index number of wholesale prices as a measure of the fluctuations in the value of gold will be followed.

Even using the index number of wholesale prices as a measure, the fluctuations in the value of gold are not so great as might be gathered from illustrations of the changes in prices between selected years, as Table VII indicates. The index chosen is that of wholesale prices in England, for prices in England before the war probably reflected the value of gold better than those of any other country. The investigation is limited to the years since 1880, for it might be argued that before that time the stability in the value of gold was influenced by the fact that some important European nations were still using silver or silver and gold as a standard, but it may be said in passing that Lawrence found the average annual fluctuation in the value of gold to be at most 4.5 per cent over a period of 145 years. According to the figures in Table VII, the average annual fluctuation in the value of gold

in England was 5.8 per cent for 1880-1931, 4.9% for 1880-1929, and 4% for 1880-1913. Since IQI41 Q 14 England actually has been on the gold standard only seven rears, so that the figures for 1880-l Q l3 are a better indication of the fluctuations in the value of gold than those for 1880-1931. During the period 1880-1913, eighteen of the annual fluctuations were less than or equal to 3%, and sixteen greater than 3%: twenty-one were less than or equal to 4%, and only thirteen were greater than that. From 1900 to 1913, one of the few periods in the history of the gold standard during which it was nearlv free from such disturbing influences as its adoption or abandonment bv a number of important countries, the average annual fluctuation was 3.86 per cent. Of the fourteen fluctuations during these vears five were less than or equal to 1%, eight were less than or equal to 3%, and ten were less than or equal to 5 per cent. From this analvsis it appears that the annual fluctuations in the value of gold are not verv large. It mav be obiected that the maximum fluctuation over a period of time rather than the average of the annual fluctuations is the important measure of instabilitv. The maximum fluctuation over a period of time is considered important because debts contracted in one vear are paid back a number of vears later, and during this time the annual changes in the value of gold mav all be in the same direction, so that the total change in the value of gold is quite considerable bv the time the debt is repaid. It should be pointed out, however, that not all debts contracted in periods of high prices are paid when prices are low, nor are

all debts made in periods of low prices paid when prices are high.

Even a consideration of the secular trend in the value of gold instead of the annual fluctuations show a rather small rate of change. Table VIII gives the value of gold, as measured tv the use of the index number of wholesale prices in England, for the vears which mark the changes in the secular trend of

and Pearson, Prices, p. 75. (1910-1914 = 100.)

prices. The extremelv low value of gold in 1809 and 1920 is to be explained in terms of wars, and that makes the rate of change in the value of gold larger than it would otherwise have been. Over the entire period 1789-1920 the average annual rate of change due to the secular trend in the value of gold was approximately 2j per cent. It is evident from this that the rate of change due to the secular changes in the value of gold is not large, although th© per cent change in the value of gold over periods of twenty to forty years is considerable. The prospect of gain or loss from these secular changes in the value oi gold is more than likely not a serious motive in the economic actions of individuals. "Undoubtedly uncovenanted

gains and losses do arise in this wav "between debtors and creditors, but thev are spread over long periods and are not 5 formidable in comparison with other changes of economic life.”

The evidence presented above shows that the general level nf prices has not been stable, but has been subject to secular as well as annual fluctuations. These fluctuations in prices are said to prove that gold has been an unstable standard of value. Quite often the impression is conveyed that all these fluctuations in the general level of prices are due to the fluctuations in the supply of the monev metal, although theoretically the changes in the supply of the money metal are held to account only for the secular trend in prices. It is well to remember that prices are affected by changes in the volume and velocity of circulation of monev and credit, bv improvements in the methods of production, and by other factors, as well as by changes in the production of gold. Nevertheless, the price level has not been perfectly stable under the gold standard, and the critics of the gold standard attribute this to the fluctuations in the production of gold. It is believed that a standard based upon a metal or combination of metals the production of which would be more stable than that of gold would be a more stable standard of value than gold. There are two concepts regarding stability in the production of the money metals. One is the old concept that production should remain the same in each year or period. This concept can be dismissed, for a metal the production of which is absolutely stable from year to year would not furnish a satisfactory base for the monetary system of an advancing economic society if what is desired of the standard is stability of value. The modern view, expressed by Professor Cassel, is that the production of the monetary metal should increase at the same rate as the physical volume of production. According to this second concept, which is the one used in the following discussion, neither the production of gold nor that of silver is stable. It is said, however, that if we want a standard that will vary less than any other we should use gold and silver together.s Another statement is that bimetallism would secure a higher degree of stability in the compound mass of the money thus formed than could possibly exist with the two metals separate and independent in their value movements, and that this would result in a better standard of deferred payments. 7 (This assumes that under bimetallism both metals will actually circulate a,nd function as a standard of value, an assumption which will be accepted for the time being.)

The theoretical argument for bimetallism is based, on the probability that the two metals will not change in value in o the same direction and in the same degree at the same time. Even if it were true that the two metals did not change in value in the same direction and in the same degree at the same time, a bimetallic system still might not result in a more stable standard of value than either of the metals separately. If metal H A* were absolutely stable, and metal H B W were very unstable, a bimetallic system composed of these two metals would no doubt be more stable than a standard based on *B W , but would be less stable than a standard based on H A*. Bimetallists generally make the stronger assumption that the production of gold and the production of silver are equally likely to fluctuate, and then say that where you have two sources of supply each equally likely to fluctuate,in quantity, the joint supply would be more stable than either of the separate sources. 9 It is expected that this would result in more stable prices! that is, the assumption is made that the more stable the production of the money metal (or metals), the more stable will be the price level. Professor Edgeworth has demonstrated, however, that according to the calculus of probability the steadying effect of bimetallism may be expected to be relatively small. 19

In view of the assumption that the stability of the supply of the money metal (that is, stability relative to the secular trend of production) and the stability of prices go together, the question of the stability of the supply of the two precious metals is sufficiently important to merit a practical investigation, which can be made by considering the statistics of production of gold and silver. The problem is to determine

whether the production of gold and silver together has kept pace with the physical volume of production more closely than has the production of gold alone.

The figures of the annual average production of gold and of l/16th silver by five year periods from 1846 to 1930 are presented in Table IX. Five year averages of production have been chosen for the purpose of measuring the stability of production of the precious metals because it is said that changes in the production by five year periods are more important in their influence on the trend of prices than the changes in annual production. In considering the relation between gold production and prices in the past 85 years Warren and Pearson found that when the production of gold by five-year periods was above (below) normal, prices in England in the following five-year period rose (fell). 11 The factor of l/16th was used to reduce the production of silver to a basis comparable with the production of gold. This factor was chosen because it represents the ratio of silver to gold which many bimetallists claim could have been maintained but for the demonetization of silver by Germany and the countries of the Latin Union. The deviation of the annual average production is measured from what is called the normal production, arrived at by

normal production is arrived at bv assuming an annual increase of from the production in the base period 1846-50. ? This represents of the annual average silver production as estimated by Director of the Mint. This factor is used in order to make the production of silver comparable with that of and Pearson, Prices, p. 97. from Soetbeer’s estimate of 25,090,342 ounces for 1841-1850. -’Computed bv dividing the total deviation bv the total normal production.

assuming* an annual rate of increase of 3 per cent from the production of the base period 1846-1850. The reason for using a rate of increase of 3 per cent is that Cassel and other economists sav that gold production must increase at this rate in order to keep pace with the volume of production and business and to keep prices stable. From the figures in Table IX coefficients of average deviation in the production of gold, silver, and gold-plus-l/16silver have been computed bv dividing the total deviation bv the total normal production. A summary of the results is presented at the bottom of Table IX.

The coefficients of average deviation indicate that the production of gold-plus-l/16-silver was somewhat, more stable than the production of gold alone from 1851 to 1930. This advantage was particularly marked in the period 1851-1890 because the production of gold changed so greatly in the fifties. The figures in column 4of Table IX show that the production of gold-plus-1/16 silver fluctuated 80 per cent as much as the production of gold for the period 1891-1930 and about 75 pei* cent as much for the period 1851-1930. This same method "has been applied to the period 1851-1930 with two other periods used as a base from which to compute the normal production, and to the period 1801-1930 with 1801-1810 and 1841-1850 as base periods. This material is found in Appendix A, where there is also given a summary of the results. A comparison of the annual average production bv ten vear periods with the normal production computed from the base 1801-1810 shows gold production to be more stable than the production

of gold-plus-l/16-silver, but the other results show an advantage for the combined production over the production of gold alone.

A verv rough estimate from these figures would be that the production of gold-plus-1/16-silver fluctuated 30 per cent less than the production of .gold alone. But this was due not to the fact that the deviations in gold and silver production offset each other, though that was true to some extent, but to the fact that silver production was more stable than gold production. What the results would have been if bimetallism had actuallv existed to the present dav it is impossible to sav. The production of silver since 1875 would have been greater than it was, it is safe to assume, and that might have increased the size of the deviations of silver production from the normal. That this might be the case is indicated bv the fact that the coefficient of deviation in the production of silver was greater in the period 1801-1870 (in which period bimetallism was the usual standard of value) than in 1871-1930. 12 Actuallv, then, it is impossible to sav definitelv whether gold and silver together or silver alone would have furnished a mere stable standard of value from 1871-1930 than gold. We can sav, however, that even if the conditions of production of the precious metals had remained the same and even if stability of value depends directly on stability of production of the money metals, bimetallism could have reduced the fluctuations in value bv not more (and probably much less) than 30 per cent.

It is not necessarily true, however, that bimetallism would result in a more stable standard of value because the production of the two metals is more stable than the production of gold alone. Under the assumption that both metals will actually circulate and function as a standard of value greater stability of value might result from a bimetallic standard; but if the bimetallic standard degenerates into an alternating standard, the greater stability of production might have no effect upon stability of value. The production of one metal might increase at a rate considerably higher than 3 per cent, while the production of the other might increase at a much lower rate than 3 per cent. The production of both metals together might then increase at exactly 3 per cent. According to the bimetallists this stability in production would mean very great if not complete stability of value, but in practice the cheaper metal might drive the other metal entirely out of circulation and become the standard of value. Then prices would be rising steadily, and stability of value would not be achieved.

?rom the figures presented regarding the stability in the production of gold, silver, and gold-plus-1/16- silver (Table IX in this Chapter and Appendix A), it appears that if what is desired is stability in the production of the money metal, the real issue should be between gold and silver, since the production of silver is more stable than the production of gold-plus-silver. It has already been pointed out that the

relative stability of production might have been different if silver instead of gold had been the most widely used monetary metal since 1875, so it is not possible to say that silver would furnish a more stable standard of value than gold for the future. Nevertheless, if the real issue is between silver and gold it becomes pertinent to ask whether there are any conditions in the production of silver which would tend to make it a better standard of value than gold. There is one important difference in the production of the precious metals, and that is the production of silver largely as a joint-product in connection with copper, lead, zinc, and other ores. Dry and siliceous ores (nearly pure silver) now account for less than 20% of the world’s silver production, the remaining silver being produced in connection with other ores. 13 Out of a total of 47,618,000 fine ounces of silver produced in the United States in 1930, only 8,422,000 were from dry and siliceous ores. The production of silver as a joint-product is held to make it particularly sensitive to monetary needs. 14 Warren and Pearson say that the production of silver has kept approximately in line with the production of basic commodities, much more so than the production of gold, and that the reason for this is probably the production of silver as a joint product. l ' s

As a result of the production of silver as a joint-product, it is said, silver would he a more stable standard of value than gold. As business increased or decreased, the production of copper, lead, and zinc would increase or decrease, and consequently the production of silver would adjust itself to the volume of thereby resulting in a stable price level and standard of value. It seems, however, that this reasoning assumes a rather close connection between changes in business and changes in the production of those metals with which silver is combined. If the volume of business increased at a rate of 3%, but the production of copper, lead and zinc increased at a rate of 5%, for example, the production of silver increasing at a corresponding rate, the increased production of silver would result in a rise of prices according to the quantity theory of money. If, on the other hand, the volume of business increased more rapidly than the production of copper, lead and zinc, and so outran the increase in the production of silver, a fall in prices might result. 16

According to the quantity theory, the production of gold acts as a check upon extreme fluctuations in prices, and consequently in the value of gold. If prices rise, the cost of mining gold increases, and since the price of gold remains same, the production of gold declines, so there is a tendency for the movement of prices to be checked or perhaps even reversed. If prices fall, the cost of mining gold declines, the production increases, and this tends to check the fall in prices. According to this same theory, therefore, a silver standard might accentuate rather than diminish fluctuations in prices. Let us examine this by considering the results of a rise or fall in ¥ prices if the world were on a silver standard. If prices rose, the production of silver from dry and siliceous ores would decrease, but this would very likely be more than compensated for by the increased production of silver in connection with copper, lead, and zinc, so that the production of silver would increase and cause a further rise in prices. If prices were to fall, the production of silver from dry and siliceous ores would increase, but the production of silver as a joint-product might decrease so much as to cause a decline in the production of silver and a. further drop in prices.

It is difficult, then, to say whether or not silver would, furnish a more stable standard of value than gold. The figures in Table X on the value of gold and silver from 1833 to show that in this period gold was more stable in value than silver. The value of gold was computed bv taking the reciprocal of the index number of wholesale prices in the United States (1926 = 100). The value of silver was measured bv changing the price of silver into an index number and dividing this index bv the index of prices. The maximum and average fluctuations in the value of gold and silver over ten vear periods

of Labor, Bulletin Ko. 543, p. 3s. (1926 = 100.) of the Mint, *Report, 1931, p. 126. 1926 = 100. Index Humber of Silver 7 Index of Wholesale Prices. in points divided by the index of value in the first year of the period. from the maximum fluctuations by ten-year periods. from the average fluctuations by ten-year periods.

were then measured in terms of the index number for the value of gold and the value of silver at the beginning of the ten-year period which they represent. These figures were totaled for three periods, 1833-1872, 1873-1912, 1913-1930. The results indicate gold to be more stable in value than silver. This is shown by the fact that the total of the maximum fluctuations in the value of silver exceeded the same figures for the value of gold in the period 1833-1872, when bimetallism existed, and in 1873-1912. The total of the average fluctuations in the value of gold exceeded that of silver in only one period, 1833-1872, when the total of the average fluctuation in the value of gold was 22.39 as against a like figure for silver of 21.98. 16 All this indicates that gold has been more stable in value than silver, but it cannot be considered conclusive proof of this fact, for the results from 1873-1930 might have been different if silver instead of gold had been the most widely used monetary metal.

Further evidence that silver might not result in a more stable standard of value than gold is furnished by Table XI, which gives the rate at which the production of gold and silver has increased in certain periods. From these figures it is evident that over long periods of time the production of silver often fails to keep pace with the physical volume of production (if we accept 3 per cent as the ordinary rate of increase in the physical volume of production). The figures in Table XI show that in the periods 1900-1929 and 1890-1929 the rate of

increase in the production of gold was closer to 3 per cent than was the rate of increase in the production of silver. In 1910-192% however, silver production kept pace with the physical volume of production more nearlv than did gold production. Nevertheless, it is evident that the use of silver instead of gold for monetarv purposes would probably not do much to make the supplv of the money mete,! keep in line with the physical volume of production. “If, as is generally contended, the test for an ideal monetary commodity is that its supply should conform closely to world economic growth, silver as well as gold falls short of the.

Even if we grant that the production of silver and the production of gold-plus-silver is more stable than the production of gold alone, one further question remains to be considered in determining whether these standards would result in more stable prices than a gold standard. That is the question as to the relation between the quantity of the monev metal and prices. If the relation between the quantity of the money metal and prices were- an exact one, or even a close one, then obviouslv there would be reason for believing that greater stability in the metallic base would result in more stable prices. If the relation is not close, then this argument for bimetallism has little if anv significance. So far we have accepted the view that there is a close relation between the quantitv of the monev metal and prices. Now it remains to consider the validitv of this view.

As has been stated, before, the critics of the gold standard often convev the impression that all the fluctuations in the general level of prices are due to the fluctuations in the supplv of the monev metal, although theoretically the changes in the supplv of the monev metal are held to account only for the secular trend in prices. Those who believe that there is a close relation between gold and prices would sav that it is the stock of gold and not the production of gold which determines price. Nevertheless, thev believe that the stock of monetarv gold must increase at the same rate as the volume of business, and if this is so, fluctuations in the production of gold would influence prices bv their effect upon the rate of increase in the stock of monetary gold. This theory of the relation between gold and prices is expressed bv Cassel in his conclusion that for the period 1850-1910 "The main cause of the secular variation of the general price level lies in the changes of the relative gold-suuplv, and that the quantitv theorv is right to the extent that the general price-level, though it is influ-

enced bv other factors, is directly proportional to the relative gold-supply. Warren and Pearson have found a close relation between the five-year average of production of gold and the price level in the next five-year period. This implies that there is a relation between gold production and the shortperiod movements in the value of

The view that there is a close relation between the supply of the monev metal and prices is generally held bv bimetallists. MacLeod states that the bimetallists consider that gold and silver onlv constitute the currency, and that prices are governed solely by the increased or decreased quantity of gold and He states that this is incorrect, and that the value of gold is determined not be the quantitv of gold alone, but bv the aggregate of gold and credits pavable in gold. It is not likelv, however, that bimetallists would hold to the view attributed to them in the former statement. The bimetallists might agree to the second statement, but add that if the amount of credit alwavs bears a fixed proportion to the quantitv of gold the value of gold would still depend upon the quantity of gold,. The important point, of course, is that there is no fixed relation between the quantity of gold and the volume of credit. Given a certain minimum reserve ratio required by custom as well as law, the quantity of gold fixes a maximum to the

volume of credit, but it does not fix a precise relation between the two. Below the maximum the volume of credit, and consequently the relation between credit and gold, may fluctuate widely from time to time. Willis points out that the satisfactory stability of the gold base does not hold the credit superstructure in line in this countr;/ because the Federal Reserve Act cut the tie which bound the gold reserve directly to the volume of credit. 22 Taussig states that credit is the main factor affecting the ups and downs of prices According to this view, since the amount of credit based upon a given amount of gold may (and does) vary greatly, there would seem to be but slight connection between gold and prices. Hobson questions the assumption that the causal relation is always from gold to credit and prices, and concludes that gold is not a chief efficient cause of the acceleration of the supply of credit, though it is, or may be, an essential or at least a facilitating condition of its production. 24 Helfferich finds it obvious that there is no direct connection between the money reserves which lie in banks and the alterations in the prices of commodities, wages of labor, etc. 25 Soetbeer pointed out that though in ancient times and in the Middle Ages the actual supply of the precious metals was the most important factor in making prices, now credit draws a line between the

two functions of money - its function as a measure of value and its function as a medium of exchange.

