The Principles of Political Economy

Henry Sidgwick

Book III

Chapter IV

Section 6

§6. So far we have considered (1) uniformity, and (2) protection against (a) fraud and (b) unequal incidence of loss from wear and tear, as the points at which Government should aim in managing coinage. We have now to take note of another important characteristic of a good medium of exchange: i.e. stability in general purchasing power. Considerable fluctuations in the value or general purchasing power of money are admitted to be an evil, from the disappointment of expectations that they cause, and the consequent uncertainty in calculating returns and remunerations, which is unfavourable to steady industry and careful trade: we may therefore assume that it is desirable to guard against such fluctuations so far as this can be done effectively without causing worse evils. There are two distinct ways in which Government may conceivably attain this end while keeping its currency on a metallic basis: either (1) by actually modifying the conditions of value of the metal used for standard coins, or (2) by measuring its changes in general purchasing power, and thus obtaining an ideal standard free from the fluctuations in value of the material medium of exchange. We might distinguish (1) and (2) as the method of real, and the method of ideal modification respectively. Let us consider the former first.

Where the medium of exchange, legally available for paying ordinary debts of money, consists of coins of one metal and notes convertible into coin on demand, I know no means generally applicable for rendering its value more stable that could be recommended for the use of Government. On the one hand, a tendency to rise in value could only be resisted by promoting the use of substitutes for coin: but it is not ordinarily in the power of Government to do this, in an advanced industrial community, except so far as the use of such substitutes is actually reduced by legal restrictions. In this latter case, no doubt some effect in the desired direction may be produced by removing or modifying the restrictions:---thus in England the demand for gold coin might be to some extent lowered by allowing the use of one-pound notes; but the effect of any such measure, adopted in a single country only, is not likely to be great. On the other hand a fall in the purchasing power of gold coin might conceivably be counteracted by restricting coinage; but as this would tend to reduce the standard coins to mere tokens, the remedy would be worse than the disease.

I hold, however, that a material improvement in the prospects of stability of value of the medium of exchange may be obtained by the plan known as Bi-metallism: i.e. by coining gold and silver freely and making them legal tender in unlimited amounts at a fixed ratio. In a former part of this work I have already explained how a combination of governments may---up to a certain point---maintain the concurrent use of gold and silver as currency at a fixed ratio of exchange, even when the conditions of supply and demand are such as would---if operating unchecked---cause them to be exchanged at a different ratio. To show clearly the nature and extent of the force that such a bi-metallic union can exert, it will be convenient to distinguish (a) the monetary demand of the combining communities from (b) the rest of the demand for the precious metals---whether this be the monetary demand of countries outside the union or the industrial or other non-monetary demand. We may call the former (a) the ``rated'' demand and the latter (b) the ``unrated'' demand, or the demand of the outside market. The force, then, by which the bi-metallic currency will tend to be maintained in effectual use,---notwithstanding changes in supply and unrated demand tending to cause a market-ratio of exchange between the metals different from the governmental ratio,---is the self-adaptation which will continually take place in the rated demand, counteracting the effect of such changes. When the outside conditions tend to make silver cheap, the rated demand will become a demand for more silver and less gold; when they tend to make gold cheap, it will become a demand for more gold and less silver; and this alternation will keep the market-ratio approximately identical with the mint-ratio, and in accordance with the ordinary law of value as dependent on supply and demand; and thus---provided that the tendency to divergence so counteracted is not too great or too prolonged---the currency will remain effectively bi-metallic, though it will be composed of the two metals in continually varying proportions.

I lay stress on the nature of the force exercised, because bi-metallists have sometimes spoken as if legal interference had some power of bringing about the concurrent use of the metals at a fixed ratio otherwise than through the operation of the ordinary law of supply and demand; while their opponents have often spoken as if the action of Governments in establishing a fixed ratio between gold and silver money was an attempt to resist natural laws, which must therefore be foredoomed to failure. Both these views seem to me misleading. On the one hand, though the fiat of Government can no doubt determine, independently of any effect on the relative market values of gold and silver, that these metals when coined shall be legal tender at a fixed ratio, it cannot secure that they shall be concurrently used, except very transiently, unless it also determines the ratio in the outside market; and the only way in which Governments can act on this outside ratio is by changes in the monetary demand as above described, which of course tend to affect market value just in the same way as any other changes in demand would affect it. On the other hand, it seems to me clear, that if the monetary demand of the bimetallic union be large relatively to the whole demand for the precious metals, the bi-metallic character of the currency may be effectually maintained in spite of very considerable fluctuations in the outside conditions influencing the market value of the metals; and that by thus maintaining it the Governments no more attempt to override economic laws than a man attempts to override mechanical laws by erecting dams or dykes against floods.

