MODERN CURRENCY REFORMS THE MACMILLAN COMPANY NEW YORK BOSTON CHICAGO DALLAS ATLANTA SAN FRANCISCO MACMILLAN & CO., LIMITED LONDON BOMBAY CALCUTTA MELBOURNE THE MACMILLAN CO. OF CANADA, LTD. TORONTO MODERN CURRENCY REFORMS A HISTORY AND DISCUSSION OF RECENT CURRENCY REFORMS IN INDIA, PORTO RICO, PHILIPPINE ISLANDS, STRAITS SETTLEMENTS AND MEXICO BY EDWIN WALTER KEMMERER, PH.D. n PROFESSOR OF ECONOMICS AND FINANCE IN PRINCETON UNIVERSITY, FORMERLY FINANCIAL ADVISER TO THE UNITED STATES GOVERNMENT IN THE PHILIPPINE ISLANDS WITH PARTICULAR REFERENCE TO THE ESTABLISH- MENT OF A GOLD-STANDARD CURRENCY Itfefo gorfc THE MACMILLAN COMPANY 1916 All rights reserved COPYRIGHT, 1916, BY THE MACMILLAN COMPANY. Set up and electrotyped. Published December, 1916. J. 8. Gushing Co. Berwick & Smith Co. Norwood, Mass., U.S.A. TO MY FORMER TEACHER AND COLLEAGUE JEREMIAH WHIPPLE JENKS WHO FIRST DIRECTED MY INTEREST TO THE FIELD OF MODERN CURRENCY REFORMS 34G449 PREFACE THE student of economics often expresses regret that his science does not submit itself to the laboratory method of investigation which has proven so fruitful in the natural sciences. His phenomena are too complex and too closely related to human welfare to permit of their reduction to simple elements and of the bringing together of these ele- ments into different combinations so as to study the vary- ing results. The facts of economic science must be studied in the complex forms in which they develop, and their development is usually slow. Such is particularly the case in monetary science, and one of the results is that this science is shot through and through with controversial problems. The nearest approach the economist has to the labora- tory method in studying monetary problems is through the study of modern currency reforms. Here the phenomena are deliberately manipulated; entire currency systems of long years standing, upon which the business and the credit of millions of people have been based, systems in which prejudice and custom have wrought their work, are entirely transformed in a short period a few years or perhaps only a few months. A silver standard, as in Mexico, or a fiduciary standard, as in Porto Rico, is trans- formed into a gold standard ; a fiduciary standard, as in the Philippine Islands, is transformed into a gold-exchange standard. The unit of value in which prices, wages, and taxes have been expressed, and debts contracted, is slowly raised by a deliberately planned contraction in the relative Vlll PREFACE money supply, as in India; is quickly raised by relative contraction, as in the Straits Settlements ; is carried up by a rising silver market, as in Mexico ; or is forced to give way suddenly to an absolutely new unit of value, as in Porto Rico. These changes are carried through in a short time, and their effects are writ large effects in prices, taxes, wages, in debts contracted in the old currency and henceforth payable in the new, in foreign trade, and in public credit. It is hoped that the discussion of these currency reforms which follows will throw light on fundamental monetary principles, and will afford lessons of value, both by exam- ple and by warning, to the countries of Asia and Latin America, which are expected soon to undertake thorough- going reforms of their currency systems. Each of the five countries whose currency reforms are studied had a different problem, and the experience of each offers its own lessons; it is none the less true, however, that in a number of respects the problems and experiences were similar. Inasmuch as some readers will not be inter- ested in all five of the essays, it has seemed best to make each a unit in itself. To this end, in the interest of clarity, some repetition has been necessary. It is hoped, however, that, through the rather liberal use of cross references, the amount has been kept down to the minimum consistent with clearness. The material of this book has been in process of collec- tion and preparation by the author for a period covering thirteen years, nearly three of which he spent as a govern- ment official in countries whose currency reforms are de- scribed. In that time he has received assistance from many persons to whom the limits of a brief preface prevent indi- vidual acknowledgment, notably government officials, bank- ers, and business men of Manila, San Juan (Porto Rico), Singapore, and the City of Mexico. It is a pleasure to acknowledge specifically and with gratitude valuable assist- ance from Mr. Edmund Enright, Assistant Secretary of PREFACE IX the Interior, Porto Rico ; Frank A. Branagan, formerly Treasurer of the Philippine Islands ; Henry C. Ide, for- merly Secretary of Finance and Justice of the Philippine Islands ; J. O. Anthonisz, formerly Treasurer of the Straits Settlements, whose recent book on the Straits Settlements currency reform came to the author's attention after the present essay on that subject was in the hands of the printer ; John Anderson, formerly Governor of the Straits Settlements ; Jeremiah W. Jenks, Professor of Government in New York University ; James W. Beardsley, Chief Engi- neer, Porto Rican Irrigation Service ; Jos Limantour, for- merly Finance Minister of Mexico; Clarence R. Edwards, formerly Chief of the Bureau of Insular Affairs, War Department; and Frank R. Maclntyre, at present Chief of the Bureau of Insular Affairs. Valuable assistance in the reading of manuscript was rendered by my colleagues in the Department of Economics and Social Institutions in Princeton University, David A. McCabe, Walter M. Adriance, and Arthur N. Young. Last but not least I wish to express my gratitude to my former student and present colleague, Neil Carothers, for most helpful and painstaking assistance in the reading of proof. PRINCETON UNIVERSITY, October 19, 1916. CONTENTS PART I THE INDIAN CURRENCY REFORM CHAPTER I PAGES INDIAN MONETARY HISTORY PRIOR TO 1892 . . . . 3-10 Character of treatment, 3-4. Coinage history prior to 1892 : Origin of "government rupee," 4-6. Efforts to intro- duce gold into circulation, 6-7. Agitation for currency re- form, 7-8. Paper currency in India to 1892, 8-10. CHAPTER H HERSCHELL COMMITTEE INVESTIGATION AND REPORT . . . 11-34 Events leading to appointment of Herschell Committee, 11-13. Constitution and work of Committee, and charac- ter of its report, 13-14. Financial burdens and inconven- iences imposed upon the Indian Government by decline in the gold price of silver, 14-17. Depreciation of silver or appre- ciation of gold? 17-22. Evil effects of the fall of exchange through influence on Indian commerce : General statement, and figures showing proportions of India's foreign trade with gold standard and with silver standard countries, respectively, 22-24. Declining exchange and India's export trade, 24-28. Temporary oscillations in exchange, 28-29. Hardships caused to Europeans in India by the fall in exchange, 29-30. Obstacles to the increase of government revenues, 31-32. Herschell Committee accepts with some modifications pro- posals of Indian Government, 32-33. Herschell Commit- tee's recommendations adopted, 33-34. CHAPTER III RAISING THE RUPEE TO A GOLD VALUE OF 16 PENCE . . 35-71 Indian mints closed to the free coinage of silver, 35-37. Fall in price of silver, 38-39. Temporary rise in exchange Xll CONTENTS PAGES and suspension of sale of council bills, 39-48. "Starving the circulation," 1893-1898, 48-55. To what extent did the rupee appreciate between 1893 and 1898? Relation be- tween exchange rates and the price level, 62-66. Discount rates, 1893-1898, 66-69. Absolute or merely relative con- traction of currency, 1893-1898? 70-71. CHAPTER IV THE FOWLER COMMITTEE'S INVESTIGATION AND REPORT . . 72-94 Indian Government's proposals for stabilizing exchange, 72-73. The Fowler Committee, 73-74. Proposals for bimetallism, 74-75. Proposals to return to silver standard, 76-77. Proposals for a gold standard without a gold cur- rency : The Probyn plan, 77-79. The Lindsay plan, 79- 92. The Indian Government's proposals, 92-93. Fowler Committee's attitude concerning gold coin and a gold reserve, 93-94. A i6d. gold par recommended, 94. CHAPTER V INDIAN CURRENCY FROM 1899 TO 1907 95-112 Prosperity of India and increasing demand for rupees, 95- 99. The new supply of rupees and the mechanism by which its gold parity was maintained : Issue of currency notes in India against sovereigns and silver bullion deposited in Lon- don, 100-104. The Gold Standard Reserve, 104-108. The circulation of gold coin in India, 108-112. CHAPTER VI CRISIS OF 1907-1908 113-123 Causes of crisis, 113-115. How did the Government meet the emergency? Sale of council bills reduced, 115-116. Policy of paying out gold freely abandoned, 1 16-1 17. Sale of telegraphic transfers on London instituted by Government, 117-118. Influence of crisis upon Government's currency reserves, 1 18-1 20. Criticism of Government'spolicyin crisis, 120-123. CHAPTER VII INDIAN CURRENCY SINCE CRISIS OF 1907-1908 .... 124-147 Reserve funds too small, 125-126. Large accumulation of rupees accompanied by temporary suspension of coinage, CONTENTS xiii PAGES 126-127. Proper size of Gold Standard Reserve, 127. Location of Gold Standard Reserve, 127-129. Composition of Gold Standard Reserve, 129-133. Convertibility of rupees into gold on demand, 134-135. The paper currency and the Paper Currency Reserve since the crisis of 1907-1008, 135-138. Gold circulation and proposals for coining gold in India, 138-145. Indian currency since the outbreak of the European War, 146-147. APPENDIX A A SELECTED BIBLIOGRAPHY ON INDIAN CURRENCY . . . 140-152 PART II THE PORTO RICAN CURRENCY REFORM OF 1899-1900 CHAPTER I CURRENCY HISTORY OF PORTO Rico PRIOR TO THE AMERICAN OCCUPATION 155-170 General character of Porto Rican currency reform, 155. Monetary history of Porto Rico from 1879 to the reform of 1895, 155-159. The currency reform of 1895 : A distinctive Porto Rican coinage introduced, 161-165. Porto Rican bank notes, 165. How the new currency system worked, 166-169. Spanish- American War and the Porto Rican currency, 169-170. CHAPTER II CURRENCY REGULATIONS UNDER UNITED STATES MILITARY GOV- ERNMENT 171-177 Confusion caused by various rates of exchange between Porto Rican and United States currency, 171-174. Govern- ment declares an official rate of 60 cents to the peso, 174-176. Discrimination against American national bank notes, 176-177. CHAPTER III FORMULATION OF A PERMANENT GOLD STANDARD PLAN . . 178-202 Question of an equitable rate of conversion : Interests of holders of Porto Rican currency, 179-180. Interests of debtors and creditors, 180-185. Advocates of a high rate of conversion, 185-187. Advocates of a low rate of conversion, xiv CONTENTS PAGES 187-191. Sixty-cent rate adopted, 191-193. How should the transition to the new currency basis be effected? 193-199. The Porto Rican currency question in the United States Congress, 199-202. CHAPTER IV PUTTING THE UNITED STATES CURRENCY SYSTEM INTO OPERATION IN PORTO Rico 203-209 Work of substituting United States money for Porto Rican money conducted by special agents of the United States Treasury, 203-205. Kinds and denominations of United States money paid out, 205-207. Inadequate number of exchange offices, 207-209. CHAPTER V SOME ECONOMIC RESULTS OF THE PORTO RICAN CURRENCY REFORM 210-224 Influence on debts, 210. Influence on foreign trade, 210- 212. Influence on domestic wholesale prices, 212-213. Influence on retail prices, 213-219. Influence on house rents, 219-220. Influence on wages, 220-223. Were the price and wage changes permanent? 223-224. CHAPTER VI COULD THE PLAN FOR CONVERTING PORTO RICAN CURRENCY INTO UNITED STATES CURRENCY HAVE BEEN IMPROVED? . . 225-233 The rate of canje, 225-228. Suggested improvements in reform plan, 228-233. APPENDIX A PORTO RICAN EXCHANGE RATES ON NEW YORK CITY, AND THE EXCHANGE AND BULLION VALUES OF THE MEXICAN PESO m TERMS OF UNITED STATES CURRENCY, MONTHLY, 1890-1905 235-236 APPENDIX B EXCHANGE AND BULLION VALUES OF PORTO RICAN PESO IN TERMS OF UNITED STATES CURRENCY, MONTHLY, 1896-1900 237-238 APPENDIX C BIBLIOGRAPHY ON PORTO RICAN CURRENCY REFORM . . 239-241 CONTENTS PART III THE PHILIPPINE CURRENCY REFORM CHAPTER I MONETARY CONDITIONS PRIOR TO THE AMERICAN OCCUPATION Varied monetary experience prior to 1877, 245-247. Origin of fiduciary standard in Philippines, 247-249. Kinds of currency in circulation at time of American occupation, 249-250. Explanation of Philippine fiduciary standard for period 1877 to 1898, 250-253. CHAPTER II THE CURRENCY PROBLEM OF THE MILITARY GOVERNMENT Character of the problem, 254-256. Proposal that Gov- ernment use United States currency exclusively, for its fiscal operations, 256-259. Proposal that Government use local currency exclusively, for its fiscal operations, 259-262. Proposal that Government use both currencies for its fiscal operations adopted, 263-266. Efforts of Government to maintain a two to one ratio, 267-276. PAGl 245-25 254-27' CHAPTER III DIFFICULTIES WITH A DEPRECIATING SILVER STANDARD . . 277-299 Quasi bimetallism, 227-281. Silver standard and the Government's finances: General statement, 281. Financial losses and uncertainties in budget, 282-288. Accounting difficulties, 288-290. Difficulties in connection with foreign trade : Extent of trade with countries on the gold standard and with countries on the silver standard, 290-292. Ex- change fluctuations and foreign trade, 292-296. Forward exchange contracts, 296-298. Attitude of different classes toward proposals for a gold standard, 298-299. CHAPTER IV PROPOSALS FOR PERMANENT CURRENCY REFORM . . . 300-313 Proposal for a silver standard with a new coinage, 300- 301. Proposal to extend United States currency system to XVI CONTENTS Philippines, 301-306. Proposal &r a distinctive Philippine coinage on a gold basis: General statement, 306. Early formulation of plan, 307-308. The Philippine currency problem in the United States Congress, 308-313. CHAPTER V THE FUNDAMENTAL LAWS OF THE PHILIPPINE CURRENCY REFORM 314-323 The Philippine Coinage Act, 314-317. The Philippine Gold Standard Act : Main provisions of Act, 3i7~3 I 9- Tne principle of the gold-exchange standard explained in its appli- cation to the Philippines, 319-322. Other provisions of Act, 322-323- CHAPTER Vt WITHDRAWAL OF LOCAL CURRENCY FROM CIRCULATION . Nature of problem, 324. Contention that old currency should be redeemed at par in the new, 325-327. Unfavor- able public reception of the new currency, 327-333. Drastic measures to force local currency out of circulation : Need of drastic measures, 332-333. Auxiliary measures, 333~33 6 - Prohibitive taxes levied on use of local currency, 336-341. Results, 341-344. Effect of Philippine currency reform on prices, 344-345. Withdrawal of local currency from circula- tion practically completed by the spring of 1905, 345-346. 324-346 CHAPTER VII DANGER TO THE NEW CURRENCY FROM THE RISE IN THE PRICE OF SILVER 347~358 Phenomenal rise in price of silver in 1905-1906, and problem it presented to Philippine Government, 347-349. Deter- mination of melting and shipping points of Philippine coins, 350-353. Measures taken by Government to prevent new Philippine coins from being melted or .exported, 354-356. Substitution of gold for silver as part of certificate reserve, 356-358. CHAPTER VHI THE RECOINAOE 359-364 The enabling Act of Congress, 350-360. Recoinage measures adopted by Philippine Government 76c CONTENTS XVll The amount recoined, 361-362. Putting the new coins into circulation, 362-363. Domestic drafts sold by Government, 363-364. CHAPTER DC THE GOLD STANDARD FUND SINCE THE RECOINAGE OF 1906-1909 365-382 Seigniorage profits realized on recoinage, 365-367. Size of Gold Standard Fund, 367-368. The investment of part of Gold Standard Fund, 369-375. Objections to depositing part of Fund in local banks, 375-377. Objections to loan- ing part of Fund, 377-379. Suggested changes in Gold Standard Fund, 379-382. APPENDIX A UNWILLINGNESS OF THE MANILA BANKS TO RECEIVE UNITED STATES CURRENCY DEPOSITS FROM THE PUBLIC 383-385 APPENDIX B BIBLIOGRAPHY ON PHILIPPINE CURRENCY REFORM . 386-388 PART IV THE STRAITS SETTLEMENTS CURRENCY REFORM CHAPTER I THE STRAITS SETTLEMENTS CURRENCY PRIOR TO THE REFORM OF 1903 Early history of Straits Settlements currency, 391-392. The circulation at beginning of the year 1903, 392-393. Dissatisfaction with silver standard, 393-394. Currency reform plan of Singapore Chamber of Commerce, 394-396. The Straits Settlements Currency Committee, 396-397. Instability of Singapore exchange, 1891 to 1901, 398. Sterling obligations of Government, 398-399. Foreign trade of Straits Settlements, 1891 to 1901, with gold standard countries and with silver standard countries, 399-401. Other disadvantages of silver standard, 401. Various plans proposed for introducing gold standard, 401. 391-401 XV111 CONTENTS CHAPTER II A CURRENCY REFORM PLAN ADOPTED Main features of plan, 402-404. Heavy shipments of Mexican and British dollars to the Straits Settlements, 404. The new dollar placed in circulation, 404-405. Old dollar demonetized, 405-406. Recoinage completed, 407. PAGES 4O2-4O7 CHAPTER III RAISING THE DOLLAR TO TWENTY-EIGHT PENCE The course of appreciation in the gold value of the Straits Settlements dollar, 408-410. Period of appreciation one of excessive speculation in exchange in Singapore, 410-416. Gold par of dollar fixed at 2&d., 416-419. Principle of gold- exchange standard rejected, 419-420. Reasons given for its rejection, 420. Inadequacy of these reasons, 420-423. 408-423 CHAPTER IV RESULTS OF RAISING DOLLAR TO TWENTY-EIGHT PENCE . Influence on domestic trade, 424-426. Influence on foreign trade : Transit trade, 426-428. Influence on export trade in local products and import trade in goods for home consumption, 428-433. Influence on equities between debtor and creditor, 433-439. Advisability of a recoinage in 1905 and of a 23. par, 439-444. 424-444 CHAPTER V RISE IN THE PRICE OF SILVER AND MEASURES TAKEN TO PROTECT THE CURRENCY The problem which the rise in the price of silver in 1905- 1906 presented to the Government, 445. Secondary meas- ures for protecting currency, 446-447. Recoinage : Plan adopted, 447-448. Results, 449. 445-449 CHAPTER VI ADOPTION OF GOLD-EXCHANGE STANDARD .... General statement, 450. The Straits Settlements cur- rency notes out of the functioning of which the gold-exchange 450-459 CONTENTS XIX PAGES standard developed, 450-452. Decline in dollar value of Note Guarantee Fund when gold value of dollar was raised, 452-453. Beginnings of gold-exchange standard, 453-458. How the gold-exchange standard in the Straits Settlements has worked, 458-459. APPENDIX A RATES OF STERLING EXCHANGE IN SINGAPORE COMPARED WITH RATES IN HONGKONG AND WITH THE BULLION VALUES OF THE BRITISH AND THE STRAITS SETTLEMENTS DOLLAR, 1902-1906 460-461 APPENDIX B BIBLIOGRAPHY OF STRAITS SETTLEMENTS CURRENCY REFORM, GIVING PRINCIPAL REFERENCES CITED . . . 462-463 PART V THE MEXICAN CURRENCY REFORM, 1903-1008 CHAPTER I INTRODUCTION "... 467-470 Mexico's historical position as a silver producer, 467. Prominent place held by Mexican dollar and its lineal pred- ecessors in the world's monetary history, 467-469. Mexico in an exceptional position because of its large silver mining industry, 469-470. CHAPTER II ECONOMIC CONDITIONS IN MEXICO IMMEDIATELY PRECEDING THE CURRENCY REFORM OF 1903-1908 471-494 Currency system of Mexico prior to 1903, 471-473. The silver standard and the Mexican Government's finances, 473- 477. The silver standard and Mexico's foreign trade: Extent of variations in gold value of silver in Mexico, 1893- 1902, 477-479. Influence of rising exchange upon the re- turns received for national products, 479-483. The silver standard and the investment of foreign capital in Mexico, XX CONTENTS PAGES 484-488. Alleged advantages of the silver standard for Mexico: Sentiment in Mexico in favor of silver standard, 488-489. Advantage of silver standard to silver mining industry, 489. Advantage to export trade, 490-493. Pro- tection to home industries given by silver standard, 493-494. CHAPTER III COMMISSIONS INVESTIGATE THE SUBJECT OF CURRENCY REFORM FOR MEXICO 495-518 Commissions on International Exchange, 495-499. Mexican Monetary Commission : Membership, and task as- signed, 497-498. Organization and apportionment of work, 498-502. Work of fifth subcommission representing Com- mission as a whole: Its problem, 502-503. Recommends abandonment of silver standard, 503. Recommends a new silver peso and new fractional coins, 503-505. Favors Indian plan for attainment of gold standard, 505-506. Considers question of justice between debtor and creditor, 506-508. Considers other transitional matters, 508. The question of a gold reserve: Disagreement upon, leading to a majority and a minority report, 508-509. The majority report un- favorable to immediate creation and use of a gold reserve, 509-511. The minority report favorable to the immediate establishment and use of a gold reserve, 511-512. The debate over a gold reserve, 512-518. Monetary Commis- sion approves report of fifth subcommission and submits it as the Commission's report to Finance Minister, 518. CHAPTER IV A GOLD-STANDARD PLAN ADOPTED Si 9" 533 A currency reform bill modeled closely upon plan recom- mended by Monetary Commission is submitted to Mexican Congress by the Finance Minister, 519-523. Reception given to proposed currency reform legislation, 523-524. Currency reform bill passed and various executive orders issued under its authority, 524-526. Restrictions placed upon the issue of bank notes, 526-530. Measures to allevi- ate the hardships expected to result to the mining interests from the currency reform, 530. Establishment of a re- serve fund and creation of a commission to administer it, 531-533- CONTENTS xxi CHAPTER V PAGES How THE PLAN WORKED 534-547 Gold standard plan favorably received, 534-535. Move- ment of exchange rates in Mexico, 1901-1908, 535. Influx of pesos into Mexico, 536-537. Problem presented to Mexico by the rise in the gold price of silver in 1905-1906, 538-539. How the Mexican Government solved the prob- lem and incidentally placed the currency system upon a strict gold standard, 539-547. Mexican gold standard breaks down as a result of recent domestic revolutions, 547. APPENDIX A EXCHANGE RATES IN THE CITY OF MEXICO ON NEW YORK, DE- MAND BANK PAPER, 1903 TO 1908, MONTHLY, EXPRESSED IN TERMS OF THE NUMBER OF UNITED STATES CENTS TO A MEXICAN PESO 549 APPENDIX B BIBLIOGRAPHY OF MEXICAN CURRENCY REFORM SHOWING PRIN- CIPAL REFERENCES CITED 550-552 GENERAL INDEX 553-564 PART I THE INDIAN CURRENCY REFORM MODERN CURRENCY REFORMS CHAPTER I INDIAN MONETARY HISTORY PRIOR TO 1892 ASIDE from the discontinuance of bimetallism by France and the other states of the Latin Union in the early seven- ties of the last century, no recent currency reform has aroused such widespread interest and keen controversy among economists as that of India. Although India is " different" from occidental countries, and her problems often appear remote, none the less few chapters in mone- tary history are more illuminating to the principles of monetary science than this Indian experience. The litera- ture on the subject is voluminous ; scarcely a year passes that does not produce several books on Indian currency. Since 1892 the subject has been investigated by three governmental commissions and each has issued an elabo- rate report, while, to the inquiring student, the magazine literature seems to be limitless. Despite this great amount of material, however, there is nowhere available an ac- count of the reform that is at once brief, comprehensive, and scientific. 1 And yet this is the type of treatment for such a subject that most American readers desire. This essay is an attempt to meet the needs of such American readers, and to furnish a background for the study of 1 The nearest approach to such an account is one by A. Piatt Andrew on Indian Currency Problems of the Last Century, in The Quarterly Journal of Economics, XV, 1901, pp. 483-516. This article, however, covers only about half of the period of the reform. 3 4 MODERN CURRENCY REFORMS subsequent currency reforms in other countries reforms in which the governmental authorities have often drawn heavily upon the lessons of Indian experience. Coinage History Prior to 1892 The earliest monetary system of India 1 which can be traced was based upon weights of fine metal, silver, gold, or copper, preference being given to silver. 4 'The unit of weight was the rati (1.75 grs. troy), which was the seed of the . . . 'wild liquorice.' A hundred ratis . . . formed the . . . sataraktika, a weight of fine metal which . . . has developed into the rupee of the British Government. . . . From the standard weight of 100 ratis originated in 1542 the rupyam (or silver coin) of Sher Shah, weighing some 176 grs., soon to be followed by a multitude of local rupees, each with its own weight and fineness. The earliest English rupee was the 'Rupee of Bombaim' of 1677, weighing 167.8 grs. But it was not till the establish- ment of British rule in 1758 that British rupees were largely coined." 2 A Bengal regulation of 1793 mentions no less than 27 varieties of rupees as current in the several districts. 3 While silver was the most widely used standard over India, gold coins also circulated at varying rates, and appear to have been the principal currency in Madras. 4 At intervals gold coins in different provinces were made legal tender, but the circulation of these coins was usually at market valuations based upon the price of bullion. Although the East India Company as early as 1806 had declared its intention to put an end to the losses and inconveniences 1 The material of this early history has been taken chiefly from Robert Chalmers, A History of Currency in the British Colonies, pp. 336-348. 2 Ibid., pp. 336-337. 3 Ibid., p. 337 and note. 4 Ibid., pp. 340-343. INDIAN MONETARY HISTORY PRIOR TO 1892 5 arising from the " circulation of so many denominations of gold and silver coins of different values in different dis- tricts [by establishing] one general system for the forma- tion of the coin for the currency of the whole of our posses- sions on the Continent of Asia/' 1 it was not until 1835 that one uniform silver rupee was made the standard throughout British India. The type of rupee chosen both as to weight and fineness was the Madras rupee of 1818. This rupee had had its gross weight of 180 grains based upon that of one of the earlier rupees, and its fineness of 1 1/ 1 2 based upon that of English gold coins, which a report of a Committee of Council of 1803 on the London Mint considered "would be equally proper for silver coin." 2 From the Act (No. XVII) of 1835 to the present time, the weight and fineness of the rupee has remained un- altered ; although in 1862 (Act No. XIII) the name of the coin was changed from " Company's rupee" to "the government rupee," and the East India Company's coat of arms gave place to the Queen's effigy as the emblem on the coin. Other silver coins are the half-rupee, quarter-rupee or 4-anna piece, and eighth-rupee or 2 -anna piece. All of these fractional pieces are of the same fineness as the rupee and of proportionate weights. The rupee and half-rupee are unlimited legal tender, while the other silver coins are legal tender only for fractions of a rupee. Down to June 26, 1893, tne Indian mints were open for the free coinage of silver when offered in sums of not less than 1000 tolas* The Coinage charges were 2 per cent for silver 1 1/ 1 2 fine, in addition to .1 per cent for melting. 4 The Act of 1835 declared that "no gold coin shall hence- 1 Cf. Chalmers, ibid., p. 338. 2 Ibid., p. 338 and note. 8 A tola is 180 grains of silver, 11/12 fine, or 165 grains of pure silver with 15 grains of alloy the exact content of a rupee. 4 A refining charge was also made when the silver was lower than 11/12 fine or otherwise unfit for coinage. 6 MODERN CURRENCY REFORMS forward be a legal tender for payment in any of the territo- ries of the East India Company." It none the less author- ized the coinage of a gold piece known as the mohur, of the same weight and fineness. as the rupee, which was to cir- culate at its bullion value. For the period from 1800 to 1835 Frederick C. Harrison estimated that Indian gold coins to the amount of 3.8 million ounces of fine gold were minted in England. 1 These coins were chiefly in units known as the pagoda 2 (worth about $1.81) which circulated in southern India, and the mohur (worth approximately 15 rupees or about $7.10) which circulated more widely. Efforts to Introduce Gold into Circulation. After 1835 efforts were frequently made to introduce gold into cir- culation; and as early as 1841 government treasuries were authorized to receive gold mohurs at the rate of 15 rupees to the mohur. The new mohurs, however, were not popular, and by 1847 gld formed no part of the currency. Then followed the gold discoveries of California and Aus- tralia, and the resulting decline in the value of gold relative to silver. Gold flowed into India in large quantities, and by 1852 some five million rupees worth of gold had piled up in the government treasuries. Not finding these gold coins acceptable for public expenditure, the Government issued a Notification (December 22, 1852) that beginning with the new year "no gold coin will be received on account of payments due, or in any way to be made, to the Govern- ment in any public treasury within the territories of the East India Company." 3 Gold might still be brought to the mints for coinage. It did not depreciate to the extent feared, and soon there ap- peared many proposals for the extended use of gold in India's circulation. 4 One widely favored proposal was for the 1 Cf. Chalmers, p. 343. 2 Ibid., p. 342. 3 Ibid., p. 344. 4 Russell, Henry B., International Monetary Conferences, etc., pp. 31-32. INDIAN MONETARY HISTORY PRIOR TO 1892 7 circulation of the British sovereign as the equivalent of ten rupees, with a 2o-rupee legal tender limit. In November 1864 the Government of India issued a Notification making sovereigns and half-sovereigns receivable at government treasuries at the rate of 10 rupees to the sovereign, and authorizing the treasuries to pay them out to any person willing to receive them in payment of claims against the Government. The Calcutta Chamber of Commerce in 1866 recommended the adoption of a gold currency ; and in the same year the Mansfield Commission made its Re- port 1 advising the Government, in view of the general wish of the country, to cause a legal tender of gold to be a part of the currency arrangements of India. In accordance with the recommendations of the Commission, and in expectation of the early introduction of gold as a legal tender in India, the Government, on the 28th of October, 1868, issued a Notification that British and Australian sovereigns and half-sovereigns should thenceforward be " received in all the treasuries of British India and its dependencies, in payment of sums due to the Government, as the equivalent of 10 rupees 4 annas, and 5 rupees 2 annas, respectively; and that such sovereigns shall, whenever available to any government treasury, be paid at the same rates to any persons willing to receive them in payment of claims against the Government." 2 The gold mohurs of 1835 were to be received in like manner at the rate of 1 5 rupees to the mohur. Shortly after this action was taken, however, the states of the Latin Union closed their mints to the free coinage of silver, and the silver price of gold began its long and pro- nounced upward move, with the result that gold practically disappeared from circulation in India. Agitation for Currency Reform. This breakdown in the comparatively fixed ratio that had so long existed between the values of gold and silver, and the subsequent 1 House of Commons Papers, No. 148 of 1866. See also Chalmers, pp. 344-345. 2 Chalmers, p. 345. 8 MODERN CURRENCY REFORMS instability in India of English exchange and exchange on other gold standard countries, caused serious dis- turbances in India's foreign trade, and added greatly to her burdens in the meeting of her gold obligations. Be- ginning about 1873, therefore, there was a twenty-year pe- riod of agitation for currency reform in India. This period has been divided into three parts by Dr. H. R. Read in an unpublished dissertation on The Development of a Qualified Gold Exchange Standard in India. 1 They are: (i) 1873 to 1878, a period characterized by dissatisfaction with the silver standard, and agitation for reform directed chiefly toward proposals for the closing of the Indian mints to the free coinage of silver, usually with the idea of sooner or later placing the country upon a gold standard. (2) 1878 to the calling of the International Monetary Conference at Brussels in 1892, a period in which the hopes for currency reform in India in the minds of her leading statesmen rested upon the securing of an international agreement for bi- metallism. In probably no other country of the world was the judgment of leading men so favorable to international bimetallism as in India. (3) From the calling of the Brussels Conference in 1892 to the closing of the Indian mints in June 1893, a period when, largely as a result of English hostility to bimetallism, all hope of securing an international bimetallic agreement was lost. Paper Currency in India to 1892 Before discussing the events immediately leading to the closing of the Indian mints, it will be well to describe briefly India's paper currency system, since this system played an important role in the country's subsequent monetary history. The banks of India had been denied the privilege of bank- 1 The dissertation was written in 1913 and is deposited in the Cornell University Library. See pp. 32-33. INDIAN MONETARY HISTORY PRIOR TO 1892 g note issue since I86I. 1 At that time the Indian Govern- ment assumed a monopoly of the right to issue paper money a monopoly which it has since retained. The Indian notes are based upon a plan fundamentally like that of the Bank of England notes under the Peel Act of 1844, the chief difference being that they are issued by a government department, instead of by an issue department of a bank. 2 There is a fixed amount of notes issued against securities. This " fiduciary circulation" was originally fixed at 40 million rupees but had been raised from time to time, until on March 31, 1893, it stood at 80 million. 3 All other notes were required to be supported by silver or gold coin or bullion. 4 For the purposes of the paper currency India was divided into "circles," at that time eight in number. The notes were legal tender only in the " circle" for which they were issued, and as a rule were con- vertible into rupees only at the office of issue, and (except in the case of British Burma) at the principal city of the Presidency to which the " circle" of issue belonged. 5 Inas- 1 Prior to 1 86 1 the banks of Bengal, Madras, and Bombay had the right of issue. 2 The original Act establishing the government paper currency was Act No. XIX of 1861. It was amended from time to time, and codified in Act XX of 1882 which was the main act in force in 1893. Chalmers, pp. 346-347. 3 Report of the Committee Appointed to Inquire into the Indian Currency, London, (C. 7060), 1893, known by the name of its chairman, Lord Herschell, and hereafter cited as "Herschell Committee Report," sec. 71. 4 They were issuable on demand in exchange for (a) current silver coins of India at par; (b) silver bullion or foreign silver coins on the basis of 165 grains of pure silver to the rupee plus a charge of 2.1 per cent to cover coining and melting expenses ; (c) a limited amount of gold bullion at rates to be fixed by the government from time to time ; (d) notes of other denominations of the same "circle." Chalmers, p. 346. 