The "driving out" process in this last case must consequently be a different one, when it takes place, from what it is in the case of bad versus good coins of the same metal.

The same with inconvertible paper versus metal. The metal and the paper may be required for different purposes, and so far as that is the case the paper does not drive out the metal from the same cause or in the same way, or proportions, as bad coins drive out good coins of the same metal. Gold is actually used less or more in currency in every country whether gold or silver is the standard, or whether there is a bimetallic standard with silver as the overrated metal; and gold, and sometimes silver, is also used in inconvertible-paper countries in the same way, although the paper is the standard money.

What is true is that the overrated metal and the inconvertible paper in the cases supposed drive the metal they compete with, the underrated metal, out of circulation as standard money. As there can be only one standard, the overrated metal or the inconvertible paper, as the case may be, becomes the sole standard. But the underrated metal is not thereby physically driven out of the country at all. It depends upon circumstances whether it is exported or not and how much the export is. Three things happen (besides export, or the chance of it):

1. The underrated metal may be hoarded. This is largely the fact, I believe, in almost all cases of inconvertible paper. There were, no doubt, hoards of gold in England in the inconvertible paper period at the beginning of the century, in the United States during the inconvertible paper régime which began in the Civil War, and later in Italy when it had inconvertible paper; and there have been hoards of gold in Austria, Russia, and the Argentine Republic.

2. The underrated metal may be used in actual circulation at a market ratio different from the legal ratio. Gold was always used in circulation in France as a monetary merchandise, when silver was the overrated metal, without any difficulty, but at a premium, not at the legal ratio.

3. Coins of the underrated metal may circulate as a species of token money, either because there has been a heavy seignorage on them, or because they have become worn and deteriorated, so that they occupy the same place, and do the same work, as token coinage of a different metal than the standard does in a monometallic system. This was notably the case in England with the silver coinage before 1800. Silver was underrated and gold had become the standard;

but a silver coinage of a very bad description remained, which was used exactly as the silver-token coinage is now used.

In these three ways, then, coins of an underrated metal in a bimetallic system, and coins of different metals in an inconvertible paper country, may remain physically in a country when they go out of use as standard money, without being actually exported.

When export does, in fact, take place, it arises from the formation of a surplus of the underrated metal, through changes of circumstances as regards the use of it in the various ways specified.

68. COMPENSATORY ACTION OF A BIMETALLIC STANDARD1 BY WILLIAM A. SCOTT

As a remedy for the variations in the market rate of gold and silver and attendant evils, bimetallists rely upon what has been called the compensatory action of the double standard. This may be described as follows: Suppose that the ratio established between the weights of gold and silver coins of the same nominal value be 16 to 1, and that a change in the market for bullion, due to a fall in the value of silver, temporarily makes the actual ratio 18 to 1. It will now be profitable for all debtors to pay in silver and sell gold coins as bullion, since for every ounce of gold thus sold they can purchase eighteen ounces of silver, and, by carrying it to the mint for coinage, pay as large a debt or make as large a purchase with sixteen ounces as they could have done with the original ounce of gold, and thus make a clear profit of two ounces of silver on every such transaction. It is not, of course, to be supposed that every person would know enough to take advantage of such a situation, or would take the trouble of going into the exchange business if he did see this chance for profit; but we may be sure that the people already in the business, namely, the bankers, would melt down or export gold coins on as large a scale as possible, and buy silver bullion and take it to the mint for coinage. One result of this procedure would be a large increase in the coinage of silver and a decrease, perhaps a complete stoppage, of the coinage of gold; and a second would be, so say the bimetallists, a large increase in the use of silver for monetary purposes, and a decrease in the use of gold. A change in the relative demand for the two metals would thus be produced which would tend to counteract the effects of the fall in the value of silver and bring the ratio between the two

1

Adapted from Money and Banking, pp. 300–303. (Henry Holt & Co., 1910.)

metals on the bullion market back to that established by law for the guidance of the mint; that is, the increase in the use of the one metal and the decrease in the use of the other for monetary purposes would raise the value of the first and lower that of the second, thus tending to bring the two ratios together. A further argument is needed to show that this compensatory action would be sufficient to make the bullion ratio actually identical with the legal, and this the bimetallists find in the enormous quantities of gold and silver used for monetary purposes and in the relatively small capacity of the bullion markets to absorb increased quantities of the precious metals without experiencing great fluctuations in their value.