There is strong theoretical support, then, for the view that there is no close relation between gold and the annual or short-term fluctuations in prices. A bit of practical evidence % on this point may also be deduced from the figures for the amount of monetary circulation and bank deposits in the United States per dollar of gold. Table XII gives these figures from 1880 to 1932. It will be seen that in 1932 the monetary circulation plus deposits per dollar of gold was $11.96. This figure could have been increased to at least $14.92, a point which was actually reached in 1920. If money and credit had been expanded to the same point as in 1920, each dollar of gold would have served as the basis of $2.96 (14.92-11.96) of additional money and credit. The gold stock in 1932 was approximately $4 billion, so it could have supported an additional amount of money and credit of $11,500,000,000. According to the quantity theory of money, this amount of money and credit would influence prices materially. Hence, both from theoretical and practical considerations, we conclude that the relation between the quantity of the money metal and the short-term movements in prices is rather slight. In view of the fact that the continuous development of credit facilities tends to make it possible for a given amount of gold to support a larger volume of credit (a tendency illustrated by the figures in Table XII), it is

also evident that there need he no necessary connection between the supply of the money metal and the secular trend of prices. This, together with the information presented earlier in the chapter showing that the use of gold-plus-silver or of silver alone would probably not do much to make the supply of the money metal keep in line with the physical volume of production, indicates that it is unlikely that either a bimetallic standard or a silver standard would be much more stable in value than the gold standard. It seems safe to conclude that if bimetallism

(or silver) possesses any advantage as regards stability of value, that advantage is probably insufficient to overcome the preference for gold as a monetary metal.

I Warren and Pearson, Prices, p. 74. 2Fisher, The Money Illusion, p. 75. 3Lawrence, The Stabilization of Prices, pp. 198-201. Snyder estimates that only $1 in $22 is used for purchasing goods at wholesale.

4lbid.. p. 203.

Shawtrey, The Gold Standard in Theory and Practice, p. 79.

s Grier, Our Silver Coinage, p. 28. lnternational Bimetallism, p. 147. 8 Johns on, Money and. Currency, p. 221.

Bimetallism, p. 120. l°EdgewortH7 w Mscellaneous Applications of the Calculus of Probability," Journal, Royal statistical Society. 1897, Vol. 60, p. 694. "Whereas upon an ideal supposition the instability of the monometallic standard would be reduced by the establishment of the bimetallic standard by some 30 per cent, this reduction is reduped to some 10 per cent when account ip taken of all concrete circumstances, tne fluctuations of credit, etc."

and Pearson, Prices, pp. 104-105. "In order to have the monetary stocks increased 3.15 per cent when only 56 per cent of the production is added to the monetary stock, world production must be 5.6 per cent of world monetary stocks of gold (3.15/0.56 = 5.6). . . For 85 years, there was only one five-year period in which gold production was less than 5.6 per cent of the monetary stocks, that was not followed by a decline in prices in England. In everv five-vear period in which production was more than 5.6 per cent of stocks, a rise in prices followed."

12 See Appendix A, Table V.

iSßratter, The Silver Market, Department of Commerce Trade Information Bulletin No. 682, p. 7. 14 Arendtz, The Way Out of the Depression, p. 86. 15 Warren and Pearson, Prices, p. 140. This statement is enlarged upon by a footnote to Figure 90, which states that "The world’s production of silver follows the production of basic commodities fairly closely, but the relationship is not sufficiently close to make it a stable standard of value."

lo The production of copper has increased as follows (thousands of pounds): 1870 -28,224; 1910 - 1,088,237; 1925 - 1,677,780, The rate of increase was 9£% in 1870-1910 and 3% in 1910-1925. The production of zinc increased from 33,765 short tons in 1882 to 269,184 in 1910 and 590,928 in 1925, or at the rate of 7f% in 1882-1910 and 5 3/8% in 1910-1925. The figures of production are by Snyder.

Mr• Y* S• Leong, found that gold was slightly more stable than silver in the period 1900-1914, but that it was less stable than silver in 1915-1932. He arrived at the following fluctuation rate coefficients and conclusions regarding the stability of value of gold and silver (silver, p." 92) :

IS(continued) 1900-14 1915-32 1900-32 Coefficient for silver 15.1 15.2 15.2 Coefficient for gold 11.1 17.5 15.0 ”It will be seen from these coefficients that when the whole period is considered the purchasing power of gold is practically as variable as that of silver. However, during 1900-14 gold fluctuated somewhat less than silver in terms of purchasing power, and during 1915-32 silver somewhat less than gold.” attempt has been made to compare the stability of prices in China (on a silver basis) with th© stability of prices in England and the United States (on a gold basis) because conditions in China are so different from those in England and the United States that anv conclusion arrived at bv a statistical analysis of the price indexes could be of but little value in determining the relative stability of gold and silver. Warren and Pearson considered the wholesale prices in these countries for 1857-1931 and concluded that prices in the United States have been more erratic than in China, (Prices, p. 148) . A priori, it would be expected that prices in the United States, because of the higher development of credit, transportation and communication, should be more erratic than prices in China,even if both countries had the same monetary system.

ISieong, op. c i t., p. 65*

Theory of Social Economv, p. 447. By "relative goldsupply" is meant the ratio of the effective or actual gold supply to the normal gold supply, which is computed by starting from an initial supply and adding a uniform annual increase of 2.8%. 20warren and Pearson, Prices, pp. 104-105, pp. 76-81. 2J-Macleod, Bimetallism, p. 135.

22Willis 9 “Federal Reserve Policy,” Gold and Monetary Stabilization, Lectures on the Harris Foundation, 1932, p. 119. 23Taussig, The Silver Situation in the United States, p. 76. 2 4 Hobson, Gold, Prices and Wages, p. 45. 25Helff erich, Money, Vol. 11, p. 541. 26soetbeer, op. cit., pp. 203-204.

26 Soetbeer, op. cit., pp. 203-204.

Year Prices in Gold Value of Gold Fluctu- ation 2 Year Prices in Gold Value of Gold Fluctu ation 2 1880 107 93 - 4 1907 97 103 /11 1881 103 97 - 2 1908 88 114 - 3 1882 101 99 - 2 1909 90 111 - 5 1883 99 101 - 8 1910 94 106 - .3 1884 92 109 - 6 1911 97 103 - 6 1885 87 115 - 4 1912 103 97 0 1886 84 119 - 3 1Q13 10.3 97 - 1 1887 82 122 - 4 1914 104 96 -18 1888 85 118 - 3 1915 128 78 -16 1889 87 115 0 1916 161 62 -14 1890 81 115 0 1917 207 48 - 4 1891 87 115 / 7 1918 227 44 0 1892 82 122 0 1919 22*7 44 0 1893 82 122 /10 1920 229 44 /23 1894 76 132 z 1 1921 149 67 z 1 1895 75 133 Z 2 1922 145 68 / 2 1896 74 135 - 2 1923 147 70 ~ 5 1897 75 133 - 5 1924 153 65 - 4 1898 78 128 - 6 1925 164 61 / 1899 82 122 -12 1926 153 65 / 3 1900 91 110 Z 8 1927 148 68 / 1 1901 85 118 Z 1 1928 145 69 Z 3 1902 84 119 0 1929 139 72 /13 1903 84 119 - 1 1930 117 85 /21 1904 85 118 - 3 1931 94 106 /35 1905 87 115 - 7 1932 71 141 1906 93 108 - 5 Warren and Pearson, Prices, p. 75. Annual fluctuations in value.

Table VII Wholesale Prices and. the Value of Gold, in England. (1910-14 = 100)

Period. Total Average Maximum 1880-1889 36 3.6 115 - 93-22 1890-1899 45 4.5 122 - 115 z 7 1900-1909 44 4.4 111 - 110 - 1 1910-1919 62 6.2 106 - 44-62 1920-1929 59 5.9 72 - 44 = 28 1880-1913 135 4.0 1880-1929 246 4.9 1880-1931 302 5.8

Fluctuations in the Value of Gold

Year Index of Wholesale Prices 1 Value Of Gold 1 Peri od Per Cent Change Rate of Change (Per cent) 1789 117 85 1789-1809 46 - 3 1/8 1809 216 46 1809-1849 143 / 2 1/4 1849 89 112 1849-1873 33 - 1 3/4 1873 134 75 1873-1896 80 / 2 5/8 1896 74 135 1896-1920 67 - 4 3/4 1920 229 44

Table VIII Secular Changes in the Value of Gold

Period 1846-50 Annual Average Gold Production Devi- ation Annual Average Silver Production Devi- ation Combined Deviation Actual- 2,225° Normal 1 Actuals 1,568 Normal 1851-55 6,410 2,580 73830 1,780 1,820 - 4Q 7 3,790 1856-60 6,486 2,990 /34O6 1,818 2,100 - 282 / 3,214 1861-65 5,949 3,470 72479 2,212 2,440 - 228 7 2,251 1866-70 6,270 4,020* 72250 2,690 2,830 - 140 / 2,110 1871-75 5,591 4,660 7 931 3,951 3,280 / 671 / 1,602 1876-86 5,543 5,400 / 143 4,923 3,800 71123 7 1,266 1881-85 4,795 6,260 -1465 5,750 4,400 71350 115 1886-90 5,461 7,266 -1799 6,806 5,100 71706 93 1891-95 7,882 8,420 - 538 9,848 5,910 /3938 7 3,400 1896-00 12, A 49 9.756 72699 10,355 6,850 73505 / 6,204 1901-05 15,666 11,310 74296 10,499 7,950 /2549 7 6,845 1906-16 20,975 13.120 77855 12,328 9,220 73108 710,963 1111-15 22,259 15,200 77059 12,654 in,6QQ 71964 7 9,023 1916-26 18,964 17,600 71364 11,540 12,406 - 860 7 504 1921-25 17,454 20,400 -2946 13,897 14,400 - 503 - 3,449 1926-36 Totals: 19,763 23,670 156,110 -3907 47057 15,942 16,700 109,890 - 758 22725 - 4,665 59,494 1851-1890 36,640 16393 25,770 5540 14,441 1891-1930 119,470 30664 84,120 17185 45,053 1851-1930 156,110 47057 109,890 22725 50,494

Table IX Actual and Normal Production of the Precious Metals, 1851-1930 (in thousands of fine ounces)

Period Gold (1) Gold and 1/16 Silver (2) Silver (3) (2; (1, L x 100 (4) 1851-1890 0.448 0.232 0.216 52 1891-1950 0.256 0.221 0.204 80 1851-1930 0.302 0.224 0.206 74

Comparison of Coefficients of Average

Year Index of Wholesale Value of Gold Price of Index Ko. Por Value of Silver 4 1833 70.4 142.00 $1,297 206.2 292.89 1834 65.6 152.40 1.313 208.74 318.20 1835 74.6 134.00 1.308 207.94 278.74 1836 83.5 110.76 1.315 209.06 250.37 1837 82.8 120.77 1.305 207.47 250.56 1838 79.4 125.94 1.304 207.31 261.09 1839 83.5 110.76 to ex? to 210.33 251.89 184 n 71.1 140.64 1.323 210.33 295.82 184-1 70.5 141.84 1.316 209.22 296.76 1842 65.7 152.20 1.303 207.15 315.29 1843 61.8 161.81 1.297 206.20 333.65 1844 62.1 161.03 1.304 207.31 333.83 1845 62.6 159.74 1.298 206.36 329.64 18 z 6 64.8 154.32 1.300 206.67 318.93 1847 64.9 154.08 1.308 207.94 320.40 1848 61.8 161.81 1.304 207.31 335.45 1849 60.1 166.38 1.309 208.10 346.25 1859 62.3 160.51 1.316 209.22 335.82 1851 64.5 155.03 1.337 212.56 329.55 1852 62.5 160.00 1.326 210.81 337.30 1853 66.4 150.60 1.348 214.31 322.75 1854 68.8 145.34 1.348 214.31 311.50 1855 68.9 145.13 1.344 213.67 310.11 1856 68.9 145.13 1*344 213.67 310.11 1857 68.5 145.98 1.353 215.10 314.01 1858 62.0 161.29 1.344 213.67 344.63 1859 61.0 163.93 1.360 216.21 354.44 I860 60,9 164.20 1.352 214.94 352.94 1861 61.3 163.13 1.333 211.92 345.71 1862 71.7 139.47 1.346 213.99 298.45 1863 90.5 110.49 1.345 213.83 236.28 1864 116.0 86.20 1.345 213.83 184.33 1865 132.0 75.75 1 .338 212.71 161.14 1866 116.3 85.98 1.339 212.87 183.03 1867 104.9 95.31 1.328 211.12 201.25 1868 97.7 102.35 1.326 210.81 215.77 1869 93.5 106.95 1.325 210.65 225.29 1876 86.7 115.34 1.328 211.12 243.50 1871 82.8 120.77 1.326 210.81 254.60 1872 84.5 118.34 1.322 210.17 248.72 1873 83.7 119.47 1.298 206.36 246.54 1874 t on c 81.0 123.45 1.279 203.34 251.03 1875 i o r# 77.7 128.70 1.242 197.45 254.11 -j 72.0 138.88 1.164 185.05 257.01 1877 t o r/ o 67.5 148.14 1.202 191.09 283.09 lo 78 61.7 162.07 1.154 183.46 297.34 io zy 1 0 O A 58.8 170.07 1.124 178.69 303.87 loot) 65.1 153.61 1.145 182.03 279.61 o Q d (D > st st 02 02 02 sf tO VO VC sf IQ CT. CO O G rd sf G KJ G CO sf HG G 02 02 2> O rd in c rd O St CO O sf rd tO CO st in z> to in co rd to VC rd d 02 G 02 st K O; O si 0KrdnO5VO£> 02 CO in O rd to 05 02 vc G n rd a to co c sf tn o co G O rd KJ KJ 02 n d > •H CO O'. z> 02 to 02 02 O 02 rd G 02 IO G G CO Z> 02 02 02 02 O VC 02 CO m 02 LG G 02 CO 02 IG) 02 VO to 02 02 o to rd rd 02 02 to 02 VC tO O O 05 02 rd rd in rd 02 sf Sf rd rd sf in rd r-t rd sf K rd LG VC to rd rd 02 02 05 o 02 to 5 1 H O O CO tO rd rd 02 rd s VC to 02 sf rd rd 00 KJ rd KJ 02 sf O c 02 O o o LC G in G CO CO rd * o d o > VO 05 oy # rd CO to VC rd CO KJ rd sr VO sf si sr VO 05 O- 02 O O sf O tn 05 o st' 02 O O CO O tO tn st C 02 to to o o' to VC sf LC 02 C VC 05 co o vc ? CO O rd rd 02 iG VO O CO 02 VC VO 02 G G cc G o- co CO Sf vo 02 st r- o o VO rd 02 rd 02 LO X 0) ■d a Id •H CO P c fxj a o rd O co J VC rd O. VC CO m in LC G s| CO st rd VC rd LG co st O tO 02 O rd rd rd CO O O- O VC G to G tn co st G G G to co VC CO 02 VC 05 0 tn LG 02 05 C CO CO 0- tn co O VC rd 02 a co co O c 02 sf ♦ tn V£ CO 05 to 02 02 G rd rd CO rd rd O rd O o G to 0- tn co VC rtf O £ •H •P £} ch O o o •H Pl P o t> •H CO 02 KJ vc 2 rd G o LO VO o LG 05 05 05 z> 05 O sf 05 LG to O' VO sT O CC co o rd O z> co co C" LG' to VC sr tn vO VO Z> vo st O VO c 05 tn 02 O O 02 VC VC VO 05 in co to 02 si lO LC 05 in o rd VC VO 02 LG O rd 05 VC tO 02 sf tO vo lG' in n tn in rd VO LG to 05 O tO rd vc lg tn VC co VC tn 05 CO 02 O VC sf in sf O 02 KJ tn o co st n O-- O O tn Sf to o G 02 vC’ rd in VO co tn VC to IC co KJ O o (D 2 ■d rd o co oo o 02 02 O CO CO 2> 02 vo UO o 02 02 tO 02 02 O' rd 02 Z> VO <n 02 o rd tn G CO O' LG to CO CO O O' rd 0- co to St er c m rd tn 02 co i> in to co to 05 C5 c co 02 vc si z> VO c vo in CG-WCOOOOHHrd V0 VO rd rd KJ 02 O O- sf sr CO G VO O 02 co in k: 02 O- vo CO X © cd ch o IO in rd LG rd sf n VC VO £> CO o sf st 05 o £ rd rd co o 02 st O 02 LG 02 st o; VC o 02 rd K CO rd o co id G VO 5 Z> VO rd VC VC VC rd rd rd to CO tn lg o- sf 1 rd 02 sf sf n st dr to VC to sf st si rd rd rd VO tn rd CO 02 sf Z> vc 02 to to O O' rd rd VO O o o o sf C 02 KJ o o rd rd in rd d ch O co 0 o •H d Ph si' VO to VC o st st st 02 CO 02 sf 05 co n VO tn 02 rd tO G VC I ■ CO 02 O VC st 05 rd 00 rd in tn tn KJ VO sf VO L- VC rd in c st o- tn to 0 nd a Id Wholesale sj vc VO sf VO VO o to VC tn VC LG) vo in lG O to VO LG LG LG 02 tO m n sj CO st vo st VO sf co st 02 in VC tG tO in 00 LG 05 LG 05 tn O VC rd vc in 02 vc vc o sf VO 05 VO 05 CO 05 VO vo VO in co rd rd tO rd co to sf LG G VO G vo O co G KJ o o n C G rd G VO G VO CO d d 0) 5 co. 02 CC cc to cC co sf CC CO LO CO CO vo CC' 00 5 co rd co co CO 05 CC co G CO s CO 02 to 05 q-5 co co sf &■ co tn 05 co rd VO G co G CO rd CC) 05 co 05 05 co O O G rd o g 02 O G rd K, a a ।— i St O 05 rd tn o o VO H O CO c c O 05 05 c C- c 05 rd rd 05 02 05 rd kj st tn 05 O G rd rd rd L0 05 G rd co 05 rd o 05 02 O rd rd 02 02 02 G O' rd rd to 02 G rd sf 02 G rd tn 02 o VC 02 G 02 G co 02 G rd G O 02 KJ G G Table X (continued) •— ,, — X. . Year Fluctuations Year Fluctuations Year Fluctuations in the Value of in the Value of in the Value of Gold Silver Gold. Silver Gold Silver 1833 /10.40 /25.31 1866 / 9.33 /18.22 1898 -14.61 -22.82 1834 -18.40 -39.46 1867 / 7.04 /14.52 1899 -13.32 / 5.12 1835 -14.24 -28.37 1868 / 4.60 / 9.52 1900 / 2.58 - 4.36 1836 / 1.01 / 0.19 1869 / 8.39 /18.21 1901 -11.05 -28.83 1837 / 5.17 /10.53 1870 / 5.43 /11.10 1902 - 2.00 / 2.32 1838 - 6.18 - 9.20 1871 - 2.43 - 5.88 1903 - 0.28 / 9.35 1830 /20.88 /43.93 1872 / 1.13 - 2.18 1904 / 1.11 / 7.16 1840 / 1.20 / 0.94 1873 / 3.98 / 4.49 1905 / 4.58 /12.82 1841 /10.36 /18.53 1874 / 5.25 / 3.08 1906 - 8.44 -12.75 1842 / 9.61 /18.36 1875 /10.18 / 2.90 1907 / 5.61 -26.20 1843 - 0.78 / 0.18 1876 / 9.26 /26.08 1908 -11.05 -12.92 1844 - 1.29 - 4.19 1877 /13.93 /14.25 1909 - 5.89 -13.15 1845 - 5.42 -10.71 1878 / 8.00 / 6.53 1910 /12.04 /22.89 1846 - 0.24 / 1.47 1879 -16.46 -24.26 1911 - 9.36 / 9.46 1847 / 7.73 /lo.05 1880 / 1.67 - 0.17 1912 - 1.46 - 3.70 1848 / 4.57 /10.80 1881 - 4.00 - 6.22 1913 / 3.58 -18.56 1849 - 5.87 -10.43 1882 / 3.51 - 0,30 1914 - 2.97 - 0.52 1850 - 5.48 - 6.27 1883 /10.49 /19.02 1915 -26.91 / 8.84 1851 / 4.97 / 7.75 1884 /ll.40 / 7.19 1916 -31.86 - 6.46 1852 - 9.40 -14,55 1885 / 1.89 -16.67 1917 - 8.94 / 5.07 1853 - 5.26 -11,25 1886 - 1.27 - 6.50 1918 - 4.01 /17.21 1854 _ o.21 - 1.39 1887 - 3.08 -15*62 1919 - 7.39 - 4.78 1855 o.OO 0.00 1888 0.00 - 1.39 1920 /37.70 - 7.47 1856 / 0.85 / 3.90 1889 / 3.71 /36.94 1921 / 0.95 - 7.16 1857 /15.31 /30.62 1890 / 1.28 -14,41 1922 - 9.60 -19.57 1858 / 2.64 / 9.81 1891 /12.36 -16.21 1923 / 8.12 /16.34 1859 / o.27 - 1.50 1892 - 4.31 -33,06 1924 - 5.31 -12.75 1860 _ 1.07 - 7.23 1893 /21.51 -21.46 1925 / 3.38 - 7.98 1861 -23.66 -47.26 1894 - 3*86 / 2.30 1926 / 4.82 - 4.86 1862 -28.98 -62.17 1895 /10.14 /18.06 1927 - 2.47 / 0.21 1863 -24.29 -51.95 1896 - 0.46 -25.06 1928 / 1.27 - 7.05 1864 -10.45 -23.19 1897 - 8.41 -12.65 1929 /12.25 -17.02 1865 /iq.23 /21.89 Period Maximum Fluctuations Average Fluctuations in the Value of- In the Value of- Gold Silver Gold Silver Points : Points % Points % Points % 1833-1842 32.64 22 .98 67 .64 23. 09 9. 74 6.85 19.48 6.65 1843-1852 12.30 7 .60 27 .32 8. 18 4, 57 2.82 8.14 2.44 1853-1862 24.73 16 .42 55 .99 17. 34 7. 82 5.19 17.51 5.42 1863-1872 45.02 40 .74 93 .46 39. 55 8. 33 7.53 17.67 7.47 1873-1882 50.60 42 .35 57 .33 23. 25 7. 62 6.38 8.83 3.58 1883-1892 36.78 23 .76 40 .18 14. 72 4, 98 3.22 16.70 6.12 1893-1902 45.27 24 .17 89 .70 38. 62 8. 79 4.69 14.30 6.16 1903-1912 25.74 15 .34 65 .02 44. 89 5. 98 3.56 13.04 9.00 1913-1922 82.08 57 .29 24 .66 17. 89 13. 39 9.35 9.56 6.94 1923-1930 22.06 19 .82 49 .45 47. 37 5. 37 4.82 9.46 9.06 Table X (continued) Period Total Maximum Fluctu- Total Average Fluctu- ations in the Value of- 6 ations in the Value of- 7 Gold Silver Gold Silver Per Cent Per Cent Per Cent Per Cent 1833-1872 87,74 88.16 22.39 21.98 1873-1912 105.62 121.48 17.85 24.86 1913-1930 77.11 65.26 14.17 16.00 1833-1930 270.47 274.90 54.41 62.84