6 Herschell Com. Rep., sec. 71. Writing in 1891 Mr. F. C. Harrison said : "There are at present eight issuing circles, which as a rule only cash their own notes, an exception being made in favor of travellers, and also on those occasions when the encashment of foreign circle notes suits the in- terests of Government. It has always been considered impracticable to have one note changeable throughout the country. Notes of large denom- inations [ the denominations varied from 5 rupees to 10 thousand 10 MODERN CURRENCY REFORMS much as the law did not state where the note reserves should be located, it was the policy of the Government to shift the funds in the note reserve from district to district, and from treasury to treasury, through debits and credits, so as to count surplus silver accumulations in whatever govern- ment treasuries located as part of the Paper Currency Re- serve, and to release for more active services of Government the silver which had accumulated as note reserve in places where coin was in stronger demand. 1 At the end of March 1893, the total circulation of govern- ment notes was in round numbers R. 264 millions against which there were held R> 175 millions in coin, R. 8.7 millions in bullion, and R. 80 millions in securities. 2 This note circulation was equivalent to about one fifth of the metallic circulation of India, exclusive of the coin held in the Paper Currency Reserve. 3 rupees ] are commonly employed for remittance purposes, and the result of cashing them freely would be a constant shifting of government funds at considerable expense in order to discharge them." The Economic Journal, I, 1891, p. 726. Cf. infra, pp. 135-136. 1 Harrison, ibid., p. 727. 2 Herschell Com. Rep., sec. 71. 3 Cf. estimates of circulation of India made by F. C. Harrison, later ac- countant general of Madras, in The Economic Journal, I, 1891, pp. 721-751 ; II, 1892, pp. 257-279; and IV, 1893, pp. 262-269; also F. Y. Edgeworth's criticisms of Harrison's method and calculations in Econ. Jour., II, 1892, pp. 162-169; and IV, 1894, pp. 109-113. CHAPTER II HERSCHELL COMMITTEE INVESTIGATION AND REPORT BEFORE the convening of the International Monetary Conference at Brussels in 1892 the opinion became wide- spread in India that the efforts to be made in the Conference to secure an international bimetallic agreement would be as futile as had been those of the international conferences of 1878 and 1 88 1. On February 18, 1892, eight months before the Brussels Conference convened, the Bengal Cham- ber of Commerce declared that it was " impossible for men of business to feel any confidence in the future value of the rupee," and that they believed that this state of things restricted the investment of capital in the country and seriously hampered legitimate enterprise. The Chamber said that if an international bimetallic agreement should prove unattainable, it saw nothing "but the prospect of endless fluctuations in the relative values of silver and gold, attended with a fall in the value of silver of indefinite amount; and the Committee [of the Chamber of Commerce] think that in such case the Govern- ment of India should take steps to have the question of the advisability of introducing a gold standard into India care- fully and seriously considered by competent authorities." 1 In a despatch of March 23, 1892, the Government of India, although urging the Secretary of State to support any pro- posals that might be made by the United States or any other country for the settlement of the silver question by 1 Cf. Report of the Committee Appointed to Inquire into the Indian Currency (Cd. 9390), 1899, sec. n. Hereafter cited under name of the chairman of the Committee, Henry H. Fowler, as " Fowler Com. Rep." 12 MODERN CURRENCY REFORMS international agreement, said that it seemed probable that, failing an international agreement, the United States would be forced to stop the purchase and coinage of silver. 1 They accordingly requested the British Government, in view of this contingency, to take under consideration the question whether any measures, and if so, what measures, could be adopted for the protection of Indian interests. 2 Three months later (June 21), the Government of India declared it to be its "deliberate opinion that, if it becomes evident that the International Conference is unlikely to arrive at a satis- factory conclusion, and if a direct agreement between India and The United States is found to be unattainable, the Government of India should at once close its mints to the free coinage of silver and make arrangements for the introduction of a gold standard." 3 The Brussels Monetary Conference suspended its labors December 17 without having accomplished anything definite in the line of an international agreement, under a resolution to meet again May 30, 1893, " should the Govern- ments approve." 4 But the Conference did not reconvene. Shortly after it suspended its labors the Government of India telegraphed in further detail its proposals to the Sec- retary of State : 1 An important factor in the Indian situation at this time was the fact that the United States, under the provisions of the Sherman Silver Purchase Act of 1890, was compelled to buy 4,500,000 ounces of silver every month, in payment for which it issued "treasury notes." These purchases for a time artificially buoyed up the price of silver, but the accumulation of silver was becoming dangerously large, and the silver market was in a precarious con- dition because of the agitation for the repeal of this Act and the further danger that much of this accumulated silver might be thrown upon the market. 2 Fowler Com. Rep., sec. n. 3 Ibid., sec. n. 4 International Monetary Conference held at Brussels, 1892, Report of the Commissioners on behalf of the United States, and Journal of the Sessions of November 22, 1892 to December 17, 1892, p. 359. HERSCHELL COMMITTEE INVESTIGATION AND REPORT 13 "Our proposal is that we shall take power to issue a noti- fication declaring that English gold coins shall be legal tender in India at a rate of not less than 13^ rupees for one sovereign [i.e., iSd. per rupee]. ... An interval of time, of which the length cannot be determined beforehand, should, we think, elapse between the mints being closed and any attempt being made to coin gold in India. The power to admit sovereigns as legal tender might be of use as a measure ad interim, but it need not be put into force except in case of necessity." l On October 21, 1892, a month before the Brussels Mone- tary Conference convened, the Government of India's proposal of June 21 was referred by the Secretary of State for India to a committee of seven members of which Lord Herschell was made chairman, with instructions to consider the proposals of the Government of India and to advise whether it was expedient for the Home Government to allow them to be carried into effect. The Committee held 1 2 hearings at the India Office in London between October 27, 1892 and February 2, 1893, and examined 28 witnesses. With one exception all the witnesses were Europeans, 16 of them had had business or governmental experience in India or Ceylon, while 3 others were connected with English business houses carrying on trade with India. Of the 25 witnesses who expressed them- selves regarding Indian conditions, 2 13 were opposed to India's going over to the gold standard, and 12 were favor- able to such action. There was no appreciable attempt to secure the opinion of natives of India either through testimony taken in India or written communication. Into an analysis and summary of this testimony the limits of a brief account of the Indian currency reform do not permit us to go. It will be sufficient here to sum- 1 Telegram of Jan. 22, 1893, Fowler Com. Rep., sec. n. 2 One spoke only concerning the currency experience of the United States; one, concerning that of Brazil ; and one, that of Java. 14 MODERN CURRENCY REFORMS marize briefly the conclusions which the Committee drew from the testimony, to give a statement of the supporting reasons, to describe the reform plan recommended, and to consider the chief arguments advanced by the supporters of the plan and by its opponents. The chief defects of the Indian currency system the Herschell Committee found to be : I. Financial burdens and inconveniences imposed upon the Indian Government by the falling rates of exchange with gold standard countries. II. Evil effects of the fall of exchange upon the people of India through its influence on Indian commerce. III. Hardships caused by the fall in exchange upon Europeans in official and business life in India, i.e., persons whose salaries and wages were paid in silver but whose re- mittances home were made upon a gold basis. Let us consider these three alleged defects of the Indian currency system in the order named. I. Financial Burdens and Inconveniences Imposed upon the Indian Government By far the most powerful influence leading to the dis- continuance of the silver standard in India was the financial burden which that system imposed upon the Indian fisc. Every year India had heavy payments to make in England -the so-called "home charges." These payments were on a gold basis, 1 and most of them were comparatively fixed. They covered such items as interest and annuities on the gold debt, salaries, pensions, and leave of absence allowances of employees in the Indian service working in England or employees who had returned to England from India and were there paid on a gold basis, purchases of 1 A small amount of the public debt expressed in rupees and therefore on a silver basis was held in England how much the evidence does not show. Cf. Herschell Com. Rep,, Evidence, Qs. 2227-29. HERSCHELL COMMITTEE INVESTIGATION AND REPORT 15 supplies in England for the Indian service, and other ex- penses incurred for Indian governmental establishments. The total of these home charges for 1892 was computed at 16 millions sterling. 1 From 1872-73 to 1892-93 the net annual disbursements of the Indian Government in England (excluding payments for the discharge of debts and all capi- tal transactions) varied between 13.3 millions and 16.8 millions. 2 The gold value of the rupee as measured by the average exchange rate in London on India for the fiscal year 1872-73 was 22.75^., which meant that it cost India in that year approximately R. 10.55 to lay down a pound sterling in London ; in 1892-93 the average sterling value of the rupee was 14.98^., 3 which meant that it cost India approximately R. 16.02 to lay down a pound sterling in London an increase of 52 per cent in 20 years. But this was not all the story. Not only had the gold value of silver declined rapidly and almost continuously since 1873, but there was every prospect that there would be a greater decline in the near future. Repeated efforts to secure an international bimetallic agreement had failed, and hope for relief in that direction was rapidly passing into despair. Moreover, the threatened panic in the United States arising in large part from the pumping into the circu- 1 "The home charges" were itemized as follows for 1892 by Mr. F. C. Harrison : figures are in millions of pounds. Interest on debt and railroad redemption annuities 8.0 Salaries and establishments out of, but debitable to, India ... 0.6 Annual charges exclusive of stores, pensions, and leave allowances i.o Pensions 3.8 Leave allowances 0.6 Stores and materials 2.0 Total 16.0 Silver in India, Econ. Jour., II, 1892, p. 653. 2 For tabular statement of these home charges by years 1850-51 to 1892-93 see Fowler Com. Rep., App. II, Table No. 9, p. 138. 3 Ibid., p. 136. 16 MODERN CURRENCY REFORMS lation of several million dollars of "treasury notes" each year in payment for the 4,500,000 ounces of silver required to be purchased monthly by the Sherman Silver Purchase Act an amount equal to about one third of the world's monthly production of silver was likely at any moment to lead to the repeal of that Act. This might possibly be followed by an actual dumping upon the silver market of the large mass of silver bullion accumulated in the United States treasury. 1 The financial burdens and the uncertainties in construct- ing the annual budgets which this situation created were serious. According to the Herschell Committee Report, there were remitted to England in the year 1892-93 16.5 millions, which at the average rate of exchange in that year, viz. 14.985^., required a payment of R. 264.8 millions. 2 If this could have been remitted at the exchange rate of 1873- 74, it would have required but R. 177.5 millions. Because of changes in the price and wage levels in England, interest rates, etc., the whole of this difference of R. 87.3 millions could not properly be regarded as a loss tP the Government of India arising from the difference in exchange. "It is certain, however/' said the Herschell Committee, "that India had actually to remit in 1892-93 upwards of Rx. 8,700,000 more than if the exchange had been at its former point. 3 At an estimated exchange is. ^d. per rupee for the past year, a surplus of revenue over expenditures was shown of Rx. 146,600 ; the exchange having fallen to 1 In the Brussels Conference of 1892 this situation was felt to be very serious, even by the opponents of bimetallism. Alfred D. Rothschild, dele- gate of Great Britain, said : " Gentlemen, I need hardly remind you that the stock of silver in the world is estimated at some thousands of millions, and if this Conference were to break up without arriving at any definite result there would be a depreciation in the value of that commodity which it would be frightful to contemplate and out of which a monetary panic would ensue, the far-spreading effects of which it would be impossible to foretell." Int. Mon. Conf. Rep., 1892, pp. 72-73. 2 Herschell Com. Rep., sec. 3. 8 "Rx." is a symbol commonly used in India to refer to tens of rupees. HERSCHELL COMMITTEE INVESTIGATION AND REPORT 17 an average of rather less than 15. 3^., this surplus has been converted into an estimated deficit of Rx. 1,081,900, not- withstanding the improvement of the revenue by Rx. 1,653,300 over the budget estimate. Nor is this all. The Government are compelled to contemplate a further fall, the effect of which cannot be forecast." 1 Sir David Barbour, Financial Member of the Council of the Viceroy of India from 1888 to 1893, said in a published statement : "The immediate cause of our financial difficulties, and the cause which, by comparison and for the time being, dwarfs all others, is the fall in the gold value of silver, which . . . has added to the Indian expenditure in two years more than four crores of rupees. 2 . . . Our financial position for the coming year is at the mercy of exchange, and of those who have it in their power to affect in any way the price of silver. If we budget for the present deficit of Rx. 1,595,100, and exchange rises one penny, we shall have a surplus ; if it falls a penny, we shall have a deficit of more than three crores ; if we impose taxation to the extent of one and a half crores of rupees, a turn of the wheel may require us to impose further taxation of not less magnitude ; another return, and we may find that no taxation at all was required." 3 Depreciation of Silver or Appreciation of Gold? An adequate understanding of the situation will require at this point a brief consideration of the time-honored question as to whether this great decline in the Indian ex- change rates from 1872-93 to 1892-93 was due primarily to a depreciation in the value of silver or to an appreciation in the value of gold. In the year 1872-73 the average gold value of a rupee was approximately 23^.; conversely, the 1 Herschell Com. Rep., sees. 3-5. 2 A crore is 10 million. It is equal to 100 lakhs, a lakh being 100,000. 1 Quoted in Herschell Com. Rep., sec. 5. c i8 MODERN CURRENCY REFORMS MOVEMENTS IN VALUE OF GOLD AND SILVER, 1873-1893 YEAR Value in United King- dom as Measured by Purchasing Power over Com- modities. (Aver- age for 1873 = ioo) 1 Gold Value of Sil- ver. (Average for 1873 = 100) Value of Rupee in India as Meas- ured by Purchas- ing Power over Commodities 3 Value of Silver in China as Meas- ured by Purchas- ing Power over Commodities * Index Numbers Index Numbers Index Numbers Index Numbers Gold 1 Silver' i873 IOO IOO IOO IOO [IOO] 1874 109 107 9 8 9 2 92 1875 116 III 9 6 103 89 1876 H7 104 8 9 IOO 83 1877 118 109 92 77 91 1878 128 113 8 9 72 87 1879 134 116 86 79 83 1880 126 in 88 QI 88 1881 I3 1 114 87 101 84 1882 132 115 87 102 85 1883 135 H5 85 IOI 89 1884 146 125 85 93 88 1885 iS4 127 82 94 88 1886 161 123 77 97 86 1887 163 123 75 96- 88 1888 159 US 72 90 92 1889 154 in 72 85 88 1890 154 124 80 85 88 1891 154 117 76 84 88 1892 163 no 67 76 85 1893 163 98 60 78 84 1 The index numbers for the value of gold are the reciprocals of the Sauer- beck index numbers for the wholesale prices in the United Kingdom of from 43 to 45 commodities. Figures have been adjusted by dividing by a con- stant so that the number for the year 1873 will be 100, thereby making each succeeding figure show the percentage change since 1873. 2 The average gold value of an ounce of British standard silver in London, in i8'73, according to the Pixley and Abell tables, was 59?^. Taking this as 100 and multiplying the index number in the preceding column showing the relative purchasing power of gold over commodities, by the figure showing the percentage decrease or increase in the gold value of silver each year, we arrive at a figure showing the relative purchasing power of silver bullion over commodities for that year. For example, the average price of silver in 1874 was sSjV/. per ounce; the gold index number for 1874, viz. 109, would be multiplied by & or .984 to obtain the silver value index number for 1874, 59i that is, 107.5. 3 Reciprocals of Atkinson index numbers for Indian prices. 4 Reciprocals for index numbers for prices in Shanghai, as given by Irving HERSCHELL COMMITTEE INVESTIGATION AND REPORT 19 average silver value of a pound sterling was 10.4 rupees. Twenty years later the average gold value of the rupee was approximately 15^., and the average silver value of a pound sterling was about 16 rupees. To the people in England it appeared as if the value of silver had fallen by about 35 per cent; to the people in India it looked as if the value of gold had risen by about 54 per cent. Did silver depreciate or did gold appreciate, or did both movements take place ? The value of gold is best expressed by its purchasing power, not over one commodity like silver, but over a large group of commodities ; likewise the value of silver is best expressed by its purchasing power, not over gold alone, but over a large group of commodities. By this test the evi- dence seems conclusive that, regardless of causes and re- gardless of subsequent events, for the greater part of the period 1872-73 to 1892-93, the decline in the gold price of silver was chiefly an expression of an appreciation of gold, not of a depreciation of silver. The character of the evi-\ dence supporting this conclusion may be seen from the preceding table and the following chart, showing the move- ment of the value of gold as expressed in its purchasing power over commodities in England, and that of the value of silver as expressed in its purchasing power over com- modities in England, India, and Shanghai, respectively. Of the four curves that of gold was clearly the most unstable, while that representing the value of silver in Shanghai was the most stable. Silver in England, instead of declining in value, actually moved upward during most of the period doubtless being buoyed up artificially during much of the time by the heavy purchases of silver by the Fisher, in The Rate of Interest, App. xxx, p. 426. They are based upon 20 inland commodities, 17 articles of export and 15 foodstuffs. Inasmuch as the figures begin with 1874 as 100, and as the purchasing power of silver in India fell 8 per cent from 1873 to X 874, I have assumed the same decline for China, calling the 1874 figure 92 instead of 100, and reducing all the others proportionately, thereby making the column comparable with the others. 20 MODERN CURRENCY REFORMS American Government under the Bland-Allison Act and later under the Sherman Silver Purchase Act. Its apparent decline in England down to 1890 was due to the fact that 160 J.50 1.40 130 ^80 ,110 .100 90 SO 70 RELATIVE VALUES OF GOLD AND SILVER As Expressed in Purchasing Power over Commodities / 1873 to 1893 / f * / ... 160 150 140 130 130 110 100 90 80 70 / x / / "" * ' A ^..''' ~r Js3 / \ / ^** S. ^ / 3 &2 s . y y \ * * v.* i* ^ \ / s, s \ / - 1 V / \ y \ / , 5 \ / , s..^ * / I AD ^d \ \ / / \ \ L \ / & ^ IJV , -- s X, y s N p *i 2 ^ ,_ r ' V - B M ^ SaaSsaaaSlilasSSaisa the price of silver bullion was always stated in terms of the rapidly appreciating gold money of the country. In India the value of the rupee as measured by its purchasing power over commodities l varied much less widely than did that of the pound sterling in England and this is par- ticularly true if one eliminates, as it is reasonable to do, the heavy drop in the value of the rupee (i.e., rise in rupee prices) during the period of the great Indian famine of 1877-79. While the value of the rupee in India was by no 1 The Atkinson index numbers for India are based on prices of thirty-eight native commodities gathered from representative parts of India, and weighted roughly according to the relative importance of the respective commodities. Cf. Jour. Royal Stat. Soc., LX, 1897, pp. 84-124; and LXXII, 1909, pp. 496-573; also U. S. Bur. of Labor Statistics, Bulletin No. 173, 1915, pp. 276-282. HERSCHELL COMMITTEE INVESTIGATION AND REPORT 21 means stable, and while from 1887 to 1893 it was less stable than was the pound sterling in England, none the less, taking the period as a whole, the rupee varied much less widely in its value than did the pound. For the pound the extreme range of the index numbers was 63 points (100-163) ; while for the rupee it was but 31 points (103-72). Ignoring the worst famine year, i.e. 1878, the range for the rupee was but 27 points ( 1 03-76).* The standard coefficient of dis- persion for the fluctuations in the value of the pound (1873- 93) was .137, and that for the fluctuations in the value of the rupee was .106. We may. conclude therefore that from 1873 to 1893 the increase in India's home charges were in the main not nominal but real, since the unit in which her fixed obligations were expressed had been increasing rapidly in size. 1 She was like a merchant who had agreed to deliver, over a long period of years, in return for a lump sum payment, a certain number of yards of cloth of a given kind annually and who unexpectedly found that the yardstick was in- creasing in size three to four per cent a year. 2 This analogy, like most analogies, is not entirely accurate. The rupee did depreciate during the latter years of the period, while gold during those years was comparatively stable. Furthermore, many of the supplies India was buy- 1 Another series of price index numbers for India was prepared by Sir James Wilson in connection with a paper he read before the East India Association in London in 1911. It covered: (i) eleven imported articles, including iron, coffee, cotton goods, sugar, kerosene, and salt ; and (2) seven food grains at selected stations throughout India. For the period 1861-90 by decades the index numbers for certain groups of commodities were : YEARS n IMPT. ARTS. 7 FOOD GRAINS 1861-70 in 115 1871-80 90 117 1881-90 84 107 Cf. [London] Economist, July 15, 1911, p. 123. 2 Inasmuch as the purchasing power of the rupee in India fell somewhat, particularly during the years 1887 to 1892, a small part of the increase in the home charges may be looked upon as nominal. 22 MODERN CURRENCY REFORMS ing in gold standard countries were being bought at de- clining gold prices as gold depreciated. The following extract from the testimony of Mr. Frank Forbes Adams, an English merchant who had lived in India seventeen years, suggests certain offsetting factors that were not adequately allowed for in most of the official statements emanating from India : " The loss on the home charges has largely increased, and yet, in that connection, I should like to say that it seems to me that usually the amount of loss to the Government in official statements and otherwise is very much exagger- ated. For instance, in the Blue-book, the statistical ab- stract of British India, . . . they take every loan as if it had been raised on the equivalent of 10 rupees to the i, that is, 2S. exchange, whereas very few loans indeed have been raised at such a high rate as that. A great many of them have been raised at varying rates from is. nd. to is. gd. down to is. >jd. ; that is, one point. Sometimes the loss on the annual amount spent by the Government in stores in this country is added, whereas, as a matter of fact, it is a very ordinary transaction, where you buy the stores at the gold price and draw for them at the price you have paid at the exchange of the day. There is no actual loss to govern- ment. They have the advantage of a fall in the gold price. Then another point ... is, that many of those loans were presumably raised in England, because the rate of interest was lower in England at the time than in India ; and there- fore, where annually the Government of India, against the loss by exchange in remitting their home charges, have a gain in interest as compared with what they would have been paying in rupees had they raised the money originally in rupees, they should set that against it as a deduction." 1 1 Herschell Com. Rep., Evidence, Q. 1894. HERSCHELL COMMITTEE INVESTIGATION AND REPORT 23 //. Evil Effects of the Fall of Exchange through Influence on Indian Commerce The second evil of the Indian currency system in 1893, and one emphasized by the Herschell Committee, was the harmful influence of a falling and fluctuating exchange upon India's foreign trade, particularly her import trade. India's exchange rates with silver standard countries were naturally comparatively constant, the normal range being determined by the " silver points," the counterparts of the " gold points " in exchange between gold standard countries. But the great bulk of India's foreign trade was with gold standard countries. This trade was subject to all the evils of an unstable and widely varying exchange. For the year 1891-92 India's total merchandise imports and exports (exclusive of treasure and government stores) amounted to R. 1,746 millions, of which 74 per cent was with gold standard countries and 26 per cent with silver standard countries. For 1890-91 the percentages were 73 and 27 respectively. 1 The average annual amounts and the per- centages of India's total merchandise exports going to gold- using and silver-using countries respectively for the period 1875-76 to 1891-92 were as follows : 2 GOLD-USING COUNTRIES SILVER-USING COUNTRIES Per Cent Av. Ann. Amt. R. 000,000 Per Cent Av. Ann. Amt. R. 000,000 1875-76 to 1879-80 62 389 38 235 i 880-81 to 1884-85 69 564 31 258 1885-86 to 1889-90 68 6 3 2 32 294 1890-91 to 1891-92 67 702 33 339 During the later years, it will be observed, the amount of export trade both to gold standard countries and to 1 Herschell Com. Rep., App. II, p. 243. 2 Ibid., p. 242. 24 MODERN CURRENCY REFORMS silver standard countries was increasing but the proportions were not materially changing. 1 Declining Exchange and India's Export Trade. There was a widespread, though not uncontroverted, opinion that the decline in exchange rates was stimulating the export trade with gold standard countries. India's exports to gold standard countries were largely raw prod- ucts, the chief of which were cotton, rice, seeds, wheat, jute, tea, and indigo. 2 The gold prices of some of these articles, as, for example, rice, jute, and indigo, had not fallen from 1873 to *892 as rapidly nor proportionately to the fall in the gold value of the rupee, 3 and the result was that Indian exporters obtained increasing numbers of rupees for their bills of exchange drawn against given quantities of these articles exported. Inasmuch as local wages, and local prices of supplies during the greater part of the period 1873-93, na d been fairly constant, the production costs of these commodities had not materially increased. The result was that certain lines of trade were artificially stimulated by the declining exchange 4 a subject to be discussed in some detail later in this volume. 5 1 Figures for imports from gold standard countries and from silver stand- ard countries respectively are not available for the above period. During each of the two years 1890-91 and 1891-92 the merchandise imports from silver standard countries were about one third of the merchandise exports to silver standard countries. The chief silver standard country with which India traded was China, and this trade was triangular, England represent- ing the third point. "China consigns a large portion of her produce to England, and the proceeds are remitted back to India in discharge of the in- debtedness of China to India." Ibid., Q. 2566, also pp. 242-243. 2 Cf . Statistical Abstract relating to British India, 1888-89 to 1897-98, London, 1899, p. 229. 3 Cf. Fowler Com. Rep., App. II., pp. 144 and 160. 4 The most striking illustration of this principle which the writer has seen is the one cited by Mr. Moreton Frewen from the experience of Hakodate, the great northern island of Japan. It was reported to the British Foreign Office by the British Consul General at Hakodate. "In 1892, Hakodate advertised for tenders for 1,500 tons of water-pipes and the contract was 5 Cf. infra, pp. 4Q2-495- HERSCHELL COMMITTEE INVESTIGATION AND REPORT 25 An illustration of the principle is found in the Ceylon tea industry down to about 1891. In Ceylon the Indian rupee circulated as in India, and tea was Ceylon's chief article of export. From 1880 to 1885 the gold price of Ceylon tea in England steadily rose, while the gold value of the rupee declined slightly, with the result that Ceylon tea dealers received increasing amounts of gold for each pound of tea and increasing numbers of rupees for each sovereign obtained for the tea. After 1885 the gold price of tea in London declined, but not so rapidly as the gold price of the rupee. 1 The result was that the tea merchants and producers were receiving increasing rupee prices for their tea. Wages and other expenses of tea production in Ceylon were nearly constant. Were India and Ceylon to go to a gold standard, it was claimed, they would lose this advan- tage, and be handicapped in their competition with silver standard countries like China and Japan for the sale of tea in the markets of gold standard countries. 2 The weight of opinion among merchants familiar with secured by a British firm, the tender being four guineas a ton. . . . At the price of silver four guineas cost Hakodate 28 silver dollars. In 1893 there came the greatest fall in the price of silver, the fall of last year [1908] only excepted. In 1894, Hakodate again advertised for 1,500 tons of pipes to complete her water system. The same English firm tendered, and this time at four sovereigns per ton. But because of the great fall in exchange it now required $40 [silver] to buy four sovereigns, or in other words, it required 40 per cent more of Hakodate's silver money to buy 5 per cent less of our gold money. Under these altered conditions Hakodate refused all the tenders ; she erected her own iron works, and when last heard from was busy exporting her pipes to China and India." Moreton Frewen, Silver and our Trade with Asia, an address published by the Canadian Branch of the Fair Exchange League, Ottawa, Canada, P. O. Box 393. 1 For the entire period 1880-92 the gold price of Ceylon tea fell 9^ per cent while sterling exchange rates fell 24^ per cent. There was a substantial drop in the gold price of tea 1892-94. 2 Cf . testimony of H. K. Rutherford, Chairman of the Ceylon Tea Planta- tions Company, before the Herschell Committee ; also letter of Thomas North Christie; and figures and chart. Herschell Com. Rep., pp. 100-113 and App. H, pp. 221-223. 26 MODERN CURRENCY REFORMS the Indian export trade was strongly in support of the claim that the declining exchange had stimulated Indian exports. One of the most capable witnesses before the Herschell Committee, Mr. Stephen A. Ralli of the firm of Messrs. Ralli Brothers, which had carried on a large import and export trade with India, declared in answer to the question: "Do you think that the decline in silver has increased pro- duction in India ?" "I do not think there can be two opinions upon that point ; that is an evident thing. No man who has any practical experience of India and of the export trade, of the business in the interior, can have any doubt whatever that the decline in silver and the decline in exchange have materially conduced to the great devel- opment of the export trade." 1 Unfortunately, data are not available that are both suf- ficiently comprehensive in scope and extensive in time, during the period of India's silver standard, to afford for India a satisfactory test of this claim. 2 Even if declining exchange did stimulate somewhat India's export trade in certain commodities, this did not mean that in its final result the stimulus to the export trade was necessarily a good thing for India. At best it was but temporary and irregular in its action. Furthermore, if falling exchange stimulated exports, it probably also in- hibited imports, 3 as the rupee was having a continually de- creasing purchasing power over gold while rupee wages in India were remaining fairly constant, 4 and the gold prices of many commodities which were being imported from gold 1 Herschell Com. Rep., Evidence, Q. 1499. 2 It is interesting to note that the Japanese Coinage Investigation Com- mission in its Report of 1896 maintained that falling exchange rates increase exports in silver standard countries; and that the Mexican Monetary Com- mission in its report of seven years later, after a careful study, came to the same conclusion for Mexico. Cf. Matsukata Masayoshi, Report on the Adoption of the Gold Standard in Japan, Tokyo, 1899, p. 162. For a dis- cussion of the subject in connection with Mexico see infra, pp. 492-495. 3 For a discussion of this subject see infra, pp. 495-496. 4 Cf. Herschell Com. Rep., App. II, p. 272. HERSCHELL COMMITTEE INVESTIGATION AND REPORT 27 standard countries were not falling proportionally to the gold price of silver and to the rise in Indian exchange. The Herschell Committee, therefore, in considering the immedi- ate stimulus of the declining exchange to the export trade, was doubtless correct in maintaining that any such tendency, if it existed, was not to be given much weight in formulating a permanent monetary program for India. 1 In justice to the advocates of a continuance of the silver standard in India, however, it must be admitted that during the period just prior to the Herschell Committee report, India's import trade with gold standard countries suffered less from the falling exchange than would normally be the case, and less than other silver standard countries suffered a few years later when silver experienced its pronounced decline in value not only as compared with gold but also as compared with commodities in general. This was true because the gold prices of many of the chief com- modities which India was importing fell rapidly between 1873 and 1893 so rapidly that in many instances there was little or no increase in rupee prices. For example, prominent among India's nine chief classes of imports in 1892-93 were the following articles : cotton manufactures, sugar, iron, mineral oils, and copper. 2 While the sterling exchange value of the rupee fell 34 per cent from 1872-73 to 1892-93, the gold prices of cotton manufactures (yarn, thread, and piece goods plain and printed) on the average fell 31 per cent ; 3 from 1873 to 1893 the gld P r i ce f sugar 1 Herschell Com. Rep., sees. 27-28. 