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59. GRESHAM'S LAW AND THE FAILURE OF DEBASEMENTS1 BY W. STANLEY JEVONS

Sir Thomas Gresham, a royal agent of Elizabeth, pointed out / how, by debasement, two kinds of metallic money, although nominally of equal value, could not be kept in concurrent circulation. In the exchanges, wherein coins are valued according to weight, the inferior were separated from the superior coins, and the latter were exported.

Though the public generally do not discriminate between coins and coins, provided there is an apparent similarity, a small class of money-changers, bullion-dealers, bankers, or goldsmiths make it their business to be acquainted with such differences, and know how to derive a profit from them. These are the people who frequently uncoin money, either by melting it or exporting it to countries where it is sooner or later melted. Hence arises the practice, extensively carried on in the present day in England, of picking and culling, or, as another technical expression is, garbling the coinage, devoting the good new coins to the melting-pot, and passing the old worn coins into circulation again on every suitable opportunity.

In all other matters everybody is led by self-interest to choose the better and reject the worse; but in the case of money, it would seem as if they paradoxically retain the worse and get rid of the better. The explanation is very simple. The people, as a general rule, do not reject the better, but pass from hand to hand indifferently the heavy and the light coins, because their only use for the coin is as a medium of exchange. It is those who are going to melt, export, hoard, or dissolve the coins of the realm, or convert them into jewelry and gold leaf, who carefully select for their purposes the new, heavy

coins.

I

Adapted from Money and the Mechanism of Exchange (1875), pp. 79–81. (D. Appleton & Co.)

IV

THE STANDARD QUESTION: BIMETALLISM

Introduction

Monetary controversies have centered mainly around the question, What should constitute the basis of the monetary system? The general problem here involved has numerous phases and its adequate presentation requires several chapters. While in its broad outlines it involves primarily only the question of bimetallism and of government paper money, for chronological reasons, as well as for clarity of exposition, its treatment is best broken up into several divisions, as is indicated by the sectional headings IV to VII inclusive.

In the present section we are concerned with bimetallism, first, as to general theory, and, secondly, as to its practical success in operation up to 1873. By the general theory of bimetallism we mean the arguments in its favor that have been advanced by scientific students, as distinguished from the views presented by the general public in connection with monetary propagandas. In raising the problem of bimetallism a frequent source of confusion must be carefully noted. The "standard" question in our monetary history did not center around the common denominator or measure of value. The bimetallic controversy was waged, on the one hand, over the adequacy of a single metal, alone, to serve the needs of trade as a medium of exchange, and, on the other, to furnish the stability required for a good standard of deferred payments. So far as serving merely as a common denominator of value at a given moment of time is concerned, a great quantity of the money material is not required, nor is stability of value particularly important. Although it is inconceivable that any commodity should come to be used as a common denominator of value that had not exhibited a relatively stable value in the past-stable enough to mean something fairly definite to those who would reckon by it-nevertheless, when it is once adopted future changes in its value become of minor consequence. General prices are merely higher or lower, as the case may be, and so far as comparing relative values at a given moment is concerned it still serves satisfactorily enough. But not so when the

time element enters. A change in the level of prices works havoc with time contracts and seriously deranges business affairs; and a first requisite for a satisfactory standard of deferred payments is stability of value. The quantity of money and the stability of its value are problems which are really connected only with the functions as medium of exchange and standard of deferred payments. The readings in this and the following chapters, therefore, are concerned with money only as a medium of exchange and as a standard of deferred payments. A loose use of terms in connection with the various functions of money has resulted in much confusion of issues and it is particularly important to keep the distinctions just made constantly in mind.

Bimetallism appears to have been universally in use in Europe until the nineteenth century, though without any conscious adoption on the part of the various nations. Both gold and silver were money, as a matter of course, after once their superiority to other commodities for monetary purposes had been demonstrated. The general belief that a large quantity of money is synonymous with great wealth appears to have been mainly responsible for this universal acceptance of bimetallism as a mere matter of course. To the mercantilist of the seventeenth and eighteenth centuries the demonetization of either gold or silver would have seemed nothing short of suicidal. And it may fairly be said that, even with a correct analysis of the real functions performed by money in mind, it might appear that there was a genuine need for using both gold and silver as money during this period. Reference to the table of the production of the precious metals (No. 44) shows that after the opening of the mines of the New World in the sixteenth century, the annual production was not enormous. Doubtless it was no more than adequate to the needs of the rapidly expanding commerce of the age. This table of the production of the precious metals, it may be stated parenthetically, should also be constantly studied in connection with the later stages of the bimetallic controversy, for the controversies that have arisen are largely attributable to changes in productivity at the mines of gold and silver.