Table X The Value of Gold and Silver, 1833-1930

Year Production (Pine Ounces-OOO omitted' Period Rate of Gold Increase Silver Gold Silver 1870 6,270 43,051 1870-1890 Decrease 5 1/2/ 1890 5,749 126,095 1870-1910 3 1/3/ 4 1/8 1900 12,315 173,591 1890-1929 3 1/4 1 7/8 1910 22,022 221,715 1900-1929 1 5/8 1 1/2 1929 19,500 260,970 1930 20,836 248,708 , Director of the Mint 1910-1929 , 1931. Decrease 7/8

Table XI Rate of Increase in the Production of Gold and Silver For Selected Periods

Year Monetary Circulation Plus Year Monetary Circulation Plas Deposits Per Dollar of Gold Deposits Per Dollar of Gold 1880 $ 8.82 1907 $10.86 1881 7.64 1908 9.80 1882 7.76 1909 10.51 1883 7.47 1910 11.26 1884 7.38 1911 10.93 1885 7.14 1912 11.19 1886 7.16 1 1913 11.17 1887 7.06 1914 11.62 1888 6.78 1915 11.22 1889 7.58 1916 10.70 1890 7.88 1917 9.35 1891 8.80 1918 10.18 1892 9.44 1919 10.05 1893 10.41 1920 14.92 1994 10.07 1921 12.12 1895 10.26 1922 10.99 1896 10.75 1923 11.06 1897 9.68 1924 10.64 1898 8.73 1925 11.80 1899 9.01 1926 12.08 1900 9.01 1927 12.19 1901 9.48 1928 14,13 1902 9.54 1929 13.39 1903 9.57 1930 12.81 1904 9,45 1931 11.16 1905 - 10.29 1932 11.96 1906 10.16 I War a ’en and Pearson, Prices, p. 108 >

Table XII The Relation of in Circulation and Bank Deposits to Monetary Gold in the United States, 1880-1932. 1

CHAPTER VII THE "SCARCITY" OF GOLD

One of the main reasons why the increased use of silver for monetary purposes is suggested is the "belief that there is a scarcity of gold - that there is not a sufficient quantity of gold available for the monetary needs of the world. This ’’scarcity” of gold is said to consist not in anv absolute diminution of the stock of monetarv gold, for that keeps increasing from vear to vear, but in a relative diminution. By ’’relative diminution” is meant a decline in the proportion of gold to the volume of transactions which it is called upon to effect. According to Warren and Pearson, the true measure of the adequacy of the stock of monetarv gold is whether there is enough to maintain the price level to societv is most nearly adjusted. This statement is rather indefinite.

There might, he differences of opinion as tn whether the monetary stock was sufficient to maintain the required price level, so the statement is amplified bv saving that in order to maintain a stable price level the increase in the monetarv stock of gold must be at the same rate as general economic development. It is said that for seventv-five vears before the World War, the world monetarv stocks of gold had to increase at the same rate as the world physical volume of production in order to maintain stable commodity prices in England. "If gold stocks increased more rapidlv than other things, prices rose; if thev increased less rapidlv, prices fell. An exception occurred during an<i after the ’World War, when most countries discontinued the gold standard. w $

'The theory as to the quantify of gold necessary to keep the general level of prices stable is due to Professor Cassel, He states that for the general level of prices to remain steady it is necessary that the gold supply shall increase by 2.8 per cent annually, “and as the average annual loss of gold may be put at 0.2 per cent of the supply, an annual production of 3 per cent of the supply at any time is a condition for the maintenance of the general price level unchanged, as far as the gold-supplv is concerned.” 4 This conclusion is drawn from the period 1850-1010, and the analysis bv which it is arrived

at is as follows:

We find that the actual gold-supply for 1850-1910 rose from 10,000,000,000 to 52,000,000,000 marks, or was multiplied 5.2 times in sixtv vears. This rise means an average annual rise of 2.79 per cent, or, in round numbers, 2.8 per cent. The general level of prices in 1910 was, taken practicallv, the same as in 1850. We mav conclude from this that + he increase of the gold-supply from 1850-1910 was necessarv and sufficient, in view of the economic development, to keep prices on the same level in 1910 as thev had been in 1850. This increase meant, as we found above, an annual increase during the whole period of, roundlv, 2.8 per cent. Now, if the world’s goldsupplv had grown bv exactly 2.8 per cent during each vear of the period, it is clear that no one could have -thought of ascribing the fluctuations of the general level of prices to fluctuations of the gold-supply. Such a uniform increase of the gold-supplv, leaving the general level of prices unchanged at the end of a certain period, we mav call a normal increase for the period in question, and the gold-supply at anv particular point of time in the period, assuming a normal increase, may be called the normal gold-supplv. It follows from what we have said that, as far as the changes in the general level of prices in the period 1850-1910 mav be generally traced to changes in the gold-supplv, thev mav be ascribed entirely to the divergences of the actual gold-supplv from the normal. 5

Other economists have arrived at approximately the same figure by the use of various methods. Professor Lehfeldt concludes that the general rate of progress is not very different from 3 per cent, and that this would be the rate at which the stock of gold would to increase in order to keep pace with the volume of business. 5 Warren and Pearson find that the world’s gold supplv would probably have to increase about 3.15 per cent per vear for the future tn sustain pre-war prices. 7

Several criticisms mav be made of the method of analvsis used by Professor Cassel and his followers. Professor Phinney points out that the method used by Cassel is based upon three assumptions: (1) that it is possible to select two points in * time,separated by a period of some at which prices stood at the same level; (2) that it is possible to determine what are ’’normal” quantities of gold for the years in which prices stood at the same level; and (3) that through-out the entire period studied the demand for gold was increasing at a p constant rate. After pointing out a number of difficulties involved in these assumptions., Professor Phinney concludes that "it is hard to believe that the Cassel method of comput- Q ing the normal rate of increase of gold has much

It should also be pointed out that the usefulness of the Cassel estimate depends upon a rather strict-interpretation of the quantity theory of money. lo If prices depend solely upon the quantity of money, and the quantity of money depends directly upon the quantity of gold, then changes in prices can be explained in terms of the relative scarcity or abundance of gold. If this strict relation is not true, it will only be possible to say that "as far as the changes in the general level of prices may be generally traced to changes in the gold- supply, these may be ascribed entirely to the divergence of the actual gold-supply from the normal," without saying how much of the change in prices is due to gold and how much is due to other factors. It may well be that the extent to which changes in the general level of prices may be traced to changes in the gold supply is very small - in fact, there is considerable support for this view, as was indicated at the end of Chapter VI. Further support for this view is derived from Professor Phinney's conclusion regarding his analysis of bank statistics: "Such data as are available show that little or no relation existed between the rate of growth of the gold supply and the rate of growth of either bank reserves or bank notes and deposits." ll

A further assumption of Cassel's method, is that the stock of gold, in 1910 was being utilized, to its fullest extent. If the gold supply in 1910 could have supported a higher level of prices than actually existed, then Cassel's estimate of 3 per cent obviously overstates the rate of increase necessary to maintain prices stable during this period. The same would be true if the gold stock in 1850 was not adequate to support the price level then existing. Now according to the Sauerbeck and Jevons index numbers used by Cassel, 12 the trend of prices was down in 1850 and up in 1910. This indicates that very likely the gold supply in 1850 was not sufficient to support the price level then existing, and that the supply in 1910 was more than necessary to sustain the level of prices in that year.

Consequently, 3 per cent is probably a higher rate of increase than would actually have been necessary to maintain prices stable under the conditions of the period if the stock of gold had been exactly adequate, neither more nor less than necessary to maintain the price level, in 1850 and 1910.

It should be mentioned that Professor Cassel carefully points out the limitations in the application of his 3 per cent estimate. He states that his calculations, “taken strictly, only apply to the period 1850-1910, and cannot claim to be valid for all future time.’’ 14 The fact that during the period 1850-1910 a number of the important commercial nations of the world changed from a silver or bimetallic standard to gold monometallism makes Cassel’s 3 per cent estimate of doubtful significance for the future. Part of the gold supply of this period obviously must have been used to replace silver in those countries abandoning the silver or bimetallic standard, and so the 3 per cent average annual increase which took place in the world’s gold stock during this period must be greater than would have been required to keep prices stable if all the nations which were on the gold standard in 1910 had been on that standard in 1850. In other words, this period was one in which the amount of gold required was not merely the amount necessary to keep pace with the increase in the volume of

business, but a larger amount because of the gold needed by countries adopting the gold standard for the first time. Consequently, if both gold stocks and the volume of business increased at 3 per cent per annum during this period in which unusual demands for gold occurred, and the result of the two movements was the same level of prices in 1910 as in 1850, it would seem logical that, perhaps because of the introduction of methods of making a given quantity of gold serve as the basis of a greater volume of transactions, the rate of increase in the gold stock required to keep prices stable was somewhat less than the rate of increase in the volume of business.

Cassel also points out that his theorv is not intended to explain movements of prices other than the secular trend. ’’The general price-level, is also subject to annual variations, but these have no connection with the gold-supplv. The relative gold-supplv mainly controls the secular fluctuations of the general price-level, but it has no influence on their immediate movements.Cassel’s theory, then, is not intended to explain the sharp drops in price which occur during periods of depression. nevertheless, attempts are sometimes made to explain bv this theorv the depression which started in 1 Q 29. It is said that ’’the initial force that started the present world depression was given by the failure of the gold standard to keep pace with the normal production of goods and services in an advancing economic society.

If the theorv that a regular rate of increase in the stock of gold is necessarv to keep the trend of prices stable is to be used to explain the share fall in the price level during periods of depression, special reasoning must be used to .justify this extension of the theory, Phis is done bv saving that a period of low production has a cumulative effect in reducing prices. x ? It is said that for a time prices may be kept stable in spite of the fact that the supplv of gold is not increasing at as rapid a rate as the volume of business. Then when the break in nrices does come, it will be severe, due to the accumulation of the annual deficiencies in the supplv of gold. According to this view, since other factors than the quantity of gold can keep prices stable, the relation between prices and gold over short periods of time is apparently not verv close. If this is so, however, there need not be any close relation during a few years of a depression between the fall in prices and the shortage in the supply of gold. Even if we overlook this inconsistency in the above view, it still appears that only a small decline in prices can be accounted for on this basis. Let us assume that the volume of business increases at 3 per cent per year, a figure commonlv accepted, that for a period of ten vears prices can be kept stable in spite of the fact that the supplv of gold is not increasing at 3 per cent, and that the price index at the end of the period depends entirely upon the relation between the volume

of business and the stock of gold. Then, as the figures below indicate, if the gold supply increased at an annual rate of 2 per cent, the deficiency in the stock of gold could account for a fall in prices onlv to the extent of 9.3 per cent. If the gold supplv increased at an annual rate of onlv 1 per cent, not more than 17.79 per cent of a drop in prices could be explained bv the failure of the gold stock to keep pace with the volume

Year Gold. Stock Increasing at- Volume of Business 2% 1/ Increasing at 3% 0 100.0 100.0 100.0 1 102.0 101.0 103.0 2 104.0 102.0 106.0 3 106.1 103.0 109.3 4 108.2 104.1 112.6 5 110.4 105.1 115.9 6 112.6 106.2 ’ 119.4 7 114.Q 107.2 123.0 8 117.2 108.3 126.7 9 119.5 109.4 130.5 10 121.9 110.5 134.4 Index of prices at end of 10th vear. Gold stock increasing at 2%= (121.9/134.41 x ioo : 90.7 Gold stock increasing at (110.5/134.4) x 100 = 82.21

of business. Bven according to the view expressed above, then, a scarcitv of gold cannot explain more than a small part of the fall in prices during a period of depression. The theory that the gold supply must increase at the same rate as the volume of business in order to maintain stable prices in itself suggests onlv that a scarcitv of gold might result in a relative deflation (perhaps calling for a decline in prices of 1 per cent a year), which could never have such disastrous results as those of the depression which started in 1929. 18

In spite of the fact that Cassel savs that the deviations of the actual gold supply from the normal can explain only the secular trend of prices, there are some who say that the fall in prices beginning in 1929 was the result of a scarcity of gold. It is said to be probable that had there been no war the world price level would have ceased to rise and probably have become substantially stationary in the decade 1915-1925, and would have been somewhat lower in 1928 than in 1913. Consequently, it is held that the gold supply in 1928 was not adequate to maintain a price level 40 to 45 per cent above At first glance this appears to be a correct analvsis of the situation. According to Warren and Pearon the world’s gold stock increased from 372 million ounces in 1910 to 550 million ounces in 1929, or at the rate of 2y per This indicates a deficiency of 0.3 of one per cent annually from Cassel’s estimate of 2.8 per cent, if that figure can be applied without reservation to the period since 1910. From this it might be argued that there was a scarci tv of gold in 1929. But this argument overlooks the fact that from 1913 to 1929 the world’s physical volume of production did not increase as rapidly as in the period 1850-1910. According to Cassel, Warren and Pearson, and other exponents of this theory, all that is required to keep the secular trend of prices stable is that the monetary stocks of gold increase at the same rate as the physical volume of production. If the rate of increase is smaller for the gold'supply than for the volume of production, the secular trend of prices will be downward: if it is greater, the secular trend will be upward. Over the period 1850 to 1910 the world’s stock of monetary gold and the world’s physical volume of production increased at the same rate, and this is said to explain why the price level in 1910 was the same as in 1850. From 1900 to 1913 the physical volume of production increased at the rate of 3 1/8 per cent, the world’s stock of annually, monetary gold increased at 3-g- per cent/ and the index number of wholesale prices changed from 94 to 117 in the United States and from 102 to 116 in England. (The figures for wholesale prices are by Warren and Pearson, with 1880-1914 = 100. See Table XIII on the next page.) Thus an excess of 3/8 of one per cent in the rate of increase of the world’s stock of monetary gold in this thirteen year period accounted for an increase in prices of 14/ in England and 25/ in the United States. From 1913 to 1929 the physical volume of production increased at the rate of per cent while the world’s monetary gold stock increased at 2y per cent annually. This excess of 3/4 of one per cent for 16 years in the rate of increase in the world’s stock of gold could account for an increase in

prices of at least 15% in England and 27% in the United States, In other words, the difference in the rate of increase in gold stocks and physical production from 1913 to 1929 was sufficient to account for a price level of from 115 to 120 in 1929, considering the price level of 1913 as 100, with other things remaining the same. One thing did not remain the same, however, and that was the efficiency in utilizing gold.