2 For list of imports and values, see Statistical Tables for East India, 1899, p. 229. 3 Cotton yarn fell 47 per cent, cotton thread rose 2 per cent, cotton piece goods (plain) fell 39 per cent, and printed and dyed also 39 per cent, giving an average of 31 per cent. Eliminating the thread, the average of the other three items was 42 per cent. Computations are based upon wholesale export values as given in the British Board of Trade's Price Tables, in House of Commons Sessional Papers, 1903, vol. 68, pp. 46-49 and notes. 28 MODERN CURRENCY REFORMS (Java) fell 38 per cent ; * that of iron bar fell 60 per cent ; 2 that of petroleum fell 74 per cent ; 3 and that of copper fell 53 per cent. 4 Omitting manufactured silk, for which no figures are available, the average decline for the eight groups of commodities mentioned above, representing 60 per cent of the total merchandise imported by sea (ex- clusive of government supplies), was 46 per cent, or 12 per cent greater than the decline in the gold exchange value of the rupee. In general, therefore, it may be said that the gold prices of the chief commodities India was buying were declining more rapidly than the gold value of the rupee and that India was probably actually receiving from Europe larger quantities of these goods on the average per rupee as well as per sovereign than she was in 187 2-73. 5 The actual development of the merchandise import and export trade therefore during the twenty years prior to the Herschell Committee's Report had hardly been such as to justify a strong condemnation of the silver standard. Temporary Oscillations in Exchange. Aside from the broad influence of the decline in exchange upon India's foreign trade with gold standard countries, there was 1 Sauerbeck index numbers. Jour. Roy. Stat. Soc., XLIX, 1886, pp. 642-647, and LXVI, 1903, pp. 97-102. 2 Sauerbeck index numbers. 3 Ibid. 4 The other four items were "cotton twist and yarn," "railway plant and rolling stock," "machinery and mill work," and "silk manufactures." Cotton yarn, which I have included in the first nine items, fell 47 per cent. There are no general price figures for such goods as railway plant and rolling stock, machinery and mill work, and provisions. But the figures given by the Board of Trade for manufactured iron (Report, op. cit., pp. 23, 26, and 27), which roughly speaking may be taken to typify the first two groups, show an average decline from 1872 to 1892 of 45 per cent, while the Board's index numbers for the group "food and drink" which in a rough way may be taken to typify "provisions" fell 21 per cent (ibid., p. xxxiv). Neither the Sauer- beck nor the Board of Trade tables give figures for silk manufactures. 6 For a discussion of the general principles governing the influence of changes in the value per se of the monetary standard on the prices of various classes of goods, see Kemmerer, Money and Prices, pp. 50-53. HERSCHELL COMMITTEE INVESTIGATION AND REPORT 2Q another influence which, though part of the same thing, was sometimes considered separately, i.e. the temporary oscillations of exchange. These brought an element of uncertainty in foreign trade transactions which often tended to transform them into a species of gambling. A glance at the chart on page 50 will show how unstable exchange was during the years 1889-93, when variations of 2 to 4 per cent a month were not uncommon. The risks and losses normally incident to such fluctuations, however, could largely be eliminated, though at a small expense, by various devices in common use among the large trading houses, devices such as the making of forward contracts with the exchange banks for the purchase or sale of ex- change at rates fixed months in advance, 1 and "hedging" through the forward purchase or sale of silver on the London market so that a loss on exchange would be compensated by a profit on the silver transaction and vice versa. ///. Hardships Caused to Europeans in India by the Fall in Exchange Another difficulty, analogous to the Government's fiscal difficulties and one which seemed likely to increase them in the future, was the burden which the falling exchange im- posed on. English officials and employees and upon European employees in commercial houses, who were receiving their wages in rupees but remitting substantial parts of them home either as savings or contributions to their families. The fact that silver prices and wages in India had been fairly constant (except for famine periods) meant that the declin- ing gold value of the rupee did not result in much hardship to these persons as regards local prices and expenses, but the fact that 100 rupees in 1892-93 would buy about 34 per cent less sovereigns than twenty years before was looked upon as a real hardship as regards sending money home. 1 Cf. infra, pp. 297-299, also Herschell Com. Rep., App. II, pp. 227-228. 30 MODERN CURRENCY REFORMS It is true that home prices had fallen on the aver- age more than proportionately, but this fact was not generally realized by the persons concerned, and it often happened that there had not been much of a decline in the prices of those kinds of things in which these officials and employees were putting many of their sovereigns, such for example as house rents, real estate, the paying off of mort- gage indebtedness, and the like. Commenting on this sub- ject the Herschell Committee said : "It is a matter of dispute how far the fall of prices in this country [England] compensates for the smaller sterling remittance which the same number of rupees will procure ; but it is certain that, when due allowance has been made for this, the purchasing power of the incomes of Indian officials has been largely reduced. "It appears that some European employers have felt themselves bound to make an allowance to the Europeans in their service in India, sufficient to counterbalance, to some extent, the loss which they experience owing to the fall of the rupee ; l and there can be little doubt that, even in existing circumstances, and still more if the fall of exchange continues, the Government of India cannot turn a deaf ear to the appeals of their servants for similar treatment, with- out the danger of engendering serious discontent, apart from the question whether such appeals are just and reason- able." 2 Such were the main points in the Indian currency situa- tion confronting the British Government in 1892. Among them it viewed as by far the most serious the fiscal burdens which the falling exchange was imposing upon the Indian Government and the prospect that they would be greatly increased in the future. This phase of the situation was made more serious by the fact that no satisfactory way could be seen by which to increase the Indian revenues. 1 For a description of such a plan see infra, p. 262, note 2 . 2 Herschell Com. Rep., sees. 17 and 18. HERSCHELL COMMITTEE INVESTIGATION AND REPORT 31 Obstacles to ihe Increase of Government Revenues To increase the import duties would cause a storm of protest at home. By far the largest item of India's imports from England was cotton manufactures, but these were actually falling off at this time (1890-91 to 1892-93), much to the distress of Manchester manufacturers and merchants ; and India was not only increasing her own manufactures of cotton goods for home use, but was going into the export market and even competing with Manchester for certain types of trade. To have further handicapped Manchester by an import duty on manufactured cotton, 1 or by an export duty on raw cotton India's chief item of export would have been the straw that would break the camel's back for Manchester and a serious political blunder for the dominant political party in England. On the other hand, many of India's internal taxes were burdensome and extremely un- popular, such as the income tax and the salt tax ; and, in the existing strained state of Indian public opinion towards England, an increase or extension of these taxes would have threatened increasing discontent and even revolutionary uprisings. The largest single source of government revenue for India was land, but this was essentially a contractual source of revenue and could not be readily increased except at certain periodic settlement dates. Sir Charles Edward Bernard, who had been Secretary to the Government of India in the revenue and financial departments, and was at the time Secretary of the Revenue and Statistics Depart- ment of the India Office, testified before the Herschell Committee that nearly one fourth of India's land revenue had been permanently settled by engagement with the Government made nearly a hundred years ago, and could not be touched, and that "the rest of the land revenue is settled for long periods of 30 years, and over a great part of the country the 30 years' settlement has recently been 1 Cf. ibid., sec. 39. 32 MODERN CURRENCY REFORMS made." * Considering in this way various suggested methods of increasing revenue, the Indian Government found none that afforded a solution of the difficulty, should exchange continue to fall as it offered every prospect of doing. 2 To meet the difficulty by a reduction of expenditures likewise seemed hopeless. On this point the Herschell Committee said: " Although ... we feel strongly the necessity for the utmost care in restricting expenditure, we are certainly not in a position to conclude that any economies are possible which would enable the Indian Government to meet successfully the great and growing deficit caused by falling exchange." 3 Herschell Committee Accepts with Some Modifications Pro- posals of Indian Government The Herschell Committee in its report accepted the plan of the Indian Government for the closing of the mint to the free coinage of silver, and for the ultimate adoption of the gold standard, with two modifications, (i) The closing of the mints to the free coinage of silver should be accom- panied by an announcement that, though closed to the public, they would be used by the Government for the coinage of rupees in exchange for gold at the rate of i6d. to the rupee. 4 This i6d. rate was not thought of by the Com- mittee as necessarily a permanent one, but rather as purely tentative, since " circumstances might arise rendering it proper and even necessary to raise the ratio; and the Indian Government might be empowered to alter it with \ 1 Herschell Com. Rep., Evidence, Qs. 3160-3255, especially 3212. 2 Ibid., sees. 35-44. 8 Herschell Com. Rep., sec. 45. 4 Ibid., sees. 150 and 151. The Government of India in their telegram of January 22, 1893, had proposed that they be given authority to declare Eng- lish gold coins legal tender in India at a rate not higher than iSd. per rupee. Herschell Com. Rep., App. I, p. 183. HERSCHELL COMMITTEE INVESTIGATION AND REPORT 33 the sanction of the Secretary of State." l Many expected that the closing of the mint would lead to a sudden rise in exchange and the rate might go beyond the i6d. par a rate that had been equalled as late as January and February 1892. It was to avoid such a contingency, to prevent the currency supply from being entirely unautomatic and to lighten the blow which the closing of the mints to free coinage would give to the price of silver, that the Committee recommended the modification of Sir David B arbour's plan permitting the Indian Government to issue rupees in exchange for gold at the i6d. rate. 2 (2) The other modi- fication was in the nature of an additional provision that at the government treasuries gold would be received in pay- ment of public dues at the same rate. Its object likewise was to prevent disturbances and inconveniences that might arise from a sudden advance in exchange and scarcity of rupees. Two members of the Committee (T. H. Farrer and R. E. Welby) signed a supplementary note, to the effect that in- asmuch as the Committee's proposal contemplated the ultimate adoption of the gold standard with gold in circula- tion, the Government of India should begin to accumulate a gold reserve so as to be prepared to secure the converti- bility of the silver coins. 3 The Committee's report recommended that a rather free hand be given to the Indian Government in consultation with the Secretary of State as to the details of the reform plan and the time of its inauguration. 4 Herschell Committee's Recommendations Adopted The Herschell Committee's Report was submitted to the Secretary of State for India May 31, 1893, and on June 2, a copy of the Report was mailed to the Viceroy of India. 1 Herschell Com. Rep., sec. 151. Ibid., pp. 41 and 42. * Ibid., sec. 150. 4 Ibid., sec. 157. D 34 MODERN CURRENCY REFORMS Five days later a summary of the recommendations was cabled to the Viceroy. 1 On June 15 the Viceroy cabled the Secretary of State that the draft of the Herschell Com- mittee's Report had been received and considered by the Indian Government and met their approval. He requested authority to put the plan into effect at once without further discussion, since " suspense would be injurious," 2 and it was not likely that any further information comparable with that already before the Secretary of State would be forthcoming from India. In response to this telegram the Secretary of State telegraphed the Viceroy June 20: "Her Majesty's Government have decided to approve the pro- posals of your Government to close the mints to free coinage and to make arrangements for the adoption of a gold standard, subject to the recommendations made by Lord Herschell's Committee which your Government have accepted. You are therefore empowered forthwith to take the necessary steps." 3 1 Correspondence between the Government of India and the Secretary of State, London, 1893, Cd. 7060-7061, p. 14. 2 Ibid., pp. 14 and 15. 3 Ibid., p. 15. CHAPTER III RAISING THE RUPEE TO A GOLD VALUE OF 16 PENCE Indian Mints Closed to the Free Coinage of Silver THE Indian Government having secured this authority was not slow in acting. On June 26 it passed Act Number VIII of 1893 to amend the Indian Coinage Act of 1870, and the Indian Paper Currency Act of 1882. 1 The Coinage Act of 1893 provided for the immediate closing of the Indian mints to the free coinage of silver with the proviso that the Indian Government should retain power to coin silver on its own account. Three administrative Notifications 2 were issued on the same date : the first provided for giving rupees in exchange for gold presented at the Indian mints, at the rate of i6d. to the rupee; the second authorized the receipt of sovereigns and half sovereigns by the Govern- ment in payment of taxes and other government dues at the same rate ; and the third provided for the issue of currency- notes in exchange for British coin or gold bullion at the corresponding rate. In recommending i6d. as a tentative rate the Herschell Committee contemplated little more than a recognition of the approximate gold value of the rupee as it had existed during the preceding year or two ; the plan proposed was not intended to raise the normal gold value of the rupee, but to prevent it from declining further, and ultimately to stabi- 1 The Indian Coinage and Mint Act as amended in 1893 is reprinted in full in L. C. Probyn, Indian Coinage and Currency, pp. 96-110. 8 Notifications are reprinted in full in Probyn, pp. 111-112. 35 36 MODERN CURRENCY REFORMS lize it. In their supplementary memorandum Messrs. Farrer and Welby of the Herschell Committee said : " . . . It is to be observed that the step which we recom- mend will produce the least possible immediate change. Its object is not so much to raise the gold value of the rupee, as to prevent a further fall. It does not materially alter the present relations between debtor and creditor, but, on the contrary, prevents those relations being altered in the future by a further fall." 1 A glance at the chart on page 50 will show that during the two years preceding the closing of the Indian mints, i.e. from July 1891 to June 1893, the sterling value of the rupee ranged from lyfd. (July 1891) to 14.3^. (March 1893), the mean being almost exactly i6d. The average monthly rates of exchange for "council bills" 2 (i.e., the 1 Herschell Com. Rep., p. 40, sec. 6. 2 Indian Council Bills. Council bills play a very important r61e in India's fiscal, monetary, and commercial life. They are bills on governmental funds in India sold in London by the Secretary of State in Council on Wednesday normally of each week to the highest bidders, provided the bids do not fall below a certain declared minimum. On each Wednesday the Secretary of State has posted at the Bank of England a notice inviting tenders to be sub- mitted on the following Wednesday for bills of exchange and telegraphic transfers on the government of Madras and the government of Bombay. The notice fixes a limit beyond which the total allotments must not go. The Secretary of State does not obligate himself to allot the total amount mentioned in the notice. On the other hand, when the total amount ten- dered for exceeds the amount offered at the accepted rates allotments are made pro rata. During the period from one Wednesday to the next what are known as "intermediates" or "specials" may be sold on the basis of a certain agio over the lowest rate at which allotments had been made on the preceding Wednesday. The chief object of these bills is to provide a means of remitting from India to London the funds needed to meet India's home charges. Often, however, bills are sold by the Secretary of State for other purposes, such as to provide additional facilities for English importers having remittances to make to India, or to transfer funds for monetary as distin- guished from fiscal purposes of the Government. The sale of council bills may be traced back to 1834, although there were some fairly long periods in which no bills were sold, notably the period 1857- 1862. For a full description of council bills, their history, and their functioning, see Memorandum on the Sale of Council Bills and Telegraphic Transfers sub- RAISING THE RUPEE TO A GOLD VALUE OF 16 PENCE 37 averages for the high and low rates for each month) for the two-year period, June 1891 to May 1893 inclusive, was isffd. and the average for the two and a half year period, December 1890 to May 1893 inclusive, was 16-^d. 1 The minimum rate at which tenders for council bills were accepted for the week ending June 21, 1893, (i.e. the week before the week containing the date on which the mints were closed) was i4ff d. It is evident therefore that the i6d. rate, although higher than the rates prevailing at the time of closure, was a fairly representative rate, if one took a period of two or two and a half years. Another advantage of the i6d. rate was the ease with which it assimilated the Indian currency system to that of England. At i6d. there would be exactly 15 rupees to the sovereign, and this rate of 15 to i was the rate at which the gold mohur formerly exchanged for rupees. 2 The rupee contains 16 subsidiary units called annas, therefore one anna would become equivalent to one penny. The anna is equivalent to 4 pice, which would give the pice and the farthing the same value ; and finally, the Indian pice was equivalent to three pie, making the pie equal to one third of a farthing. When one considers the close fiscal and com- mercial ties existing between India and the mother country and the prospect at the time that the sovereign would soon become an important coin in India's monetary system, this close assimilation of the sovereign and the rupee units and their fractions will be seen to be a meritorious feature of the i6d. rate. mitted to the Royal Commission on Indian Finance by F. W. Newmarch, Financial Secretary for India. Royal Commission on Indian Finance and Currency, 1914, (Cd. 7070), pp. 217-233. 1 Figures were computed from the table of exchange rates given in the Herschell Com. Rep., App. II, p. 254 ; and from Fowler Com. Rep., App. II, chart facing p. 146. * Cf . supra, p. 6. 38 MODERN CURRENCY REFORMS How the Plan Worked Fall in Price of Silver. One of the first results of the closing of the Indian mints a result that was somewhat discounted in advance was a striking fall in the price of silver. This is shown graphically in the chart on page 50. During the month of June 1893, silver in London fell from a high point of 38^. an ounce to a low one of 3ojd. Silver was quoted in London at tf^d. on June 24, but on that date rumors became current in London and New York that India contemplated closing her mints; and the white metal began a rapid decline, reaching 36^. on the 26th when the definite announcement of India's action was made, and 3o|d. on the 3oth. But India's action was not the sole cause of this decline, al- though her coinage of silver for the fiscal year 1892-93 had been equivalent to 31 per cent of the world's total silver production for the calendar year 1892, and although the psychological effect, upon a highly sensitive market like that of silver, of closing the Indian mints which had offered for years an unlimited demand for silver at a fixed rupee price, was undoubtedly great. 1 The silver situation at this tune had become serious in the United States as the result of the heavy silver accumulations in the Treasury, and of the inflation of the currency, arising from the requirement of the Sherman Silver Purchase Act of 1890 that the Secretary of the Treasury should buy 4,500,000 ounces of silver every month, and pay for the same by the issue of "treasury notes." The panic of 1893 in the United States was in full swing during June, and there was a strong movement on foot for the repeal of this silver purchase clause, which was widely looked upon as the chief cause of the panic. The silver market naturally asked what would happen to silver if on top of India's action the United States should suddenly 1 Cf. E. W. Kemmerer, The Rise in the Price of Silver, etc., in Quart. Jour. Econ., XXVI, 1912, pp. 219-220. RAISING THE RUPEE TO A GOLD VALUE OF 16 PENCE 39 discontinue its policy of purchasing annually about a third of the world's annual silver production, and should begin to dump its enormous accumulations of silver bullion on the market. Congress met in special session August 7, 1893, and after lengthy debate the purchase clause was repealed on November i. The anticipation of such action by the United States, we have seen, 1 was an important factor in leading India to close her mints. It is also true that the closing of the Indian mints and its depressing effect on the price of silver was repeatedly urged as a reason why the United States Treasury in self-defense should discontinue its heavy purchases of the white metal. A reference to the chart on page 50 will show that, although there were constant fluctuations in the price of silver after the closing of the Indian mints, the low level then reached or a lower one prevailed until India found herself actually on the gold standard. Temporary Rise in Exchange and Suspension of Sale of Council Bills Simultaneously with the closing of the Indian mints ster- ling exchange rates advanced sharply, reaching i6d., and then suddenly declined. A brief explanation of the move- ment will be of assistance in understanding the subsequent course of exchange. Neither the Herschell Committee nor the Indian Govern- ment were at all certain as to what would be the immedi- ate effect of the closing of the mints on the gold value of the rupee. Referring to the Indian Government's proposal for the closing of the mints and for the making of gold coins legal tender at the rate of not less than 13 J rupees to the sovereign, the Herschell Committee said : "It is true that those who think that exchange would not for a considerable time rise at all, and that even the existing 1 Supra, p. 12. 40 MODERN CURRENCY REFORMS ratio might not be maintained, may be right in their antic- ipations. But it must be admitted that on such a point no one can predict with certainty; exchange might rise suddenly and considerably, unless the Government were to interfere actively to prevent it ; and the public would not feel any certainty as to the course they would take." 1 Sir David B arbour, the Financial Member of the Council of the Viceroy of India, who more than any other person was responsible for the reform plan adopted, said in intro- ducing the bill in the Legislative Council : "It may well be asked whether it will be possible for us to make the gold standard effective at once. ... To this question I cannot give a confident answer, and I do not believe that it is possible for anyone to do so. ... It may be that the gold standard can be made effective from the first, although it will not be secure until there is a consider- able amount of gold in our treasuries and banks. Or it may be that the making of the gold standard effective will in- volve a long and arduous struggle, and necessitate heavy sacrifices." 2 Although it cannot be said that either the Herschell Com- mittee's Report or the statements of the Government of India gave the public any warrant for believing that the closing of the mints would result in an immediate advance in exchange to the i6d. par contemplated, nevertheless many influential persons promptly came to the conclusion that such would be the result. As soon as it was known that the mints would be closed and that the gold value of the rupee was to be raised to a maximum of i6J., there began a heavy speculation in rupee paper which forced exchange up rapidly ; and the advance itself tended to confirm the belief of those who expected the immediate attainment of a i6d. rate. Even the Indian Government became con- vinced of the soundness of this belief, and, apparently ex- 1 Herschell Com. Rep., sec. 149. 2 Cf. [London] Economist, July 29th, 1893, p. 907. RAISING THE RUPEE TO A GOLD VALUE OF 16 PENCE 41 pecting the attainment of the new gold par within a few months, 1 urged the Secretary of State for India not to sell his council bills below a i6d. basis. His sales of bills below that rate were vigorously protested by the English Currency Association, 2 and by numerous business men in Calcutta, 3 Bombay and Madras. For the week of June 21, 1893, just before the mints were closed, the minimum rate at which tenders for council bills had been accepted was i4f|J; but the following week some tenders were actually made and accepted at i6d. There being practically no demand at this latter rate, and the Secretary of State being in need of funds for home charges, he accepted tenders during the week of July 5 at a rate as low as 1 $%d. This latter rate he attempted to maintain as a minimum, but the result was that practically no sales were made. Later the Secretary announced that the minimum rate had been reduced to i5id., and some cable transfers were sold by him at that rate on August i6. 4 This announcement called forth strong protest from Cal- cutta, Bombay, and Madras business men. 6 Despite the reduction, however, no considerable amounts of bills were sold, and the reduction was taken by many to be equivalent to an abandonment of the policy of maintaining any mini- mum rate whatsoever; for the public had no assurance that the new rate in turn would not be lowered. The result was that on January 20, 1894, the Secretary announced 1 Cf. telegrams passing between Viceroy and Secretary of State on this subject between June 30, 1893, and August 25. Cd. 7253 of 1893, pp. 3-5. 2 Cf. [London] Economist, Aug. 26, 1893, p. 1026; and [London] Times, July 8, 1893, p. 7. 3 The Calcutta correspondent of the London Times telegraphed early in July: "The course which the Secretary of State has been following in con- nection with the sale of council bills is causing general surprise and indigna- tion, and is considered quite incomprehensible. It has severely shaken public confidence, which will not be restored till he announces that i6d. is the minimum rate, and that it will be adhered to in future. . . ." Econo- mist, July 8, 1893, pp. 814. Cf. also Cd. 7253 of 1893, p. 4. 4 Cf. Cd. 9376 of 1899, p. 158. 6 Cf. Cd. 7253 of 1893, p. 4. 42 MODERN CURRENCY REFORMS his abandonment of the attempt to maintain " a forced value for his bills," and the first considerable issue of council bills was made on January 31, when a rate of i4fd. was obtained. 1 The Secretary to the Government of India (Legislative Department) said in the Financial Statement for 1894-95 : "I think it is now recognized that the policy of refusing to issue bills was a mistaken policy, and that it would have been better to issue bills moderately so as to meet the de- mands on the Home Treasury. But the circumstances we had created were altogether new, and both officials and merchants and bankers had all to learn, by actual experi- ence, what new economic forces had been called into exist- ence, and how they affected the question of the apprecia- tion of the rupee." 2 Largely as a result of this mistaken policy of trying to suspend by government fiat the law of demand and supply, the total sales of council bills fell from R. 113. 4 millions for the last six months of 1892 to R. 11.4 millions for the corresponding period of i893. 3 This practical discontinuance of the sale of council bills for a period of nearly six months had a number of serious results, the chief of which, briefly summarized, were as follows : (i) Interference with Export Trade. It interfered with the export trade at a most inopportune time. Any advance in exchange rates in India, we have seen, 4 tends to inhibit the export trade, by lessening the number of rupees the exporter receives for a given amount of foreign or British currency. This sudden and artificial advance in exchange, however, had a greater inhibiting effect on exports than a normal advance would have had because the public were at 1 East India Financial Statement for 1894-95, p. 12. 2 Page 12. 3 Figures cited by Probyn, p. 68 note. 4 Cf. supra, pp. 24-28. RAISING THE RUPEE TO A GOLD VALUE OF 16 PENCE 43 sea as to how the Government's currency scheme would work, and were doubtful of the Secretary of State's ability to hold exchange at the rate announced. This doubt in- creased as time went on, and as the Secretary, finding it practically impossible to sell bills at the first minimum rate announced, was forced to announce a second and lower rate. Naturally, exporters in India and importers in England held back for more favorable rates. The Secre- tary's ability to make his minimum rate effective was further weakened by the fact that the currency reform had been initiated at the most unfavorable time of the year, namely, at the beginning of India's slack season when her exports are smallest. The result was that India's visible trade balance, which is usually " favorable" because of her heavy home charges and her heavy dividend and interest payments on investments of foreign capital, actually be- came ''unfavorable" for a time. 1 (2) Heavy Importation of Silver. India's home charges are in the nature of the price she pays for the "imports of services" which she purchases from the British Government ; the council bills are bills of exchange which the British Government, the exporter of these services, in order to se- cure its remuneration, draws upon the Indian fisc, the im- porter. The Secretary of State sells these bills to persons in England who are purchasing Indian products or Indian securities. The council bills therefore represent India's imports of services which she pays for by her exports of products and of equities in her properties. Inasmuch as the Secretary's excessive price for council bills made the use of these exports of British Government services to India impracticable on any considerable scale as remittance to India in payment for her exports, it became profitable to find some other kind of British export as a means of re- mittance. Moreover, the higher the exchange rate, and the longer the high rates prevailed, the more profitable 1 East India Fin. Stat., 1894-95, p. 12. 44 MODERN CURRENCY REFORMS the exportation of other goods to India became, since, as the demand for means of remittance to India increased the amount in English pence which the British exporter could secure for a given bill drawn against shipments to India also increased. A common resort in such a situation is to export securities and to draw bills against them. But obviously India was not buying British securities at this time nor was she buying back her own securities. Strong economic forces had caused the flow of securities from the country that was economically new to the one that was economically old. Since British securities were unavailable as exports to India with which to break down this attempt of the Secretary of State to establish a quasi- monopoly price on remittances to India, this function was performed by the exportation of that commodity which in India had been so highly marketable in the past, viz. silver. This was an occurrence which greatly surprised many, both in India and England, who had expected that with the closing of the mints the Secretary of State in his sale of council bills would be relieved from the competition of silver exports as a means of remittance to the East. 1 India, for generations the land of treasure hoards, of ornaments, and of the free coinage of silver, also a land whose great population was in the main ignorant, and dominated by custom, such an India could hardly be expected to dis- continue the buying of silver when it became cheap, just because the mints had been closed to free coinage. What did the mass of India's three hundred millions of people know of the closing of the mints ? In the past a tola of silver had always been saleable at the mints and at the bazaars for approximately one rupee, and the rupee had been con- vertible, by melting, into a tola. The majority of the natives saw no reason why such would not be the case in the future. But the advance in the value of the rupee 1 Cf. The [London] Economist, Dec. 16, 1893, p. 1488; and Herschell Com. Rep., sec. 123; also cf. infra, pp. 114-115. RAISING THE RUPEE TO A GOLD VALUE OF 16 PENCE 45 after the closing of the mints was making the rupee price of a tola in the market lower than ever before, at just the time when the practical suspension of the sale of council bills was putting a premium on bills of exchange drawn against the exportation of silver to India. Said the Indian Financial Statement for 1894-95 : "The divorce between the value of coined and of uncoined silver brought about a state of things utterly unknown in Indian history in the experience at least of any of the present generation viz., that uncoined silver could be sold at a profit for considerably less than its weight in coined silver. Silver dealers rushed in to make a profit out of the inability of the ordinary Indian to understand that it was not necessarily a profitable transaction to buy a tola of rupee silver for 15 annas. The question was violently agitated of imposing a silver import duty, so as to prevent a demand for silver that threatened to annihilate, by its own force, that balance of trade which had hitherto required settlement by council bills." l For the eight months July 1893 to February 1894 inclu- sive, India's silver imports amounted to approximately 31 million fine ounces. 2 Such heavy importations of silver at this time were unfortunate. One of the strongest objections urged against the Government's plan of closing the mints and raising the gold value of the rupee by relative contraction of the currency had been that it would at one and the same time depress the gold price of silver and raise the value of the rupee, with the result that India's great hoards of un- coined silver hoards which under the silver standard could readily be turned into coin with little loss in times of 1 Ind. Fin. Stat. for 1894-95, p. n. 2 These heavy silver imports taking the place of council bills as a means of remittance to India were obviously a surprise to the Secretary of State, for he had said in a telegram to the Viceroy as late as July 4, 1893 : "Though silver will no longer compete with bills on India, gold may compete." Cd. 7253 of 1893, p. 3. 