The crux of the difficulty with bimetallism is found in the variations in value of the metals jointly serving as the standard, and these variations in turn are obviously due to the conditions governing the relation of supply and demand for the precious metals. Given variations in the market ratio of the two metals, the operation of Gresham's

law works havoc with the system. It was necessary, however, for a good system of coinage to be developed before the operation of Gresham's law in connection with bimetallism could well be discerned. The whole problem was long obscured because of the perennial debasements of the currency and the perpetual mutilation of the coinage. "Bad money [mutilated or debased] drives out good money." When a uniform currency was achieved it was observed that Gresham's law still operated-that legally overvalued money would drive out legally undervalued money; hence the retention of bimetallism became a debatable question.

The argument on the compensatory action of a bimetallic standard has commonly been put forward as a positive argument for bimetallism. In fact, however, it is rather a negative argument, advanced in refutation of the contention that since the relative values of gold and silver can never be kept steady, owing to variations in the conditions governing supply and demand, Gresham's law will operate to defeat the maintenance of a double standard. In the readings, therefore, the compensatory action is separated from the argument for bimetallism and placed by itself following the discussion of the operation of Gresham's law.

The history of the double standard in various countries shows unmistakably that bimetallism when practiced by one nation independently of others is not a workable system; and the various nations have abandoned it one by one. This abandonment, however, did not come without a vigorous effort on the part of bimetallists to secure the adoption of international bimetallism. It was believed by many scientific students of the question that an international bimetallic system would be free from the objections to national bimetallism. The failure to secure its adoption, however, after thirty years of effort compels us to subject its merits to the test of theory rather than of actual practice. The Latin Monetary Union was the nearest approach to international bimetallism that we have had, but it cannot be regarded as a real test of the principles involved.

A. General Principles

60. THE VARIOUS KINDS OF STANDARDS

The three primary functions of money are to serve as a medium of exchange, a common denominator of value, and a standard of deferred payments. While it is theoretically possible that we might

sharply differentiate these functions and use a separate commodity for each, it is the usual practice to employ the same commodity, or commodities, for all. Indeed, it is almost, if not quite, universal that the same commodity serves as both a common denominator of value and a standard of deferred payments; where differentiation occurs it is only with reference to the exchange function. The choice of a good standard, then, has been influenced by varying considerations; among these the quantity of the monetary material and its stability of value are of the greatest importance. Once the choice of the money material had narrowed down to the precious metals, the problem usually became one of a choice between gold and silver, or the concurrent use of both.

The single standard, or monometallism, is one in which a single metal is used as the basis of the monetary system. If gold, for instance, is chosen for this purpose, silver, as well as nickel and copper and the various forms of paper currency, occupies but a subsidiary position in the system: There is restricted coinage of silver and the bullion content is of less value than the coined money.

Under bimetallism, or a double standard, two metals are made the basis of the system. Both are freely accepted at the mints, and they are coined at a given legal ratio, adjusted as nearly as may be to the current market ratio of the two metals in the form of bullion.

With the parallel standard, the two metals are freely accepted at the mints, but are not coined as dollars or sovereigns at a given legal ratio of weights. Under bimetallism one ounce of gold when coined equals in value, say, sixteen ounces of silver; and individuals are expected to exchange them at that precise ratio regardless of their relative bullion values. With the parallel standard, on the other hand, the pieces of money are coined merely as so many ounces or pounds of metal; and no legal ratio is laid down. They pass legally only at their market ratio as it is adjusted from time to time by the play of economic forces.

A limping standard is not a true standard, but rather a temporary phenomenon found in the process of transition from bimetallism to monometallism. With such a standard, only one metal enjoys free coinage; but the second retains full legal-tender power and is perhaps not directly redeemable in gold. It is also usually called a standard from force of habit.

A kind of limping standard known as the gold-exchange standard has been developed in recent years. By means of the gold exchange,

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