The increased efficiency in the use of gold is another reason for doubting that a scarcity of gold initiated the fall in prices and caused the depression. During the World War gold was withdrawn from circulation and concentrated in central banks and government treasuries. In 1912 the amount of gold

in circulation in the world was over $3 billion; by 1924 only $lO7 million remained in circulation, in spite of the fact that the total monetary gold stock had increased 50 per cent. 22 Since the adequacy of the monetary gold stock depends not only upon its quantity but also upon the efficiency with which it is used, it stands to reason that the rate of increase in gold reserves held by central banks and governments is a more significant measure than the rate of increase in the total monetary gold stock in considering the question of the scarcity of gold. Board The figures given by the Federal Reserve/on the gold reserves of central banks and governments of 47 countries show an increase from $4,857 million in 1913 to $10,305 million in which shows a rate of increase of 4-J per cent. annually • This figure, which is particularly significant in view of the fact that gold reserves in central banks are much more important in their influence upon the price level than gold in circulation, indicates that since 1913 the effective gold stock of the world has increased at a higher rate than that at which Cassel considered necessary to maintain stable prices from 1850 to 1910. Cassel estimates that the withdrawal of gold from circulation and its concentration in central banks would permit an increase in gold prices of 24 per cent. 23 An additional increase in gold reserves was due to the fact that a considerable portion of the gold which had before the war been utilized in the form of jewelry and plate was turned over to central banks under the stimulus of war patriotism. Furthermore, a

number of central banks in Europe were permitted to hold foreign exchange as part, of their reserve after the war, and this effected a gold savins which would permit an additional increase in gold trices of about 18 per cent. These three changes combined are amply sufficient to account for a world price level 40 to 45 per cent abova al so , the increase in gold stocks at a faster rate than the physical volume of production from 1013 to 1Q29 together with the concentration of gold stocks in central banks is sufficient to account for a sold price level of between 14Q and 150 in 1029 ( 115 x 1.24 = 142.6; 120 x 1.24 - 148.8), without talcing into account the greater* economy of gold through the use of foreign exchange as part of the reserves of central banks. There seems no reason, then, for believing that there was a scarcity of gold in 1920 as far as the monetarv needs of the world were concerned.

Even if it could be shown that the supplv of gold in 1929 was insufficient to support a price level of to 150, that ’’scarcity” of gold would be due not to the failure of the gold supply to keep pace with the volume of production but to the abnormal rise in prices during the war. Prom 1910-1929 the gold supplv kept pace fairlv well with the volume of production, so from that standpoint it would be incorrect to speak of a

scarcitv of gold. If we can speak at all of a scarcity of gold in it is because the price level was about 140 instead of 100. and in that case the ’’scarcity” of gold is to be attributed to the factors which brought about the high price level and not to any factor on the side of the gold supply.

It may be argued, even when it is shown that there was no scarcity of gold in l$2 q as far as the monetary needs of the world were concerned, that the maldistribution of gold has resulted in a. scarcity of gold in certain countries, and that this is responsible for the fall in prices. Professor Hansen finds +he explanation of the drastic decline in world prices since I Q 2B to be two-fold:

First, the progressive credit restrictions imposed upon England, Germany, and indeed all the countries of the world by reason of the abnormal absorption of gold bv the United States and France? second, the progressive change that was taking place in the monetary systems of Europe from the gold exchange to the gold bullion and gold specie standards. 25

The second, point has already been answered. It is not necessary to consider the greater economy of gold effected bv the use of foreign exchange as part of the reserve of central banks in order to explain a urice level of 140 to 150 in 192 Q. European countries were on a gold specie standard before the war. Considering the rate of increase in the gold stocks and physical production, and the concentration of gold stocks in central banks, a price level of to 150 would have been possible even if all European countries had returned to a gold bullion standard.

On the fir/t point mentioned bv Dr. Hansen there seems to be a divergence of opinion. Professor C. 0. Hardv states that with regard to the maldistribution of gold it is almost sufficient to point to the fact that prior to the crisis of 1929 there was no appearance of a shortage of bank credit in anv countrv but England. 27 On the other hand, the Macmillan ¥ Committee on Finance and Industrv reported that the present maldistribution of gold is very generallv held to be unsatisfactorv; a maldistribution to which the Committee attributed a large measure of responsibilitv for the he aw fall in prices in recent Let us consider the facts rather than the opinions on this issue.

Board The Federal Reserve/reports on the gold reserves of central "banks and governments of 47 countries show that the United States held 26.6% of the gold reserves in 1913 and 37.8% in 1929. .At the same time the gold reserves of France increased from 14 to 15.8%, and those of England from 3.4 to 6.9 per cent. Table XIV shows how the distribution of gold reserves changed between 1913 and 1929. The mere fact that the proportion of the gold reserves held bv the United States and France has increased does not prove that there is a maldistribution of gold, however, for the distribution of wealth and production of commodities was also different in 1929 from what it was in 1913. The question mav well be asked, ’’What constitutes a fair proportion

of the total gold reserves to be held by each country?” It may be that a faster rate of progress in this country than elsewhere requires that the proportion of the total gold reserves held by the United States should increase. At all events, that was what happened in 1900-1913 as well as between 1913 and 1929. In 1913-1929, according to the figures of Warren and Pearson, the physical volume of production increased at an annual rate of 2 3/8 per cent in the United States and at 2 1/8 per cent for

the world. This would seem to justify the holding of a larger proportion of the world’s gold by the United States in 1929 than in 1913. According to Professor Kemmerer, the best evidence we have seems to show that in a normal year the United States do about 35/ of the total business done in advanced countries of the world, 29 so it might be argued that this country has about its fair share of the total gold reserves. In any case, it is not easy to prove that there is maldistribution of gold.

The figures for the rate of increase in gold reserves from 1913 to 1929 offer some but not much support for the belief that other countries have suffered because of the unusual accumulation of gold in the United States and Prance. Table XV shows the rate of increase in the gold reserves of important countries in 1900-1913 and 1913-1929. The figures show that in the majority of these countries the rate of increase in the gold reserves was higher in the period 1913-1929 than in 1900- 1913. The United States and the Netherlands had approximately, the same rate of increase (slightly over 7/) in both periods; Germany, Italy and Sweden had a slightly lower rate of increase in the more recent period. In the period 1913-1929 the rate of increase in gold reserves was for Germany and 9 1/3 per cent for England, which countries are said to have been the chief sufferers from the concentration of gold in the United States and Prance. Table XIV shows that between 1913 and 1929 the reserves of Austria-Hungary, Canada and Russia declined;

the reserves of Argentina, India, Italy, South Africa and Yugoslavia, increased at less than 4% annually; and the reserves of 14 other important countries increased at more than 4/ annually. The gold reserves of 23 other countries holding about 5 per cent of the total reserves increased at a rate of annually. In brief, the figures of the rate of increase in the gold reserves of central banks from 1913 to 1929 furnish very little support for the theory that credit restrictions were imposed upon England, Germany and all the countries of the world by reason of the abnormal absorption of gold by the United States and France. Furthermore, if prices have fallen in some countries due to a

scarcity of gold they should have risen in others due to an excess of gold, since there is no scarcity of gold for the world as a whole.

The above analysis disposes of the argument that there is a scarcity of gold, and therefore of the argument that the increased monetary use of silver is necessary in order to % compensate for a deficiency in the supply of gold. It is also worth pointing out that if the countries of the world had been on a bimetallic (or symmetallic) rather than on a gold basis before the war and returned to a double standard after the war, they still would not have been able to avoid the problems which are said to have resulted from the’ use of the gold standard ('‘scarcity” and "maldistribution” of the money metal). There is no reason for believing that the proportion of the world’s metallic reserves held by various nations would have been different because of the use of a double standard, so that what is now called a maldistribution of gold would 30 instead have been a maldistribution of gold-plus-silver, if the leading countries of the world had been on a double standard. Furthermore, as was pointed out in the preceding chapter, the inclusion of silver as a monetary metal would not have done much to make the supply of the money metal keep in line with the physical volume of production. From 1900 to 1929 the rate of increase in the production of silver was about the same as the rate of increase in the production of

so if we can speak of a scarcity of gold in 1929 it would also have been possible to speak of a scarcity of gold-plus-silver if the world had been on a double standard from 1900 to 1 Q 29»

-‘■Warren and Pearson, Prices, pp. 114-115, "World monetary stocks of gold in 1929 were 52 per cent above the five-year pre-war average. If the world physical volume of production of commodities had continued to increase at the pre-war rate, it would have been 69 per cent above the pre-war average, Fortunately for the price level, the world physical volume of production of all commodities was only 40 per cent above pre-war. The normal expectancy was, therefore, that prices in 1929 would have been about 9 per cent above pre-war (1.52 •* 1.40 = 1.09). The years of low demand for gold resulted in business in the United States becoming adjusted to a price level about 40 to 50 per cent above pre-war. Prices in 1929 averaged 139. The amount of gold necessary to sustain that price level, with all the world back on a gold basis and the volume of production of 1929 was about double pre-war (1.39x1.40 - 1,95), p 0 sustain this price level would have required about 28 per cent more gold stocks than existed in 1929 (1.95 4 1.52 = 1.28). This would have required 704 million ounces of world monetary stocks of gold instead of the 550 million ounces which have been accumulated in all history. The attempt of all the gold-using world to return to a gold basis brought prices back to their normal relationshir to gnld." 2 lbid., p. 76.

3lbid., p. 80. 4Qassel, The Theory of Social Economy, p. 451. This overlooks the use of gold for non-monetarv purposes. The theory is generally understood to mean that gold production must be such that the amount remaining after the non-monetary demand is satisfied is equal to 3 per cent of the monetary gold stock.

s Cassel, op. cit., p. 442, p. 444, p. 445. sLehfeldt, Gold Prices and the Witwatersrand, p. 32. r l Warren and Pearson, op. cit., p. 82.

8 Phinney, ’‘Gold Production and the Price Level,” Quarterly Journal of Economics, 1933, p. 647. This is an excellent analysis of Cassel’s method. This article is so easily available that it has not been considered necessary to review the article here. Instead, an attempt is made to point out other objections to Cassel’s theory. 9.lbid., p. 678. criticism is implied to a certain extent in Phinney's statement that one of the sub-assumptions of the third assumption is that the rate of growth of the entire circulating medium varied as did the rate of growth of the gold supply. Ibid., p. 659.

p. 667, 12 Cassel, op, cit., p, 441,

lsThis criticism differs from Phinney’s criticism of what he calls the second assumption. Phinney points out that the "normal” amount of gold for a given year can be determined only if we know the lag between variations in gold production and changes in price, and that the lag can be determined only if we know the normal rate of increase. op. cit., p. 451.

Ibid. , p. 447, The Wav Out of the Depression, p. 40,

and Pearson, op. cit., p. 99.

yx Haberler, "Money and the Business.Cvcle,” Gold and Monetarv Stabilization, Lectures on the Harris Foundation, 1932, p. 55.

Economic Stabilization in an Unstable World, p. 102. and Pearson, Prices, p. 115. <31 563/340 = 1.66 approximately. (1 + 0.025) 20 z 1.6386. It has already been suggested above that a rate of increase in the gold stock somewhat less than the rate of increase in the volume of business might be sufficient to keep the trend of prices stable during a period in which there were no unusual demands for gold in order to introduce a gold standard. It is apparent that the demands for gold in ordei' to introduce a gold standard for the first time must have been considerably less during 1910-1929 than from 1850-1910, so the fact that the gold stock increased at less than 2.8 per cent annually from 1910-1930 does not necessarily prove that there was a scarcity of gold in 1930.

22Voung, European Currency and Finance, Vol. I, p. 68. 23Hansen, op. cit., p. 102.

, p. 102. 25Warren and Pearson say that the world’s gold stock in 1 Q 29 was sufficient to support a price level of onlv 109 (Supra, p. 113, Note 1). If we accept this figure and then take into account the effect of the concentration of gold in central banks, we find that a price level of 135 could have been supported bv the gold stock in 1929. When we take into account the other economies in the use of gold, the price level of 139 in 192 q does not seem too high for the gold stock.

2sHansen, op. cit., p. 103.

2'Hardv, "Gold and Credit,” Annals, American Academv of Political and Social Science, Vol. 165, p. 201. PSReport, Macmillan Committee, p. 67.

29 Testimony before the House Committee on Coinage, U.S. Cong. Hearing, 72nd, Ist session, Vol. 389, p. 269,

' 'Bratter, Should We Turn to Silver?, p. 13. 51 Supra, p. 107.

Year Index Humber of World’s Volume Index Humber World’s Stock Monetary Gold of of Index Humber of Whole- sale Prices of Production England United States 1900 106 101 102 94 1910 140 147 106 118 1913 157 161 116 117 1929 208 238 156 159 1930 198 243 132 144 1 Warren and Pearson, Prices, p. 79, P. 86.

Table XIII Relation Between the Physical Volume of Production, The Stock of Monetary Gold, and Prices in England and the United States 1 (1880-1914 = 100)

Period Physical Volume of Production Stock of Monetary Gold 1900-1913 3 1/8 % 3 1/2 % 1913-1929 1 3/4 2 1/2 1913-1930 1 3/8 2 1/2 1900-1910 2 3/4 •3 3/4 1910-1929 2 1/8 2 5/8 1910-1930 1 3/4 2 1/2

Rate of Increase in the Physical Volume of Production and the Monetary Gold Stock

United States . England. . . . . 1913 Cent 1929 Cent Annual Rate Increase-Per 1913-1929 7 1/8 o 1/3 of Cent 1,290 165 26,6 3.4 3,900 37,85 6,90 France .... 679 14.0 1,633 15,85 5 5/8 Germany . . . . 279 5.75 544 5,26 4 1/4 Argentina . . • 256 5.2 434 4.2 3 3/8 Australia . . . 22 0.45 90 0.87 9 1/3 Austria-Hungary 251 5.1 0.87 Decrease Belgium • • • . 48 0.99 163 1.58 8 Canada . . • . 117 2.4 78 0.76 Decrease Denmark . . . . 20 0.41 46 0.44 5 3/8 India ..... 124 2.56 128 1.24 1/4 Italy ..... 267 5.5 273 2.65 1/4 Japan ..... 65 1.34 542 5.3 14 1/8 Netherlands . . 61 1,26 180 1.75 7 Norway .... 12 0.25 39 0.38 7 5/8 Rumania . • • . 29 0.6 55 0.53 4 1/8 South Africa 34 0.7 36 0.35 5/12 Spain 92 1.9 495 4.8 11 Sweden .... 27 0.56 66 0.64 5 3/4 Switzerland . . 32 0.66 115 1.12 8 3/8 Russia .... 786 16.22 147 1.43 Decrease Yugoslavia . . 11 0.23 18 0.17 3 1/8 22 (24) countries 4,667 96.08 9,782 94.94 4 3/4 23 other countrie s 190 3.92 523 5.06 « 1/2 45 (47) countries A,857 100.00 10,305 100.00 4 3/4 Reserve Bulletin 1932, p . 311. Hungary , and Czechoslovakia.

Table XIV Gold Reserves of Central Banks and Governments (Millions of Dollars)

1900 Cent United States * 511 30.5 France . . . . 451 27.0 England .... 139 8.3 Germany .... 119 7.1 Austria-Hungary 186 11.5 Italy ..... 78 4.7 Spain 68 4.1 Netherlands . . 24 1.4 Belgium .... 21 1.3 Switzerland . . 19 1,1 Sweden .... 10 0.6 No rway • . . . 7 0.4 Japan ..... 33 2.0 Argentina ... 1913 Cent 1,290 36.6 679 19.3 165 4.7 279 7.9 251 7.2 267 7.6 92 2.6 61 1.7 48 1.4 32 0.9 27 0.8 12 0.3 65 1.8 256 7.2 1929 Cent 3,900 42.5 1,633 17.8 710 7.7 544 5.9 90 3 1.0 273 3.0 495 5.4 180 2.0 163 1.8 115 1.2 66 0.7 39 0.4 542 5.9 434 4 O 7 Rate of 1900-13 7 3/8 3 1/4 1 1/4 6 3/4 2 3/8 9 7/8 2 3/8 7 1/2 6 1/2 4 8 4 1/4 5 1/2 Increase 1913-29 7 1/8 5 5/8 9 1/3 4 1/4 Decrease 1/4 11 7 8 8 3/8 5 3/4 7 5/8 14 1/8 3 3/8 14(16) countries 1 31 other countries ,666 100 9 1, 524 333 100 9,184 1,121 100 6 6 1/4 40 countries - 4,857 10,305 Uy the Director of the Mint. in the Federal Reserve Bulletin, 1932 -'Austria, Hungary, and Czechoslovakia. , p. 311 •

Table XV Gold Reserves of Central Banks and Governments (Millions of Dollars)

CHAPTER VIII AN ANALYSIS OF THE ARGUMENTS ADVANCED DURING PERIODS OF DEPRESSION FOR THE INCREASED USE OF SILVER

Another explanation of the depression, an explanation which is almost as common as that of the scarcity of gold, is the low price of silver. ”It has sometimes been stated that the fall of silver is a principal factor, sometimes even the principal factor in the world depression.” x Because of this belief it has been proposed during this depression, and also during other depressions in the past, that the way to recovery is the increased monetary use of silver. The proposals for increasing the monetary use of silver are particularly prevalent during periods of depression. So long as the world is in a period of prosperity very little is heard about the silver question, regardless of the fluctuations that occur in the price of silver. In the period 1900-1905, and again from 1908-1913, the average price of silver was less than for the years 1894- 1896, but in these later periods nothing was heard about the silver question which had caused such discussion during the nineties. A further illustration of the fact that the silver question is almost entirely a depression issue is afforded by the developments of recent years. The annual average price of silver fell almost without interruption from 1925 to 1932, but the pleas that something be done for silver did not become common until 1930, after the depression had begun.

The reason why the silver question exists in periods of

depression and not during prosperous years is that a depression is a particularly opportune time for the advocacy of silver* The people are willing to listen to almost any scheme which promises a way out of the depression, and the increased use of silver is one of the most familiar of the many plans for inflation proposed during depressions. Though not all of the advocates of the increased use of silver say that their plan alone would end the depression, 2 many of them seem to think that their plans would go a long way toward getting the world out of its present impasse. During a period of prosperity any proposal for the increased monetary use of silver stands almost no chance; during a depression the same proposal has a much greater chance of success, because the public is in a receptive mood* The explanation of this is to be found in the fact that the vast body of debtors and poor people generally believe that inflation is the cure for the world’s financial ills, and seize on bimetallism as a simple, attractive, and effective means of inflation. 3 Of course, bimetallism is not the only proposal suggested for increasing the use of silver, but it is the best known. Also, most of the methods proposed for increasing the use of silver resemble bimetallism to the extent that they are intended to result in inflation or facilitate it.