46 MODERN CURRENCY REFORMS famine or other great emergency would be greatly de- pressed in price. But here was a situation in which the Government's very mechanism for raising the value of the rupee was aggravating the evil by artificially stimulating the importation of silver bullion. In ignorance of the changed situation, and stimulated by the Secretary of State's action, the Indian people therefore were buying silver heavily upon what was practically certain to be a falling market. The large supply of uncoined silver in India had been believed by many to offer a serious obstacle to that rarifica- tion of the currency which the reform plan contemplated. There was the constant menace of counterfeiting with full weight silver, a menace which would increase as the money value of the rupee rose above the bullion value; there was the possibility of the use of silver bullion as a medium of exchange : and, most important, there was the stimulus to native discontent and possibly revolution that this large supply of depreciating silver would continually offer to the natives. 1 All these dangers were aggravated 1 "The change in the value of the rupee inflicts a cruel injury on an enormous class in India, namely, on those who have hoarded silver orna- ments (a practice almost universal). Hitherto the mints have always af- forded a fixed market in which nearly the full value of these ornaments could be at once realized without any shadow of doubt ; and in times of scarcity or depression, enormous quantities of silver ornaments have been brought to the mints or deposited with the buniahs by those who had to pay their taxes, or satisfy other obligations in rupees ; but now this market for such hoards no longer exists ; the owners of such ornaments will not only find that the value of their hoards when measured in rupees is already about twelve per cent less than before, but that there is now no certainty about their value, which is fluctuating and likely to fall still lower, thus giving rise to an element of uncertainty, of which the buniahs will naturally take advantage, to the prejudice of the unfortunate holders of the hoards." Guilford L. Moles- worth, British delegate from India to the Brussels International Monetary Conference of 1892, in Ann. Amer. Acad. Pol. and Soc. Sci., IV (1893-94), p. 524- The Herschell Committee, although disposed to minimize the importance of these ornament hoards for later years, said that no less than 45 million rupees were coined at the Indian mints from the melting down of such RAISING THE RUPEE TO A GOLD VALUE OF 16 PENCE 47 by the large importation of silver after the closing of the mints. The situation became so serious that after considerable discussion the Indian Government imposed an import duty on silver coin and bullion. 1 (3) Fiscal Results. A third result of the Secretary of State's attempt arbitrarily to maintain a high price for council bills was the imposition of a heavy financial burden on the Indian Government. The Secretary of State had estimated that he would raise 18.7 millions by council bills during the fiscal year ending March 31, 1894. During April, May, and June of 1893 he issued an unusually large amount of council bills aggregating over 5.7 millions, and leaving, according to his estimate, 13 millions to be sold during the balance of the fiscal year. When in the first week of July the Viceroy sought to have him stop the extra allotments of council bills and to hold the price of bills up to i6d.j he replied that, considering the requirements of the home treasury which would average about 347,000 a week, he could not run the risk of holding to that rate. 2 None the less, as we have seen, he yielded to the extent of undertaking to maintain a rate of i$%d. and later -of i$?d. The result was that for the seven months, July 1893 to January 1894, during which he was trying to maintain his high rates, he sold council bills only to the amount of 862,602, whereas according to his estimate, he should have sold 10.1 millions. To meet the emergency certain payments were delayed, others reduced, the Secre- tary's cash balance was permitted to decline over a million pounds, and 7,386,000 were borrowed. Meanwhile, at the very time these inconveniences were being experienced ornaments during the great famine of 1877 and the years immediately follow- ing. Report, sec. 106. 1 Cf. East India Fin. Stat. for 1895-96, pp. 6, 10, and n ; also Fowler Com. Rep., App. II, Table 5. 2 Cf. telegrams Nos. 4, 6, and 7. Cd. 7253 of 1893, pp. 3 and 4. 48 MODERN CURRENCY REFORMS and the interest-bearing debt incurred, there was "an enor- mous accumulation of silver" in the Indian Treasury, and the Secretary's idle cash balance in India at the end of Feb- ruary had grown to the unprecedented figure of R. 250 mil- lions. 1 "Starving the Circulation" 1893-1898 We are now prepared to consider the more general aspects of India's five-years experience in raising the gold value of the rupee. The essence of the reform plan as formulated by the Indian Government and the Herschell Committee was, by closing the Indian mints and limiting the supply of money while the demand for money was in- creasing through the growth of population and trade, to divorce the value of the rupee from that of its silver content, and to prevent its further depreciation. Some absolute reduction in the rupee circulation was also contemplated. 2 In the minds of those responsible for the plan the object, as we have seen, 3 was not so much to raise the value of the rupee as to stabilize it and prevent its further depreciation. The i6J. par was selected largely because it represented a close approximation to the average value of the rupee during the years immediately preceding, and at the same time left a sufficient margin of safety above the bullion value at the time to protect it from the melting pot. This i6d. rate, moreover, was looked upon as a purely tentative one that might be raised if the situation should so demand. The plan adopted therefore was not so much to raise the value of the rupee as it was to maintain it, although a cer- tain amount of "raising" was obviously necessary. 4 In a telegram to the Viceroy dated August 23, 1893, the Secre- tary of State, protesting the advisability of meeting the 1 East India Fin. Stat. for 1894-95, pp. 12-13. 3 Herschell Com. Rep., sec. 50; and David Barbour, The Standard of Value, p. 186. 3 Supra, pp. 35-36. 4 Cf. Herschell Com. Rep., sees. 135 and 150. RAISING THE RUPEE TO A GOLD VALUE OF 16 PENCE 49 Government of India's suggestion that he announce a minimum rate of i6d. for council bills said : "The object of the recent currency legislation was to arrest the further fall in exchange which appeared to be imminent at the time.'* Sir David B arbour, twenty years later, in explaining the theory of the reform said : " The proposals recommended by the Government of India had been drawn up by me and were to the effect that the Indian mints should be closed to the unlimited coinage of silver and no further steps taken until the effect of closing the mints had been ascertained." And again : "I was firmly convinced of the soundness of the quantity theory of money and knew that if the unlimited coinage of silver was stopped, it was quite possible to reduce the amount of the rupee circulation to such extent as to bring the Indian exchange to a par with gold at a rate of exchange which could be permanently maintained. How great the necessary amount of reduction might be I could not tell." * In 1898, W. H. Cheetham of Calcutta stated the theory of the reform well when he said : 11 The closing of the mints has reduced the volume of the currency in relation to trade. Population is always increas- ing, and trade is expanding ; if you do not continually add to the currency, you actually in fact reduce it ; that is to say, it is reduced in relation to requirements." The plan was variously called "starving the currency," " rarification of the currency," " creation of scarcity value," and " relative contraction of the currency." Effect of Closing Mints on Relation between Bullion Value and Exchange Value of Rupee. How did this scheme of relative contraction work ? The story of the next six years 1 David Barbour, The Standard of Value, pp. 202 and 186. 2 Fowler Com. Rep., Q. 8713. 50 MODERN CURRENCY REFORMS of Indian exchange is told graphically on the following chart. One of the first facts that strike a person, on examining the chart, is that down to June 1893 tne month in which the mints were closed the bullion value PEKCE PENCE INDIAN CURRENCY REFORM MONTHLY VARIATIONS IN EXCHANGE BULLION VALUES OF RUPEE of the rupee and the exchange value moved continually together, but that from that date forward the close par- allelism in the movements of the two values ceased. It was no longer possible to have bullion transformed into rupees by the payment of a small brassage charge whenever the gold value of the rupee rose above the gold value of 1 80 grains of silver, 11/12 fine. The closing of the mints had divorced the two values and the divorce decree became effective at once. RAISING THE RUPEE TO A GOLD VALUE OF 16 PENCE 51 A second fact that strikes the attention is, that, ignoring the brief and sharp rise in exchange immediately following the closing of the mints which was due to the Secretary of State's ill-fated attempt to hold up exchange by maintain- ing excessively high rates for council bills, exchange moved downward until January 1895 ; and that, although during this period the exchange value of the rupee was always far above the bullion value, and the difference tended to be a widening one, there was still a remarkable parallelism in the movements of the two curves. Clearly the closing of the mints had failed to maintain exchange at the old level, and, although the bullion value of the rupee and the ex- change value may have been divorced, they still showed a considerable " hankering after each other." From Febru- ary * 1894 to January 1895, the correlation between the mean monthly exchange value of the rupee and the average monthly bullion value gives a coefficient (according to Karl Pearson's method) of -f .58 a probable error of .128. This is a small correlation but a real one. What is the explanation of this decline in the exchange value of the rupee at a time when the mints were closed, and of this correlation between the exchange value and the bullion value of the rupee at a time when bullion could not be transformed into rupees on private account at the mints ? The first point to be noted is that the decline in the sterling exchange value of the rupee was not so great as is commonly supposed. The "sag" in exchange during the greater part of the year 1894 has usually been contrasted with the "peak" of June 1893, which was largely nominal and due to the Secretary of State's council bill fiasco. If one compares 1894 rates with the rates prevailing im- mediately before the closing of the mints, he will find that 1 February is taken as the first month of comparison because it was not until January 20 that the Secretary of State discontinued his effort to hold up the price of council bills. Supra, pp. 41-42. 52 MODERN CURRENCY REFORMS the average telegraphic transfer rate in Calcutta for the period April 5 to June 2, 1893, was i^d, and for the period February 1894 to January 1895 (monthly averages, inclusive) was i^d. a decline of 9.8 per cent. The decline from the average of the first period to the minimum rate of 1895 (viz., i2|J. in January) was 14 per cent. These were not heavy declines for a country like India, as a glance at the exchange curve of the chart for the period prior to the closing of the mints will show. The second point to note is that the supply of currency was not absolutely limited to the amount in circulation at the time the mints were closed. " Immediately after the closing of the mints, the Government accepted from banks and others silver to the amount of Rx. 2,000,000 [i.e. 20,000,000 rupees], which had been shipped to India before the closing of the mints, and coined it. . . ." 1 There was an expansion in the average circulation of notes un- covered by silver during the fiscal year ending March 31, 1895, of 25.3 millions, whereas during the preceding fiscal year there was a contraction of 28.2 millions. 2 Further, the resumption of the sale of council bills in considerable quanti- ties after January 1894 released from government treasuries many millions of rupees that had been physically tied up in vaults during the period of the practical suspension of council bill sales. For the fiscal years 1892-93, 1893-94, and 1894-95, respectively, the amounts of council bills drawn were (in round numbers) R. 265 millions, R. 157 millions, and R. 310 millions, showing that the sales of 1894-95 were practically double those of the preceding year. 3 The cash balances in government treasuries (exclu- sive of those on deposit in banks) for the close of the same three years respectively were, R. 110.7 millions, R. 222.omil- 1 J. Barr Robertson, The Currency Policy of India, in Jour. Soc. of Arts, March 27, 1903, p. 427. 8 Statistical Abstract relating to British India, 33d number (1899), p. 140. 3 Ibid., p. 137. RAISING THE RUPEE TO A GOLD VALUE OF 16 PENCE 53 lions, and R. 181.0 millions. 1 There were, moreover, many millions of rupees in circulation in the native states of India, and in the other countries in the neighborhood, and many of these rupees returned to British India when the silver exchanges and the falling rupee price of silver showed that the rupee possessed a substantially higher value as money than as bullion. Probably the largest source of the increase in the rupee circulation, however, was the rupee hoards. The efficiency of money is measured in terms of the rate of turnover. Money in hoards has a turnover rate of zero. What proportion of India's enor- mous hoards of silver was in the form of rupees, and what proportion in the forms of bullion and ornaments, no one knew. Sir A. P. MacDonell, who had held high official positions in India for many years, and who was a member of the Viceroy's Council from the end of 1893 unt ^ April 1895, testified before the Fowler Committee that in his opinion an Indian cultivator, out of each 100 rupees saved, would normally store away 75 in rupees and melt down the other 25 for ornaments. 2 Mr. W. H. Cheetham, a mer- chant of Calcutta, testified before the same Committee that the above testimony of MacDonell's coincided with independent evidence that he had. 3 After the closing of the mints the prices of silver bullion and ornaments in India declined, i.e. from the point of view of the natives they became cheaper. The price of a tola of silver fell and silver could no longer be turned into rupees at the mints. 4 From this situation there naturally followed a reduction in the 1 Computed from figures given for the different treasuries, etc. Ibid., p. 136. Were the figures for 1893-94 and 1894-95 for the end of January instead of the end of March, the increase in circulation from this source would probably have appeared much greater since the sale of council bills on a substantial scale was resumed after January 20, 1894. a Fowler Com. Rep., Evidence, Q. 5769. Ibid., Q. 8809. 4 Preceding the closing of the mints the average annual coining of rupees had been about 70 millions. Correspondence Respecting the Proposals on Currency Made by the Government of India, Cd. 8840 of 1898, p. 3. 54 MODERN CURRENCY REFORMS number of rupees being melted down l and an increased accumulation of ornaments which were becoming cheaper. The average native could hardly be expected to believe that the rupee was appreciating. To this day the average American business man believes that "a dollar is a dollar," which is his way of saying that the dollar is stable in value and all other goods vary. The result of this situation in India was the continuance in circulation as money of many rupees that under the silver standard would have been melted down and hoarded or exported; and the calling out of hoards and into active circulation of millions of rupees whose monetary efficiency had previously been zero. Any attempt at a complete explanation of the decline in exchange during the calendar year 1894 would require the consideration of numerous other factors, the chief of which would be the relative monetary demand as exemplified in the amount of business done in 1894 in comparison with 1893. On this subject there is little useful information available, and such consideration as we can give it will be found later when the period of "rupee appreciation" as a whole is discussed. 2 Here it is merely intended to show that there were important forces 3 at work during the early stages of the period which prevented that rigid limitation of the currency supply that was desirable in the interest of a prompt "rarefication of the currency." Having reached its low point in January 1895, the ex- change value of the rupee began an upward move inde- pendent of the bullion value, which continued at the lowest 1 Mr. Frederick Harrison estimated that at the time of the closing of the mints the normal annual "wastage" of rupees was 60 million, but that of this sum, the wastage of 27^ millions was due to melting for industrial usage a form of wastage which the closing of the mints had practically stopped. Econ. Journ., IV (1894) p. 264. 8 Cf. infra, pp. 70-71. * One of these forces was the depressing effect on business which the Secre- tary of State's unfortunate council bill policy exerted through causing the public to lose confidence in the success of the new currency plan. RAISING THE RUPEE TO A GOLD VALUE OF 16 PENCE 55 level in history ; and by the latter part of 1897 the exchange value nearly reached the i6d. par. At that point, however, the rupee showed great instability, and seemed unable to attain and clinch the i6d. rate. 1 This was the situation when on March 3, 1898 the Government of India sent a communication to the Secretary of State for India calling attention to "the pressing necessity of taking active measures to secure the stability of exchange which was the main object of the policy adopted in June 1893" a communication which led to the appointment of the Indian Currency Committee of 1898 commonly known as the Fowler Committee from the name of its chairman, Henry N. Fowler. Before taking up the work and recommenda- tions of that Committee, it will be well to consider the ex- tent to which the rupee appreciated and some of the forces at work during the period of appreciation. 1 In a memorandum on Discount Rates in India submitted to the Fowler Committee (App. I, p. 67), Messrs. J. M. Anderson and H. M. Ross said: "... The fixing of 15. 4d. as the convertible rate of the rupee in India, and of is. 4$zd. as the convertible rate against deposits of gold in England, amounts to a firm offer of rupees to all comers for all time at these rates [?]. It is therefore clear that every banker or merchant, having such firm offer to fall back on, will exercise all his ingenuity to obtain his rupee requirements on better terms, and will only close with the Government's offer when all the other means have failed him. This is the secret of the failure of the repeated attempts of the Secretary of State to fix a minimum for his council bills, for it is to be understood that the minimum of the Secretary of State is the maximum of the banker or merchant, and, as such, is evaded as long as possible. Each time that exchange approaches this maximum, the export merchant ceases to sell bills, since he cannot sell them on worse terms, and may, by waiting, sell them on better, while the importer hastens to buy sterling in excess of his requirements, because he cannot lose, and may gain, by so doing. During the last two years exchange has again and again approached this maximum, only to recede almost immediately, from the effect of mercantile and banking operations such as are here described." Another reason for this inability to clinch the i6d. rate appears to have been the tendency of Europeans who lacked confidence in the system to take advantage of this rate, when it was reached, to send capital back home. Cf . Memorandum of Chairman of Madras Chamber of Commerce, in Correspond- ence Respecting the Proposal on Currency Made by the Government of India, Cd. 8840 of 1898, p. 12. Cf. also Fowler Com. Rep., Evidence, Qs. 287 and 288. MODERN CURRENCY REFORMS To What Extent Did the Rupee Appreciate between 1893 and 1898? The chart shows that the sterling exchange value of the rupee, after declining to about i2^d. in January 1895, rose to approximately i6d. in January 1898. But this tells us merely the value of the rupee in terms of one other com- modity gold, a commodity which itself was very unstable, during this period. The value of gold is best expressed in its purchasing power over a large number of commodities. For England the variations in the purchasing power of gold over an average of 45 commodities are expressed in the reciprocals of the Sauerbeck index numbers of wholesale prices. Let us com- pare the annual movement of the value of gold so expressed with the annual movement in the gold value of the rupee for this period. APPRECIATION or RUPEE IN TERMS OF BRITISH COMMODITIES, 1893-1898 (A minus sign shows decrease) CALENDAR YEAR RECIPROCAL OF SAUERBECK INDEX NUMBERS Av. 1867-77 = IOO PERCENTAGE INCREASE EACH YEAR OVER PRECEDING YEAR. AVERAGE EXCHANGE VALUE OF RUPEE (TELEGRAPHIC TRANSFER) PENCE PERCENTAGE INCREASE EACH YEAR OVER PRECEDING YEAR ANNUAL APPRECIATION OF RUPEE IN TERMS OF ENGLISH COMMODITIES PERCENTAGE 1893 147.1 0.0 14.97 1894 I58-7 7-9 I3-4I 10.4 - 2.5 1895 161.3 1.6 13.28 i.o 0.6 1896 164.0 i-7 14.38 8-3 10.0 1897 161.3 -1.6 14-73 2.4 0.8 1898 156.2 -3.2 15-93 8.2 5-0 Briefly summarized the table shows : (i) that in terms of purchasing power over commodities in the United Kingdom the rupee declined 2.5 per cent in 1894, and that each suc- ceeding year to 1898 it rose, the rises in 1896 and 1898 RAISING THE RUPEE TO A GOLD VALUE OF 16 PENCE 57 however, being the only important ones; (2) that in 1896 the gold value of the rupee rose 8.3 per cent, but that, inas- much as the value of gold itself rose 1.7 per cent, the actual appreciation of the rupee (in terms of purchasing power over British commodities) was 10 per cent; (3) that in 1897 and 1898, while the value of the rupee moved toward i6d. gold, the value of i6d. gold moved to meet the rupee, thereby hastening the time of the attainment of the i6d. gold par; (4) that from 1894 to 1898 gold depreciated 1.6 per cent in terms of purchasing power over English commodities, and the rupee appreciated 17.2 per cent. But how about the value of the rupee in India as measured by its purchasing power over Indian commodities? On this subject the data are less satisfactory, for India is a large country in which very different prices often prevail for the same commodity in different sections. The best criterion of the variations in the purchasing power of the rupee in India is found by taking the reciprocals of the Atkinson index numbers of the prices of one hundred com- modities in India. 1 Below is given a table showing, for the years 1893-99, the Atkinson index numbers for each of three groups of commodities. Index numbers are also given showing the annual fluctuations in the value of the rupee as expressed in its purchasing power over each of these groups of commodities, and over all the groups combined. 1 These index numbers were prepared by Mr. Fred J. Atkinson, Ac- countant General of the United Provinces of India. They were first pub- lished in the Journal of the Royal Statistical Society of March 1897, and were brought down to 1908 in the isssue of September 1909 (pp. 500-502). The loo commodities consist of 60 articles of food, 29 of raw produce, and ii of manufactures. The average for the years 1868-76 is taken as 100. The weighting was accomplished "by giving to each commodity included as many quotations as corresponded to its importance in the whole pro- duction value of India in 1893." Cf. Bulletin No. 73, U. S. Bureau of Labor Statistics, pp. 276-282. 58 MODERN CURRENCY REFORMS o 8 PH 13 u 8 fe?3> O O *> t^ CO 8 | ft II io w oo ^f N ^t i -" 1 C 3 i-. O O M I s - M O *r> 1 | 3 (In o o 5^ O - 3 PL, II 00 vO rf O t>- 10 w o ** M CJ CO 1 1 1 3 Purchasing Ru 11 covo o w to co q \C) o OO tOOO O ci t^OO 00 t^ IO t^OO i 1 H M M co co M M es co o* M ro t>. co N PH 1 I co rf to \O r^OO ON O\ ds ON ON bN ON $N CO CO CO CO CO CO CO a I a RAISING THE RUPEE TO A GOLD VALUE OF 16 PENCE 59 For the five years prior to the closing of the mints the rupee had been depreciating in its purchasing power over commodities in India ; that is, prices had been rising. 1 Im- mediately after the closing of the mints the value of the rupee as measured by its purchasing power over Indian commodities began to increase. In 1894 it rose 5 per cent over 1893 and in 1895 it rose 2 -6 per cent over 1894. This increase in purchasing power in both of these years was limited to the "food group" of 60 articles, the purchasing power of the rupee over the "manufactures group" of n articles having declined slightly in each of the two years, and that over the "raw produce group" of 29 articles having declined slightly in 1894, and substantially in 1895. The years 1896 and 1897 went contrary to expectations and each year witnessed a large depreciation in the purchasing power of the rupee, the decline being 8.7 per cent in 1896 and 14.7 per cent in 1897. A glance at the table, however, will show that this decline took place only in the "food group," the purchasing power of the rupee over raw produce having increased on the average 4.1 per cent in 1896, and 5.3 per cent in 1897; while that over manu- factures increased 6.4 per cent in 1896 and 7.8 per cent in 1897. The fact that prices in the other groups fell in these two years while those in the food group rose is explainable by the great famine which India suffered at that time. In the fall of 1896 the monsoon failed, crops were ruined, and India found herself face to face with one of the worst and most widespread famines in her history. The famine was accompanied by a visitation of the Plague in certain parts of the country, a devastating earthquake along the eastern side, and fanatical attacks of the tribes on the northwest border necessitating rather extensive military 1 The Atkinson price index numbers for 100 articles for these five years respectively were as follows: 1887 101; 1888 108; 1889114; 1800 114; 1891 116; 1892 128. 60 MODERN CURRENCY REFORMS operations. 1 The Government's expenditures for famine relief, which were very large and which caused heavy deficits in the budget, showed that the effects of the famine were severe for about eighteen months. 2 During that period the prices of food (which constitute the bulk of the items in the Atkinson index numbers) rose to extravagant heights. O'Conor's figures for the retail prices of India's seven chief food grains collected in repre- sentative places throughout the country showed that the prices of these grains together moved as follows (taking the average price for 1891-95 as 100) : 3 CALENDAR YEAR INDEX NUMBER 1893 99-2 1894 88.7 1895 93-o 1896 I2O.O 1897 160.0 107.9 At the same time the prices of staple articles not belonging to the group of necessary foods continued to fall, registering the appreciation of the rupee. O' Conor calculated whole- sale price index numbers for twelve important articles of export. 4 Omitting from his list the two important Indian food articles, rice and wheat, and combining the other ten articles, 5 using Calcutta prices where prices for two or more 1 Cf. Financial Statement 1897, pp. 37, 49, 64, 65; and Fin. Stat. 1898, pp. 7, 10, n, and 15. 2 For quarterly periods ending December 1896, and March, June, Septem- ber and December 1897, respectively, the amount of relief money spent by the Government (in millions of rupees) was 1.3, 19.0, 24.9, 23.7, and 6.4. The numbers of millions of units relieved (a unit being one person for one day), respectively, for these five quarterly periods were 32.1, 228.7, 3 I2 -9> 222.3, an d 3 2 -8. East India Fin. Stat. 1898, pp. IO-H. 8 Fowler Com. Rep., App. II, p. 170. 4 Ibid., p. 161. 6 The articles were cotton, opium, linseed, jute, jute gunny bags, tea, cotton yarns, cotton tea-cloth, indigo, and hides. RAISING THE RUPEE TO A GOLD VALUE OF 16 PENCE 6l sections are given, we find that the index number of these articles moved as follows : 1891-95 100.0 1893 I0 9- 6 1894 104.0 1895 105-7 1896 103.9 1897 92.6 1898 87.0 1899 81.7 Every one of the ten articles but jute was lower in 1897 than in 1896, all but three (viz. cotton, jute, and cotton yarn) were lower in 1897 than in 1895, an d all but three (viz. tea, indigo, and cotton tea-cloth) were lower in 1898 than in 1897, an d of those three the two former were un- changed and the last rose but one point. Except for foods therefore, which bore famine prices, the evidence points to a downward tendency for prices in India beginning with 1895. Food prices which had declined in 1895 rose to great heights during the famine period of the latter part of 1896 and the year 1897, and then resumed their downward course. John Stuart Mill in a well-known passage concerning the relation of money to prices said: "At prices one fourth higher, one fourth more money would be required to make the accustomed purchases; and if this were not forth- coming, some of the commodities would be without pur- chasers, and prices could not be kept up." 1 In India at this time whence came the money to make possible the marketing of these foods supplied at such abnormally high prices? Aside from a small expansion of circulating bank credit, the chief factors permitting this expansion appear 1 Political Economy, II, pp. 43-44 (Appleton Edition, 1899). Mill had in mind a society in which exchanges were all made with money, and apparently assumed a constant rate of monetary turnover. 62 MODERN CURRENCY REFORMS to have been as follows: (i) A decline in the amount of goods sold. Although food prices were much higher than normal, the quantity of food bought and sold was much smaller. The monetary demand as related to food sales is represented by the number of units of food sold multiplied by the average price per unit. 1 Furthermore the famine interfered with business in many other lines, lessening the monetary demand. (2) The monetary circulation was actually increased: (a) By an Act of December 17, 1896, 20 millions of rupees were authorized to be released from the government Paper Currency Reserve, securities to be sub- stituted. 2 By the end of March 1897 this coin had all been put into circulation, (b) The Government's cash balances in treasury vaults were greatly depleted, the funds having been paid out largely in relief work. Cash balances in government treasuries (exclusive of government balances in banks) at the end of the fiscal years 1894-95, 1895-96, and 1896-97, respectively, were : R. 185.3 millions, R. 122.0 millions, and R. 99.7 millions. 3 (c) Large amounts of rupees how large no one knows were withdrawn from hoards and put into active circulation. Relation between Exchange Rates and the Price Level From what has been said it is evident that, while from 1895 to 1898 the general tendency of rupee prices was downward (due allowance being made for famine food prices), and the tendency of exchange rates was upward both movements registering the appreciation of the rupee there was apparently no appreciable correlation between the two movements. 4 1 The unit taken for each article would be the amount that could be bought for R. 100 in the base year. 2 East India Fin. Stat. 1897, pp. 62-63. 3 Computed from Statistical Abstract relating to British India, 33d No. (1899), p. 136. 4 The figures for price movement, covering as they do units of years, RAISING THE RUPEE TO A GOLD VALUE OF 16 PENCE 63 The idea is often met that the movement of rupee ex- change rates between the closing of the mints in 1893 and the attainment of the i6d. par in 1898 reflected the move- ment of the value of the rupee in India, that is, of its pur- chasing power over Indian goods and services. While there are forces that tend to cause a rough correlation be- tween the two movements, the price movement tends to lag behind the " exchange" movement, and the response is particularly slow and impeded by economic friction in a country like India with its isolated communities and its respect for custom. Passing over the fact that exchange rates, being merely the gold price in England of the right to one rupee in India, or the amount of gold in England one could obtain for one rupee in India (either at once, i.e. cable, or after a stated period of time) , reflect changes in the value of gold per se as well as changes in the value of the rupee 1 per se, we should note that gold is merely one of many commodities whose price is expressed in the value of the rupee. Furthermore, it should be emphasized that gold, which is a commodity of universal demand, easily transferable, and with a highly organized and keenly competitive world market, is one of the most sensitive of commodities in its price movement. During the American greenback period, when the greenback was depreciating, the price of gold and the rates for the gold exchanges were the first to rise substantially, and rose farthest ; and when the greenback began to return toward par, they were likewise the first to decline. Wholesale prices, retail prices, and wages lagged behind gold in the order mentioned both on the upward movement and the downward movement. The greenback price of gold and gold exchange (as long as the exchanges were quoted in greenbacks) were responsive to the daily rumors and to the afford no satisfactory basis for comparison with exchange rates, for such a brief period, in order to determine a 'useful coefficient of correlation. 1 Cf. supra, pp. 17-21. 64 MODERN CURRENCY REFORMS temporary successes and failures of the Northern cause, which found no appreciable response in the more lethargic prices for commodities and services. 