I will illustrate the process above described by a hypothetical case; which will at the same time show how the effectiveness of the bi-metallic union will depend upon the proportion of the monetary demand that it controls to the whole demand. Let us assume that there is a bi-metallic union of countries holding three-fourths of the whole stock of gold coin in use, which we will take to be £700,000,000; that when the union begins the governmental ratio of gold to silver is that of the market,---say 1 : 15½---; and that three-eighths of the annual supply of gold goes to the bi-metallic mints, one-eighth being absorbed by the non-bi-metallic mints and one-half by the non-monetary demand. Let us assume further, that when the union begins, the countries are increasing in wealth, and that the annual supply of gold and silver is just sufficient to keep their values unchanged in relation to commodities generally. Now let us suppose that, other things remaining unchanged, the annual supply of gold falls from £20,000,000 to £15,000,000. Obviously the most that could be required to maintain the rated value of gold in the outside market would be that the same supply as before, £12,500,000, should go to satisfy the outside demand; but in fact slightly less than this will suffice, since the value of gold---and therefore, under the bi-metallic system, of silver also---will rise slightly in consequence of the decreased supply of gold, and this rise will cause a corresponding reduction in the unrated demand for both metals. This last effect will also involve a slight increase in the amount of silver brought to the bi-metallic mints. The bi-metallic currency will thus tend to have less gold in it than before in proportion to silver; but it will not, therefore, have positively less gold than before, since the supply that still comes to the bi-metallic mints will more than suffice to make up for the loss through wear and tear of coins. And this state of things may be conceived to go on for an indefinite time without any tendency to deprive the bi-metallic currency of its gold, or to cause a divergence between mint-ratio and market-ratio; though of course the proportion of gold coin to silver will steadily decrease under the conditions supposed.

If, however, we had inverted the supposed relation of the two monetary demands---if we had supposed a bi-metallic mint absorbing, before the fall in production, only one-eighth of the annual supply, and non-bi-metallic mints absorbing three-eighths---, the change supposed must at once have decreased the stock of gold coin held by the bi-metallic country; and each succeeding year would diminish it further until the currency became practically a mono-metallic currency of silver with some gold coin probably circulating at a premium.

Similar results would follow, mutatis mutandis, if we supposed an increased supply of silver instead of a decreased supply of gold; in either case, the questions whether, and how long, the nominally bi-metallic currency can really maintain its character, must depend on the extent of the rated demand as compared with the outside demand, and on the magnitude of the changes that occur in the outside conditions determining the value of either metal.

Supposing that the bi-metallic system is effectually maintained, in the manner above explained, it will evidently have two effects: (1) it will keep the ratio of exchange between the metals approximately uniform, not only within but outside the range of the bi-metallic union; and (2) it will tend to make fluctuations in the standard of value less rapid and serious by spreading the effect of any change in the conditions of supply of either metal over the whole aggregate of the world's currency, instead of letting it operate solely on that part of the currency which is composed of the metal primarily affected. The advantages of (2) are, I conceive, generally admitted: nor will the advantages of (1) be disputed, if we assume that both gold and silver are to continue to be extensively used in the whole aggregate of civilized communities effectively united by international trade: and at the present time the most eager mono-metallists do not appear to desire the universal adoption of a gold currency, at the risk of a great rise in the value of the medium of exchange. Indeed we may say that the trade of the world---even the internal trade of the British Empire---will in any case be carried on under what may be called, in a certain sense, "bi-metallic" conditions: and that the practical issue, so far as international trade is concerned, lies not between mono-metallism and bi-metallism, strictly speaking, but between what we might call ``rated'' and ``unrated bi-metallism''.

If, then, the advantages of effectual bi-metallism be granted, the next point in a practical consideration of the scheme would be to estimate carefully the actual chance of maintaining it. But to frame such an estimate hardly comes within the scope of the present treatise: since for this purpose, as we have seen, it is fundamentally important to determine the extent and durability of the combination of Governments which can reasonably be anticipated, as well as the extent of the monetary demand that they can control, as compared with the outside demand for the precious metals. I do not profess to deal with the strictly political aspect of this question, and, in a treatise that is primarily concerned with principles, it would be out of place to discuss fully even its economic aspect:---especially as the industrial world of which England is a part seems to me to have before it a difficult choice between different kinds of risk and inconveniences, the decision of which requires a very careful estimate of the economic quantities involved. I may, however, say that at present the balance of argument appears to me to be on the side of bimetallism; provided that a stable combination can be effected---such as is now proposed---of England, the United States, Germany, and the countries forming the Latin Union. It must, indeed, be conceded to mono-metallists that if---as Soetbeer holds---the present consumption of gold in arts and manufactures absorbs nearly three-fifths of the annual supply, then, considering the general reasons that we have for expecting the production of gold to grow hereafter more scanty and costly as compared with that of silver, any possible bi-metallic union has to face a serious risk of its currency coming to consist mainly of silver. On the other hand the same causes that would bring about this result would, if there were no bi-metallic union, inflict on the industry of the countries with a gold standard the serious evils of a great rise in the purchasing power of the medium of exchange:---and, though our ideal aim should be simply to keep the value of this medium stable, it must be recognised that the economic evils of a rise in value axe considerably greater than those of a fall in value; since the latter change is on the whole favourable to the classes that are economically most important. Further, I think that the ``misery'' of having to use silver instead of gold is somewhat exaggerated by English mono-metallists especially when only an easily altered law prevents an Englishman from having the one-pound notes on which his Scotch fellow-countrymen seem to thrive. Nor is the extra cost of storing silver bank-reserves, and of transmitting silver bullion in payment of international debts, an evil of such magnitude that the mere risk of it should be held to be a conclusive objection to bi-metallism. Similarly, the disturbances caused to expectation by the transition from mono-metallic to bi-metallic currency are not I conceive sufficiently important to weigh heavily in a practical consideration of the question; provided that care is taken to choose a governmental ratio not very divergent from the market ratio that would have established itself without governmental interference, if a change bad taken place in the demand for gold and silver equal to that which would be caused by the action of the bi-metallic union.

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