The argument that the increased monetary use of silver would relieve the burden of debts is only one point used in the advocacy of silver during periods of depression. Another point is that the increased price of silver would make it possible for the silver-using countries of the East to buy more goods from the industrial nations of the world. Thus international trade would be stimulated, and at the same time it would be facilitated by greater stability in the exchange between goldusing and silver-using countries. This, together with the rising prices which would result from the increased use of silver, would revive commerce and industry in the United States and Europe, according to the advocates of silver. There are a few more arguments advanced regarding the benefits of the increased use and higher price of silver, but they are of minor importance compared to those mentioned above.

According to one writer, the existence of injustice to debtors is the justification and excuse for being of the bimetallic school. 4 The injustice to debtors is said to result from the fall in prices during periods of depression. Since the debtor agrees to return a fixed sum in dollars, the existence at the time he repays his debt of a price level lower than that at the time he borrowed'the money means that the debtor returns a greater amount of purchasing power than he borrowed. In other words, at the time he repays the money, it will purchase a greater quantity of commodities than it would at the time he borrowed it. This is said to be unjust to debtors•

If the change in prices ’Were the only factor involved, then of course there would be reason for saying that a fall in prices imposed an unjust burden upon debtors. At certain times, however, there may be another factor which mitigates, if it does not completely wipe out the injustice resulting from falling prices. This factor is a declining cost of production. If the fall in the price level is due to the fact that the cost of production has diminished generally, then it does not represent an increase in the burden of debts. It is true that in this case the quantity of commodity purchasing power returned is greater than the quantity borrowed, but the two represent approximately the same quantity of labor, and so the requirement of justice would be fairly well satisfied. It should be noted, however, that the cost of production does not change at the same rate or to the same degree for all commodities, so that some debtors may find the burden of their debts increased while others find it decreased.

Even when the fall in the level of prices is due to an increase in the value of gold rather than to a decrease in the value of commodities, the increased burden imposed upon debtors is not as great as it seems to be at first glance. The extent to which a fall in the price level increases the burden is overstated when the index of wholesale prices is taken as a measure of the increase in the burden of debts. The index number of wholesale prices is not truly representative of the changes in the value of money. An index of general prices , such as Snyder’s Index of General Prices, would be a better

measure of the changes in the ,burden of debts. 5 Another point that must be considered is that not all debts are contracted in years of high prices and paid in years of low prices. Of all the debts contracted in 1925, for example, repayments of some were made in 1926, of others in 1927, and so on, with most of them probably being repaid within thirty years, and a few running for fifty years or longer. In looking at the wholesale index number for the United States of 103.5 in 1925 and of 86.3 in 1930, then, it would be misleading to say that the burden of debts increased about twenty per cent in five years. Theoretically such a statement might be justified, but practically it has very little significance, since not all debts contracted in 1925 were paid in 1930. Some of the debts incurred in 1925 were paid in the period 1926-1929, when the value of the dollar had not changed so much. Furthermore, some of the debts paid in 1930 were probably contracted between 1900 and 1910, in which case the debtor would be returning a smaller quantiy of purchasing power than he borrowed, since the price level in the period 1900-1910 was lower than in 1930. Of course, some of the debts repaid in 1930 were contracted in the years 1917 to 1920, when prices were very high, and in these cases the debtors very likely returned a larger amount of purchasing power than they borrowed. Though the debtor class loses when prices fall, it gains when prices rise. Since the injustice suffered in one period is counteracted by the benefits of the other period, it appears that the injustice

to the debtor class from changes in the price level may not be large. Individual debtors and creditors, however, may find that changes in the price level result in injustice to them.

During periods of depression bimetallists argue that the burden of debts has increased, and propose to reduce this burden by raising prices through the use of silver. But there ¥ is considerable danger that this will result in injustice to creditors* At least one of the methods proposed for increasing the monetary use of silver, bimetallism at a ratio of 16 to 1, might result in raising the level of prices so high that all or practically all debtors would pay back a smaller amount of purchasing power than they borrowed, A doubling of the 1932 price level, which was 65*9, would result in the repayment of all debts other than those contracted in 1919 and 1920 with a smaller quantity of purchasing power than was borrowed, for it would mean a price level of 131,8, which would be higher than the index for any other year except 1919 and 1920, An increase of only 50 per cent above the 1932 price level would result in an index of 98,85, which would be very close to the index of 1926, and would mean that all debts other than those contracted in the years 1926, 1925, 1923, 1917-1920, and 1865-1868 could be repaid with a smaller amount of purchasing power than was borrowed. Thus any proposal which raised the price level to 131.8, or even to 98,8, would probably result in serious injustice to creditors, not merely in rendering justice between debtors and creditors. It may also be said that bimetallism

favors only one party, the debtor, who is free to choose the cheaper of the two metals for the payment of his obligations.s The creditor is not given any chance to choose which metal he shall be paid in under bimetallism.

It would appear, therefore, that the proposals to increase prices through the greater use of silver in order to relieve the burden of debts need not necessarily result in greater justice in creditor-debtor relations, and may indeed result in considerable injustice to many creditors. The advocates of silver have other arguments, however, in support of the increase in prices which they would like to see brought about by the greater monetary use of silver. It is said that rising prices would revive and stimulate industry and trade, and thus bring the depression to an end, "Many believe that the rehabilitation of silver would help more rapidly than any other single device to raise commodity prices and restore some trade which in recent years has disappeared owing to the abnormal decline in the value of silver,The introduction of bimetallism at the ratios ordinarily advocated, which range between 16 to 1 p tend to and 30 to 1, undoubtedly would/raise prices. We have already pointed out one disadvantage, the injustice to creditors, likely to result from such a rise in prices. It remains to be seen

whether the other disadvantages would not balance or outweigh the advantages of rising prices.

It is said that an appreciation of the currency checks trade and production because when prices fall profits are diminished. A depreciating standard, on the other hand, is held to benefit producers and stimulate production. It still does not follow that rising prices are an unmixed benefit, as can be seen from a consideration of the effects produced upon the distribution of incomes. Rising prices do benefit the residual claimants to the national income, but are disadvantageous to the receivers of wages, interest, and rent.' These latter distributive shares are either fixed or lag behind the rise in prices, so that they represent a smaller purchasing power. This will almost invariably result in a loss to the receivers of rent and interest, and may be detrimental to laborers also. If the working classes are not to be injured, either their wages must increase in proportion to the rise in prices of the commodities which they buy (which rarely happens), or a greater amount of employment and regularity of work must augment their total earning sufficiently to compensate them both for their extra work and the smaller purchasing power of the dollar. v Of course, those who advocate rising prices would say that the workers would benefit because of greater employment. There is no doubt some truth in this, and it would probably be

impossible to prove conclusively by means of statistics that the working class as a whole would lose by inflation, but at least it is by no means clear that a violent stimulus to prices such as would result from bimetallism at a low ratio would result in a net gain to the working class.

Even if it could be shown that the inflation of prices resulting from bimetallism would be of rather general benefit temporarily, another question would have to be considered before the case for low ratio bimetallism could be considered proved. That question is whether such an action might not result in apprehension of further arbitrary changes in the standard. If such apprehension did arise, it would probably act as a check upon industry, commerce, and finance generally, an evil which might more than outweigh any temporary benefits due to inflation. And this apprehension might very easily be aroused, for if bimetallism is established with the hope of inflating prices and stimulating trade, ”we shall never feel that we have reached finality, until, indeed, the ratio is so low that gold is entirely driven out of circulation, and we have practically obtained a silver monometallic system.

Another thing that can be said against any attempt to raise prices by the use of bimetallism is that it would result in unstable prices, at least upon the introduction of the system, and possibly later also, if a reaction in price occurred, whereas bimetallism is ordinarily advocated on the ground that

it would increase stability of prices. Furthermore, if the introduction of bimetallism is used to inflate prices, then the argument that an increase in the metallic reserve will make the world’s credit structure more secure loses whatever force it might possess. It is said that the stretching of the gold supply through the multiplication of credit instruments has been accompanied "by wider fluctuations in the price level, than tock place under bimetallism, and that a wider metallic base will reduce these but if the wider metallic base is to be used merely to expand credit in order to raise prices, then there will be no reason why the fluctuations in prices should be smaller, and, indeed, there is a possibility that they will be larger, since the credit structure will be larger.

Hot all of the proposals for the increased use of silver are claimed to raise the general level of prices, but all of them, are intended to raise the price of silver, which, it is said, will improve trade with the Orient. It is said that the low price of silver was the chief cause of the decline in trade between the United States and the Orient. Furthermore, those who think something must be done for silver claim that half of the world’s population still uses silver; that the fall in the price of silver has caused a social upheaval (the extent of which cannot be imagined) in India, and China because the inhabitants of those countries invest their savings in silver; and that inasmuch as China is on a silver basis, her purchasing power in terms of imports has been melting "Hence it is easy to see that a large part of the economic.disturbance of which the industrial countries are victims is due to the loss of purchasing power of the countries using silver. An increase in the price of silver, therefore, is expected not only to improve trade with ths Orient but also to help preserve the value of the immense silver hoards in India and China and save the seven hundred millions of inhabitants from utter catastrophe. *

There are certain fallacies involved in the above reason- ing that go far to disprove *the conclusions arrived at. In the first place, if silver using countries have 50 per cent of the world’s population, they have accounted in normal times for but 10 per cent of the world’s international trade. Secondly, fluctuations in the price or value of silver have no effect upon the value of the monetary unit in countries like India and Mexico, the free coinage of silver has been abandoned, China is the only important country which has a free silver standard, so that the value of the monetary unit fluctuates with the value of silver. Thirdly, even in the case of China, there is no essential connection between the purchasing power of the monetary unit and the amount that can be purchased from other nations.

Disregarding changes in the distribution of wealth as irrelevant, it may be said that national prosperity and purchasing power are dependent not upon the value of the monetary unit, nor even upon the value of the total stock of money in the country, but upon commodity wealth, production, and advantages in the interchange of products

Some advocates of silver might not be satisfied with these arguments, since they can point out that our trade with China has actually declined since 1929. This is true, but our trade with gold standard countries has also declined, and to a greater degree than our trade with China, as the figures in Table XVI

indicate. It will be seen that our exports to China, despite the fall in the value of silver and in the prices of commodities, were greater in 1931 than in 1930, though we exported 37 per cent less to other countries. Our exports to China and India fell off about as much in 1930 as those to other countries, but the quantity we exported to those two countries in 1931 constituted a much larger per cent of our exports to them in 1929 than was the case for other countries.

The fallacy in the argument that a fall in the price of silver reduced the imports of China from other countries lies in the fact that China does not use silver to pay for her

imports, but uses the net proceeds of her exports to buy silver. 1® If China paid for her imports with silver, it would be expected that she should be a net exporter of silver. But actually, China is a consistent net importer of silver. Consequently, a fall in the price of silver only means that China can buy silver more cheaply than before, rather than that China 1 s purchasing power abroad has declined. The amount that China can buy in other countries depends not on the price of silver, but on the volume of her commodity exports and the gold price obtained therefor. Any absolute decline which has taken place m Chinese imports from the United States is to be attributed rather to our own failure to buy from them than to ths fall in the gold-silver ratio.l9

It might be thought that even if we do not need to raise the price of silver in order to increase Chinese imports, we still ought to do something for silver in Justice to the people of India and China who invest their savings in the white metal. But there are reasons for doubting the necessity of raising the price of silver in order to preserve the value of silver hoards and save their owners from utter catastrophe. In so far as the xall in the gold price of silver is due to a rising commodity value of gold, the commodity purchasing power of silver will be unaffected. To a certain extent, however, the value of silver in terms of commodities has fallen. Merely

raising the price of silver -will not raise the commodity value of silver unless the general level of commodity prices remains the same or fails to rise as rapidly as silver. Those proposals, therefore, which would raise the price level and the price of silver at the same time might not result in a greater value for the silver hoards of India and China. Since India and China are importers qf silver, there is but little danger of any national loss in the export of hoards of silver for the purpose of conversion into commodity As to the silver which occasionally finds its way out of the Orient, it is likely to be replaced at the earliest opportunity, and . probably at as low a price as it is sold.

It should be noted that the extent of the loss to silver hoarders from the fall in the price of the white metal is not as great as is sometimes implied, besides being hypothetical, since it will not be realized on those hoards not disposed of at a lev; price, Lisman in Barron*s, May 23, 1932, wrote that the shrinkage in the value of silver hoards of Asia during the two years preceding was less than the two-year shrinkage in the market value of American Telephone and Telegraph stock, very little more than that of United States Steel or of the Standard Oil group or the copper stocks, and much less them that of American railway stocks. Furthermore, gold as well as silver is hoarded in the Orient. China does not have much gold in hoards, but India is said to have a larger value in gold hoards ($3,080 million) than in silver hoards ($2,660

million) even at the gold-silver ratio prevailing prior to the recent fall in the price of silver. It is also interesting to note that although the fall in the price of silver has been considerable, other commodities have suffered even more. Between October, 1929, and February, 1932, rubber declined 80%, copper 67%, cotton 66%, corn 61%, zinc 48%, lead 46%, and silver 40 per This fall in the price of silver has no doubt worked considerable hardships on the countries producing silver, and particularly on Mexico, whose silver exports constituted a considerable proportion of her total exports, whatever hypothetical loss it may have inflicted on silver hoarders. In the case of the United States, however, silver mining is of but little importance in the national economy. Less than 3 per cent of the income of the United States is derived from the mining industries, and the value of the output of silver constituted but 0.6 per cent of the total revenue from all mineral products in 1925-1929. Since silver is of such minor importance in the United States, and since the United States produces one-fourth of the world supply of silver, it is obvious that the silver industry as a whole is of little significance to the world.

It is commonly assumed by the advocates of silver that the fall in the price of silver has harmed silver using countries* But this amounts to saying that a depreciating currency has

detrimental effects which outweigh its benefits, an idea which the silver advocates forget when they favor a depreciation of the currency in gold standard countries by the adoption of bimetallism or some other method of increasing the use of silver* Upon a priori reasoning it might be - and is - argued that a depreciating currency benefits the country by stimulating exports As early as 1904, the fallacy in this argument (which is still quite prevalent) was pointed out by the Commission on International Exchange. “After a generation of an almost steady decline in the gold price of silver, however, a survey of the influence upon the silver using countries of the rupture of the par of exchange does not indicate that large benefits have been derived by these countries from their monetary policy, or that they have even derived from it the benefits v which, upon a, priori reasoning, might have been expected.” The Commission said that statistics did not afford evidence of any direct and powerful stimulus of exports under the silver standard. Also,

The silver countries have been progressively giving up under the silver standard a larger and larger quantity of the products of their labor in exchange for the products of the gold countries. It is this fact which has impaired the benefits of any increase of trade which they might have derived from falling exchanges, and would tend, if continued indefinitely, to leave them poorer in the end than if their trade had not expanded.-4

During periods of depression, when the price of silver falls rapidly, the instability of the exchange rates between gold-using and silver-using countries is increased, and consequently, one of the arguments during depressions for silver

is that its greater use by gold standard countries will help stabilize the exchanges. The bimetallists claim as one of the advantages of their proposal the avoidance of fluctuations in exchange rates between gold and silver standard countries. Other writers merely propose to stabilize the price of silver, and so stabilize the exchange rate, without introducing bimetallism. The argument for bimetallism to stabilize exchange rates is out of date now, for countries whose circulation consists primarily of paper or silver have found an effective method of stabilizing their exchange with gold standard countries in the gold exchange standard. Of course, stability of exchange rates could be secured equally well or better by the adoption of the if gold standard in all countries, but/it is believed impossible to establish a full gold standard in China and other silver using countries, then a gold exchange standard will serve the 25 purpose of stabilizing the exchange rate. One writer objects that the extension of the gold exchange standard involves danger, because the people of India and China insist upon using the precious metals as a store of value. The answer to that objection is that India has used the gold exchange standard successfully, and that the gold exchange standard does not prevent the use of silver as a circulating medium and as a store of value for those who desire to use it for these purposes.

A new argument as to why something must be done for silver is to be' found in a statement by Henry Hentz and It is aaid that China, with her productive capacity enlarged by the installation of machinery, a depreciating currency, and wages which are still a pittance compared to the West’s, might prove to be too strong a competitor for other countries in the markets of the world. It is feared that the depreciating currencies of silver using countries generally will give them a cost of production so low as to make it impossible for gold standard countries to compete successfully against them. In order to prevent this, it is said that the price of silver must be increased. This reasoning seems to assume a continued depreciation of silver and silver currencies, for it is only during the period of actual depreciation that China will find her competitive position improved as a result of her currency. When this depreciation stops, an adjustment will take place in the price level of China and other countries which will restore the various countries to their former competitive position, China might become a serious competitor in world markets as a result of other factors than her currency, but then raising the price of silver merely to weaken the competitive position of China probably would not be advisable.

Another argument for increasing the monetary use of silver and raising its price is that a higher price for silver would mean a lower price for copper, lead and other metals associated with silver. It is said that the industrial nations do not

realize the effect of a fall, in the price of silver upon the cost of production of the metals with which it is It is true that the extent of the production of silver as a joint-product in connection with copper and other ores may result in changes in the price of silver affecting the prices of these other metals. If the joint-products are to cover their cost of production, then a lower price for silver means that the other joint products|must sell at a higher price. Price does not always cover cost of production, however, and this is particularly likely to be the case in periods of depression, so that it is difficult if not impossible to say what and how much effect the lower price cf silver has had on the price of copper and other metals produced in connection with silver. In 1926 Mr. H. H. C. Tennison, a consulting engineer, stated at a hearing of the Royal Commission on Indian Currency and Finance that the decrease to 35/ or less per ounce of silver would in all probability result in the following increases in the prices of the metals in connection with which most by-product silver is derived: copper, 2/ per pound* lead, 3/ per pound; zinc, 1 or IJ/ per pound, r Since then the price of silver has declined to less than 35/ per ounce, but at the same time the prices of copper, lead, and zinc also declined greatly. Mr. Tennison added that one effect of a permanent decline in the price of silver is to encourage economies in production, metallurgical improvements, and

inventions by important producers of copper, lead and zinc. It is impossible, therefore, to predict what effect a decline in the price of silver will have upon the price of copper, lead and &inc.