1 A similar situation appears to have existed in India. While India's exports and imports in the absolute are large, still, in the main, the people of India live on their own products, and a large part of those products run their life history from production to consumption in a very small territory. They have only the remotest connection with foreign trade, gold, and the gold exchanges. In time, of course, any substantial disturbance in the equilibrium of values in the country's import and export trade will make itself felt in these local prices, but, allowing for exceptions, it may be said that in a country like India the influences of such disturbances travel very slowly and lose much of their momentum in traveling. In the articles of import or export and closely related articles the response of prices to exchange movements is quicker and more direct. If the Indian currency is con- tracted relative to trade demands, so that " there isn't enough to go around" at the old prices, a few of the more sensitive commodities in which there is keen competition "give way" early, and among these gold is usually the first to yield. If sterling exchange rises from 14^. to 15^., the Indian exporter of cotton yarns who has sold 1000 worth of yarn in England will find that, although he is selling his yarns for the same gold price as before, he now is receiving for his shipment only R. 16,000 whereas formerly he re- ceived R. 17,140. This will cut into his profits, perhaps lessen his production and export of yarn, and thereby reduce his demands for cotton and also for labor, in turn tending to push down the price of raw cotton and the wages in the cotton industry. A decline in the exportation of yarn lessens the supply of sterling bills and tends to force down 1 Cf. W. C. Mitchell, A History of the Greenbacks, pp. 239-279; also infra, pp. 345 and 426-428. RAISING THE RUPEE TO A GOLD VALUE OF 16 PENCE 65 exchange rates. On the other hand, an advance in exchange from iqd. to 15^. enables the importer of cotton cloth in India to buy 1000, with which to pay for his cloth in England, for only R. 16,000 instead of R. 17,140 as for- merly, a net gain which stimulates the importation of cotton cloth, and tends to raise the foreign price of such cloth and to depress the Indian price of cotton cloth, cotton garments, etc. While the abnormally large imports of cotton cloth continue, they create an extra demand for sterling exchange and tend to lower the rate, thereby destroying the extra exchange profit which had .been the stimulus to the addi- tional imports. In this way prices in India and abroad tend to be brought into equilibrium with each other, and home prices into equilibrium with the rupee value of gold as expressed in exchange rates. But all this adjustment takes time, and, in a country like India, much time. New forces are continually coming into operation, and a condition of static equilibrium is never reached. This lag in the adjust- ment of prices in India is shown by the fact that the Atkinson index numbers of Indian prices fell from 149 in 1897 to 122 in 1898 and 117 in 1899, although the i6d. par was prac- tically reached in January 1898, and although general prices in England at this time were tending upward ; the Sauer- beck index numbers having increased from 62 in 1897 to 64 in 1898 and 68 in 1899. Although there is a tendency to an inverse correlation, with a lag, between exchange rates (when quoted in terms of the foreign money as are sterling rates in India) and general prices, there occasionally arise conditions in which temporary forces tend to pull exchange rates and general prices in the same direction. For example, during the famine in 1897 the Secretary of State, to relieve the Indian Government of a drain on its funds, discontinued for a time the sale of council bills, thereby forcing up exchange while the very funds that would have normally been released from Indian treasury vaults and injected 66 MODERN CURRENCY REFORMS into circulation by the sale of the council bills were none the less put into circulation by government expenditures for famine relief; and the famine was dragging millions of rupees into circulation from the hoarded savings of the people. 1 Discount Rates 1893-98 There was much complaint of the high discount rates in India during the period in which the rupee was appreciating. A superficial examination of the published discount rates of the period 1893-98, in comparison with those of the pre- ceding five-year-period and the succeeding one, fails to show the rates of 1893-98 to have been exceptionally high. Below are given the simple averages of the prevailing official minimum discount rates of the Presidency Bank of Bengal, 2 by half-year periods, for the five years pre- ceding the closing of the Indian mints (i.e. July i, 1888 to June 30, 1893), the five years during which the rupee was being raised to the gold par of i6d. (i.e. July i, 1893 to June 30, 1898), and the five years succeeding the practical attainment of the i6d. par (i.e. July i, 1898 to June 30, 1903) . 3 1 The Indian Financial Statement of 1898 (pp. 14-15), after referring to the demands for famine relief and the hostile attacks on the northern frontier in the summer of 1897, said: "These demands came upon us at the most difficult time of the year, so far as the supply of funds is concerned, for under ordinary circumstances our cash balances . . . run down throughout the five months, July to November. A careful reexamination showed that, in the face of the new demands upon us, we would be obliged to ask the Secre- tary of State to greatly reduce his drawings ; and, as the military operations became more extensive, he not only stopped them altogether, but remitted back to us a crore of rupees out of the amounts he had already drawn." 2 Professor Keynes refers to these rates as the rates charged day by day for a loan advanced on such security as government paper, the interest on which is calculated day by day at the published rate prevailing on each day. "The rates, announced by the three Presidency Banks, are not always identical, but seldom, if ever, differ by more than i per cent." Keynes refers to these Presidency Banks rates "as the best available index to variations in the value of money in India." J. M. Keynes, Indian Currency and Finance, pp. 240-242. 3 These average minimum rates for the period 1888 to 1898 are weighted RAISING THE RUPEE TO A GOLD VALUE OF 16 PENCE 67 AVERAGE DISCOUNT RATES AT PRESIDENCY BANK or BENGAL Half- Year Periods 1888-1893 1893-1898 1898-1903 DATE 1888 (2) RATE 5-2 DATE 1893 (2) RATE 4.1 DATE 1898 (2) RATE S-o 1889 (i) 1889 (2) 9-3 4-7 1894 (i) 1894 (2) 7-3 3-6 1899 (i) 1899 (2) 6.2 S-6 1890 (i) 1890 (2) 8-3 3-3 1895 (i) 1895 (2) 3-6 1900 (i) 1900 (2) 6.4 4-2 1891 (i) 1891 (2) 3-5 2.6 1896 (i) 1896 (2) 5-8 5-6 1901 (i) 1901 (2) 6.8 4.1 1892 (i) 1892 (2) 3-9 1897 d) 1897 (2) 9.9 6.0 1902 (i) 1902 (2) 6.2 3-6 1893 (i) 5-7 1898 (i) II.O 1903 (i) 6-3 Average of first half-years . 6.1 Average of sec- ond half-years 3.8 Average of first half-years . 7.8 Average of sec- ond half-years 4.6 Average of first half-years . 6.4 Average of sec- ond half-years 4.5 Average of years 5.0 Average of years 6.2 Average of years 5.4 These figures show an average interest rate (6.2 per cent) somewhat higher for the five-year period of relative con- traction, July i, 1893 to June 30, 1898, than for the pre- ceding five-year period (5 per cent) or the succeeding one (5.4 per cent) ; but this difference is due chiefly to the abnormally high rates of the famine period. The actual rates, however, of the currency reform period according to the number of days the respective rates were in force, and were taken from Table No. 14, App. II, of the Fowler Committee Report. The figures for the years 1899 to 1903 represent the average of the simple averages of the rates prevailing during each month. Those for the years 1899 and 1900 were taken from the chart facing p. 240 of Keynes' Indian Currency and Finance, and those for the years 1901-03 were computed from the table given in App. II of the Report of the Royal Commission on Indian Finance, 1914, p. 86. 68 MODERN CURRENCY REFORMS are higher than the superficial figures show. It is in its purchasing power over Indian commodities that the real value of the rupee should be measured, and the fact should not be overlooked that the five-year period before the re- form and the five-year period following the reform were both periods in which the purchasing power of the rupee was falling ; while the period of the reform was one in which it was rising. In other words, the lender during the first and third periods was usually paid back his principal in a less valuable rupee than he loaned, and the interest itself each year was paid in a depreciating unit. To compensate for this depreciation in the money unit a higher interest rate was needed. On the other hand, during the period of appreciation the lender tended to be paid both principal and interest in a more valuable unit than he loaned. To compensate for this appreciation in the money unit a lower interest rate was needed. From 1888 to 1893 the average annual interest rate was 5 per cent. The average annual depreciation in the purchasing power of the rupee was 2.7 per cent, 1 which reduced the " purchasing power interest rate" or "commodity interest rate" to an average of approximately 2.3 per cent. From July i, 1898 to July i, 1903 the average annual interest rate was 5.4 per cent; and for the period January i, 1898 to January i, 1903 the average annual depreciation of the rupee was 1/3 of i per cent, making the purchasing power interest rate average for the five-year period slightly over 5 per cent. For the period of appreciation 1893-98 the average annual rate was 6.2 per cent, and the average annual appreciation of the rupee was approximately . 5 per cent, giving an aver- age annual commodity interest rate for the period of approximately 6.7 per cent. As the result of the careful studies of Professor Irving 1 The Atkinson index numbers for prices in India increased from 108 in 1888 to 125 in 1893, showing a depreciation of the rupee for the five years of 13.6 per cent. RAISING THE RUPEE TO A GOLD VALUE OF 16 PENCE 69 Fisher, we know that a long period of relative contraction of the currency is likely to depress industry through forcing down prices, and thereby to lessen the demand for capital and depress interest rates. Furthermore, whenever the lending and borrowing public are conscious to any considerable extent of an artificial "raising" of the money unit, as they were in India from 1895 to 1898, there is likely to be, to a small extent, a conscious allowance for the appreciation of the money unit in the fixing of interest on long-time loans. For India, however, the period of actual appreciation was too short and too uncertain to give these forces full play. Even in such times, moreover, when the interest rate on long-time obligations is tending downward, the restraints and uncertainties of a period of relative currency con- traction are very likely to lead to decided fluctuations in the rates on short-time bank loans. This was the experience of the United States between 1865 and 1879, when the greenback was appreciating, and may explain in part the instability of the interest rate in India during the period 1893-98. While of course capital and money are not the same thing, still money is an important part of capital, and it is through the form of money or rights to draw money on demand that loans of capital goods are usually made. A period therefore in which the currency supply is being reduced relatively to trade demands is likely to be a period in which funds loanable on short maturities will not readily be forthcoming to meet exceptional though temporary demands. When one notes the irregularity of the interest rate move- ments of these periods, and of the price movements during the second and third periods, also the short duration of the period of appreciation, and the artificial conditions pre- vailing during the latter part of it arising from famine and border warfare, he is precluded from drawing any safe in- ferences from the data available as to the influence of rela- tive contraction upon the interest rate. 70 MODERN CURRENCY REFORMS Absolute or Merely Relative Contraction of Currency, There has been much discussion among students of Indian currency concerning the question whether between 1893 and 1898 there was any actual contraction of the cur- rency or not. Elaborate and ingenious calculations have been made of the amounts of money in circulation at the be- ginning and at the end of this period. 1 Into this controversy we need not go. The important question is not whether there was an actual contraction of the currency or not, but whether there was a contraction relative to trade de- mands. In the absence of any even remotely satisfactory indices of the growth of business in India during this period, i.e. of the variations in the demand for money, speculations as to the net amounts of money withdrawn from hoards, imported from abroad and from the native states, amounts melted down, etc., seem largely gratuitous. Furthermore, we have no evidence as to variations in the efficiency of money in India as expressed in rates of monetary turnover, and no adequate information concerning variations in the circulation of deposit currency and in the proportion of bank reserves to deposit circulation. If the law of supply and demand in its application to money needs to be subjected to an inductive test, that test may best be made in some advanced country like the United States, 2 where a moderate amount of roughly reli- able data are available, rather than in a country like India, where the data for such a study are grossly inadequate. The presumption is strong that the law of supply and de- mand applied to currency conditions in India during the 1 For a brief summary of different investigations of the rupee circulation, with criticisms and citations of sources, see Keynes, Ind. Cur. and Fin., pp. 2 For two such tests see E. W. Kemmerer, Money and Credit Instruments in Their Relation to General Prices, second edition, Book II; and Irving Fisher, The Purchasing Power of Money, pp. 276-318. RAISING THE RUPEE TO A GOLD VALUE OF 16 PENCE 71 period under investigation and that the appreciation of the rupee during the period 1893-98 (exclusive of the famine period) was due to the fact that the monetary demand in- creased more rapidly than the money supply. This is what is meant by relative contraction. The burden of the proof is upon those who deny the application of the apparently universal law of supply and demand to the value of one commodity, i.e. money. To disprove it, in the case of India, they must not only satisfactorily measure the vari- ations in India's monetary supply for the period 1893-98, but also those in her monetary demand. CHAPTER IV THE FOWLER COMMITTEE'S INVESTIGATION AND REPORT Now that we have considered the chief facts of the period of transition from the silver standard to a quasi-gold stan- dard, we may proceed to a consideration of the efforts to clinch the new gold par and place India definitely and per- manently upon the gold basis. The various plans proposed, and the policies subsequently adopted, were formulated in the investigation and report of the Indian Currency Com- mittee of 1898, i.e. the "Fowler Committee." Indian Government's Proposals for Stabilizing Exchange The Indian Government on March 3, 1898 sent a long communication to the Secretary of State for India laying down a program for future action as regards Indian cur- rency. 1 This communication refers to "the pressing neces- sity of taking active measures to secure the stability of exchange which was the main object of the policy adopted in June 1893." It said that "Our experience since 1893 has put beyond doubt one of the main principles upon which the legislation of that year was based a principle which was challenged at the time namely, that a contraction in the volume of our silver currency, with reference to the demands of trade, has the direct effect of raising its ex- changeable value in relation to gold." 2 The difficulty of clinching the new par and stabilizing exchange were discussed, and also the evils of the existing in- 1 Correspondence Relating to Proposals on Currency Made by the Govern- ment of India, Cd. 8840 of 1898, pp. 2-11. 3 Ibid., p. 2. 72 THE FOWLER COMMITTEE'S INVESTIGATION 73 stability and uncertainty. "Under these circumstances, " the Government said, "we believe that it will be wiser not to pursue a course of inaction which may be prolonged in- definitely, and that it is desirable in the interests of the state and of the mercantile community to terminate the period of transition without further delay." 1 The Indian Govern- ment's proposal was to establish a gold reserve by means of borrowing, and then to withdraw from circulation and melt down a sufficient quantity of rupees to raise the gold value pf the rupee to i6d. The reserve would be aug- mented by the sale of the silver bullion obtained from the melting down of the rupees. Exchange was to be main- tained at the 1 6d. rate by the confidence the reserve would inspire and by the actual redemption of rupees in sovereigns at the i6d. rate. The Fowler Committee About a month after the receipt of the above communica- tion from the Indian Government the Secretary of State for India appointed a committee of eleven men, of which Henry H. Fowler was Chairman, to make a report on the whole subject of Indian currency. The Committee held 43 meetings, examined 49 witnesses, and in other ways col- lected a large amount of evidence on the subject. Its re- port with the testimony and other evidence was submitted to the Secretary of State for India, July 7, 1899. The investigation showed much difference of opinion to exist. Speaking broadly, there were four main proposals : (i) to adopt bimetallism ; (2) to return to the silver stand- ard ; (3) to adopt a form of the gold standard without gold coin in circulation ; (4) to go directly upon the gold stand- ard, with gold coin in circulation, either by the method suggested by the Indian Government or by some other method. Let us consider each of these proposals, paying 1 Ibid., p. 5. 74 MODERN CURRENCY REFORMS particular attention to the third, which was the stone the builders rejected but was later to become the head of the corner. Bimetallism At the time of the appointment of the Herschell Committee, in 1892, there was a very strong sentiment among people familiar with Indian currency problems in favor of international bimetallism as the solution of India's currency troubles. It was because the attainment of an international agreement seemed hopeless that India had accepted her second choice and had closed her mints in 1893. During the following years there had been a re- vival of sentiment in Europe and America in favor of in- ternational bimetallism. The subject of free coinage had been the campaign issue in the United States in 1896, one party favoring national bimetallism if an international agreement could not be obtained, and the other being op- posed to national bimetallism but favoring a renewal of the attempt to secure international bimetallism. The Republi- can Party had won, and, following its platform pledge, had appointed a commission known as the Wolcott Commission, from the name of its chairman, Senator E. O. Wolcott, to confer with representatives of European countries on the subject of an international bimetallic agreement. France was in favor of cooperating with the United States on the basis of a ratio of 15! to i, and the English Government, being at the time under the influence of men favorably dis- posed toward bimetallism, appeared favorable to the pro- position of India's joining with France and the United States in such an agreement. England seemed disposed also on her own account to make certain concessions to silver. In fact she took a much more favorable stand toward bimetallism than she had taken in any of the earlier negotia- tions. 1 When the proposals were submitted to India, how- 1 "We will re-open the Indian mints, we will engage that they shall be kept open, and we shall therefore provide for a free coinage of silver within THE FOWLER COMMITTEE'S INVESTIGATION 75 ever, the Indian Government, much to the surprise of bimet- allists, rejected them. This it did largely because they seemed to require a ratio of 15! to i or 1 6 to i, whereas her new ratio was 22 to i, and the readjustment to such a low ratio, through the increased gold value it would give the rupee, seemed likely to cause great disturbances in Indian business and finance. To further experimentation in the line of currency reform the Indian Government was natu- rally not favorably disposed at a time when the country was suffering grievously from famine and border warfare, and was only beginning to see light in the currency reform she had undertaken a few years before. 1 In 1898, however, there were still many who believed that the best solution for India's currency difficulties was an international bimetallic agreement, and who held that India had rejected the proposals of the Wolcott Com- mission too quickly and without adequate consideration. They believed that a compromise on the ratio difficulty would have been possible between India, France, and the United States, and even hoped that a renewal of negotia- tions might lead to a satisfactory bimetallic agreement. Concerning those who advocated delay in going definitely to the gold standard in order that an international bimetallic agreement might be reached, the Fowler Committee con- fined itself to stating "that, the negotiations of 1897 with France and the United States of America having proved fruitless, no fresh proposals, so far as we are aware, have been, or are being, made by any of the governments con- cerned." 2 the limits of the British Empire for a population greater in number than the population of Germany, France, and America put together." Mr. Balfour, First Lord of the Treasury. Cf. Fowler Com. Rep . Evidence, Q. 11650. 1 For a brief account of the Wolcott Commission's activities and the atti- tude of India toward its proposals, see Henry B. Russell, International Monetary Conferences, pp. 459-463. 2 Fowler Com. Rep., sec. 19. 76 MODERN CURRENCY REFORMS Return to Silver Standard In the evidence and testimony submitted to the Fowler Committee much was said in favor of a return to the silver standard. 1 Such a policy was more particularly favored by persons interested in India's export trade, who believed, for the reasons hereafter discussed, 2 that a rising exchange was unfavorable to export trade, and especially, that it handicapped India in its competition with China and other silver standard countries for European markets. 3 The con- dition of India's foreign trade during the period of the "rais- ing" of the rupee, however, had been so abnormal, because of the famine and other troubles, that no additional evidence of value in support of their conclusion could be offered. Moreover, it was clear that were the mints to be reopened there would be a great fall in exchange, accompanied of course by a rise in silver, and that this fall in exchange would cause great disturbance to business, to equities as between debtor and creditor, and to the government finances. Obviously, if such a policy should become at all probable, there would be a rush to withdraw capital from India before the anticipated decline in exchange should take place a rush which would of itself cause an abrupt fall in exchange rates. 4 This latter danger was a serious defect in the scheme proposed by some of returning to a silver basis gradually. H. D. MacLeod referred to the pro- 1 Cf., for example, testimony of W. H. Cheetham, Fowler Com. Rep. Evidence, Qs. 8685-8692. 2 Infra, pp. 479-483. Cf. also supra, pp. 24-28. 8 Cf. Fowler Com. Rep., sec. 20. 4 Sir John Lubbock favored the reopening of the mints to the free coinage of silver, but proposed to protect the rupee by increasing the import duty on silver, and by imposing a high seigniorage charge on coinage ; these two measures, coupled with the appreciation of silver which he thought the re- opening of the mints would cause, he believed would prevent any undue depreciation. Ibid., Evidence, Qs., 11084-11086, 11155-11158. Cf. also Testimony of Thomas North Christie and W. M. Leake, Qs. 4424-4581, and 4870-4877. THE FOWLER COMMITTEE'S INVESTIGATION 77 posal for reversing the policy of 1893 and reopening the mints as " little short of madness." 1 The proposal was unanimously rejected by the Fowler Committee. A Gold Standard Without a Gold Currency Various proposals were made favoring a gold standard without a gold currency. The advocates of these schemes in general maintained that silver was better suited to India's domestic currency needs than gold, and that if a mechanism could be devised whereby rupees and rupee notes could continue to be the currency of domestic trade, but could be maintained at a parity with gold through a mechanism that would make possible the settlement of trade balances with other countries in gold, India's needs would be most effectively and economically met. To this end the two most important plans recommended were the Probyn Plan and the Lindsay Plan. The Probyn Plan. This plan was advocated by Mr. Lesley C. Probyn, who had been in the Indian government service for twenty-five years ending with 1879, his last post having been that of Accountant General of Madras. The Probyn Plan was suggested to the Gold and Silver Com- mission as early as 1886, and was formulated in considerable detail in a paper read by Mr. Probyn before the East India Association in June 1888 ; later, in 1892 in a paper read before the Institute of Bankers, 2 in 1894 in a paper read before the East India Association, and in 1895-96 in papers published in the Asiatic Quarterly Review. In its various formulations the Plan was revised, and was finally pre- sented to the Fowler Committee in the testimony of Mr. Probyn of July 18, i898. 3 It is from this last formulation that the following description is chiefly drawn. ., Q. 12932. 2 These papers have been reprinted by Probyn in his book on Indian Coinage and Currency, op. cit. "Fowler Com. Rep., Evidence, Qs. 6818-7055. 78 MODERN CURRENCY REFORMS Mr. Probyn claimed that a gold currency in India was "not only unnecessary but, in the first instance, at any rate, undesirable. ... If gold coins were put into circulation the temptation to hoard them and to use them as ornaments would be very great. ... If gold coins were passed into the currency it would be at first almost like pouring water into a sieve." * His Plan contemplated the introduction of a new govern- ment note to be issued in the denomination of R. 10,000 and in exchange for gold. Notes of smaller denominations were to be issued in exchange for gold or for silver rupees, but at first were to be redeemable only in silver rupees. As trade demands increased, exchange would rise to the gold import point and gold would be presented at the currency reserve offices, at first probably against the issue of the large gold notes. "But gradually, as need arose, gold would come against the issue of smaller notes, thus practically freeing the silver rupees held in the currency reserve. And this process of the expansion of the rupee currency to meet the wants of the people would go on automatically. . . . There would be no power to touch this gold reserve, except for . . . restricted silver coinage, and if the currency gradually ex- panded without a contraction of the paper issue, the gold reserve would gradually rise. The scheme prohibits gold coinage, and though it does not prevent the receipt of gold at government treasuries, it does not provide for gold (except the large io,ooo-rupee notes) being legal tender. Provision is made that when any further coinage of silver rupees takes place, the difference between the nominal and intrinsic gold values of the silver coins shall be added to the gold reserve. The scheme empowers, but does not require, the Government, after the gold in the reserve (other than in the gold note reserve) has continuously for one year been more than silver, to notify that gold will be always given in exchange for rupees or notes presented for the 1 Fowler Com. Rep., Evidence, Q. 6849. THE FOWLER COMMITTEE'S INVESTIGATION 79 purpose in parcels of 10,000 rupees. When the Govern- ment is able to issue such a notification, a perfect gold standard will have been attained." 1 The Probyn scheme was not favorably received either by the Indian Government or by the Fowler Committee. In commenting upon the proposal the Indian Government said : "We do not think it either desirable or necessary that gold coins should, until the gold standard has for some time been established, pass to any appreciable extent into general circulation. . . . But we do not think it necessary ... to refuse to have legal tender gold coins of a convenient value. We are, moreover, not satisfied that there would be any smaller disappearance into hoards of the gold bars, which would be easy to subdivide, than of gold coins. We are also of opinion that the simpler and more direct a monetary standard can be made, the more acceptable it will be to the public. We think that the only state of things which can be called a thoroughly satisfactory attainment of a gold standard is one in which the gold coins which represent our standard are those also which are good for payments in England." 2 The Fowler Committee objected to the plan on the ground that there was no successful European or Indian precedent in support of such a use of gold bullion, and that the danger of gold coin being hoarded in India in large quantities was exaggerated. "The habit of hoarding," therefore, the Committee declared, "does not present such practical diffi- culties as to justify a permanent refusal to allow India to possess the normal accompaniment of a gold standard, namely, a gold currency." 3 The Lindsay Plan. Of much greater importance was the second plan for securing a gold standard without a gold 1 Ibid., Q. 6858. 2 Letter to Secretary of State for India, March 3, 1898, in Correspon- dence respecting Proposals on Currency Made by the Government of India Cd. 8840 of 1898, p. 10. 8 Fowler Com. Rep., sec. 51. 80 MODERN CURRENCY REFORMS currency. This Plan, which provided for a system of re- demption in drafts on a gold fund located outside of the country, was named after its chief advocate, A. M. Lindsay, deputy secretary and treasurer of the Bank of Bengal. It appears to have been first proposed for India by Mr. Lind- say in 1876. It was discussed by him in the Calcutta Review for October 1878, and July 1885 ; also in the Bankers' Magazine (London) of August and September 1892. In the latter month Mr. Lindsay published a pamphlet on the subject, entitled Ricardo's Exchange Remedy, a Proposal to Regulate the Indian Currency by Making it Expand and Contract Automatically at Fixed Sterling Rates with the Aid of the Silver Clause of the Bank Act. 1 The scheme was described and supported by Charles MacDonald in Novem- ber 1892, in his testimony before the Herschell Committee, and was briefly mentioned among " various schemes" in the Herschell Committee's Report. 2 The basic principle of his plan Lindsay claimed he drew from Ricardo's recommendations for the resumption of gold payments by the Bank of England through the redemp- tion of its notes in gold bullion a form of gold which would not circulate. 3 Referring to Ricardo's proposal and its subsequent enactment into law, 4 Lindsay said : "The currency at that time was based on inconvertible notes of the Bank of England, and Mr. Ricardo suggested x This pamphlet of 36 pages was published in London by Effingham Wilson & Co. 2 Herschell Com. Rep., sec. 144, and Evidence, Qs. 579-584, 589-592. 3 Cf. Ricardo, Proposals for an Economical and Secure Currency, etc., especially chapter 4. Published in McCulloch's edition of Ricardo's Works. 4 The law of 1819 provided that the Acts restraining cash payments by the Bank were to be continued until May i, 1823, at which date they were to cease; that between February i and October i, 1820, the Bank should pay all notes presented to it at the rate of an ounce of gold for each 4 is. (the par rate being 3 175. lof d.) ; between October i, 1821, and May i, 1821 the rate should be 3 195. 6d. ; and between May i, 1821, and May i, 1823 the rate for gold bullion should be 3 175. io^d. Statutes of Realm, Vol. LIX, p. 156 ; cf. also Andreades, History of Bank of England, p. 241. THE FOWLER COMMITTEE'S INVESTIGATION 8 1 that stability in the foreign exchanges might be secured and all legitimate requirements met by the simple and eco- nomical expedient of arranging that the Bank of 'England should sell its paper money at a fixed gold price, and buy back the notes when desired at ij per cent below that price, the gold employed to be in the shape of gold bars or any other form that would prevent its being used as a medium of local payment. He said a currency is in its most perfect state when it consists of cheap material, but of cheap material of an equal value with the gold which it professes to represent ; and he added that a currency of this description might be equally well issued by a Govern- ment as by a Bank. . . . " This proposition of Mr. Ricardo was recommended by the Committee of the House of Lords and Commons ap- pointed in 1819, to consider the expediency of the Bank of England resuming gold payments, and was afterwards adopted on a temporary footing in the Bill for their resump- tion, introduced by Sir Robert Peel. From ist. February, 1820, to ist May, 1823, the value of our paper currency was raised gradually and successfully from its degraded position to the old fixed standard of 3 17$. io^d. paper money to the ounce of gold, by making the notes convertible into gold bars, that could not be used in the internal circu- lation. This short trial is the only one ever given to Ri- cardo's scheme, and it passed through the ordeal satis- factorily. The arrangement appears to be in every respect a suitable precedent for the Government of India to follow, as a temporary expedient at all events ; and it is the duty of the Indian authorities to consider carefully whether this scheme of currency, which was devised by our greatest currency authority, not merely as a temporary remedy, but as a permanent measure of reform, should not be adopted in India on a permanent footing." 1 Inasmuch as the Lindsay Plan and the currency problem it was formulated to solve underwent modifications during the period between the Plan's original formulation and its 1 Ricardo's Exchange Remedy, pp. 6-7. 82 MODERN CURRENCY REFORMS advocacy before the Fowler Committee in 1898 ; and since the limits of this paper will not permit a discussion of the historical development of the Plan, it will be advisable to examine it in the form described by Mr. Lindsay in 1898.* "When formulating this scheme, years ago," said Lind- say, "I based it on the legislation of 1819, but, simply for the sake of convenience and economy, I substituted sterling drafts on London for the gold bars of the Ricardo plan. It was with pleasure that I discovered, last year, that the sterling draft system had been in operation in Scotland for 40 years, 2 and had been recommended for adoption in Ireland by a strong parliamentary committee in 1804." 3 The Lindsay Plan, which has since received the name of the "Gold-Exchange Standard," provided for the im- mediate accumulation by the Indian Government through a long-time loan (say for 15 years) of i 0,000,000 . 4 This was to constitute a gold standard reserve fund, most of which should be kept on deposit by the Government of India in London, preferably in the Bank of England, but part of which should be kept in rupees in government treasury offices in India some in Bombay and some in 1 Fowler Com. Rep., Evidence, Qs. 3275-4303. 2 "After the Peace of Versailles in 1763, a great scarcity of gold was ex- perienced in Scotland. . . . Exchange with London fluctuated 5 or 6 per cent, and, in order to fix exchange and frustrate the attempts of speculators, the Scotch banks established a gold fund in the Bank of England ; and, by offering drafts on London at \ to i per cent over the speculators ' rate, they gradually brought the exchange to par, and with the aid of this conversion fund they maintained exchange at this level up to 1804, and until gold coins were again used." Lindsay, Fowler Com. Rep., Evidence, Q. 3360. 3 Ibid., Q. 3359. 4 Lindsay believed that this reserve could be reduced to 5,000,000 if the Government would impose a prohibitive duty on the importation of silver, which he favored. He believed that the recent heavy imports of silver were used largely for the illicit coinage of rupees of the Native States, and that these counterfeit coins circulated "on large tracts of territory that border these Native States all through India, and displace British rupees, thereby creating a redundancy of the British rupee currency." Ibid., Qs. 3399, 4076-4078, 4219-4231. THE FOWLER COMMITTEE'S INVESTIGATION 83 Calcutta. 1 This fund was to be a separate and trust fund to be used only for the purpose of maintaining the parity of the rupee with sterling at the rate of i6d. to the rupee. 2 The Government was to offer to sell on demand both in Bombay and Calcutta drafts on the gold standard reserve in London for sums of 1000 and upwards, at the fixed rate of i$%d. to the rupee; and in London to sell, on de- mand, drafts on Bombay and Calcutta for sums of 15,000 rupees and upwards, at the fixed rate of i6^d. to the rupee. 