On account of this compensatory action of the double standard, the bimetallists claim that, if a sufficient number of nations could be induced to adopt the bimetallic system of coinage, no variation in the relative value of the precious metals could take place. The general level of prices might rise and fall on account of changes in the relative value of gold and silver and other commodities, but so far as their relations to each other are concerned no change could take place, since any tendency in that direction would be immediately counteracted by a modification in the relation between the demand and the supply of the two metals brought about by the process just described. The above supposition of a difference between the legal and market ratios, therefore, must be regarded as a hypothetical case, useful as an illustration of the way the law operates, but not useful in correspondence with facts as they would present themselves under the bimetallic system.

The relation between the compensatory law and the alleged evils of monometallism are obvious. The bimetallic system acts as a check upon fluctuations in the value of both metals, but cannot entirely prevent them. As soon as some external force, such as a discovery of new sources of supply or improvements in the methods of production, begins to affect the value of one of the metals the action of the compensatory law commences and modifies the demand for it in such a way as to counteract the rise in value, if that is the tendency of the movement, or the fall, if the new force is working in that direction; but the maximum result of this counteraction will be to prevent a change in the ratio of the two metals. It cannot go so far as to make the ratio between the demand and the supply of both metals precisely the same as before. For example, suppose that the production of silver for monetary purposes were to increase 25 per

cent under the bimetallic system; all that is claimed is that the demand for silver for monetary purposes would be increased and that for gold would be decreased to whatever degree might be necessary to prevent a change in that ratio, but that would not mean a 25 per cent change on both sides, which would be required to exactly restore the former ratio of demand to supply. Very likely a 12 per cent increase in the monetary demand for silver and a corresponding decrease in that for gold would be sufficient, in which case both metals would have experienced a considerable fall in value, but not so great a fall as silver would have experienced had no counteracting agency been in operation. If no change had taken place meanwhile in the value of commodities prices would certainly rise, but not in the same degree as in a silver monometallic country under the same circumstances, and, if both metals had previously been appreciating in their relation to other commodities, this tendency would have been checked and perhaps entirely counteracted. As compared with conditions in a gold monometallic country suffering from an appreciating standard, the situation would be much better, because the decrease in the demand for gold for monetary purposes might just counterbalance the increasing demand or the decreasing supply which was the cause of its appreciation in the gold-standard country.

B. History of Bimetallism

69. SUMMARY STATEMENT OF MODERN MONETARY

HISTORY1

BY W. A. SHAW

Modern monetary history may be divided into three great periods: 1252-1492; 1493-1660; 1661 to the present time. The first period marked the reintroduction of gold into the coinage of Europe. The second period witnessed the discovery of America and the enormous flow of precious metals to Europe. The third period was one of remarkable steadiness of silver production with some changes in gold production until the middle of the nineteenth century, and then one of remarkable increase in the volume of both gold and silver.

The history of the first period shows with unmistakable clearness two simple facts: First, it was a period in which the commercial

'Adapted from History of Currency. Summarized from various chapters. (G. P. Putnam's Sons, 1899.)

expanse outstripped the reinforcing supply of the precious metals, with a consequent rise in the value of the precious metals. Second, the evil effects of such a scarcity of the precious metals were enormously increased by shortsighted, crafty manipulations of the currency by the European rulers, and by the rough, unscientific system of the prevailing coinage and exchange rates, and by the inability of the age to understand, or even to perceive, the hidden working of Gresham's law.

The second period was one of widely fluctuating ratios between gold and silver values, and the accompaniment of feverish instability and flux. The ratio averaged by periods is as follows:

These fluctuations of the ratio varied in different countries and there was endless movement of specie from one country to another under the operation of Gresham's law. The governments of the time constantly endeavored to control this flow by changing the coinage ratios, altering the denomination of the coinage, and diminishing the content and reducing the standard of fineness. During the latter part of the period the mercantile theory was primarily responsible for the legislative attempts to control and increase the quantity of money in the various countries.

The third period first witnessed the practical decline of the mercantile theory and its elaborate legislation for the control of the currency supply. By an act of 1663 England took the lead and the statutes forbidding the exportation of bullion were removed at one blow of astounding boldness. The fall of mercantilism and the perception of a right theory of international balances opened the way to highly important results. It separated the currency phenomena from the larger problem of industrial and national power and thus prepared the ground for a scientific conception and treatment of them. This treatment resulted in the evolution of a theory and practice of bimetallism in one direction, and of the theory and practice of monometallism in another direction. Modern currency history has centered around the antagonism of these two systems. Second, this period has witnessed an enormous expansion in the production of the precious metals, the result of which has been the adoption almost universally of gold monometallism.