In the preceding pages various reasons which have been advanced for increasing the monetary use of silver and raising its price have been considered. Claims have been made that the greater monetary use of silver would solve the economic difficulties of the world, but an analysis of these claims shows that they possess little foundation in fact. The fall in the price of silver has not been an important factor in decreasing the imports of silver-using countries from the United States, nor has it had disastrous results, for the Indians and Chinese who hoard silver. The fall in the price of silver is not a cause of the depression, and an increase in the price of silver is neither necessary nor sufficient as a way out cf the depression. Bimetallism, one of the most important methods suggested for increasing the monetary use of silver, would raise prices and might stimulate industry and commerce, but it would not be without its disadvantages. Of course,., bimetallism is only one of the ways suggested for bringing about inflation. Since bimetallism is proposed as a means of bringing about inflation, it has been necessary to consider this aspect briefly, but it is not the purpose of this study to pass judgment upon the general question of inflation. Some people regard bimetallism as a better way

of bringing about inflation -than pamper money,and others believe that paper inflation is better. Individual opinions on this will differ, depending upon whether it is considered desirable or not to continue to tie the currency to a metallic base. Bimetallism and the various other methods proposed for increasing the monetary use of silver rest upon the assumption that we will continue* to use a metallic base for the currency. We will accept this view and proceed to consider the various silver plans in the next chapter.

Arthur Salter, ’’The Silver Problem,” Political Science Quarterly, Vol, XLVI, p. 325,

The Desirability of Restoring Silver to Its Pre-War Status♦ 3 ’’The Revival of Bimetallism," The Annalist, April 8, 1932, p 9 631*

4Ross, ’’The Standard of Deferred Payments,” American Academy of Political and Social Science, Vol. 3, p. 293.

o Supra, pp, 85-86.

sThe Gold Standard Defence Association, The Gold Standard , p, 5. Sir Robert Horne, Dormer Chancellor of the Exchequer, quoted in the Commercial and Financial Chronicle, 1932, p. 927. former ratio was proposed by Senator Wheeler in a bill introduced January 4, 1934 (Commercial and Financial Chronicle, 1934, p. 57). The higher ratio is suggested by Arendtz, The Way Out of the Depression, p. 85.

y This is shown very clearly by means of the great quantity of statistical data from the Civil War period in Mitchell’s History of the Greenbacks. Bimetallism, p. 75.

p. 79.

-<Arendtz, The Way Out of the Depression, p. 72 and p. 89. The statement that wider fluctuations have occurred under the gold standard than under ‘bimetallism seems to be warranted by the figures in Table X, page 104, which show the total of the fluctuations to be 87,74 in the period 1833-1872, when the monetary systems of the world approached fairly closely to bimetallic principles, and 105.62 from 1873-1912. It must be remembered, however, that other things have not been equal. For one thing, the introduction of the gold standard in many countries during the latter period may have produced fluctuations in the value of gold which would not occur once the gold standard was fully established. Then again, the economic system has become much more complex, with its partsmore interdependent than in the past, so that a given derangement causes greater disturbances. In view of these facts, the greater fluctuation in the value of gold during the period 1873-1912 does not appear very significant. It may also be noted that the average fluctuations in the value of gold were somewhat smaller in the period 1873-1912 than from 1833 to 1872, as is indicated by the fact that the total of the average fluctuations was 22.39 for the earlier* period and only 17,85 for the period 1873-1912.

lmproving World Trade Conditions, p. 12* 14perez Duarte, La Crisis Mundial, p. 6, "Con la exposicion anterior, es facil concebir que gran parte de los trastormos economicos de que son victimas los parses industriales se debe a la adquisitivo de la humanidad que usa plata. Dues por pequeno que se suponga el poder adquisitivo normal "per capite” de una masa de 800,000,000 de hombres, se llega a cifras fabulosas, cuya perdida resienten hoy los paises civilizados." ISBrownell, op. c i t., p. 13.

|~Sir Arthur Salter, op. cit., p. 325* I 'Graham, ’’The Fall in the Value of Silver,” Journal of Political Economy, 1931, p. 428, As a matter of fact, the relation between the purchasing power of the monetary unit and the amount that can be purchased from other nations may be inverse rather than direct, A fall in the price of silver, which amounts to a depreciation of Chinese currency relative to gold currencies, should stimulate Chinese exports, and thus make available a larger balance for the purchase of goods from other countries.

--Bratter, "Silver-Some Fundamentals, ” Journal of Political Bconomp, 1931, p. 335. ' Graham, op. cit., p. 434.

20 Ibid.. p. 438.

21 Ibid,, p. 437, 22Bratter, The Silver Market, p. 25. 23 Leong, Silver, p. 97,

on International Exchange, The Gold. Standard in International Trade, pp. 465-466*

25a resolution introduced by Senator Wheeler and adopted by the Senate on May 8, 1933, stated that 60 per cent of the population of the world uses silver as its monetary yardstick, and will continue to use it regardless of all efforts to introduce a gold standard. Commercial and Financial Chronicle, Vol. 136, p. 3444. 2sArendtz, op. cit., p. 72.

’'Commercial and Financial Chronicle, 1933, p. 3443 *

26 Brownell, The Desirafoili ty of Restoring Silver to Its Pre- War Status. , The Price of Silver, p. 5.

° Senator B, K, ’Theeler, according to a report in the Washington -tar of September 25, 1932, stated the case fcr silver inflation as follows : "The remonetization of silver is a far better method of inflation than the issuance of paper money* The difficulty with the issuance of paper money is that once it is started it is almost impossible to control*" The advocates of paper inflation believe that it is possible to control the volume of paper currency, and so bring about a desired price level, a result which might not be possible if silver were used to inflate.

To- 1929 Exports 1930 1931 Per Cent of 1929 Exports 1930 1931 Canada . • • • $847,442 $584,407 $327,631 68.96 38,66 France . , . . 280,654 241,007 149,093 85.87 53.12 Germany • . , 426,483 311,272 188,520 72.98 44.20 Japan » » . . 301,519 218,739 168,954 72.54 56.03 United Kingdom 953,736 746,992 471,853 87,49 49.47 China . . . • 147,740 106,907 108,890 72.36 73.70 India, British 66,066 55,326 49,243 83.74 74.53 Mexico . . . . 1 C.Q2WJ , C-g. Xeaz 127,487 Book, 193 112,579 2, Vol, 2 61,657 , p. 726. 88.30 48.36

Table XVI Exports from the United (Thousands of Dollars)

Measured from- 1929 1931 Measured from- 1929 1931 Canada . » . . , -74,6 -39*1 Total , * ® 9 9 -69,3 -33,5 France . » . . , -58,0 - 8*4 Europe . 9 9 9 -66,5 -33,9 Germany , . ♦ . -67*5 -19,7 Asia . , 9 9 9 -54,6 -24,4 United Kingdom . -66*0 -36,8 Far East 9 9 9 -60,8 -23,6 India, British China • . . . p Department of * -55*0 . -56*9 Commerce -32,1 -41,4 , Foreign i Trade in 1932, p, 38,

Per Cent Change in 1932

CHAPTER IX METHODS PROPOSED FOR INCREASING THE USE OF SILVER

Many proposals designed, to help silver have been put forth within recent vears. We have seen that thev result from the belief that there is a scarcitv of gold and that the low price of silver has destroved the purchasing power of millions of people, and so brought on the depression. These proposals for silver range from plans to have governments cease selling stocks of demonetized silver to purchases bv governments when silver falls below a certain price, and from stabilization of silver at no fixed ratio to gold to bimetallism at 16 to 1. The plans may be divided into two groups: (1) those which would increase the use of silver without abolishing the gold standard: (2) those which would make some combination of gold and silver the standard.

Proposals of the first type are designed to improve the price of silver rather than to increase the level of prices* They are based on the assumption that an increase in the price of silver would improve world trade and economic conditions. It is said that even countries on the gold standard can use large quantities of silver in their currencv to advantage. 1 The following resolution presented by Senator Kev Pittman to a committee of the World Economic Conference includes all the proposals of the first class:

Whereas silver constitutes an important medium both in international and domestic exchange for a large pro-

portion of the world’s population; And, whereas the value of this purchasing medium has been impaired bv government action in the past; And, whereas it is necessarv that the confidence of the East should be restored in its purchasing medium, which can onlv be done if the price of silver is restored to an equilibrium with commoditv price levels; Now, therefore, be it resolved that First, an agreement be sought between the chief silver producing countries and those countries which are large holders or users of silver to limit arbitrary sales upon the world market? Second, that all nations agree to nrevent further debasement of their subsidiary silver coinage; Third, that all nations agree to remonetize their subsidiarv coinage up to a fineness of at least 800, when, and if, consistent with their respective national budget problems; and Fourth, that it is recommended to central banks that they agree that 80 per cent of their metal cover shall be in gold and 20 per cent shall be optionally in gold or in silver, provided that silver is obtainable at or below a price to be agreed upon as corresponding to the general commoditv price level and that governments agree to modifv their laws to this

The first two measures of this resolution are designed to prevent further depreciation of silver, and also to make possible an improvement in the price of silver, since it is held that the fall in the price of silver was due not to current overproduction but to sales of silver bv governments. The third proposal is to increase the use of silver in subsidiary coins. Besides the use of more silver in the alloy of minor coins, it is also suggested that silver coins should be used instead of paper money of small denomination. This proposal is open to the objection that it would involve consideraole expense to the governments undertaking it, and also that it would benefit only silver producers, who, according to one writer, are less numerous and no more deserving than the producers of copper,

•z lead, and zinc.° Furthermore, the substitution of metallic for paper money runs counter to the general tendency in monetary practice. Where people have confidence in the government, they usually prefer paper notes to heavy silver coins, as evidenced by the experience of the United States with silver dollars. More silver is legally issuable in many countries, and the fact that the full amount has not been issued suggests ¥ that there is no demand for additional silver coins, nevertheless, it is suggested that the principal industrial countries agree to increase their subsidiary coinage up to $7.50 per capita, which is the figure for Germany now 3 But in these countries the people are accustomed to the use of bank notes and checks and there is a practical limit to the amount of metal which may be put into circulation/ 0 The general practice is to issue silver coins only as public demand for subsidiary money requires.

An increase in the quantity of subsidiary silver coinage, therefore, appears to offer less hope for an increased use of silver than the increase in the fineness of silver coins and the return to silver coins by those countries that replaced silver by base metal in some coins after the war, This proposal also runs counter to the monetary practice of the time. Since in every country there is normally a certain minimum demand for currency as a medium of exchange, it is possible within that limit to vary the character of the money with considerable

freedom* Within this limit nations may safely substitute copper for nickel, nickel for silver, or silver- for gold-secured paper, and may vary the fineness of the coins considerably. A number of European countries have made use of this fact to decrease their use of silver and to decrease the fineness of silver coins. In part, such changes were the result of economy measures, but the most important changes in the fineness of coins after the World War were designed to prevent the melting down of coins. 6 An increase in the fineness of silver coins is not necessary at the present time and might result in exposing those countries adopting such a plan to the danger of having silver coins disappear if silver were to rise sharply again as it did during 1916-1920. The lack of necessity and the disadvantages of these methods of increasing the use of silver stand in' the way of their adoption. In so far as it is not certain that an increase in the price of silver resulting from such measures would improve world economic conditions, there is reason for doubting that the advantagesjof these measures would compensate for the cost they would involve. That there are also practical difficulties in the way of such plans is indicated by the recent report that it is improbable that England, Prance, Germany and other countries can be persuaded to increase the silver content of their subsidiary coinage. 7

The proposals that central bank reserves should be composed partly of silver has come into prominence only recently, but

it is not new. It was envisaged nearly a century ago in the permissive authority granted the Bank of England to hold a part of its reserve in silver. 8 At the present time, these proposals call for a relatively small introduction of silver into the reserve, and are generally permissive rather than compulsory. As long as they go no further than this, very little objection can be made to them; but there is a possibility that the acceptance of such plans might only lead to further demands for increasing the proportion of the reserve constituted by silver. If the silver is to be taken at its market value, the benefit even to silver producers would be slight and only momentary. If silver is to be taken at an arbitrary value, there is the danger that people may not consider a reserve so constituted as adequate security for the currency. Aside from the desire to raise the price of silver, the chief reason for these proposals is the belief that the supply of gold is inadequate to support a ’’profitable” level of commodity prices. This view is expressed by Sir Robert Horne in a statement that the metallic basis of credit would thus be expanded (by the use of silver in the reserve) and the level of commodity prices raised and kept higher and more constant than would be possible with gold alone. $ This overlooks the fact that the existing monetary gold stock can support a larger volume of credit and higher level of prices than existed in 1930-l Q 33. An increase in the reserves of central banks can translate itself into a higher price level only through a liberal credit policy, a

policy which has already been followed for some time. This proposal to include silver in the reserve also runs counter to the monetary tendencies of the time. The reckoning of silver among reserves practicallv ceased before the war, and since the war there has been a decrease in the holding of silver for reserve purposes (both relative to the total reserve and absolutely).*-''

Another proposal would raise the price of silver without affecting the currency or reserves, bv having governments purchase liberallv when the price of silver is below a certain point, and not sell silver until it reaches a higher price. It is alsn suggested that India should discontinue sales of demonetized silver until the price goes above a certain point. It is said that governments would benefit from such action, for the value of their silver stocks would increase. This increase in value, however, could not be realized, for the price would fall if attempts were made to dispose of the silver stocks. Instead of benefitting the governments which adopted them, such plans would only involve the building up of stocks of useless metal which might never be saleable except at a loss. The provision of the Farm Relief Act of 1933 authorizing the President to accept silver up to an aggregate amount of §200,900,000 in payment of the war debts is similar in nature to the above proposal . It will not solve the problem of silver depreciation, and will only burden the United States

Treasury with more silver when it already holds over 400 million ounces which a.re rendering no indispensable economic serviced 1

The plans to increase the monetary use of silver which would abolish the gold standard are bimetallism and svmmetalism. One of the recent proposals for bimetallism, that of Senor Perez Duarte of the Mexican Finance Ministry, differs from the tra¥ ditional scheme by calling for a sliding scale of value for silver over a transition period of twentv-five Nations accepting: the plan would give silver bars unlimited power to redeem transactions which stipulated payment in gold accordingto the following relations between gold and silver:

Year 1-5 6-10 11-15 16-20 21-25 After 25 Ratio 1:50 1:45 1:35 1:30 1:25

This sliding scale of value, it is said, will make silver desirable, Senor Perez Duarte admits the possibilitv of overproduction of silver as a result of this plan, and suggests that the output of the principal silver producing countries should be controlled. The onlv advantage of this scheme over fixed-ratio bimetallism is that the initial ratio would approximate the market ratio much more closelv. Except for this the plan is open to the same objections that are raised against fixed-ratio bimetallism.

In the United States and Great Britain there have been a number of prominent men who have advocated bimetallism at a ratio of 16 to 1 or 20 to 1 within recent years. In this country Senator Pittman, Senator 'Wheeler, and other have advocated the former ratio. In England, J. F. Darling, Director of the Midland Bank, and Lord Desborough have spoken for bimetallism at 20 to I, 1 * and have been supported in their plea for silver bv Sir Robert Horne, L. S. Amperv, M.P., Sir Hugo Cunliffe Owen, head of the British Tobacco Trust, and numerous other distinguished business men of England and other countries. Dr. H. F. Arendtz suggests a ratio of 30 to 1 because that approximates the average ratio for 1923-1928. These differences of opinion even among the advocates of silver indicate the difficulties which would be encountered in choosing a ra’tio between silver and gold. If the market ratio of silver to gold were chosen for the bimetallic system, remonetization would not attain the avowed object of bimetallism - raising world prices to a relativelv high level. 14 Low ratio bimetallism would no doubt raise prices, but it is open to even more serious objections than those against market ratio bimetallism. Low ratio bimetallism, in so far as it raised the value of silver, would tend to depress prices in silver-using countries, a result which is considered the chief argument against gold at the present time. In countries adopting bimetallism however, prices would rise. This will result in instabilitv of values ior some time, although bimetallists usuallv advocate their system on the ground that it would increase monetary stability.

It may be argued, however, that this instability will have a beneficial effect and that eventually there will be greater stability of prices. It has already been pointed out that theoretically bimetallism offers but little hope for greater stabilitv of value than exists under the gold standard, and that a rising price level has detrimental as well as beneficial effects .*

Even if the first influence of such a rise in prices as bimetallism would cause were beneficial, it is by no means certain that the total effect would not be harmful, for a reaction would almost certainly follow.

We cannot be certain that the evils due to permanent apprehension of future arbitrary changes in the effect of contracts would not more than outweigh the benefits due to any temporary inflation of trade. If a bimetallic system should ever be introduced we should have to admit nearly all the pleas which might be urged in favor of further reduction in the ratio. Establish bimetallism with the hope of inflating trade, and we shall herer feel that we have reached finality until, indeed, the ratio is so low that gold is entirely drawn out, and we have practically obtained a silver monometallic system.

Furthermore, there is no assurance that bimetallism would not cause a rise in prices far greater than necessary to compensate for the fall which has occurred in the past few years.

If an increase in the volume of money designed to offset a decline in its turnover should accompany, perhaps cause a restoration of the old turnover, or generate a higher one, instead of a restoration of a past price level there would ensue a tremendous swing in the opposite direction. Stability around any level is better than wild fluctuations in either direction, and so long as the currency manager can control only one element in the situation, volume of money, without any control over its turnover (to say

nothing of the quantity of goods available for purchase), there is no reason to anticipate a successful outcome of his experiments. 1

If bimetallism is used to bring about inflation there is not even any control over the volume of money, so there is but little assurance that prices would rise by exactly the amount they have fallen. That apprehension as to the result of bimetallism has really been ielt by business men in the past is evident from the following message sent by the principal merchants of St. Louis to Congress when it was considering a proposal for bimetallism in 1891:

We believe that the passage of the Senate bill, whilst the present unstable market values of silver obtain, would disturb the standard of values upon which all transactions, domestic and foreign, are based, would discourage for an indefinite period commercial intercourse, and depress the industries of the country in their varied directions. To agriculture, commerce, and manufactures alike, we believe it would be prolific of the most serious results. 18

A practical difficulty in the way of bimetallism is that of maintaining both metals in circulation. It is certain that if one country alone were to attempt bimetallism at a ratio different from the market ratio, one metal would quickly disappear from circulation. Professor F, A. Walker, an advocate of international bimetallism, stated before a House Committee in 1891 that he could not conceive how any man who had studied the question could believe that the United States could undertake silver coinage alone without coming to speedy grief.