3 The Indian rate of 15!^. was supposed to repre- sent approximately the gold-export point of India. In other words, it was assumed that, if India were placed upon a gold standard with gold coins in circulation, the expenses involved in securing gold in India and shipping it (in large sums) from Calcutta to London would be about \d. for each i6d. Under a strict gold standard therefore London demand exchange could drop to 15!^., and no further ; for at that rate gold would be exported, the cur- rency supply would be reduced, and the further decline in exchange would be stopped. Lindsay's plan was to give the "would-be gold exporter," not gold to export, but a draft on the Government's gold fund located in London and held as a deposit in the Bank of England, and to deduct from the value of the draft penny on each i6d. to cover the expenses (interest in transit, freight, insurance, etc.) which the " would-be gold exporter" would have incurred had he been compelled to ship gold from India to London. The rupees which he would pay for these drafts were to be 1 Ibid., Qs. 3382-3390. 2 There were frequent suggestions of other rates, especially the rates of i5 D AVERAGE RATE 1890-99 65.1 cents 1890-99 (exclusive of war period April to Oct. 1898) . 66.7 cents 1894-99 59.5 cents 1895-99 58.7 cents 1895-99 (exclusive of war period) 60.3 cents 1896-99 5 8.6 cents 1896-99 . (exclusive of war period) 60.4 cents i896-March 1898 60.7 cents 1898-99 56.0 cents From the above it will be seen that whether one takes the average rate for the six-year period 1894-99; the five- year period 1895-99; or the four-year period 1896-99, ex- clusive of the war period or inclusive of it ; or the two and one fourth-year period from January 1896 to March 1898; he obtains approximately the same result, that is a rate very close to 60 cents. A ten-year average gives a higher rate (65.1 cents), while a two-year average gives a lower rate (56.0 cents). From the standpoint of the effect of the rate chosen upon the conflicting interests of debtors and creditors the two-year average of 56 cents undoubtedly would have given too much weight to the war period, and have underestimated the importance of debts of long stand- ing; while the ten-year average (65 cents) gave debts of long standing too much emphasis, since no one questioned the fact that the great bulk of the outstanding obligations did not extend back farther than five years. The 6o-cent rate had two other advantages. It was an in- tegral decimal rate, and therefore could be easily calculated and expressed, 1 and it stood between the extremes advo- cated and fairly distant from both. In the Philippines and India, countries which live largely upon their own produce, and in which import and export trade therefore is of relatively small importance as com- pared with domestic trade, the connection between price 1 The peso at this valuation in terms of American cents was very conveniently divisible, for the figure 60 can be divided integrally by 2, 3, 4, 5, 6, 10, 12, 15, 30 and 60. FORMULATION OF GOLD STANDARD PLAN 193 level and short-time fluctuations in gold exchange rates is rather remote. Most of the items in the daily budgets of the masses are chiefly local matters and have only a distant relation to gold prices abroad and to foreign exchange rates. 1 This was not true in Porto Rico. There the native's sup- plies his rice, his corn, and his clothing were largely imported ; while the products of the country the sugar, coffee, tobacco, fruits, etc. were largely exported. 2 The result was that local wholesale prices were tied up closely to foreign prices and to foreign exchange rates, and con- sequently followed more closely the ups and downs of ex- change than in most other countries. The average gold exchange value of the peso, in Porto Rico, therefore, was probably a better criterion of the peso's purchasing power than it would have been in most countries. How Should the Transition to the New Currency Basis be Ejected? In addition to the rate of conversion, two other matters relating to the reform received attention. The first was the question as to whether the transition to the United States currency basis should be effected quickly or slowly ; and the second, whether an American coin corresponding to the Porto Rican peso should be coined and circulated, in order to bridge over the transition 3 with the least possible disturbance. On both of these subjects the opinion of the authorities appears to have shifted between 1898 and the spring of 1900. Secretary of the Treasury Gage in his annual report for 1898 favored the assimilation of Porto Rican currency to that of the United States, and its conversion at 60 cents to 1 Cf. infra, pp. 325, 344-45. J Cf. infra, pp. 210-11. 1 The advisability of the permanent use in Porto Rico of an American coin of the denomination of 60 cents was also considered. 194 THE PORTO RICAN CURRENCY REFORM OF 1899-1900 the peso ; but this assimilation was to be accomplished only so rapidly as could be done "without unduly disturbing existing conditions, and contract relations in Porto Rico." 1 "It is not contemplated," he said, "in the considerations here presented to retire the Porto Rican coins : certainly not until the coins of the United States have become familiar and acceptable to the people." The Secretary was much impressed with the importance of heeding popular prejudice in such a matter as the currency, and of the danger of trying suddenly to force United States currency into circulation. "Therefore, the peso, if received through the customs house or for other taxes, or if received in exchange for Ameri- can money at the government agencies, should be again disbursed or re-exchanged as the demand from the people might require. In fact it may be necessary, in order to give absolute steadiness to the peso, not only to receive or redeem it at a fixed price to be again disbursed at the same price, but it may also be necessary to coin at our mints an additional amount of pesos and their fractional parts for use in the Island." 2 These coins, it was contemplated, would not be copies of the Spanish Porto Rican pesos, but would bear the insignia of American sovereignty. Commissioner Porter, in his report to Secretary Gage, favored the introduction of United States currency into circulation along with Porto Rican currency, by making it legal tender, receivable for taxes at the rate of 60 cents to the peso, and by the giving out of pesos for United States currency at this rate. He said : " The objection to do away with all the present Porto Rican currency, exchanging it for American silver, is, as you have most aptly stated, that the day laborers are not likely to perceive the difference between the intrinsic value or mint value of a coin and its monetary par value as a division 1 Report, pp. 89-91. 2 Ibid., p. 91. FORMULATION OF GOLD STANDARD PLAN 195 of a gold coin. No amount of reasoning will convince them, and the only effective object lesson must be the constant and long-continued taking and giving of the peso by the authorities at the specified rate of 60 cents. 1 ... If the inhabitants of the Island of Porto Rico should prefer American currency, as it is hoped they will, the pesos will soon find their way to the United States treasury. ... If the pesos are preferred and more asked for than should be in stock at our fiscal agencies, this could be met by the coinage of a sixty-cent American silver piece, equal in size, weight and mint value to the existing Porto Rican peso." 2 To this American peso it was contemplated giving a fixed value in relation to United States currency, and the dual character of the coin, it was often suggested, should be stamped upon it. For example, said former United States Consul Philip C. Hanna of San Juan : "On one side of the coin let it read, 'one Porto Rican peso/ and let that peso stand good for the debts of the past contracted in pesos ; then . . . stamp on the other side of the coin the number of cents that this coin is worth in the money of the United States." 3 A similar object, it will be recalled, was in the mind of the Spanish minister in 1895 when he had placed on the new Porto Rican peso words implying that it was equal to five Spanish pesetas. 4 Objections soon appeared to the plan of a gradual transi- tion to the United States currency basis, either with or without the coinage of an American Porto Rican peso. One objection was the confusion and inconvenience incident to a dual currency. There were circulating at this time in the Island, United States gold coins, various kinds of United States paper money, silver dollars, fractional silver, and minor coins ; also the Porto Rican peso and its frac- tional parts, and the bank notes of the Spanish Bank of Porto Rico. Although the official rate was 60 cents to the 1 Italics are mine. ' Carroll, p. 485. 2 Porter, Report, pp. 5 and 6. 4 Cf. supra, pp. 161-62. 196 THE PORTO RICAN CURRENCY REFORM OF 1899-1900 peso, or Pi.66f to $i, even as late as the latter part of 1899 and the fore part of 1900 there were numerous de- partures from this rate, and it was common for merchants to allow only Pi. 65 or Pi. 60. For an ignorant people like the great mass of the natives, this dual system, and particularly the mingling together of fractional parts of the dollar and fractional parts of the peso, were confusing. The fact, however, should not be overlooked that most of the natives had little or nothing to do with United States currency, their small money transactions being con- fined almost exclusively to the local money. 1 But to the American the dual currency caused particular annoyance. 2 It was but natural therefore that there should be a demand for the speedy elimination of the dual system, and that Americans should make their desires felt at home for "the good old American currency and no other." The Sub- governor of the Spanish Bank of Porto Rico, speaking on this subject for the Bank, said as early as October 24, 1898 : "In this matter we declare ourselves frankly partisans of a change quick and radical. We say immediate because of the damage to business caused by the paralyzation in- duced by the uncertainty of the present state of affairs, and to signify that in our judgment the settlement should not be delayed beyond December or January next, the period coincident with that of low-priced exchange, and radical because we wish the real effective substitution for once and forever of the American dollar for the colonial peso." 3 41 Some who favored prompt action none the less, advised that the conversion be not undertaken until the crop period of December to May was over, so as not to interfere with crop financing, and so as to make possible the paying 1 Cf. infra, pp. 229-30. z See Report of United States Insular Commission, on Civil Affairs in Porto Rico, to the Secretary of War, 1899, p. 17. 3 Carroll, p. 474. FORMULATION OF GOLD STANDARD PLAN 197 off by the agricultural interests of many of their short-time obligations to the commercial interests at the annual settle- ment period, before the old pesos should be withdrawn from circulation. 1 A second argument advanced for speedy action was that if a long period were allowed for conversion, the result would be variations between the official rate and the commercial rate leading to harmful speculation. 2 It was never satis- factorily explained, however, just how such speculation would be possible if the Government should receive both kinds of money at a fixed relation to each other, and should pay out on demand in convenient places throughout the Island pesos for dollars and dollars for pesos at the official rate. A third argument in favor of speedy action, and one upon which much emphasis was placed, was the danger of illicit coinage and importation of Porto Rican pesos. The dies from which these coins were made, as previously noted, were believed to be still in existence. The business of illicitly smuggling coins into Porto Rico had been an established one of long duration. 3 In this case it was claimed the profits would be large, i.e., 35 per cent to 40 per cent, if a 6o-cent gold rate were adopted, and that the Spaniards would have no scruples in thus taking advantage of Americans. "Cer- tainly," said one witness, 4 "the Spaniards have no love for the Americans and they would not hesitate to coin large quantities of Porto Rican pesos, in full weight and fineness, when by that operation they would gain 10 to n cents gold per peso. There are certainly lots of Spanish firms in the Island that would help their friends to carry on such a profitable business." 5 1 Cf. testimony of Manuel Egozcue representing a provincial deputation. Carroll, pp. 467-468. 2 Cf. Memorandum of Carlos M. Soler, ibid., p. 474. 'Supra, pp. 158-59. 4 Carroll, p. 482. 6 The United States Insular Commission in its report of June 1899 (cited 198 THE PORTO RICAN CURRENCY REFORM OF 1899-1900 The danger of smuggling illicit coins into the Island may have been a real one in the Spanish days from 1886 to 1895, when the Mexican peso, which was an article of world merchandise, was circulating at a high monopoly value in Porto Rico, and when Spanish customs officials in the Island were notoriously lax in their administration, if not corrupt ; and this danger may possibly have justified the great brevity with which the Spaniards carried through the currency reform of 1895. It was n t> however, an adequate reason for rushing through the reform of 1900. The coin to be withdrawn was a local coin which did not circulate outside of the country, American customs administration in the Island at that time was efficient and honest, there was no proof that coins were being illegally made from the old dies and imported j 1 and were such a danger a real one, it would long since have been realized, because for over a year before the canje was begun the peso had been circulating in the Island at a gold value of 35 to 40 per cent above its bullion value, and had been interchangeable with United States currency at approximately that rate. Those persons who favored immediate and rapid conver- sion of pesos into American currency and the evidence supra, p. 196) said on this subject (pp. 16-17) : "It is also claimed that large amounts of silver stamped with the Porto Rican stamp, in the form of pesos, are now coming into the Island from Spain or some other country, and our attention was called to the great number of silver pesos bearing the date of 1895, all apparently new, which are now in circulation. It may be that this silver is only part of the currency which was paid to the Spanish soldiers before leaving Porto Rico, and which was carried with them to Spain [cf. supra, p. 163], and is now drifting back to the Island, but it would appear as if there is most certainly an increase in the silver of the country." In explanation of the large amounts of new silver coins that were ap- pearing in circulation, the Military Governor said in his Report of September 30, 1899 : that up to about that time there had been lying in the banks and merchants' safes " two or three millions of Puerto Rican pesos that had never been removed from the original paper envelopes in which they were packed at the mints " (page 509). 1 The figures for the later conversion showed that the supply of colonial money in the Island presented for redemption was slightly below the esti- mated figures for the amount in circulation. Cf . infra, p. 204. FORMULATION OF GOLD STANDARD PLAN 199 seems to show that they were in the majority among those who took an active interest in the subject naturally were opposed to the introduction of an intermediate American peso as a substitute for the Spanish Porto Rican peso. To them such a procedure seemed to be merely a method of prolonging the trouble. The introduction of an American peso at a value of 60 cents, it was argued, would require also a suitable Porto Rico-American fractional coinage, and the introduction of such a system would not only be ex- pensive, but might clinch for a long time a dual currency for the Island. The Porto Rican Currency Question in the United States Congress The Congressional history of the legislation concerning Porto Rican currency demands little attention. There was not much debate on the subject, and most of what there was either was irrelevant or showed gross ignorance of the problem and of the monetary principles involved. The provisions for the currency reform were enacted as part of the Porto Rico Civil Government Act, commonly known as the Foraker Act. On February 19, 1900 the Porto Rican Civil Government bill (H.R. 8245) came before the House in Committee of the Whole, on motion of Representa- tive Payne of New York. It contained no provisions for currency reform. The bill was debated for several days and passed the House February 28. It was immediately reported to the Senate by Senator Foraker of Ohio, the Chairman of the Senate Committee on Pacific Islands and Porto Rico. As a matter of fact the subject had been in- formally considered by the Senate Committee for several months before the bill was formally reported to the Senate from the House. 1 The House bill was referred to the Senate Committee on March i, and reported back to the Senate 1 Cong. Rec., March i, 1900, p. 2437. 200 THE PORTO RICAN CURRENCY REFORM OF 1899-1900 with amendments the next day. In the bill the Senate Committee had inserted the following provisions regarding the currency : "That for the purpose of retiring the Porto Rican coins now in circulation in Porto Rico and substituting there- for the coins of the United States, the Secretary of the Treasury is hereby authorized to redeem, on presentation in Porto Rico, all the silver coins of Porto Rico known as the peso and all other silver and copper Porto Rican coins now in circulation in Porto Rico, not including any such coins that may be imported into Porto Rico after the ist day of February, nineteen hundred, at the present established rate of 60 cents in the coins of the United States for one peso of Porto Rican coin, and for all minor or subsidiary coins the same rate of exchange shall be applied. The Porto Rican coins so purchased or redeemed shall be recoined at the ex- pense of the United States, under the direction of the Secretary of the Treasury, into such coins of the United States now authorized by law as he may direct, and from and after three months after the date when this act shall take effect no coins shall be a legal tender, in payment of debts thereafter contracted, for any amount in Porto Rico, except those of the United States, and whatever sum may be required to carry out the provisions hereof, and to pay all expenses that may be incurred in connection therewith, is hereby appropriated, and the Secretary of the Treasury is hereby authorized to establish such regulations and employ such agencies as may be necessary to accom- plish the purposes hereof; Provided, however, That all debts owing on the date when this act shall take effect shall be payable in the coins of Porto Rico now in circula- tion, or in the coins of the United States at the rate of ex- change above named." 1 As previously noted, the currency provisions of the bill received scant consideration in Congress. Senator Morgan of Alabama proposed an amendment coupling with the bill 1 Cong. Rec., March 2, 1900, p. 2469. FORMULATION OF GOLD STANDARD PLAN 2OI a provision for the free coinage of silver, when silver and gold in certain quantities were brought to the mint together. After some discussion the amendment was lost, and then the Senator proposed an amendment providing for the redemp- tion of Porto Rican pesos in United States dollars, 1 at par, later corrected to 93! cents, 2 when he learned that the peso contained but 93! per cent as much pure silver as the American dollar. The reasoning naively ignored the money value of the two coins and viewed the coins entirely from the standpoint of their respective bullion contents. To the mind of more than one Senator the bill involved a proposal to take away 33! cents or 40 cents of every peso owned by the poor Porto Ricans, and put it into the Treasury of the United States. 3 This amendment was lost by a vote of 33 to i2. 4 Senator Foraker of Ohio, in defending the bill, spoke of the inconveniences of a dual currency in Porto Rico, and the desire of the Porto Ricans to have but one currency, and the " apparently universal sentiment" in the Island that that currency should be the currency of the United States. "The only question is," he said, "how can that transac- tion be consummated? The method provided by this bill is the only way that anybody has pointed out. Our en- deavor was, after that was settled, to find a rate of exchange that would be fair to the people of Porto Rico ; and inas- much as the President had fixed 60 per cent as the rate of exchange while the two coins were in circulation there, we adopted that rate for this measure." 5 1 Ibid., March 29, 1900, p. 3477. 2 Ibid., p. 3511. 1 " Can we take from these people, poor as they are represented to be, this 40 cents in every dollar and put it into the Treasury of the United States, and go home and go to bed and sleep with our own consciences?" Senator Morgan, Cong. Rec., March 30, 1900, p. 3478. "It not only destroys 40 per cent of the money, but we take that 40 per cent ourselves and put it into our treasury." Senator Bacon of Georgia, Cong. Rec., March 29, 1900, p. 3478. 4 Cong. Rec., March 30, 1900, p. 3512. 6 Cong. Rec., March 30, 1900, p. 3511. 202 THE PORTO RICAN CURRENCY REFORM OF 1899-1900 On April 3 the Senate passed the House bill as amended, by a vote of 40 to 31, 16 not voting. The bill was returned to the House on April 4, and referred to the Committee on Ways and Means. On April 10 the Committee reported it back to the House with recommendation that the Senate's amendments be accepted. This was done on April n, by a vote of 161 to 153, n answering "present" and 26 not voting. 1 On April 12 the bill received the signature of the President, and on May i the new Civil Government was inaugurated in Porto Rico under the governorship of Charles H. Allen. 1 Cong. Rec., April n, 1900, p. 4071. CHAPTER IV PUTTING THE UNITED STATES CURRENCY SYSTEM INTO OPERATION IN PORTO Rico THE work of withdrawing the old currency from circula- tion was handled by the United States Treasury Depart- ment. Two special agents were sent by the Department to Porto Rico. They arrived April 30, and began work the following day, the day on which the Act of April 12 went into effect. One of the two special agents, who is still in the United States Treasury Department, wrote me under date of August 30, 1915, in answer to an inquiry concerning the exchange: "We visited every important town on the Island during our four months' sojourn holding interviews with officials, bankers, and merchants. . . . The people of the Island were notified of our presence through publi- cations in the Porto Rican newspapers and by circulars scattered and posted by the civil officials." Banks and banking houses were appointed as agents to conduct the exchanges in San Juan, Ponce, Mayagiiez, and Cayey. They were allowed 1/8 of i per cent on amounts exchanged, and expenses. One of the special agents spent one day in Fajardo, making exchanges for the accommodation of the eastern end of the Island and the adjacent islands. The special agent wrote : "The peons or peasants of Porto Rico had no savings, and the money we received came from the banks and merchants. There was considerable opposition, at first, to the exchange. . . ." The time contemplated for the withdrawal of the old currency was but three months, since the law provided 203 204 THE PORTO RICAN CURRENCY REFORM OF iSgg-igoo that "from and after three months from the date when this Act shall take effect no coins shall be a legal tender, in pay- ment of debts thereafter contracted, for any amount in Porto Rico, except those of the United States." About July 3 the Treasury agents received authority from the Secretary of the Treasury to continue the exchange opera- tions after July 3I. 1 They continued their work until August 20, and during that time they redeemed and shipped to the United States mint at Philadelphia P 5,470,705. 2 Upon their return to the United States the latter part of August, the banking firm of De Ford and Company of San Juan was designated to continue the exchange. It re- deemed, from August 20, 1900 to June 30, 1901, P 302,996^ This gave a total redemption of P 5, 733, 701, or about Pi 16,000 less than the figures previously given 4 for the circulation of Spanish and Porto Rican coins in the Island, showing the fallacy of the rumors concerning the smuggling into the Island of large quantities of illicit colonial coins in 1899 and i90o. 5 1 La Correspondencia de Puerto Rico, San Juan, July 24, 1900. 2 Ann. Rep. Sec. Treas., 1900, p. Ixxvi. 3 Ibid., 1901, p. 70. 4 Supra, p. 165. 6 The Acting Superintendent of the United States Mint at Philadelphia, the mint at which the Porto Rican money was recoined, informed the writer by letter of November 2, 1915, that the kinds of money recoined were as follows : 5-centavo pieces, equaling .... 4,312.27 pesos lo-centavo pieces, equaling .... 14,353.40 pesos 2o-centavo pieces, equaling .... 339,265.80 pesos 40-centavo pieces, equaling .... 144,832.90 pesos Peso pieces, equaling 2,889,828.25 pesos 3>3Q2,592.62 pesos Mixed coin, unassorted, equaling . . . 2,307,649.10 pesos Total silver coin 5,700,241.72 pesos Copper bronze coin, the equivalent of . 34,126.77 pesos Total 5,734,368.49 pesos This total is 767.49 pesos larger than the total reported by the Secretary INTRODUCING UNITED STATES CURRENCY SYSTEM 205 As early as April 27, the Spanish Bank of Porto Rico had issued a notice to the effect that : the canje having been decreed, the Bank had decided to replace its present bank notes of provincial money by other notes payable in Ameri- can money; and that at the opportune time current and deposit accounts would be transferred to the American currency basis. On August n it was announced in the newspapers that the new notes were in circulation. 1 The work of exchanging the new currency for the old was criticized, apparently with justice, on two grounds. Kinds and Denominations of United States Money Paid Out It will be recalled that the money work of Porto Rico for many years had been done chiefly with coins of the de- nomination of a peso or less. 2 The Porto Rican bank notes, which were of large denominations, were being replaced by others payable in United States currency of equivalent value. Furthermore, the American notes already in the Island were meeting needs for money of denominations larger than a peso. One would expect then that the pro- vincial pesos and the fractional silver and minor coins would have been redeemed in American silver dollars, fractional silver, and minor coins; and that, inasmuch as the American 5o-cent piece was the coin nearest in value to of the Treasury in 1901, a difference which is probably to be accounted for by receipts of Porto Rican coins subsequent to June 30, 1901. The Porto Rican coin received was recoined into United States money as follows : Half dollars $2,250,633.50 Quarter dollars 1,514,338.25 Dimes 1,862,635.20 Total silver $5,627,606.95 Bronze cents 52,720.20 Total $5,680,327.15 The recoinage was at the expense of the United States Government. 1 La Correspondencia, San Juan, April 30 and Aug. n, 1900. 2 Supra, p. 165. 206 THE PORTO RICAN CURRENCY REFORM OF 1899-1900 the provincial peso, the Government would have introduced a large amount of these pieces. A high official in the Porto Rican Government service wrote the author under date of November 4, 1915 : "The American silver dollar is not popular because it always requires to be changed for the needs of the great mass of the people. It is a clumsy coin they like to get changed as rapidly as possible. The half-dollar more nearly meets their needs and is much more popular. Gold coins circulate to a very little extent." As a matter of fact, of the $3,200,000 of United States funds which the Treasury agents paid out in exchange for the more than five million pesos of provincial coins (all of the latter being of denominations not greater in value than 60 cents in United States currency), $700,000 was in the form of exchange on New York city, and $2,500,000 in money of the following kinds and denominations : Gold Coin : Double eagles $200,000 Eagles 500,000 Half eagles 445,ooo $1,145,000 Silver Certificates : Tens 300,000 Fives 180,000 Ones 300,000 780,000 Standard Silver Dollars : 200,000 Subsidiary Silver : Half dollars 125,000 Quarters 125,000 Dimes 50,000 300,000 Minor Coins : Nickels 50,000 Cents 25,000 75,000 $2,500,000 These are the official figures furnished the writer by one of the two Special Treasury Agents who had charge of the work. He adds: "Very little of the paper money (silver INTRODUCING UNITED STATES CURRENCY SYSTEM 207 certificates) was retained in circulation on the Island, - but [it] was almost immediately returned to this country by the bankers and merchants to meet bills." The above figures show that of the $2,500,000 paid out, exclusive of the New York exchange, only $375,000 or 15 per cent was in denominations as small or smaller than the peso, and that $1,625,000 or 65 per cent was in denomina- tions over eight times as large as the peso (i.e. of $5 or over). Although gold had not circulated readily in Porto Rico, $1,145,000 of the amount paid out was in gold coin. In his annual report of September 30, 1899 the Military Governor had said: "The funds sent here for army dis- bursements should be in silver, nickel, and copper. . . . Paper money soon disappears, while metallic money would be much more likely to make its way into general circulation and remain there." 1 Despite this, the treasury agents paid out $780,000 in bills, of which $480,000 were in de- nominations of five and ten dollars. It would appear that the convenience of those who did the exchange work, and the immediate convenience of the large merchants and bankers who turned in the bulk of the provincial money, rather than the needs of the Porto Rican public dictated the form of United States money paid out. It is not surprising that we read in one of the daily papers of August n that "great scarcity exists in the entire Island of small money of silver and copper. . . . Letters which we are receiving from all parts of the Island announce the approach of serious trouble." Inadequate Number of Exchange Offices The second ground on which the work of the exchange was criticized was the lack of a sufficient number of con- 1 Page 506. 2 La Correspondencia, San Juan, August n, 1900. Cf. also report of Dr. Jacob H. Hollander, Treasurer of Porto Rico, in First Annual Report of the Governor of Porto Rico, 1901, p. 195. 208 THE PORTO RICAN CURRENCY REFORM OF 1899-1900 veniently located exchange offices. It appears that for the most part exchange offices were opened only in the prin- cipal cities. 1 The banks that held large supplies of the colonial money as reserves, the substantial merchants who held moderate amounts as till money, and the speculators who had been collecting and hoarding the colonial coins in the expectation of realizing a high gold rate of conversion 2 all these brought their money with little expense and inconvenience to the exchange offices and converted it into American currency. This was also true of many of the poorer classes who lived in or near the few large cities in which exchange offices were established. But for hun- dreds of thousands of small farmers and peons scattered over the Island and living in places remote from the large cities the exchange resulted in real hardship. Many indi- vidual cases were cited where these people suffered heavily. An open letter to Governor Allen on the subject, dated June 25, 1900, nearly two months after the exchange work was begun, signed by a Porto Rican business house, was published in La Correspondencia in San Juan in its issue of June 25. The firm refers to having seen a circular issued by the Treasury agents under date of June 20, in which they request the people of the Island to go to San Juan, Ponce, or Mayagiiez, the only places where exchange agencies had up to that time been established, to redeem their Porto Rican money in United States currency. It calls attention to the injustice of such a requirement to the poor people far removed from these cities, and mentions the large number of exchange offices established throughout the Island by the Spanish Government in 1895 when Spain substituted the provincial money for the Mexican money. 3 1 Cf. list of places previously cited, p. 203; also Davis, Ann. Rep., 1900, p. 174. 2 Cf. Carroll, pp. 496-97. 3 The letter refers to a recommendation contained in the Treasury agent's circular that commissions be named in each pueblo to collect the provincial money from the people, in order to exchange it at the exchange offices in the INTRODUCING UNITED STATES CURRENCY SYSTEM 209 A conservative statement of the situation is that of General Davis in his report as Military Governor for 1900 : "To get the local money from the interior to these [few] points [where the Treasury agents had established ex- changes] was not easy, and the expense for transportation was considerable. This, of course, fell on the inhabitants. The peon who was so fortunate as to be the possessor of a few pesos was illiberally dealt with by the merchants or others who collected the money. False reports were circu- lated, and some were made to believe that if they did not turn in their pesos immediately they would soon be value- less." 1 Although this exchange was effected at much less expense than the Spanish exchange of 1895 an d a longer time was allowed, it was not managed with anything like as much convenience to the public as the Spanish canje in which, as we have seen, 2 exchange offices were established in some forty-two places over the Island. The work of the exchange was controlled from Washington by people un- familiar with Porto Rican conditions, the force employed to carry on the work was altogether too small, and the length of time allowed for its accomplishment was under the circumstances inadequate. principal cities and bring back to the people the American money received. Such a proposal the letter characterizes as simply absurd, because of the expense and labor involved, and of the unwillingness of the people to trust their hard-earned savings to such commissioners. The letter suggested that exchanges be established in all customs houses. La Correspondencia in its issue July 30, 1900 said that it was being over- whelmed with questions from towns all over the Island as to what had been decided concerning the exchange, since the period of exchange was supposed to end that day, and there was much money not yet exchanged. It referred to Arecibo, a town of over 8000 population and of great commercial im- portance, as not having had any exchange agency designated for it. 1 Report, p. 174. 2 Supra, p. 162. CHAPTER V SOME ECONOMIC RESULTS or THE PORTO RICAN CURRENCY REFORM THE economic results of the reform may be considered under the rubrics : debts, foreign trade, domestic wholesale prices, domestic retail prices, house rents, and wages. It is only upon the last three items that any considerable in- fluence can be traced. Let us briefly consider first, however, the other items. Debts In the discussion of the proper rate of conversion prior to the Act of April 12, 1900, the equities between debtor and creditor played a most important role. After the rate was once decided upon, this subject appears to have aroused little interest. A search through Porto Rican newspapers of the year 1900 disclosed no local discussion of the subject. Of course many creditors were disappointed that the gold rate was so low as 60 cents, and many debtors, that the rate was so high. The more intelligent of both classes, however, accepted the rate as a reasonable compromise, and as it was the rate which had already been in force for nearly a year and a half there was little difficulty in commuting outstand- ing debts to the new currency. Foreign Trade As we have already seen, 1 there are few countries in the world whose prosperity rests so much on foreign trade as 1 Supra, p. 193. 