bills on London or Paris will rise in price just like gold itself, since they are in fact equivalent to gold. 3. The third sign is the flight of metallic money. However slight the depreciation of paper money may be (and unless this defect is immediately remedied by the withdrawal of the excessive paper), all metallic money will speedily disappear from a country. This phenomenon is invariable and therefore characteristic; it occurs in all countries where paper money has been issued in excess. 4. The fourth sign is a rise in prices. This appears later on, and shows that the evil has already become a grave one, and that the permissible limit has been greatly exceeded. While the depreciation is still slight, say 2 or 3 per cent, prices (except those of the precious metals) are not affected. Retail dealers, and even wholesale dealers, will not alter prices for so trifling a difference as this; and even if they did so, the public would not worry about it. But whenever the depreciation of paper money reaches 10, 15, or 20 per cent, then all tradesmen and all producers raise their prices correspondingly. The evil, which until then has been latent, suddenly bursts forth and is revealed to all. 5. Finally, we must note that the old prices continue the same for those persons who can pay in metallic money, if there is any of it left. For metallic money has lost none of its former value; on the contrary, compared with paper money it has gained. Hence we observe the curious phenomenon of two different sets of prices for commodities. Every article now has two prices, one payable in metallic money, the other in paper money. The difference between the two prices exactly measures the depreciation of the paper money. As soon, therefore, as a government perceives the premonitory signs, namely, a premium for gold and a rise in the rate of exchange, its first duty is absolutely to forbid the emission of any more paper money, since the extreme limit has already been reached. If this limit has unfortunately been overstepped, and we discover the ominous symptom of double prices, it must endeavor to retrace its steps and destroy the paper money that returns to the public treasury until there is the right amount in circulation. Such a heroic remedy as this, however, involving the partial suppression of the national revenue, is not within the power of all governments. They cannot resort to it unless they can afford to sacrifice a part of their revenue; in other words, the public revenue must be in excess of public expenditures. 119. PAPER MONEY AND THE FOREIGN EXCHANGES BY FRANCIS A. WALKER One of the most important phases of the subject of paper money is its relation to the International Exchanges. By the mere fact of the adoption of this kind of money, a country loses all the advantages of an automatic regulation of the money supply through the normal movements of trade. Paper money finds no outlet in international commerce. It cannot be exported and retain its value. Hence its regulation becomes purely mechanical. Having no natural cost of production, it will not, if in excess in any country, flow away in obedience to the law which governs the distribution of a money having acceptance abroad equally as at home; but, if issued in excess, it can only be removed by being pumped out by the same force which originally issued it, at least until the stage of utter popular repudiation is reached. Even where the excess of such paper money over what would have been that country's distributive share of the world's money be not enough to produce grave disturbances of domestic industry, the effect on foreign trade will yet be momentous. The immediate result of any excess must be to establish a premium upon that metallic money in which alone foreign balances can be paid. To one who is not familiar with the largest operations of commerce this may seem a small matter; yet if we may trust those who are best qualified to decide such questions, the money of a commercial state cannot depart, even by the narrowest interval, from the money in which international balances are discharged, without creating obstructions, exciting apprehensions, and even occasioning losses, to which modern trade, with its highly developed and acutely sensitive organization, will not submit, or will do so only upon the payment of heavy fines by the offending community. During the German War, and for some years after, viz., from 1871 to 1877, the notes of the Bank of France were inconvertible; yet such was the sagacity and prudence of the directors of that institution that at no time was there any considerable discount on that money, the premium on gold often being but a small fraction of 1 per cent. Yet, slight as was the disturbance of the domestic circulation thereby produced, Mr. Bagehot, in his standard work, 1 Adapted from Political Economy, pp. 173-74. (Henry Holt & Co., 1883.) Lombard Street, written during the period of suspension, attributes to it the most momentous consequences. "The note of the Bank of France," he says, "has not, indeed, been depreciated enough to disorder ordinary transactions. But any depreciation, however small, even the liability to depreciation, without its reality, is enough to disorder exchange transactions. They are calculated to such an extremity of fineness, that the change of a decimal may be fatal, may turn a profit into a loss. Accordingly London has become the sole great settling house of exchange transactions in Europe, instead of being, as formerly, one of two." VI THE STANDARD QUESTION: THE SILVER Introduction The discussion of bimetallism in chapter iv ended, so far as the United States was concerned, with the year 1873. The present chapter is a continuation of our bimetallic history and treats of the acute stage of the controversy that followed close upon the general demonetization of silver by the leading countries of the world. The reason for having broken the continuity of the discussion by introducing the chapter on paper money is that in the United States the "greenbackers" and the "silverites" possessed in many respects a common philosophy-actually joining forces, in the main, after 1878. An understanding of the greenback movement is, therefore, essential to an appreciation of the last stage in the bimetallic controversy in this country. The silver movement began about 1875, when it was discovered that the standard silver dollar was no longer coinable at the mints. For many years prior to 1873, when the silver dollar was dropped from the list of coins that might be struck, the legal ratio of silver to gold had been 16 to 1 while the market ratio was around 15.6 to 1. There was consequently no incentive to coin silver, and none had in fact been coined for generations, except a small quantity for use in oriental trade. But when silver fell in value in 1874 and 1875 so that the market ratio became 16+ to 1, it was promptly presented to the mints for coinage, where minting into standard silver dollars was of course refused. Immediate indignation was aroused; it appeared that the "surreptitious" demonetization of silver that had occurred was nothing short of a vicious crime engineered by and in the interests of the gold conspirators. By a single act of Congress, unknown to and unsanctioned by the general public, it seemed that the country as a whole had been deprived of a large portion of its national wealth. The controversy over this act of 1873 was bitterly waged for more than twenty years. The silver party, so called, was composed of numerous elements, with differing points of view, but imbued with a common purpose of securing the recoinage of silver. In this movement the problem of deferred payments became, even on the popular side, more or less differentiated from the mere question of the volume of money. It appears to have been very clearly appreciated that the fall in prices following the war was rendering the repayment of mortgages and other long-time obligations annually more difficult; and the issue between the debtor and the creditor classes, as shown in numerous selections below, was bitterly contested. One cannot fail to be impressed with the sincerity of conviction manifested on both sides; and it is a matter of much significance, as well as interest, that practically every class, even the economists, became largely imbued with a partisan spirit, and very generally impugned the motives of the opposition; the very air seemed charged with feeling. The result of the silver agitation was to secure a limited coinage of silver and thereby to derange our monetary system for nearly twenty years. It must be said in justice to the advocates of bimetallism, however, that the system did not have a real trial during this period; and their contention in the nineties that a larger rather than a smaller coinage of silver was needed may easily be justified, granting the premise of the bimetallic argument. The state of our currency under the Bland-Allison and Sherman acts served one useful function, however: it demonstrated as nothing else could have done the working of monetary principles and the evils of an uncertain standard of deferred payments. The issues of 1896 appear to have been settled by the geographical distribution of our population and the relative numerical strength of the opposing interests, rather than by logic or virtue or honesty or devotion to the public welfare. And, similarly, the failure of the agitation to arise again since then does not denote so much an increased knowledge of the principles of sound money, as it does a change in the fundamental conditions governing the supply of gold. The productivity of the world's mines since 1896 has given an enormously increased volume of currency, enough at least to dull the edge of that insistent desire for more money which characterizes the true inflationist. At the same time the high prices of the present era serve effectively to remove the grievance of the debtor classes. In fact, it is now a horse of a different color; for it is the creditor class that is feeling the ill consequences of a changing price level. |