"The proposed measure would simply result in stripping us of our gold, in upsetting our exchange with the great trading and producing nations of the world, in bringing us down to the level of second-rate financial powers, and involving our trade and production in all the evils, the inexpressable evils of a 19 depreciating and fluctuating currency." It is contended, however, that an agreement to use both metals in the United States, Europe, and India would make variations in the relative value of gold and silver forever impossible. 2o

There is some doubt even as to whether an international agreement could maintain the two metals at the mint ratio in spite of the course of production and of non-monetary demand. The validity of the view that a fixity of value between gold and silver can be maintained by creating an unlimited demand for both metals (by free coinage at a fixed ratio) depends upon the answer to these questions: (1) Can the supply of either metal be so increased that, in spite of the demand for its use as money, its value will continue below the mint ratio? (2) Can the system be upset by a preference on the part of the people for one of the metals? On the first point the bi« metallists state that at no time in the past has the supply of either metal increased with such rapidity that either could have taken the place of the other entirely if universal bimetal lism had prevailed.2l On the other hand, it should be pointed out that if the price of silver were raised the production of silver would be greatly increased through modern methods of silver mining and the practically inexhaustible supplies of low grade ores. The production of silver now depends much more on the price of silver (and the other metals in connection with which silver is mined) and less on accidental discoveries than in the past, To the that the production of silver is inelastic because it is chiefly a by-product, it may be answered that in so far as bimetallism raised the level of prices it would stimulate the production of copper, lead, zinc, and other ores, and so greatly increase the production of silver in connection with these metals. Also, the industrial use of silver would be greatly restricted bv the rise in the price of silver. Thus at the same time that the supply of silver was increased the industrial demand for it would be reduced. Furthermore, lowering the value of gold relative to silver might lead the people of India and China, who have been consuming approximatelv 65 per cent of the annual production of silver, to hoard gold instead. In consequence of the remonetization of silver and the resulting rise in prices, gold production would be likely to decline considerably. ”If the output of silver should enormously increase on the one hand and the supplv of gold should severelv decline on the other because of the increased consumption bv India and China for hoarding purposes and the decrease in production, gold would be driven out of circulation and the bimetallic standard would in effect degenerate into a silver The difficulty which even international bimetallism faces is that gold and silver are used for hoarding and for industrial purposes as well as for monetary needs. This gives a field for the operation of Gresham’s law even if all countries agree upon a ratin between gold and silver for monetary purposes.

Inevitably the coin which is rated too low according to its natural or market value disappears from circulation; and the one which, is rated above its natural or market value alone remains current. And this is true whether the whole world does so, or onlv single and separate countries. If, then, the whole world were to agree to rate a coin below its market value it would entirelv disappear from circulation; because, if the whole world were to agree to such a system, it would, for the purposes of coinage, become country, and. the whole world can no more by international agreement make Q equal 12 than any separate country, . . Gresham’s law would operate in the more extended space in the same wav as it operates in single countries.

A question raised at a meeting of the Societv of Political Economy of Paris in 1933 mav well be repeated here: ”How can an international agreement lead people to accept silver money for a value which it does not have in their eves?”^ 4

A further difficulty in maintaining international bimetallism would be the fear that the system, might fail. Such a fear would lead to a for gold, particularly if a low ratio of silver to gold were adopted. ’’The important commercial countries would be most reluctant to agree to anv low ratio of silver to gold, such as the much advocated 15 to 1. For, apart from the fact that the commoditv value of their gold stocks might diminish in consequence of the rise in general

prices, the financial ministers of these countries recognize the possibility that the rise in the gold price of silver might stimulate the production of silver to such an extent as to make 05 bimetallism unworkable." This knowledge that the system might not work would induce some governments, and perhaps all of them, to manipulate their stocks in favor of gold, for they know that if the agreement were broken- they would gain much more from the possession of a large stock of gold than from the possession of a stock of silver, which, though equivalent to it under the rating, would be of much lower value after the rating had ceased to be effective. 20 A struggle for the possession of gold might thus come about and result in a premium on gold, making the system unworkable. 27 This fear of holding silver reflects the belief that there is a growing tendency in all commercial nations in favor of the use of gold.

This theory (of the compensatory action of bimetallism) takes no account of the actual preference of the commercial world for gold over silver. Under a double standard, if a change in the market ratio begins to bring in gold and drive out silver, there is acquiesence; but if it works to drive out gold, there is a strong objection. Indeed, a fall in the value of silver does not have the same effect on the value of gold as a fall in the value of gold has on the value of silver. That is, they are not interchangeable for monetary uses. 28

Another practica.l difficulty in the wav of international bimetallism is the achievement of the necesaarv cooperation. Silver has received considerable support bv the government of the United States and from some important English business men, and some steps were taken to improve its position by the World Economic Conference of 1933, but otherwise silver has not gained much support. In 1931 Mr. Silas H. Strawn testified before the House Committee on Coinage that the bankers and merchants with whom he had discussed silver in London, Paris, and Berlin seemed to of the opinion that there is little if any prospect for a conference to consider the silver question. Proposals for the rehabilitation of silver through an international conference at the time met with complete indifference on the part of the British government and in French financial circles, including the Bank of France. The English financial press in Great Britain and in India has shown comparatively 30 little concern about the low price of silver. On December 7, 1932, an attempt' to get bimetallism placed at the forefront of the agenda of the World Economic Conference was resisted bv government members in the British House of Lords. It was argued that while bimetallism might make some difference, the increase in the world’s monetarv stock would be so small as not to be worth bothering about.' 53 - French opinion is not favorable to the remonetization of silver. The officials of the Bank of France are flatly opposed to a change from the gold standard. In 1930, a writer in L’Economiste stated that the time was not right to let silver play a monetarv role, and that

such a time would probably never 1933 an article appeared criticising the return of the idea of bimetallism.

Does not this deny good sense by pretending that the two metals can be well matched when one of them, silver, follows a stormy course, as the considerable variations in its price for more than half a century irrefutably demonstrate? What do the partisans of such a plan desire? Their design is to arrive thereby at an artificial rise in prices. This is unquestionably an error, for the deflation has been the reaction, painful but necessary, of an abnormal rise in

Mr. Bratter, of the Finance Division of the Department of Commerce, reported in 1933 that little general interest in silver is shown in various European countries whose currency systems were being studied as part of a world survey? 4 Mr. Warburg, who attended the World Economic Conference, stated that international agreement can be secured only on a gold standard:

I am sorry that some of our monetary theorists did not have the opportunity that I had to take part in the discussions of the ’gold committee’ of the London Conference, because I feel certain that they would have come away with the inescapable conclusion that international agreement on anything other than a modernized gold standard is quite out of the question.

Due to all these difficulties which stand in the way of international bimetallism, another method has been proposed for using silver and gold together in a monetary svstem - symmetalism. This plan would insure the circulation of both metals and would eliminate the necessity for international cooperation. Under symmetalism the standard is not a unit

of gold mr so many units of silver (as under bimetallism), but a unit of gold and so many units of silver. In suggesting * this method to the Royal Gold and Silver Commission in 1888, Professor Marshall proposed that one part of gold and twenty parts of silver might be used.' Paper currency would be used within the country and would be redeemable in bars of gold and silver. It is pointed out that symmetalism could be started ¥ by any nation independently, and different nations could fix. different proportions of gold and silver, without the system failing to work. 0 ? Besides being to introduce and maintain, symmetalism is said to result in a more stable standard of value.

Suppose it could be proved that one metal, say silver, was considerably less stable than the other, bimetallism would cease to be desirable for both parties, both the original gold-using and the original silver-using countries, whereas the principle of svmmetalism might be still usefully employed to produce a compound more steady than either of the components. Just as. according to the theory of errors, two observations, though very unequal in weight, may vet be so weighted that the combination of the two is better than either singly, so silver in the case supposed may be combined with gold in a proportion so small that the compound will be slightlv steadier. 38

One disadvantage that a gold standard country would find in introducing svmmetalism would be the loss in the stability of exchange with gold standard countries. On the other hand, there would be some gain in the steadiness of exchange with silver using countries, since the fluctuation between silver and the compound would be less than between silver and gold. Another objection is that if the supply of either metal should decline, only so much of the other metal could be made use of as the proportion set between the two metals permitted. 3 "' Other critics of symmetalism object to the fact that only two metals are used, stating that greater stability of the monetary unit would be obtained if a number of metals were treated in the same manner/ 10 Such an objection is itself open to the criticism that people do not consider the base metals as well suited for monetary purposes as the precious metals. Furthermore, it would be highly impractical to have a SSO note redeemable in an ounce of gold, 20 ounces of silver, 4 pounds of copper, 8 pounds of iron, and so forth. Such a plan would stand less chance of success than symmetalism which itself is unlikely to succeed because the public is not familiar with it. Furthermore, although svmmetalism could be used by one nation independently of all others, it is unlikely that the plan will be tried unless a number of the important commercial nations of the world agree to it. So, for all practical purposes, svmmetalism involves much the same difficulties in securing international cooperation that bimetallism does.

The advocates of svmmetalism and ‘bimetallism expect that the inclusion of silver in the monetary base would result in a more stable standard of value. It has already been pointed' out that, at least temporarily, a change in the monetary system would result in greater instability. Another point that is overlooked is t’-at in a period of superabundance of gold

relative to economic progress, the inclusion of silver in the monetary base would result in a much greater rise in the general level of prices than would occur if only gold were used. In so far as these proposals are based upon the quantity theory of monev and the idea that there ia a scarcity of gold, their validity depends upon the correctness of these views. ¥ Since there are reasons for doubting that there is a scarcity of gold and that there is a close connection between the quantity of the money metal and the price level, it follows that there is justification for scepticism concerning the necessity and advisability of bimetallism, symmetalism, and other proposals designed to increase the monetarv base.

3-Brownell, Improving World Trade Conditions, p. 13.

and Financial Chronicle, Vol. 136, p. 4316-17,

-■The Annalist, "The Revival of Bimetallism,” 1932, p. 631. and, financial Chronicle, Vol. 136, p. 3444. °Bratter, The Monetary Use of Silver in 1933, p. 4.

s lbid.•, p• 5. 7 Hearings, House Committee on Coinage, 72nd Cong., V. 389, p. 338, “The Effect of Low Silver.”

p* 9 Ibid* s p. 52.

"Changes in the Monetary Use of Silver Since 1914, Department of Commerce Trade Information Bulletin Ko. l 7

Silver, p. 134. Duarte, La Crisis Mundial.

13 Cpmmercial and Financial Chronicle, Vol. 135, p. 1082, Vol. 133, p. 2528. 14 Leong, np. cit., p. 133.

1 5 Supra, pp. 141-143. 1 sDarwin, Bimetallism, p. 77.

I 1? Hardy, Devaluation of the Dollar, Public Policy Pamphlets, Ho * 8, p. 19. The Question of Silver, p. 101.

19 Ibid., p. 81 SOgernuschi, Uomisma, p. 20. 21 Johnson, Money and Currency, p. 220.

22Leong, op. cit., p. 132.

’’Gresham’s Law,” Gold Standard Defense Association, p. 130, p. 134, Francais, 1933, p. 517.

25Leong, op. cit., p. 131. Money, Credit and Commerce, p. 63. Commission on Gold and Silver, Report, p. ?2. 28 Laughlin, Money, Credit and Prices, p. 115.

29” The Effect of Low Silver,” Cong. Hearings, op. c i t., p. 388 ’^Leavens, ’’Silver and the Business Depression? op, cit., p. 330, 51 Commercial and Financial Chronicle, Vol* 135, p. 3954*

32p a yen, Hp ne Recidive,” L’Economiste, 1930, p. 749. 33Liesse, "L’Etalon D’Or," Ibid., 1933, p. 98 °-Commercial and Financial Chronicle, Vol. 136, p. 261. York Times, November 28, 1933,.

op, c i t., p. Papers Relating to Political Economy, Vol. I, p. 432. 58 Ibid., p. 441. ~~ ‘

and Pearson, Prices, p. 163.

CHAPTER X CONCLUSIONS

In the historical section of this study certain facts ordinarily overlooked in considering the relations between the precious metals have been pointed out. It has been shown that bimetallism has not always succeeded in keeping the ratio of value between gold and silver stable nor in keeping both metals in concurrent use for monetary purposes. The attempt to keep both gold and silver in circulation during the Middle Ages constantly upset the coinage systems of the various countries because of the different ratios at the several mints and because of the fluctuations in the market ratio between the precious metals. In spite of government decrees fixing the mint ratio between gold and silver there has been a consistent downward trend in the value of the white metal except for a short time in the eighteenth century. This is clearly shown by the following averages of the ratio between silver and gold:

Period Ratio Period Ratio Period Ratio 1501-1540 11.0 1661-1700 15.0 1821-1860 15.7 1541-1580 11.4 1701-1740 15.2 1861-1900 20.3 1581-1620 12.0 1741-1780 14.7 1901-1930 32.8 1621-1660 14.2 1781-1820 15.3

These fluctuations in the ratio of value "between the precious metals, as well as the relative stability of the ratio from 1720 to 1870, are explainable in terms of the supply of and demand for gold and silver. Up until the end of the eighteenth century both gold and silver were employed in European commerce without any restrictions on the tender of

either metal, but the market ratio between the precious metals did not remain stable# The stability of value of the ratio between gold and silver from 1800 to 1870 is to be explained in terms of the general monetary situation in Europe rather than attributed to the French bimetallic system. There was an increase in the demand for gold which kept the ratio stable when the production of gold increased so greatly following the discoveries in California and Australia. This demand for gold for monetary purposes (which amounted to a preference for gold rather than silver) expressed itself in the seventies in legislation closing the mints of European countries to the supply of silver which threatened to displace the gold circulation which had already been achieved. The French monetary situation, rather than the bimetallic system, exerted a stabilizing influence upon the ratio of value between the precious metals. The French law did not really achieve a bimetallic standard, but resulted in an alternating standard, with one metal predominating in the circulation and the other commanding a premium. To the extent that bimetallism breaks down into an alternating standard it fails to achieve fully the stability of exchange with silver standard countries which is claimed for it. If bimetallism, through its compensatory action, succeeded in maintaining greater stability of value than a single standard, this advantage was not considered sufficiently important to outweigh the disadvantages resulting from changes in the medium of exchange. Therefore, practically all the countries of the world adopted the gold standard between 1870 and 1914.

At the same time that this change in the standard took place, there occurred a great drop in the value of silver relative to gold. This led many people to conclude that it was legislation and legislation alone which caused the price of silver to fall, and that if the Latin Union had maintained free coinage of silver the ratio could have been kept at 15£ to 1, or very near that. This explanation overlooks the real cause of the monetary phenomena of the nineteenth century, namely, a growing preference for gold. The great increase in the production of gold in the fifties and nineties made it possible for this preference to express itself, and the result was the adoption of the gold standard. This displaced some silver which had formerly been used for monetary purposes and reduced the monetary demand for silver, so there occurred a fall in value of the white metal. Since 1914 the fluctuations in the price of silver have been rather closely parallel to the movement of the general level of prices. Here again the movements in the price of silver are explainable in terms of the supply and demand for the white metal.

In spite of the defects of the bimetallic standard which have been revealed by its operation in the past, there has been some agitation recently for a return to bimetallism. The depression is attributed to the fali in the value of silver and to a scarcity of gold for monetary purposes. It is contended, therefore, that the way to relieve the depression and secure a more stable standard of value for the future is to return

to bimetallism, or at least to increase the monetary use of silver. These arguments, together with the popular arguments for silver, have been considered in the various chapters of Part 11. The popular arguments were found to be of but little value in deciding whether a greater monetary use of silver is desirable.

The theoretical arguments were then considered and found to be of doubtful validity. In considering the relative stability of value under the gold standard and bimetallism, it was first pointed out that the fluctuations in the value of gold are often exaggerated. Most of the extreme fluctuations in the value of gold have occurred as a result of wars. These fluctuations in prices would have taken place even if two metals instead of one had been the customary standard of value. A consideration of the production of the precious metals in the past shows that the use of silver for monetary purposes, either alone or in connection with gold, would not do much to make the supply of the money metal keep pace with the economic growth of the world. The production of gold-plus-l/16-silver has kept pace with the physical volume of production more closely than the production of gold alone, but not much more closely. Even assuming that greater stability in the production of the money metal would result in more stable prices, it is unlikely that the production of gold-plus-silver would be sufficiently more stable than the production of gold to lead the public to give up the gold standard for a bimetallic

standard. The production of silver has also conformed more closely to world economic growth than the output of gold, but it often fails to keep pace with economic progress over long periods of time. A study of the fluctuations in the value of gold and the value of silver from 1833 to 1930 showed that both the maximum and average fluctuations in the value of gold were less than the corresponding fluctuations for silver. Another point made in Chapter VI was that a more stable production of the money metal need not necessarily result in a more stable standard of value. The final conclusion drawn from the evidence of Chapter VI was that if bimetallism (or silver) possesses any advantage over gold as regards stability of value, that advantage is probably insufficient to overcome the popular preference for gold as a basis for modern monetary systems.

Our study has also led us to the conclusion that bimetallism is not a necessary or satisfactory solution of the world’s economic problems® A consideration of Professor Cassel’s theory as to the rate of increase in the gold stock which is necessary to maintain the secular trend of prices stable and of the statistics of the world’s monetary gold stock cast considerable doubt on the theory that the present depression is due to a scarcity of gold. Prom 1913 to 1929 the world’s monetary gold stocks increased at a faster rate than the physical volume of production, and a number of economies in the use of gold were effected, so that the gold stock of 1929 was not too small to support a price level 40 to 50 per cent above 1913. Even if

there had been a scarcity of gold relative to the needs of the world, only a gradual downward trend in the price level, or at most but a small part of the decline in prices since 1929, could be explained by the failure of the gold supply to keep pace with the physical volume of production. It is sometimes contended that the maldistribution of gold, rather than the scarcity of gold, was in a large measure responsible for the heavy fall in prices in recent years. The evidence on the distribution of gold does not furnish much support for the view that there is a maldistribution of gold, if the distribution and the rate of increase of gold reserves of central banks from 1900 to 1913 may be taken as criteria. Hie mere fact that the distribution of gold has changed does not in itself prove that there is maldistribution. Furthermore, there is no reason for believing that bimetallism would remedy whatever maldistribution of the money metal may exist. The same forces that have brought about the present maldistribution of gold would have brought about a like distribution of gold-plussilver if bimetallism instead of gold had been the standard of value before and after the World War.