210 RESULTS OF THE PORTO RICAN CURRENCY REFORM 21 1 Porto Rico. Despite the backwardness of the country and the fact that nearly three fourths of its adult male popula- tion could neither read nor write, its per capita foreign trade amounted to $22.60 United States currency in 1897, and was nearly as large as that of the United States for the same year, which was but $2 5. 36.* The big fact in the ex- planation is of course that for Porto Rico the great bulk of the trade was foreign, while for the United States the foreign trade constituted but a very small percentage of the total. During Spanish times this Porto Rican foreign trade had been handicapped by the instability of exchange rates, but since President McKinley's proclamation of January i, 1899 fixing the official valuation of the peso at 60 cents, ex- change rates on gold standard countries had been com- paratively stable. As to foreign exchange rates, therefore, the canje recognized a situation that had been existing for nearly a year and a half. By fixing a definite rate of con- version, however, it lessened the need on the part of ex- porters and importers of making forward exchange con- tracts as a means of protection against unfavorable exchange fluctuations pending the carrying out of their business con- tracts. 2 The chief influence exerted by the canje upon the foreign trade of the Island appears to have been through its effect in raising wages a subject to be considered later. 3 The higher wages measured in gold which the planters were compelled to pay increased somewhat the expense of pro- ducing sugar and tobacco, and probably put a small handi- cap on the export trade in these articles, because in neither article did the Island have such a monopoly (as for example the Federated Malay States had in tin at the time of the Straits Settlements currency reform in I9O5) 4 that it could collect this extra expense in the form of a higher price charged 1 Computations are made on the basis of 59 cents to the peso and the census population of 1900. 2 Cf. infra, pp. 296-98. 3 Cf. infra, pp. 220-22. * Cf. infra, pp. 430-32. 212 THE PORTO RICAN CURRENCY REFORM OF 1899-1900 to the foreign importer. On the other hand, by placing sums of larger gold value in the hands of the laborers, the canje may have tended to enhance slightly the demands for the imported articles they consumed. 1 There were so many other forces coming into operation at this time, how- ever, that it is utterly impossible to disentangle their in- fluences from that of the canje, and to assign to any one of them its proportionate importance. For example, the entire economic life of the Island was being revolutionized through the disruption of long-established Spanish connec- tions and the establishment of a new insular government and new relations with the United States. The Act of April 12, 1900 substituted for the tariff laws of Spain those of the United States, and established duties of 1 5 per cent of the Dingley tariff rates on all merchandise passing between Porto Rico and the United States. The hurricane of August 8, 1899 one of the worst in the history of the Island destroyed 3500 lives and did damage to property estimated at P 36,000,000, the coffee plantations suffering the worst. 2 Under such conditions, and in view of the paucity of trade data available, it is not possible to measure statistically the influence of the canje upon the Island's foreign trade. It is sufficient to say that it is the judgment of the best informed Porto Ricans with whom the writer has been privileged to confer that this influence was small. Domestic Wholesale Prices There is no evidence that the canje had any appreciable influence in Porto Rico on prices in wholesale trade except 1 But see infra, p. 217. 2 The British Consul reported to his Government in 1900 that owing to the great damage done to the coffee plantations by the hurricane of 1899, the coffee yield on an average for the whole Island in 1900 was but one fifth of an ordinary crop. The sugar crop he reported excellent, but tobacco, he said, "since the destruction of the Cuban and Spanish outlets, through the effects of the war, has become quite a drug in the market. . . ." British Diplomatic and Consular Reports, Porto Rico, 1900, pp. 6 and 7. RESULTS OF THE PORTO RICAN CURRENCY REFORM 213 possibly indirectly through its influence on wages. In the wholesale trade competition was strong and the business was largely in the hands of a few important houses. Local wholesale prices continued as before to be adjusted to the gold values of the local money, falling in nearly all cases approximately 40 per cent when the 6o-cent peso was dis- placed by the loo-cent dollar. Retail Prices It was upon retail prices that the canje had its greatest influence. To understand this influence one must bear in mind three important facts in the economic life of Porto Rico : (1) The great masses of the people live from hand to mouth. The country is tropical and most kinds of goods will not keep except in refrigerators. These were expensive luxuries and at this time were owned in Porto Rico only by a few of the wealthiest people. Even the despensa, or family cupboard, in which rice, sugar, and a few perishable foods are kept, was found in a comparatively small propor- tion of the homes. The laborer bought each day the food he wanted for the day, and looked with suspicion upon food that was bought yesterday. (2) The second fact is largely a corollary of the first. Porto Rico was a land of the penny ; the great bulk of the purchases being in petty amounts. In those sections (as for example in Guayama) where native servants were given an allowance of so much a day for food, in addition to money wages, the food allowance was usually 6 cents to 8 cents. A Porto Rican even to-day will buy a cent's worth of rice, a cent's worth of bread, and half-a-cent's worth of codfish, beans, or sweet potatoes. Often two cents will buy three or four different articles. In 1900 it was upon the centavo that the great bulk of the transactions fell. There was nothing like the tendency in Porto Rico that is found in 214 THE PORTO RICAN CURRENCY REFORM OF 1899-1900 the United States for prices to break on the figures 5 and 10. (3) During Spanish times the United States had been known in Porto Rico as a land of great wealth and of millionaires. Such Americans as visited the Island had usually spent money freely. With the American occupa- tion, American soldiers, who were much better paid than Spanish soldiers, spent their money generously; likewise American travelers and business prospectors. Great hopes were built concerning the future of the Island, and long before there was any official change in the currency, prices and wages in Porto Rico were moving rapidly upward, as is evidenced by the numerous references in the news- papers 1 to the rising cost of living, and by the public pro- tests that were being made against the alleged unreasonable price advances in the retail trade. This movement was in operation at the time of the beginning of the canje, May i, iQoo. 2 With a setting of this kind, suddenly, within a period of a few months, the currency was converted into another currency whose coins of corresponding denomination are 66f per cent more valuable in terms of gold. And coins of small denominations were replaced to a large extent by money of large denominations. It must now be remem- bered that the natives tend to measure the value of similar 1 See for example an article in La Correspondencia of San Juan, April u, 1900, entitled Subida de Precios es Escandaloso, in which there is a bitter complaint against the rise in prices of necessities, and a plea for government action against the unreasonable exactions of retailers. 2 The British Consul in his 1900 report said that "the first months of the year well kept up the universal enhancement in the prices which had set in on the American occupation. . . ." British Diplomatic and Consular Reports, 1900, Porto Rico, p. 8. General Davis, in the hearings before the Senate Committee in January 1900, was asked a question concerning the cost of living in Porto Rico. He replied: "[It is] much higher than in the States. There are a few things which are cheaper, but most necessities are greater in price." Senate Miscellaneous Documents, 56th Congress, ist Session, DX, No. 147, p. 76. RESULTS OF THE PORTO RIGAN CURRENCY REFORM 215 coins in terms of their size, and that the dollar and the dime were but little larger (namely about 7 per cent) than the peso and the ten-centavo piece, respectively ; and further, that the smallest coin, the coin in terms of which most people thought and bought, was suddenly reduced to less than two thirds its former size, 1 and raised in its gold value 66f per cent. With these facts in mind, it can be easily under- stood why retail prices for small purchases should in a very large number of cases have been transferred without reduc- tion from centavos to cents of 66f per cent greater value. Although there is unfortunately lacking the evidence of accurate price statistics on this subject, the testimony of numerous responsible witnesses and of the contemporary press strongly supports this conclusion. As was the experience a few years later in the Philip- pines, 2 the transfer to the new currency basis appears to have been postponed by the great majority of merchants and others to the latest date contemplated by the law. 3 A careful examination of two Porto Rican daily newspapers, El Impartial of Mayaguez for the first month of the period of the canje, and La Correspondencia of San Juan for the entire period, shows that up to August i practically all of the prices mentioned in the papers were quoted in terms of the provincial money. There were numerous complaints of rising prices during this period, 4 May i to August i ; the 1 The American cent weighed 48 grains, and the Spanish centavo (or five- centimo piece) weighed 77.16 grains. 2 Infra, pp. 341-43- 3 Formal efforts were early made to transfer prices to the new basis, but they appear to have been of little effect. The newspapers of May 7th and 8th (La Democracia of Ponce and La Correspondencia of San Juan) con- tained notices on this subject signed by various merchants. Those of Ponce declared that their transactions in the future would be on an American gold basis, but that they would naturally receive the provincial silver at the proper rate. Those of San Juan proposed to give, in separate price lists, prices in United States currency and prices in provincial money, in order that the pub- lic might see that there was a difference. 4 Examples are : La Correspondencia of San Juan, May 8, published a pro- test against the raising of the prices of necessities by retailers, referred to a 2l6 THE PORTO RICAN CURRENCY REFORM OF 1899-1900 cause, however, was not often directly attributed to the canje, but rather to the combinations of retailers and their selfishness. On August i the old money ceased to be legal tender, and, as it was generally expected that the money would not be received by the Government in exchange for United States currency after July 31, the transference to the new basis was very active near the first of August. Henceforth most mercantile prices were quoted in terms of United States currency, 1 and railway rates were placed upon the new currency basis. 2 On August i the prices of newspapers were generally changed to the new basis, and we read in La Correspondencia for August 3 an announcement of a well-known pawn shop, that, although all its business up to July 31 was in provincial currency, henceforward it would be exclusively in United States currency. From the evidence available it is impossible to tell to what extent the canje was used as an excuse for transferring combination of retailers, Trust de Detalistas, and favored the formation of a League of Defense among consumers, giving notice of the opening at its editorial office of a register of protests which all classes were invited to sign. The newspaper El Pais is referred to in this issue as favoring a Union of Consumers; and a Committee of Defense against the exactions of retailers. La Correspondencia of May 9 had an article on the League (Gremio) of Retailers. In its issue of May 1 1 the same paper published a letter from the Federacion Regional de Obreros congratulating it on its campaign against the exactions of retailers and promising the support of the Federation. It advocated the calling of a meeting to request the organization of consumers. The issue of May 17 complained against the rise in the price of bread from four or five centavos to six centavos a pound. The same issue referred to the plan of the socialist laborers of forming in each barrio a society of some forty members to combat rising prices by buying supplies cooperatively in large quantities. El Imparcial of May 19 referred to the decision of the socialist laborers in Mayagiiez to form such cooperative groups, and favored the organization of groups of other laborers to protect themselves by buying only of such establishments as charge reasonable prices. In its issue of June 21 La Correspondencia had an article on The Question of Subsistence, in which it paid particular attention to the rise in the price of bread and the exorbitant profits being realized by bakers. 1 Cf. advertisements in La Correspondencia, Aug. i and 2. 2 See announcement, ibid., July 21. RESULTS OF THE PORTO RICAN CURRENCY REFORM 217 retail prices at par from provincial money to United States money. Many merchants in their advertisements made a virtue of the claim that their prices had all been transferred at the official rate, that is, reduced by 40 per cent. In some cases this claim was doubtless true, although there appears to be ground for the suspicion that in some cases at least the striking advances in prices in May and June were preparations for these later "generous reductions." If one may trust the newspaper accounts, there were many cases in which merchants in converting their prices to United States currency " split the difference/' making the new prices approximately 80 per cent of the old ones. The complaints were very numerous, however, that in a large number of cases prices were transferred to the new currency without any reduction whatever. On this point a few citations from responsible sources will suffice. General Davis wrote in his annual report as Military Governor for 1900: ' The dense ignorance of 80 per cent of the inhabitants and their general helplessness was taken advantage of by the merchants, local bankers, and employers of Labor. The poor peon who had a few pesos saved was given in ex- change the United States dollars at the official rate. For P 10 he received $6 ; but the merchant and tradesman with whom he spent his money would seek to put him off with as little codfish, rice, or rum as he would have gotten the day before for his pesos." J The first Civil Governor, Charles H. Allen, said in his first annual report, dated May i, 1901 : " Doubtless some sort of exchange from the Spanish silver currency of Porto Rico to American currency was necessary ; but coming just as it did, about one year after the hurricane, 1 Report, p. 173. 2l8 THE PORTO RICAN CURRENCY REFORM OF 1899-1900 it proved to be a hardship upon the people. This result ensued . . . from the fact that the merchants of Porto Rico were slow to recognize the difference in value between a Porto Rican peso and an American dollar. Some of them continued to charge the same prices for their goods in American money as they had previously received in the de- preciated currency of Porto Rico. The fruit venders and other peddlers of small wares could not be made to under- stand that a Porto Rican medio was only worth three cents, and bakers gave no larger loaf of bread for an American cent than for a Porto Rican centavo. ... So it happened that the greed of one class and the ignorance of others caused great friction in the purchase and sale of commodities and in the transaction of business. In fact, owing to the peculiar circumstances of the case, the ex- change from one currency to another amounted for a time almost to the contraction of the circulating medium to the extent of 40 per cent. 1 The second Civil Governor of Porto Rico, William H. Hunt, in a letter dated April i, 1902, said : " There was considerable apprehension on the part of the people and some little misunderstanding. In some places storekeepers closed their shops, because there was little or no American money to be had on August i in the partic- ular towns where such action was had and because they feared that Porto Rican money would only be taken at its bullion value after that date. Market people, omnibus drivers, street venders, storekeepers, and house owners could not understand that the new American dollar ought to have a greater purchasing power than the Porto Rican peso, and it was because of this misunderstanding and apprehension that on August i persons who had charged a peso for an article asked and received an American dollar; Omnibus fares, which were 10 centavos on July 31, were 10 cents on August i. . . . " 2 1 Report, pp. 65-66. 2 Quoted in Cong. Rec., June 26, 1902, p. 7461. RESULTS OF THE PORTO RICAN CURRENCY REFORM 219 The British Consul said in his 1900 report that the dollar was made synonymous with the peso and that "there was an immediate rise all round of 66f per cent." 1 Rents Rents in the cities appear frequently to have been con- verted at par from pesos to dollars. As early as April 28 we find La Correspondencies advising renters in San Juan to institute a crusade against the abuse now becoming common on the part of landlords of transferring rents to an American currency basis without reduction; while on August i this paper had an editorial (cited more fully later, p. 222) in which it said that "the landlords have covered in gold the rent of the house. ..." The issue of this paper for August 1 2 contains the following item : "Various landlords of urban properties in Arecibo [a city of 8000 population] have notified their tenants that after the first of the present month they will be expected to pay their rents in gold to the same amount as formerly in pro- vincial money." 2 A native Porto Rican, who at one time held one of the most important engineering positions in the Island, informed the writer that the rents of several pieces of real estate which he owned hi San Juan were converted to a gold basis without reduction at the time of the canje, and said that such conversion was the rule among the property owners with whom he was acquainted. Governor Hunt is responsible for the statement that "rentals rose, and a dollar was exacted after August i for every peso that had been collected the month before." 3 This advance in rents, it should be borne in mind, how- 1 Pp. 8-^. 2 Four days previously this same paper published a letter saying that vigorous protests were being made against this proposal of property owners in Arecibo. Letter quoted in Cong. Rec., June 26, 1902, p. 7461. 220 THE PORTO RICAN CURRENCY REFORM OF 1899-1900 ever, was one more step in an upward movement that had set in vigorously shortly after the American occupation. 1 Wages The same forces that caused the conversion of numerous retail prices from centavos to cents without change in amount tended to cause a similar conversion of wages, while the fact of the conversion of prices was itself a power- ful leverage in forcing the conversion of wages. If the peon's customary living cost as many cents per day as it formerly cost centavos, and such was not far from the case in numerous instances, he naturally protested vigorously at any attempt to scale down his wages 40 per cent. In some prosperous lines of industry, like sugar, which em- ployed more labor than any other industry in the Island, the need for labor was so great that the peon's demands for conversion at par were commonly realized; in other lines, as for example in the coffee fincas, which were still suffering from the disastrous effects of the hurricane, the peon was not so fortunate. There were strikes for conver- sion of wages at par, some of which were successful and some of which resulted in compromises. 2 The demands of labor were strengthened by the fact that the normal tendency of wages since the American occupation had been strongly upward. 3 Said General Davis in his 1900 report as Military Governor : "The employer of labor who had been allowing wages of 50 centavos per day would only give 30 cents American, 1 Cf. British Diplomatic and Consular Report, 1900, Porto Rico, p. 9. 2 La Correspondencia for August 1 2 said that the coachmen's union of Ponce, which had declared a strike, had returned to work, having changed the schedule of rates ; and that the laborers in the match factory in Mayagtiez had declared a strike. The issue of August 13 said that the tailors' union of a certain small town had come to an agreement after a strike of several days. 3 Cf. Senate Hearings, op. cit, p. 205. RESULTS OF THE PORTO RICAN CURRENCY REFORM 221 which money at first had little or no more purchasing power locally than the same number of centavos. It is true there were strikes and appeals to the authorities for justice, but effective help could not be applied by any one in power. Some proprietors did make concessions, and about split the difference of the two moneys in fixing the wage rate. The field hand who had been getting 50 centavos, worth 30 cents gold, claimed 50 cents, and was allowed 40 cents gold as a compromise ; but this was not an advance equal to the general increase in price of almost all necessaries of life. The sugar makers and tobacco manufacturers could afford to increase wages, but the coffee growers not only could not make any increase, but they were all so greatly embarrassed and damaged by the loss in crops for the preceding two years that a great many had prac- tically abandoned business. The wage rate for labor in the coffee fincas had not only not increased, but not more than half the hands accustomed to secure employment could get it at any wage rate. The change of currency has worked an injury to the coffee laborers, for it has only caused confusion and hard feeling between proprietor and laborer and merchant." 1 A report of similar tenor was made by the British Consul to his Government in 1900. He said : " Where the peso [formerly] was asked the dollar is required and freely granted in the case of English-speaking domestics, all of whom are colored. . . . Labor of all sorts in the town and port demanded and generally obtained a similar rise but not without a series of strikes." The Consul also pointed out that in the interior wages did not rise in the same proportion, and that in some districts, especially those suffering most from the hurricane, they did not rise at all. 2 La Correspondencies of August i, 1900 had an editorial under the title Consumatum Est, which said in part : 1 Davis. Report, 1900, pp. 173-74. 2 British Diplomatic and Consular Reports, 1900, Porto Rico, p. 9. 222 THE PORTO RICAN CURRENCY REFORM OF 1899-1900 "The clamorous canje has been effected. . . . We have exchanged the pen as for the plumed Indians. We ought to be satisfied. ... It is true that the landlords have covered in gold the rent of the house, the cook refuses to season the olla unless we give her in gold what she formerly earned in silver, the washwoman demands the same pay in gold for the washing; . . . and, since the incomes of most people have not increased, the result is a deficit in the household budget. . . . One of the great arguments for the canje was that it would reduce the cost of living, which was becoming very high in Porto Rico. The result, how- ever, has been that we are paying double for all classes of service, many provisions are dearer, and others are the same, but nothing has fallen." An interesting illustration of how some of the wage ad- vances worked appears in a railroad announcement in La Correspondencia of August 6 : "To the public. Although the entire personnel of this enterprise will be paid from the ist of August forward a dollar gold for each provincial peso formerly paid, and accordingly it would be equitable for us to convert freight and passenger rates in the same manner, 1 nevertheless, being attentive to the manifestations of the public, we have resolved to reduce rates, beginning with to-morrow, accord- ing to the following schedule : . . ." But these rate reductions appear to have been nothing like sufficient to compensate for the increased value of the monetary unit. For example, it was pointed out 2 that from Bayamon to Viga Baja the third-class rate was formerly 70 centavos, and the new rate 63 cents, whereas a reduction proportionate to the increased value of the dollar would have given a rate of 46 cents. 1 Note the false implication that all expenses rose in proportion to the increase in wages. 2 La Correspondencia, Aug. 12. RESULTS OF THE PORTO RICAN CURRENCY REFORM 223 Were the Price and Wage Changes Permanent? It is customary to think of changes in prices and wages resulting from the introduction of a new unit of value as merely nominal, except for a few temporary maladjust- ments friction points, as it were, in a new exchange mechanism quickly to be worn off by use. Even if these maladjustments were but temporary, it should not be over- looked that the losses (and gains) resulting from them may have been very real and permanent. A peon on a coffee plantation whose wages of Pi5 a month were reduced to $9 as the result of the canje, and who found the prices of the goods he bought unchanged, irrecoverably lost 40 per cent of his monthly wage ; and his loss was repeated each month until there was a readjustment through an increase in his wage, a reduction in prices, or both. This ultimate readjustment, however, no matter how perfect, did not re- store his lost money nor blot out such evil results as the impairment of his health or that of his family, strikes, and destruction of property l with resulting hard feelings be- tween employer and laborers. In this particular reform, however, it appears that many of the supposedly temporary price and wage changes persisted at least in part. The advances took place at a time when the tendency of both general prices and wages, for other causes, was upward ; and the reform anticipated and hastened price and wage changes that were destined soon to take place anyway. On this subject Governor William H. Hunt said in a letter dated April i, 1902 : 1 In a hearing conducted by Mr. Carroll, January 14, 1899 (Carroll, pp. 468-69), the following question and answer appeared: "Dr. Carroll Do you think that you will not be able to induce your peons to continue their work by explaining to them that they can buy as much with the gold as they could with the nominally larger amount of silver ? " Mr. Huicy [a member of the municipal council of Arecibo] "We will have to try it, but the chances are that we will not succeed and they will strike, and strikes mean fires. There have been two instances here of that. On two estates they cut down wages 10 cents and that same day the two estates were burned." 224 THE PORTO RICAN CURRENCY REFORM OF 1899-1900 "Naturally, business was much disturbed for a short time, but the disturbed conditions were soon adjusted with some relation to American money. I think it can be safely said, however, that there never has been, in all respects, an entire readjustment; rents, for instance, never having gone back to what they were prior to August i, 1900. Wages are somewhat higher than they were prior to that time, but, generally speaking, all prices have risen in Porto Rico within the past eighteen months, as all conditions have much improved." 1 Of similar purport is the statement of the after effects of the canje made by De Ford & Co., at that time one of the leading banking houses in Porto Rico, in a letter to Mr. Charles A. Conant, dated August 2, 1901. It is as follows : "The immediate effect of our advertised intention to re- tire the old currency was a very general raising of prices and a demand for the raising of wages among the smaller merchants, retailers, and workingmen. This lasted but a short time, however, and the prices of staple commodities, as well as the price of labor, have since worked back toward the old basis, steadily but surely. To-day we believe that a conservative opinion would say that the change in the currency is perhaps responsible for a rise in the cost of liv- ing of from i o to 15 per cent. In some parts of the Island it is much higher, owing to combinations of capitalists, but these will undoubtedly be dissolved in time.' 7 1 Letter is printed in Cong. Rec., June 26, 1902, p. 7461. 2 Quoted by Charles A. Conant in his Special Report on Coinage and Banking in the Philippines, p. 119. CHAPTER VI COULD THE PLAN FOR CONVERTING PORTO RICAN CUR- RENCY INTO UNITED STATES CURRENCY HAVE BEEN IMPROVED ? ONE of the motives in studying a currency reform like that of Porto Rico is to get from it lessons for the future. Many currency reforms will doubtless be carried through during the present generation, especially reforms in the Orient, in South America, and in Africa. If mistakes have been made in recent reforms it is well to know them so as to avoid similar ones in the future. Many things are known to the student of Porto Rican currency to-day that were not known to those who were responsible for the reform of 1900, and the discussion which follows seeks to draw lessons for the future, not to criticize actions of the past. In the light of present knowledge, how, if at all, should the reform program of 1900 have been changed? The Rate of Canje In view of the resulting price and wage disturbances was the 6o-cent rate of conversion a wise one ? Particular atten- tion was paid, in the discussions of 1899 and 1900 concerning the proper rate, to the question of justice to debtors and creditors and to the holders of the provincial money. To secure approximate justice for these classes it was sought to find a rate that was substantially in harmony with the gold value of the provincial money during the years immediately preceding. On this basis 60 cents gold was decided upon, Q 225 226 THE PORTO RICAN CURRENCY REFORM OF 1899-1900 and seemed to be a rate that conformed reasonably well with the criterion of justice generally held. The carrying out of the reform, however, brought into prominence certain results whose importance had been greatly underestimated in the earlier discussions results in the form of malad- justments in retail prices, rents, and wages. Would a fore- knowledge of the character and importance of these results have called for a different rate ? If a conversion rate of 60 cents to the peso resulted in a temporary transference of numerous prices and wages at par from pesos to dollars, it would seem probable that such would have been the case with any higher rate up to par, and that the tendency to convert prices and wages at par (that is, to the same number of dollars and cents United States currency that they formerly were in provincial cur- rency) would have been stronger somewhat in proportion as the rate were higher. The fact that the sizes of the old coins and the new ones were approximately the same (ex- cept the centavo and 5-centavo pieces) would have tended to cause the masses to look upon them as equivalent, re- gardless of their gold value, and to demand par rates. The nearer the actual conversion rate came to par the weaker would be the resistance of those paying the prices, the wages, and the rents to demands for the payment of par rates in the new currency. A higher gold rate than 60 cents, such as 70 cents, 80 cents, or 90 cents, therefore, would not have caused any conversions above par, but would probably have increased the number of conversions at par. The latter result would have been truer of wages, where the amounts involved were relatively large, than of retail prices where the amounts were often very small. It is doubtful whether the immediate result as regards prices of native supplies bought in amounts not exceeding a few cents' worth would have been much different with a go-cent rate than it was with a 6ocent rate. Carrying this same principle in the other direction, how- REFORM PLAN CRITICALLY EXAMINED 227 ever, a point would have been reached somewhere at which conversions at par would be difficult, despite the pressure, because the amounts involved would have been so large. A 6o-cent rate might result in numerous conversions at par, but how about a 45-cent rate (i.e. approximately the bullion rate favored by some), or even a 35-cent rate ? At a 35-cent rate it is difficult to believe that there would have been many conversions at par. That would have meant bankruptcy to employers; and, in the cases where there was not a great increase in his gold wages, starvation to the laborer who was compelled to pay as many dollars and cents for his supplies as he formerly had paid pesos and centavos. At what rate then would the most perfect immediate adjustment have taken place? The answer to this ques- tion, I believe, is the 5o-cent rate ; for at that rate prices would have tended to break exactly in two. Two to one is easily thinkable, and the average peon would have under- stood it, likewise the petty merchant and storekeeper. There would have been friction and dispute ; but of all rates that would have even approximated justice between debtor and creditor a 5o-cent rate would probably have caused the least temporary disturbance to existing price and wage standards. This advantage, however, would have been bought at the expense of scaling down debts by about i6f per cent in gold values from the rate which appeared most equitable. 1 Possibly the advantage would have been worth the expense in view of the oppressive burdens the debtors had been carrying, and of the claim that in Porto Rico the debtors were the more productive classes. There are strong argu- ments on both sides of this suggestion of a 5o-cent rate. Fortunately, however, it is not necessary to try to weigh them and to find on which side the balance of advantage 1 Another objection would have been the conversion of cash holdings at an unduly low gold rate. 228 THE PORTO RICAN CURRENCY REFORM OF 1899-1900 lies ; for there is another proposal which would have had the advantages without the disadvantages of a 5o-cent con- version plan. Suggested Improvements in Reform Plan That proposal is analogous to the plan originally contem- plated, 1 of effecting the reform slowly and introducing dur- ing the transition period Porto Rican coins with American designs. As intimated in the preceding discussion, the argu- ments in favor of a speedy transition to an exclusively United States currency basis had little weight. 2 That the alleged danger of counterfeiting was not serious was proved by the fact, that, after nearly a year and a half, under the American regime, of an official rate of 60 cents to the peso, giving it a value of from 35 to 40 per cent in excess of its bullion value, there was no evidence of any appreciable amount of counterfeiting, 3 and by the fact that the Treasury agents in withdrawing the old currency from circulation secured considerably less money than the estimated amount in circulation. 