We also found that the depression is not due to the fall in the price of silver. The low price of silver has not had such disastrous effects upon the Orient as to explain the depression. Furthermore, an increase in the price of silver would not in itself contribute much toward the relief of the present depression. Specifically, it would not do much to increase trade with the Orient. If silver is used to raise

prices in order to relieve the burden of debts, there is danger that the result will be considerable injustice to creditors. To increase the price level of 1952 by 100 per cent or even 50 per cent (that is, to raise the price level to 131.8 or 98.8) would probably result in serious injustice to creditors, and not merely in rendering justice between debtors and creditors. An attempt to restore bimetallism, particularly at a ratio widely different from the market ratio, would result in unstable prices for a time, and not in the stability of value which is claimed for the system. The rise in prices which such a measure would bring about would work a hardship upon the receivers of incomes which do not increase as rapidly as prices rise (salaried persons, wage-earners now employed, landlords, receivers of fixed incomes, etc.). If bimetallism is established to inflate prices and so stimulate industry and trade, there is the possibility of apprehension of further arbitrary changes in the standard, a result which would act as a check rather than a stimulus to industrial, commercial, and financial transactions.

Finally 9 the various methods proposed for increasing the monetary use of silver have been studied* The suggestions that more silver should be used in subsidiary coinage and in the metallic reserves run counter to present day monetary practice. Furthermore* these measures would involve considerable expense to the governments adopting them. Bimetallism would involve certain disadvantages and difficulties which

would probably outweigh whatever benefits might be derived from the rising prices it would bring about. There is some doubt as to whether even an international agreement could maintain the precious metals at a fixed ratio in spite of the course of production and of non-monetary demand. The fear that the bimetallic system would fail would lead to a preference for gold, for of a stock of silver and a stock of gold of equal value under the rating, the silver stock would be of much lower value after the rating had ceased to be effective. Furthermore, there is very little chance that the international agreement that is practically essential to the adoption of bimetallism or symmetalism could be secured.

The general conclusion drawn from this study is that bimetallism does not offer much hope of being a better standard of value than the single gold standard, neither is any other method proposed for increasing the monetary use of silver likely to result in a greatly improved standard of value. There is not such a scarcity of gold as to make necessary the monetary use of silver. Finally, a return to bimetallism would not in itself do much to end the depression or to establish a more stable standard of value.

APPENDIX A STABILITY OF PRODUCTION OF THE PRECIOUS METALS

The coefficients of deviation in Table V show how different conclusions regarding the stability of production of the precious metals are arrived at by taking different base periods, and this indicates the difficulty of determining whether the production of gold-plus-1/16- silver is more or less stable than the production of gold alone* If the production of 1801-1810 is assumed as a base from which to compute the normal production, the fluctuations from normal in the production of silver and of gold-plus-1/16- silver are much larger than the fluctuations in the production of gold (Table 111 and Table V, B). If the production of 1841- 1850 is assumed as a base, however, the fluctuations in the production of gold are greater than in the production of silver and in the production of gold-plus-1/1 6-silver• If we overlook the results arrived at by using 1801-1810 as a base period, it appears that the production of gold-plus-1/16- silver fluctuates from 70 to 75 per cent as much as the production of gold alone. It seems reasonable to conclude, therefore, that the advantage in stability of the production of gold-plus-silver over the production of gold alone would not be over 25 to 30 per cent, and might be much less*

this appendix the figures for the production of gold and silver are in thousands of fine ounces* The "actual* production stated for silver represents l/16th of the annual average silver production as given in the reports of the Director of the Mint. The factor l/16th is used in order to make the production of silver comparable to that of gold. In each of the following tables the normal production is arrived at by assuming an annual change of 3 per cent from the production of a base period. Two base periods have been selected for each of the intervals considered, 1851-1930 and 1801-1930, in order to determine the effect of assuming a different period as representing normal production.

Period Annual Average Gold Production Actual Iforinal Devi- ation 1 Annual Average Silver Production Actual normal Devi- ation Combined Deviation 1851-55 6,410 3,080 Z3.330 1,781 2,170 - 389 Z2,941 1856-60 6,486 3,580 /2,906 1,818 2,520 - 702 /2,204 1861-65 5,950 4,150 /I,800 2,213 2,930 - 717 /I,083 1866-70 6,270 4,800 /I,470 2,691 3,400 - 709 / 761 1871-75 5,591 5,591 0 3,951 3,951 0 0 1876-80 5,543 6,470 - 927 4,923 4,570 / 353 - 574 1881-85 4,795 7,500 -2,705 5,750 5,300 Z 450 -2,255 1886-90 5,461 8,690 -3,229 6,807 6,150 Z 657 -2,572 1891-95 7,883 10,100 -2,217 9,849 7,100 /2,749 / 532 1896-00 12,449 11,700 / 749 10,356 8,200 /2,156 /2.905 1901-05 15,607 13,600 /2,007 10,500 9,500 Zl,000 /3,007 1906-10 20,976 15,700 /5,276 12,328 11,000 /I,328 Z6,604 1911-15 22,259 18,200 /4,059 12,655 12,700 45 /4,014 1916-20 18,964 21,100 -2,136 11,540 14,700 -3,160 -5,296 1921-25 17,455 24,400 -6,945 13,898 17,000 -3,102 -10,047 1926-30 19,763 28,200 -8,437 15.942 19.700 -3,758 -12,195 186,860 48,193 130,890 21,275 56,990

Table I Actual and Normal Production of the Precious Metals, 1851-1930 (Normal Production, 1871-75)

Period Annual Average Gold Production Actual Normal Devi- ation Annual Average Silver Production Actual Normal Devi- ation Combined Deviation 1851-55 6,410 2,620 /3,790 1,781 2,360 - 579 X3,211 1856-60 6,486 3,040 /3,446 1,818 2,740 - 922 X2.524 1861-65 5,950 3,530 X2,420 2,213 3,170 - 957 X1.463 1866-70 6,270 4,100 /2,170 2,691 3,660 - 969 X1.201 1871-75 5,591 4,770 X 821 3,951 4,250 - 299 / 522 1876-80 5,543 5,543 0 4,923 4,923 0 0 1881-85 4,795 6,400" -1,605 5,750 5,700 / 50 Xi »555 1886-90 5,461 7,400 -1,939 6,807 6,600 X 207 -1,732 1891-95 7,883 8,550 - 667 9,849 7,650 X2.199 X1.532 1896-00 12,449 9,900 /2,549 10,356 8,850 X1.506 X4,055 1901-05 15,607 11,450 /4,157 10,500 10,250 X 250 X4.407 1906-10 20,976 13,200 /7,776 12,328 11,900 X 428 X8,204 1911-15 22,259 15,300 /6,959 12,655 13,800 -1,145 X5,814 1916-20 18,964 17,700 /I, 264 11,540 16,000 -4,460 -3,196 1921-25 17,455 20,500 —3,045 13,898 18,500 -4,602 -7,647 1926-30 19,763 23,700 -3,937 15,942 21,400 -5,458 -9,395 157,700 46,545 141,750 24,031 56,458

Table II Actual and Normal Production of the Precious Metals, 1851-1930 (Normal Production, 1876-80)

Period Annual Average Gold Production Actual Normal Devi- ation Annual Average Silver Productio Actual Normal Devi- n ation Combined Deviation lbux-10 572 572 0 1,797 1,797 0 0 1811-20 368 768 - 400 1,087 2,412 -1,325 - 1,725 1821-30 457 1,032 - 575 925 3,244 -2,319 - 2,894 1831-40 652 1,390 - 738 1,198 4,344 -3,146 - 3,884 1841-50 1,761 1,860 99 1,568 5,844 -4,276 - 4,375 1851-60 6,448 2,500 /3,948 1,799 7,844 -6,045 - 2,097 1861-70 6,110 3,360 /2,750 2,452 10,562 -8,110 - 5,360 1871-80 5,567 4,500 /I,067 4,440 14,187 -9,747 - 8,680 1881-90 5,128 6,050 - 922 6,279 19,062 -12,783 -13,705 1891-00 10,165 8,120 /2,045 10,102 25,625 -15,523 -13,478 1901-10 18,291 10,900 /7.391 11,414 34,375 -22,961 -15,570 1911-20 20,612 14,800 /5.812 12,101 46,250 -34,149 -28,337 1921-30 18,609 19,900 -1,291 14,920 61,875 -46,955 -48,246 75,752 27,038 237,421 167,339 148,351

Table 111 Actual and Konnai Production of the Precious Metals, 1801-1930 (Konnai Production, 1801-10)

Period Annual Average Gold Production Actual Normal Devi- ation ; Annual Average Silver Production Actual Normal Devi- ation Combined Deviation 1801-10 572 540 / 32 1,797 480 /I,317 / 1,349 1811-20 368 725 - 357 1,087 645 / 442 / 85 1821-30 457 975 - 518 925 865 / 60 458 1831-40 652 1,310 - 658 1,198 1,165 / 33 625 1841-50 1,761 1,761 0 1,568 1,568 0 0 1851-60 6,448 2,360 /4,088 1,799 2,100 - 301 / 3,787 1861-70 6,110 3,170 /2,940 2,452 2,820 - 368 / 2,572 1871-80 5,567 4,250 /I,317 4,440 3,790 / 650 / 1,967 1881-90 5,128 5,700 - 572 6,279 5,090 /I,189 / 617 1891-00 10,165 7,650 /2.515 10,102 6,820 /3,282 / 5,797 1901-10 18,291 10,300 /7,991 11,414 9,150 /2,264 /10,255 1911-20 20,612 13,800 /6,812 12,101 12,300 - 199 / 6,613 1921-30 18,609 18,600 71,141 Z 2 27,809 14,920 16,600 63,393 —1,680 11,785 - 1,671 35,796

Table IV Actual and normal Production of the Precious Metals, 1801-1930 (normal Production, 1841-50)

A. For 1851-1930, By Five-year Periods. B. For 1801-1930, By Ten-year Periods. C. For 1801-1870, 1871-1930, By Ten-year Periods, with 1841-56 as a Base. A. Base Gold Silver Gold-Plus-1/1€ i-Silver (2) a (1) (2) (3) w (ij A. 1846-50°0.302 0.206 0.224 68 74 1871-75 0.256 0.163 0.180 61 70 1876-80 0.296 0.170 0.188 58 64 B. 1801-10 6.357 0.705 0.473 197 132 1841-50 0.390 0.186 0.266 48 68 C. 0.795 0.262 0.431 (for 1801-1870 0.318 0.172 0.237 (for 1871-1930 3-Based on Tables I-IV. The coefficient of deviation is computed by dividing the total deviation by the total normal production. a This represents the fluctuation in the production of silver as a per cent of °This represents the fluctuation in the production of gold. the relation i between the fluctuation in the production of gold-plus-1/16- silver and the fluctuations in production of gold. c Supra, Table IX, p. 94.

Table V Coefficients of Average Deviation from Normal

BIBLIOGRAPHY

I. Books

Arendtz, H. F., The Way Out of the Depression, Houghton Mifflin Company, Hew York, 1931.

Barbour, Sir David, The Influence of the Gold Supply on Prices and Profits, Macmillan and Co., Ltd., London, 1913.

Boissevain, G. M., The Monetary Question, Macmillan and Co., London and Hew York, 1891.

Cassel, G., The Theory of Social Economy, Harcourt, Brace and Company, Hew York, 1924.

Cernuschi, H., Nomisma, or “Legal Tender,“ Hew York, 1877.

Darwin, L., Bimetallism, John Murray, London, 1897.

Del Mar, A,, A History of the Monetary Systems, The Cambridge Encyclopedia Company, Hew York, 1903.

Dodd, Agnes F., History of Money in the British Empire and the United States, Longmans, Green and Company, London, 1911.

Edgeworth, F. Y., Papers Relating to Political Economy, Macmillan and Company, London, 1925.

Ehrich, L. R., The Question of Silver, G. P. Putnam’s Sons, Hew York, 1892.

Fisher, 1., The Money Illusion, Adelphi Company, Hew York, 1928.

Grier, J. A., Our Silver Coinage and Its Relation to Debts and the World Wide Depression in Prices, Sherman and Company, Philadelphia, 1885.

Gold Standard Defense Association, The Gold Standard, Cassel and Co., Ltd., London, 1898.

Hansen, A. H., Economic Stabilization in an Unstable World, Hareout, Brace and Company, Hew York, 1932.

Harvey, W. A., Coin’s Financial School, Coin Publishing Company, Chicago, 1894.

Harvey, W. A., Coin’s Financial School Up To Date. Coin Publishing Company, Chicago, 1895.

Hawtrey, R. G., The Gold Standard in Theory and Practice, Longmans, Green and Comany, Ltd., London, 1927.

Helfferich, K., Money, The Adelphi Company, Hew York, 1927.

Hobson, J. A., Gold, Prices and Wages, Methuen and Company, Ltd., London, 1923.

Horton, S. P., The Silver Pound, Macmillan and Company, London, 1887.

Johnson, J. F., Money and Currency, Ginn and Co., Boston, 1905.

Kemmerer, E. W., Modern Currency Reforms, The Macmillan Company, Hew York, 1916.

Kemp, W., The Precious Metals as Money, A. Gardner, Limited, Paisley, 1923.

Lawrence, J. S«, Stabilization of Prices, The Macmillan Company, Hew York, 1928.

Laughlin, J. L., A Hew Exposition of Money, Credit and Prices, University of” Chicago Press, Chicago, 1931.

Lehfeldt, Rs A., Gold Prices and the Witwatersrand, P. S. King and Son, Ltd., London, 1919.

Leong, Y. S., Silver, An Analysis of Pactors Affecting Its Price, The Brookings Institution, Washington, P.C., 1933.

Liverpool, Earl of, A Treatise on the Coins of the Realm, E. Wilson, London, 1880.

MacLeod, H. D., Bimetallism, Longmans, Green and Company, London, 1894.

Marshall, A., Money t Credit and Commerce, Macmillan and Co., Limited, London, 1925.

McCormick, S. C., Pear Dollars and Cheap Commodities, B. C. Jones Company, Austin, Texas, 1895.

Ridgeway, W., Origin of Metallic Currency and Weight Standards, University Press, Cambridge, 1892.

Schoenhof, J. A., A History of Money and Prices, G. P. Putnam’s Sons, Hew York, 1900,

Shaw, W. A., The History of Currency, 1252 to 1894. Wilson Mine, London, 1895®

Taussig, F. W., The Silver Situation in the United States, Third Edition, G. P. Putnam’s Sons, New York, 1900.

Todd, J. S., The Fall of Prices, Oxford University Press, London,

Walker, F. A., International Bimetallism, Henry Holt and Co., New York, 1897.

Walker, F. A. , Money in Its Relation to Trade and Industry, Macmillan and Company, London, 1880.

Warren, G. F., and Pearson, F. A., Prices, Wiley and Sons, New York, 1933. .

Willis, H. P., A History of the Latin Monetary Union, University of Chicago Press, Chicago, 1901.

Wright, Q., Gold and Monetary Stabilization, Lectures on the Harris Foundation, University of Chicago Press, 1932.

11. Official Publications, Special Studies, and Reports

Bratter, H. M., Should We Turn to Silver?. Public Policy Pamphlets No. 6, University of Chicago Press, 1933.

Brownell, F. H., Improving World Trade Conditions By Informally Stabilizing Silver at No Fixed Ratio to Gold, Irving Trust Company, New York, 1931.

Commission on International Exchange, The Gold Standard in International Trade and the Stability of Exchange, Washington, Government Printing Office, 1904.

Hardy, C. 0., Devaluation of the Dollar, Public Policy Pamphlets No. 8, University of Chicago Press, 1933.

International Monetary Conference,Brussels, 1892, Proceedings, Washington, Government Printing Office, 1893.

Perez Duarte, C., La Crisis Mundial y La Depreciacion de la Plata, Mexico, Qnpresa editorial de Ingenieria y Arquitectura, 1931.

Royal Commission appointed to Inquire Into the Recent Changes in the Relative Values of the Precious Metals, Final Report, Washington, Government Printing Office, 18^•

Shirras, G. F., The Price of Silver, International Financial Conference, 1920, Paper Ho. XIV.

Soetbeer, A., Materials Toward the Elucidation of Economic Conditions Affecting the Precious Metals and the Question of Standards, U.S. Senate Executive Documents, 50th Cong., Ist Session, Ho. 34.

Stewart, M. S., "Silver - Its International Aspects," Foreign Policy Reports, Vol. VII, Ho. 13.

United States Department of Commerce, Trade Information Bulletin Ho. 140 ("Changes in the Monetary Use of Silver Since 1914," L. R. Robinson), Washington, Government Printing Office, 1923.

Trade Information Bulletin Ko. 682, ("The Price of Silver," H. M. Bratter), Washington, Government Printing Office, 1930.

Trade Information Bulletin Ho. 742, (The Silver Market in 1930, H, M. Bratter), Washington, Government Printing Office, 1931.

Trade Promotion Bulletin No. 139 ("The Silver Market," H. M« Bratter), Washington, Government Printing Office, 1932.

Trade Promotion Bulletin, Ko. 149 (“The Monetary Use of Silver in 1933," H, M, Bratter), Washington, Government Printing Office, 1933,

United States Treasury Department, Bureau of the Mint, Reports.

United States Congressional Hearings, 72nd Cong, Ist Session, Vol. 389, House Committee on Coinage, "The Effect of Low Silver," Washington, Government Printing Office, 1933.

Young, J, P., European Currency and Finance, Washington, Government Printing Office, 1925.

111. Articles

Bratter, H, M., “Silver - Some Fundamentals," Journal of Political Economy, Vol. 39.

Commercial and Financial Chronicle, 1930-1934.

Editorial, “The Revival of Bimetallism," The Annalist, 1933,

Editorial, "The Silver Situation," The London Economist, 1931

Elliston, H. 8., "The Silver Problem," Foreign Affairs, Vol. 9.

Graham, F. D.» "The Fall in the Value of Silver and Its Consequences, " Journal of Political Economy, 1931.

Haberler, G., "Money and the Business Cycle," 2211 and Monetae Stabilization. Lectures on the Harris Foundation, 193<, t University of Chicago Press, 1932.

Hardy, C. 0., "Gold and Credit ," Annals, American Academy of Political and Social Science, Vol. 165.

Leavens, D. H., "Silver and the Business Depression," Harvard Business Review, Vol. IX.

Lexis. W., "Doppelwahrung," Handworterbuch Pgr schaften, Dritte Auflage, 111 Band, G. Fischer, Jena, 1909.

Lexis. W., "Silber und Silberwahrung, * Handwort er buch Her Staatswissenschaf ten, Dritte Auflage, VII Band, G- Fischer, Jena, 1909.

Liesse, A., "L’Etalon D’Or," L'Economiste, 1933.

Meade, E. S., "The Relative Stability of Gold and Silver,” Annals, American Academy of Political and Social Science, Vol. 14, 1899.

Phinney, J. T., “Gold Production and the Price Level: The Cassel Three Per Cent Estimate,” Quarterly Journal of Economics, 1933•

Ross, "The Standard of Deferred Payments,” Annals, American Academy of Political and Social Science, Vol. 3.

Salter, Sir Arthur, “The Silver Problem,” Political Science Quarterly. Vol. XLVI.