4 An efficient police service and an honest customs service would have been guarantees against any such danger had it arisen. Furthermore, the profits to be realized from counterfeiting United States silver coins would have been greater than from counterfeiting the Porto Rican coins. The receipt of both kinds of currency at the official rate for all taxes and public dues, and the ready interchange of both kinds for the public by various govern- ment fiscal officers at convenient places, would have pre- vented the market rate of exchange from varying from the official rate, and removed the alleged danger of speculation. 1 Supra, pp. 194-95- 2 Supra, p. 198. 3 The writer found in the Porto Rican newspapers but one reference to the counterfeiting of coins, and the counterfeiter in that case was making both provincial and United States coins. Cf. La Correspondencia, July 13, 1899. 4 Supra, pp. 165 and 204. REFORM PLAN CRITICALLY EXAMINED 229 The alleged inconveniences of the dual currency during the latter part of 1899 and the fore part of 1900 the writer believes to have been greatly exaggerated in the reports that reached the United States. Brigadier General Davis, the Military Governor, said as late as September 30, 1899, in his annual report of that year : "As respects the volume of American money now circu- lating [in the Island], it is impossible to furnish a satisfactory estimate. Although the army disbursements in the Island have been several millions, it is believed that most of it has been sent back to the United States. It came usually in bills, a form convenient for cheap conveyance and trans- mission by post. Merchants and others wishing to remit to New York or Europe are in the habit of buying American currency and sending the same to New York in registered letters, buying there European exchange for such amounts as they may wish to remit to London, Paris, or Madrid. Bank bills are therefore at a premium over American gold, for the latter can only be shipped by express at much greater cost than the postage or registration expenses of parcels by mail. . . . The army disbursements amount, approxi- mately, to $200,000 per month, but this money inevitably drifts into the banks and does not go into circulation. The estimated amount of American money now in the bank vaults is $253,598.98, as shown by data recently obtained from the cashiers." 1 It was the few Americans in the Island who felt most the inconveniences of the dual currency, and they were the ones whose opinions were heard in the United States. Even for them the inconveniences were of declining im- portance, since the natives were slowly becoming more and more familiar with the relative values of the two currencies. The great bulk of the native transactions, even down to the latter part of July 1900, were on a provincial currency basis, and most natives had little to do with United States 1 Report, p. 506. 230 THE PORTO RICAN CURRENCY REFORM OF 1899-1900 money. 1 Such Porto Rican newspapers for 1899 and 1900 as the writer has examined contain very few references to inconveniences arising from the dual currency. There was much discussion of the need of free trade between Porto Rico and the United States; but aside from occasional references concerning discussions of Porto Rican affairs in the United States Congress, notes on certain fiscal matters of the Military Government in Porto Rico, and advertise- ments of American concerns in the United States quoting gold prices, the newspaper reader would scarcely have known that there was any currency in Porto Rico except the provincial currency. There was certainly no evidence that the inconveniences of the dual currency to the Porto Ricans were such as to make an early and hurried reform urgent. The main outlines of the plan which the writer believes should have been adopted are as follows : The official rate of 60 cents should have been early declared, and both kinds of currency should have been made legal tender and re- ceivable for public dues at this rate. A new Porto Rican centavo and lo-centavo piece would then have been coined bearing United States-Porto Rican designs, being made similar in size and form to the corresponding Spanish-Porto Rican coins, but made easily distinguishable from the American cent and dime. These coins would have been minted in liberal quantities and generously circulated throughout the Island. After a time they would have been gradually substituted in the circulation for all the provincial coins of denominations below the peso. Meanwhile United States currency would have continued to be placed in circulation, and its use in every way encouraged. There would have been a ready interchange at numerous exchange 1 "The peso and centavo are still the money of the people, and no great progress has been made in displacing them. Our currency, having the value of gold, is still an article of merchandise." Davis, Ann. Rep., 1899 (Sept. 30), P- SO?- REFORM PLAN CRITICALLY EXAMINED 231 offices of these new coins with pesos, and with United States money, especially of small denominations, at the official rate. In this way the masses of the people, i.e. those most ignorant and prejudiced in money matters, would have become accustomed to American-Porto Rican coins of the denominations which they most used, and with their correct values in relation to United States money. The objection to coining other new fractional pieces than the centavo and lo-centavo pieces would have been the expense and the undesirability of making the pro- vincial system so convenient as to encourage its permanence. It is doubtful whether it would have been wise to coin the American-Porto Rican peso piece which was so often pro- posed. The existing peso was a new one and was in a good state of preservation. The fact that it bore the Spanish emblems would not have been serious if it were understood that its circulation was to be continued only a short time. Any inconvenience from a scarcity of pesos could have been met by the use of the United States currency equivalent, i.e. 60 cents ; l and, if Congress would have authorized it, by the introduction of a silver certificate representing three dollars or five pesos, and payable on demand in either form at the option of the holder in San Juan. Such certifi- cates, if issued in convenient sizes similar to those issued in 1903 in the Philippines, would almost certainly, as in the Philippines and in the Straits Settlements, have become popular, and would have rendered great assistance in the work of gradually withdrawing the peso pieces from circu- lation. The smaller denominations left in circulation then (after the pieces of 2, 5, 20, and 40 centavos had first been gradually withdrawn) would have been as follows, 1 There should have been brought to the Island an ample supply of 50- cent pieces, and their use should have been encouraged. Doubtless in some cases this piece alone would have proven a substitute for the peso, resulting in a reduction in prices ; while in many others it would have been received with the American dime (together making 60 cents) as a substitute for the peso. 232 THE PORTO RICAN CURRENCY REFORM OF 1899-1900 viewed from the standpoint of the dollar unit and of the peso unit respectively : DOLLAR NAME PESO 0.006 Centavo O.OI O.OI Cent o.oif 0.06 10 Centavos O.IO O.IO Dime o.i6f 0.25 Quarter 0.41! 0.50 Half dollar 0.83^ 0.60 Peso I.OO 1. 00 Dollar i.66f 2.OO 2 dollars 3-331 3.00 5 pesos 5.00 From the above it will be seen that the provincial pieces (above the centavo) would have fitted conveniently and without fractions into the United States currency system, and the use of this system would have been encouraged ; while the United States currency pieces (with the excep- tion of the $3.00 P 5.00 silver certificate suggested) would have required awkward fractions to express their values in provincial money, the money which was to be discriminated against. Under such a plan, and the steady and tactful encourage- ment of the use of United States currency, the so-called dual system, within a couple years, would have become a single one, and the pieces of i-centavo, lo-centavos, i-peso, and 5-pesos would have become practically denomina- tions of United States currency, i.e. 6-mills, 6-cents, 6o-cents, and 3 -dollars respectively, the other denomi- nations of provincial money having been withdrawn from circulation. The result would have been accomplished slowly and almost imperceptibly, and there would have been little disturbance to retail prices, wages, and rents. The expense would have been very small. As soon as this result REFORM PLAN CRITICALLY EXAMINED 233 was accomplished, the remaining Porto Rican coins of the provincial system could likewise have been slowly with- drawn from circulation, through their receipt for customs dues and internal revenue taxes. Before any attempt was made to withdraw the centavo piece from circulation, it would have been wise to make a modification of the American system for Porto Rico, i.e. to introduce an American |-cent piece a coin for many years (1792-1857) legally coined in the United States. For a country like Porto Rico the American cent is too large a denomination for the smallest coin. It is nearly twice as valuable as the centavo, and its large value probably adds materially to the cost of living of the masses. Many an article costs a cent that would cost only a half cent, were there such a coin in circulation, and many an article costs 2 cents that would cost only i cents. In fact when the United States substituted an American cent for the centavo as the minimal denomination of Porto Rican currency it withdrew from circulation the most important single coin of the poorer people of the Island. The substitution of the |-cent for the centavo, giving 12 half -cent pieces for 10 centavos, would have been a real improvement in the American system for Porto Rico, and while it doubtless would have caused some temporary disturbance, the ten- dency would have been strongly in the direction of favor- ing the peon, for it is very probable that the J-cent piece would have attained practically the same purchasing power which the centavo previously had. APPENDIX A PORTO RICAN EXCHANGE RATES ON NEW YORK CITY, AND THE EXCHANGE AND BULLION VALUES OF THE MEXICAN PESO IN TERMS OF UNITED STATES CURRENCY, MONTHLY, 1890-95 EXCHANGE BULLION EXCHANGE BULLION VALUE OF VALUE OF VALUE OF VALUE OF PESO 1 PESO PESO PESO DATE U.S. DATE U.S. Rate Cur- Rate Cur- Per rency High Low Per rency High Low Cent Equiv- Cent Equiv- alent alent cts. cts. cts. cts. cts. cts. 1890 Jan. 21 82.6 77-3 76.0 1891 Jan. 2lf 82.1 84.0 80.7 Feb. 24 80.6 76.9 75-3 Feb. 21* 82.5 80.5 76.6 Mar. 23 8i-3 74-4 75-4 Mar. 20* 83-2 78.0 76.9 April 24 80.6 82.7 75-6 April 2O 83.3 77-5 75-6 May 27 78.7 81.8 79.2 May 20* 83.0 77-7 76.2 June 28 7 8.1 84-4 76.7 June 2ll 82.5 79.2 76.2 July 26 79-4 87.6 81.9 July 21* 82.3 79-9 78.6 Aug. 20 83-3 93-8 87-4 Aug. 21* 82.3 79-4 77-6 Sept. 14 87.6 94.1 86.1 Sept. 21* 82.3 78.0 77.1 Oct. 16 86.1 88.7 82.9 Oct. Sif 2.1 77-5 75-9 Nov. 16 86.1 84.0 77-5 Nov. 21* 82.3 75-9 7S-o Dec. 18 84-7 85.6 81.4 Dec. 21* 82.3 76.2 7S-o Year, average i 82.3 83.2 Year, average A 82.5 77-6 1 Exchange rates express premiums in terms of percentages. For example, a rate of 21 means that 121 pesos were required to buy a sight draft on New York for $100. Rates for the year 1890 were furnished by Fritz Lundt & Co., Bankers, of Mayagiiez, Porto Rico, and refer to the first of each month. Rates for the years 1891-95 were furnished by the Spanish Bank of Porto Rico, and are the prevailing rates for each month. Cf . Carroll, pp. 473 and 479. 235 236 THE PORTO RICAN CURRENCY REFORM OF 1899-1900 PORTO RICAN EXCHANGE RATES Continued EXCHANGE BULLION EXCHANGE BULLION VALUE OF VALUE OF VALUE OF VALUE OF PESO PESO PESO PESO DATE U.S. DATE U.S. Rate Cur- Rate Cur- Per rency High Low Per rency High Low Cent Equiv- Cent Equiv- alent alent cts. cts. cts. cts. ctt. cts. 1892 Jan. 21 82.6 75-4 71.9 1894 Jan. 41 70.9 54-7 52.5 Feb. 22 82.0 72.2 70.8 Feb. 44 69.4 52.9 47-4 Mar. 22 82.0 71.7 6 7 .2 Mar. 49 6 7 .I 48.0 46.5 April 23* 8l.6 69.1 67.6 April 5o 66.7 50.6 48.4 May 25 80.0 69.5 68.4 May 49s 66.9 50-4 48.3 June a6| 79.0 70.8 69.0 June Sol 66.4 49.8 48.8 July 28 78.1 69.3 67.3 July 52! 65.6 49.8 49-7 Aug. 31 76.3 67-3 65-2 Aug. 60 62.5 52.5 49-4 Sept. 3i* 76.0 66.0 65-7 Sept. 61 62.1 52.1 50-3 Oct. 32| 75-5 68.2 65.7 Oct. 54* 64.7 50.9 49.8 Nov. 29 77-5 67.6 66.7 Nov. 55f 64.2 50-5 48.9 Dec. 3i 73-3 67-5 65-4 Dec. 561 63-8 49.1 46.8 Year, average 26f 78.8 68.5 Year, average 5*A 65-8 49-8 1893 Jan. 3 76.9 66.4 65.7 1895 Jan. 57! 63-4 47-3 46.8 Feb. 28 78.1 66.3 6S-9 Feb. 82 54-9 47-7 46.9 Mar. 28 78.1 66.1 64.7 Mar. 62 61.7 51.2 47.6 April 32 75-8 66.0 65-5 April 63 61.3 53-2 5i-S May 32* 75-5 66.4 64.8 May 66 60.1 S3- 2 52.0 June 40 71.4 66.7 52.5 June 7i 58.5 52.9 52.0 July 42! 70.2 59-9 55-3 July 72^ 58.0 52.7 52.0 Aug. 42 70.4 60.1 56.3 Aug. 73 58.0 52-6 52.1 Sept. 4*1 70.7 59-4 58.3 Sept. 7o| 58.7 52-6 52.4 Oct. 41 70.9 58.8 54-3 Oct. 7i 58.5 54-o 52.7 Nov. 42 70.4 56.4 54-3 Nov. 66 60.2 53-4 52.7 Dec. 42^ 70.2 55-7 54-7 Dec. 58 63-3 52-9 5i-7 Year, average 36H 73-i 61.4 Year, average 67f 61.1 51-5 APPENDIX B EXCHANGE AND BULLION VALUES OF PORTO RICAN PESO IN TERMS OF UNITED STATES CURRENCY MONTHLY, i 896- i goo 1 DATE EXCHANGE VALUE BULLION VALUE High Low High Low 1896 Jan. 67.1 65-8 48.9 48-4 Feb. 66.7 65.7 50.0 48.9 Mar. 66.2 65.7 50.0 49-3 Apr. 67.4 66.7 49.4 48.8 May 63-3 61.7 49-5 49.1 June 63-3 62.5 50.0 49.4 July 62.9 61.4 49.9 49.8 Aug. 62.5 61.4 49-7 48.2 Sept. 62.9 61.6 48.7 47-6 Oct. 62.5 60.6 48.1 47.2 Nov. 61.6 60.2 48.9 47.2 Dec. 62.1 60.6 47-6 47-3 Year 67.4 60.2 50.0 47-2 1897 Jan. 62.5 61.7 47-3 47.1 Feb. 61.6 61.0 47.2 47.1 Mar. 59-9 58.8 47.0 44-9 Apr. 59-5 58.8 45-2 44-7 May 60.2 58.8 44-7 43-6 June 59-5 58.8 44-o 43-6 July 57-8 57-i 43-9 41.8 Aug. 56.9 56.5 42.0 37-6 Sept. 57-9 S7-o 43-2 37-6 1 The exchange value of the peso has been computed from sterling ex- change rates for demand paper furnished the writer by Frank M. Welty, Vice President and Cashier of the American Colonial Bank of Porto Rico. The bullion values of the peso have been computed from the figures for the London price of British standard silver published by Pixley and Abell, Brokers, London. United States currency equivalents of sterling prices have been computed on the basis of $4.8665 to the pound sterling. 237 238 THE PORTO RICAN CURRENCY REFORM OF 1899-1900 EXCHANGE AND BULLION VALUES Continued DATE EXCHANGE VALUE BULLION VALUE High Low High Low 1897 continued r~ fch Oct. 58.2 56.7 43-6 40-5 Nov. 61.0 59-8 43-6 41.8 Dec. 58-5 57-i 44.0 41.1 Year 62.5 56.5 47-3 37-6 1898 Jan. 57-8 57-0 42.6 41.4 Feb. 57-8 56.6 41.6 40.6 Mar. 56.8 55-5 41-3 39-5 Apr. 52.7 5i-3 41.7 40.7 May 41.0 40.0 42.6 41.0 June 48.1 45-4 43-6 42.3 July 45-5 40.0 44.2 42.8 Aug. 48.7 44.1 44.1 43- Sept. 54-0 Si-3 44-9 43-9 Oct. 57-1 52.6 44-8 43-7 Nov. 59-5 58.0 44.9 43-6 Dec. 58.8 57-i 43-8 43-3 Year 59-5 40.0 44-9 39-5 1899 Jan. 61.6 59-9 43-8 43-2 Feb. 61.0 60.2 43-6 43-4 Mar. 60.6 59-9 43-7 43-4 Apr. 61.0 60.0 45-8 43-4 May 61.0 60.2 45-8 44-4 June 60.6 60. i 44.4 43-9 July 60.5 59-9 44.0 43-8 Aug. 59-9 59-5 44.1 43-o Sept. 60.0 59- 43-4 42.7 Oct. 59-9 58.9 42.7 42.2 Nov. 59-9 59-5 43-3 42-3 Dec. 60.0 59-5 43-3 42.7 Year 61.6 58.9 45-8 42.2 1900 Jan. 60.0 59-5 43-9 42.8 Feb. 59-7 59-5 44.0 43-3 Mar. 59-5 59-i 43-7 43-5 Apr. 59-9 59-5 43-6 43-3 May 59-9 59-3 43-8 43-6 June 60.0 59-6 45-3 43-7 APPENDIX C PORTO RICAN CURRENCY REFORM. BIBLIOGRAPHY British Diplomatic and Consular Reports, Porto Rico, 1898-1901. London: Eyre & Spottiswoode. British Blue Books. CARROLL, H. K. Report on the Island of Porto Rico, its Popula- tion, Civil Government, etc. Washington: Superintendent of Documents, 1899. . What Has Been Done for Porto Rico under Military Rule? Review of Reviews, XX, 1899, pp. 705-709. CASTELLANO, TOMAS, Ministro de Ultramar. Canje de la Moneda en Puerto Rico. Discursos Pronunciados por el Ministro de Ul- tramar en las Sessiones de los Dias 6 y 8 de Agosto de 1896 y en la del Senado del n del mismo mes y ano. Madrid: Imprenta, Fundicion y Fabrica de Tintas de los Hijos de J. A. Garcia, 1896. COLL Y TOSTE, CAYETANO, JR. A Review of the Social, Economic, and Industrial Conditions of the Islands of Puerto Rico Im- mediately Preceding Occupation by the United States. Ap- pendix I of Report of Brigadier General George W. Davis on Civil Affairs of Puerto Rico, 1899. House Documents, $6th Congress, ist Session, VII, No. 2, Reports of War Department. CONANT, CHARLES A. A Special Report on Coinage and Banking in the Philippines Made to the Secretary of War. Washington: Superintendent of Documents, 1901. CORWINE, WILLIAM R. Report on Porto Rico to the Merchants' Association of New York, June 5, 1899. DAVIS, GEORGE W. Report of Brigadier General George W. Davis on Civil Affairs of Puerto Rico, 1899. House Documents, s6th Congress, ist Session, VII, No. 2. Reports of War Department, PP- 505-509. DINWIDDIE, W. The Money of Puerto Rico. Harper's Weekly, XLII, 1898, p. 1286. Director of the Mint. Annual Reports, 1899-1902. Washington: Superintendent of Documents. 239 240 THE PORTO RICAN CURRENCY REFORM OF 1899-1900 El Impartial, Mayagiiez, Porto Rico. Daily Newspaper. Governor of Porto Rico. Annual Reports, 1901 and 1902. San Juan, Porto Rico. GRIFFIN, A. P. C., Compiler. Bibliography on Porto Rico. Senate Documents, 56th Congress, 26. Session, Document No. 222. Hearings before the Committee on Pacific Islands and Puerto Rico of the United States Senate on Senate Bill No. 2264, to Provide a Government for the Island of Puerto Rico and for Other Purposes. Senate Miscellaneous Documents, 56th Congress, ist Session, IX, No. 147. HENRY, GENERAL GUY, Military Governor of Porto Rico. Remarks on "The Financial Administration of Colonial Dependencies," with particular reference to Porto Rico. Journal of Social Science, December 1899, pp. 158-163. HITCHCOCK, F. H. Trade of Puerto Rico. Bulletin No. 13, United States Department of Agriculture, Section on Foreign Markets. Washington: Superintendent of Documents, 1896. HOLLANDER, JACOB H. Annual Report of the Treasurer of Porto Rico, 1901. San Juan, Porto Rico. La Correspondencia, San Juan, Porto Rico. Daily Newspaper. La Democracia, Ponce, Porto Rico. Daily Newspaper. LANDRON, RAFAEL LOPEZ. Cartas Abiertas para el Pueblo de Puerto Rico. Mayagiiez, Porto Rico: Imprenta Union Obrera, 1911. PATON, FEDERICO G. La Fabricacion de las Monedas. Madrid: J. Benito y Cerezo, 1903. PORTER, ROBERT P., Special Commissioner for the United States to Cuba and Porto Rico. Report on the Currency Question of Porto Rico. Washington: Superintendent of Documents, 1899. ROWE, LEO S. The United States and Porto Rico. New York: Longmans, Green, & Co., 1904. Secretary of the Treasury. Annual Reports, 1898-1902. Washing- ton: Superintendent of Documents. UBEDA y DELGADO, MANUEL. Isla de Puerto Rico, Estudio, Historico, Geographico y Estadistico de la Mesura. Puerto Rico : Establa- cimiento tip. del Boletin, 1878. United States Insular Commission. Report to the Secretary of War upon Investigations Made into the Civil Affairs of the Island of Porto Rico, with Recommendations. War Department, Di- vision of Customs and Insular Affairs, June 9, 1:899. Washington: Superintendent of Documents, 1899. VAN MIDDELDYK, R. A. The History of Puerto Rico. New York: D. Appleton & Co., 1903. APPENDIX C 241 WHELPLEY, J. D. The Currency of Porto Rico. Forum, XXVII, 1899, pp. 564-569- WIENER, C. Financial Wrong in Porto Rico. North American Review, CLXVII, 1898, pp. 754-755- WILLOUGHBY, W. F. Territories and Dependencies of the United States. New York: The Century Company, 1905. PART III THE PHILIPPINE CURRENCY REFORM CHAPTER I MONETARY CONDITIONS PRIOR TO THE AMERICAN OCCUPATION THE monetary experiences of the Philippine Islands have been scarcely less varied than those of the United States. Among the articles used as money which one finds referred to in the early records may be mentioned rice, coarse cloth, 1 metal bells brought from China, 2 silver wire rolled up like a wax taper from which pieces were cut equal in value to the price of the article being purchased, 3 gold and silver by weight, 4 and silver in pieces marked by weight. 5 Along with the wide use of barter and the extensive use of articles of universal demand as money practices which are found even to-day in the remoter regions of the Philippines we find evidence of both silver coin 6 and gold coin 7 circu- lating in the Islands as early as the last quarter of the sixteenth century. In 1627 we find that salaries of Spanish officials were expressed in pesos of gold. 8 For the next two hundred and fifty years there appears to have been no time when silver and gold did not circulate in the Islands. The coins came from Spain, Mexico, South America, China, and India. During the early part of 1 Blair and Robertson, The Philippine Islands, 1493-1898, LI, pp. 84-85, note. 2 Ibid., XVI, p. 128. Ibid., XIX, p. 316. < Ibid., XIII, p. 56. 6 Ibid., XVIII, pp. 340-41, and XXXIV, p. 381. 6 Ibid., VI, p. 28, and XIV, p. 19, and VII, pp. 154 and 202. 7 Ibid., VII, p. 14. 8 Ibid., XXII, pp. 228-29, and 234. 245 246 THE PHILIPPINE CURRENCY REFORM the nineteenth century it was customary to stamp them for circulation in the Philippines. A decree authorizing the circulation of gold and silver coins from Mexico, Cen- tral America, and certain South American countries, with- out the necessity of their being restamped, was issued in I837- 1 Twenty years later a royal decree authorized for Manila the first and only mint ever established in the Philippines. 2 It began operations in 1861, coining only gold coins of the denominations of 4 pesos, 2 pesos, and i peso respectively. These gold coins, which were all .875 fine, contained 22.84 grains Troy of pure gold to the peso and were therefore equivalent to about 98.4 cents of United States money. A decree of March 5, 1862 3 authorized the mint to recoin the silver circulating in the Philippines into coins of 50, 20, and 10 centavos. The 5o-centavo piece became a very popular coin and was made unlimited legal tender. These new silver coins were .900 fine and contained 360.55 grains Troy of pure silver to the peso, giving a mint ratio with gold of 15.77 to i. 4 With the numerous currency decrees and ordinances of the fifteen years 1862-1877 we need not concern ourselves in this attempt to get a background for the discussion of the currency reform undertaken by the American Govern- ment a generation later. It is sufficient to note that in the Philippines, as in Europe, the decline in the value of gold resulting from the Californian and Australian output was for a time favorable to the circulation of gold and tended to drive out of circulation the heavier silver coins which at the mint ratio were undervalued. Gold appears to have been abundant in the Philippines until about 1875, when 1 Aguilar y Biosca, Legislaci6n sobre Moneda Filipina, p. 20. 2 Ibid., p. 36. 3 Ibid., p. 58. 4 Estimates place the total coinage of gold and silver at the Manila mint down to 1876 at : gold, probably more than 20 million pesos ; and silver, about one million pesos. Report of the Schurman Philippine Commission, I, pp. I44-4S- EARLY MONETARY CONDITIONS 247 the advance in the market ratio between gold and silver throughout the world began to make itself felt in the Philip- pines, reversing the previous course by driving out of cir- culation the gold, which at the mint ratio was now under- valued, and by drawing in from abroad the overvalued silver, especially Mexican pesos. 1 By 1884 gold coin had entirely disappeared from circulation. 2 In a communication of March 20, 1877 to the Governor- General, the Director of the Public Treasury called attention to the fact that the Mexican silver money, which from very early times had circulated freely in the country and for some time had supplied the needs resulting from the scarcity of national money, had now considerably declined in its "in- trinsic value," and was rejected by many individuals and by nearly the entire commercial community 3 of Manila. " Under the circumstances/' he declared, "if the Treasury should indefinitely continue to accept legally and disburse this money, it would cause injustice to its debtors and evi- dent loss to its creditors; it would furthermore cause a dis- turbance in the exchanges which might convert itself into a veritable monetary crisis." Pursuant to the Director's recommendations, the Governor- General on the same day issued a decree 4 prohibiting the importation of all kinds of foreign money, authorizing for the time being the con- tinuation of the circulation of the Mexican silver coin then in the Islands, but directing its recoinage into Spanish coin at the mint of Manila as soon as possible. In this way it was expected to control the supply of money. From this time until after the American occupation the importation of Mexican and other foreign money was 1 Report of Schurman Philippine Commission, I, pp. 146-47. 2 In 1880 the British consul at Manila reported to his Government that "the gold coinage has now all but disappeared, having been replaced by Mexican and Spanish silver dollars, which still continue to be imported on a pretty large scale." 3 Aguilar y Biosca, pp. 85-86. 4 Ibid., p. 87. 248 THE PHILIPPINE CURRENCY REFORM prohibited, although there was a considerable illicit impor- tation of Mexican pesos with the connivance, in part at least, of Spanish officials. 1 Down to the year 1905 Mexican pesos constituted a large part of the country's money sup- ply at the time of the American occupation probably something over half. With the objects of preventing the exportation of Span- ish-Filipino silver coin, and of bringing the money of the Philippines into closer harmony with that of the mother country, a decree was issued March 23, 1877,* providing that the silver which should be coined at the Manila mint should have a fineness of .835 (that is, the fineness of Spanish coin) instead of .900, as was the case before. 3 This action was ineffective for some time because it did not 1 "When the country required currency to move off and balance the heavy exports of a good season, the only means of getting the needed money was by raising the value of the dollar [i.e. the peso] to a price that would enable the smugglers to bring in coin from China at a substantial profit to themselves. It was not uncommon for the dollar to go to a premium of 10 or 12 per cent, and this would immediately start the flow of silver toward the Islands, which would be continued until the demand was met and the rate of exchange was reduced to a point which caused smuggling to cease being profitable. "The smuggling of silver into the Islands was a recognized industry. It was carried on largely by the rich 'mestizos,' or Chinese half-castes. There was a regular system for the bringing in of these coins, which would be shipped from Hong feong in a special steamer and the cargo landed at some point north or south of Manila Bay. . . . There was nothing disgraceful in the view of the people in Manila in these practices, and those who were in- terested in the illicit trade will discuss their operations, telling the manner in which coins were brought in. In a convent north of Manila there were regularly equipped vaults in the basement of the building, where much of the silver was first taken. The customs officers were said to be aware of the manner of bringing in coin, and in the charges computed for the import of contraband silver was also included a 'squeeze' for the officials." Edward W. Harden, Special Commissioner of the United States, Report to the Secretary of the Treasury on the Financial and Industrial Conditions of the Philippine Islands, 1898, p. 6. 2 Aguilar y Biosca, pp. 88 and 89. 3 This reduction to .835 fine gave these coins a gross weight in Troy grains of 400.56 to the peso, and a pure silver content of 334-69 grains to the peso. EARLY MONETARY CONDITIONS 249 meet the approval of the Government at Madrid; but finally on November 23, 1880 an order was issued putting it into effect. During the next few years the mint was kept busy recoining Spanish coins, Spanish-Filipino coins, and foreign coins into pieces of 50, 20, and 10 centavos. In 1897 the Spanish Government sent to the Philippines six million peso pieces known as Alfonsinos, coined under the same law which governed the five-peseta piece of Spain. 1 The Alfonsino contained 25 grams (385.8 grains) of silver .900 fine, giving it a pure silver content of 347.175 grains; whereas formerly the pure silver content of the coins had been 360.55 grains. Kinds of Currency at Time of American Occupation The kinds of currency in the Philippines at the time of the American occupation therefore may be described briefly as follows: (1) An unknown quantity of Mexican pesos, many of which had been illicitly smuggled into the country. These pesos were of widely different dates of coinage and of different weights. Most of them, however, were com- paratively recent and contained 417.7 grains of silver .9028 fine, or 377 grains of pure silver when of full weight. Their pure silver content was therefore about 1.5 per cent greater than that of the United States silver dollar, and their gross weight about 1.3 per cent greater. Many of them were badly worn. (2) Five and a half millions of Alfonsino pesos, commonly known as Alfonsinos, having a pure silver content of 347.175 grains or 7.9 per cent less than that of the Mexican peso. (3) An unknown quantity of silver coins of denominations of 50, 20, and 10 centavos coined in the Philippines, and containing when of full weight 334.69 grains of pure silver 1 The royal decree providing for this coin is given in full in La Politica de Espana en Filipinas, March 15, 1897, VII, p. 217. 250 THE PHILIPPINE CURRENCY REFORM to the peso or 11.2 per cent less than the pure silver con- tent of the Mexican peso. (4) A miscellaneous assortment, unknown in quantity, consisting of Spanish pesos, some of them dating as far back as the eighteenth century; Spanish fractional silver coins; silver coins from Spanish America (in addition to those from Mexico above mentioned); copper coins of Spain 1 and of numerous other countries, including many from British North Borneo; and a considerable number of crudely made coppers known as Igorot coppers, which had been hammered out by the natives from copper obtained from the surface copper deposits which crop out in the northern Luzon provinces of Lepanto, Bontoc, and Nueva Vizcaya. (5) About 3,400,000 pesos of asset currency bank notes issued by the Spanish-Filipino Bank of Manila, under the authority granted by a Spanish decree of 1896. This decree had continued to the Bank its monopoly of the' note issue privilege, and had authorized it to issue notes to the amount of three times its capital stock of 1,500,000 pesos. All of these different kinds of money normally circulated at a par with each other, and at a value, expressed in gold through exchange rates on gold-standard countries, well above the bullion value of the Mexican peso or its market price as coin in London. The explanation is that the supply of money was so limited that all kinds circulated at a " scar city value" substantially above the bullion value of the dearest, i.e., of the Mexican peso. The fluctuations by months in the gold value of the peso for the period January 1893 to September 1904 are shown graphically on the following chart. Exchange rates are quoted in terms of the number of English pence to the peso. 2 1 Just prior to the American occupation the Spanish Government brought from Spain a half million Spanish 5-centavo pieces supposedly equivalent to i/ioo of a peso in the Philippines. They were worth, however, much more for circulation in Spain and were promptly sent back. a The figures for sterling exchange rates upon which the chart is based EARLY MONETARY CONDITIONS 251 In the interpretation of the chart allowance must be made for two facts : first, that the exchange rates cited for the period under review were for four months sight bank paper and therefore presumably higher than cable rates would have been by an amount approximately equal to interest * ^ONTHLY VARIATIONS IN EXCHANGE AND r for five months at the London market rate; second, that quoted prices of silver used in computing bullion value are those for prompt delivery in the London market, while shipment from London to Manila normally involved ship- ping expenses of about one per cent and interest for about 40 days. After due allowance is made for these facts, it will be seen that the Philippine coins circulated for a con- siderable part of the time prior to 1897 at a value sub- stantially higher than that of the bullion they contained in the markets of the world. 1 were compiled by the writer from the daily records of the Manila branch of the Hongkong and Shanghai Banking Corporation through the courtesy of its manager, H. D. C. Jones. These figures, together with those for the bullion value of the peso and for sterling exchange rates in Hongkong, are given in detail by months in the writer's Second Annual Report as Chief of the Division of the Currency for the Philippine Islands, pp. 23-26. 1 For 1894 the average exchange rate was so.iod., and the average bullion value of the Mexican peso in London was 24.59^., a difference of 22.7 per 252 THE PHILIPPINE CURRENCY REFORM The explanation is in limitation of quantity. Strictly speaking, the Philippines were not upon the silver standard from the time that gold disappeared from circulation in the early eighties to the time of the American occupation in 1898. They were upon a fiduciary coin standard, there being no free coinage, no free movement of money into and out of the country, and therefore no ready increase and decrease in the money supply in response to the declines and advances in the gold price of silver. Here is an excel- lent illustration of the oft-disputed principle of monopoly or scarcity value as applied to currency. During this period none of the Philippine currency was redeemable in gold 1 and there was little prospect of such redemption; cent. If we reduce the former by 0.55 per cent, representing five months' interest at the average London market rate (1.3 per cent) for six months' bills, and if we raise the' figure for the bullion value of the peso by 1.14 per cent, representing one per cent for transportation charges, and interest for 40 days in transit at the prevailing rate of 1.3 per cent per annum, we have for the money value and the bullion value of the peso, respectively, 30.02^. and 24.87^. This represents an average money value above the average bullion value for the year 1894 of 20.7. The corresponding figure for 1896 would be 9.3 per cent. Very substantial differences between money value and bullion value are found for the years 1890, 1892, and 1893. To the same effect is the evidence based upon the near-by silver exchanges, as will be seen by a comparison of the sterling exchange rates in Manila, and in Hongkong for the same period, given in the Report cited in the pre- ceding footnote. The following extract is quoted from a report of the British Vice Consul in Manila: "... During the export season, when money was scarce, Manila rates would rule as high as 10 or 15 per cent over those in Hong- kong and China, whence the dollars were smuggled, . . . while in the au- tumn exchange would fall to par in those places, there being frequently an export of Mexicans at this season to be again replaced by smuggled coins when required." Quoted in U. S. Bur. Statistics, Monthly Summary, Nov. 1899, p. 1323. 1 An attempt was made during the seventies and eighties to put the Archipelago on the gold standard, but nothing came of it. Cf. James A. LeRoy, The Americans in the Philippines, I, p. 46. In November 1894 the Manila Chamber of Commerce passed a petition favoring the establishment in the Philippines of a gold standard. The peti- tion and the contemporaneous discussions did not show a very high order of intelligence on the subject of currency. Cf. La Politica de Espana en Fili- pinas, V, No. 105, pp. 37-42. EARLY MONETARY CONDITIONS 253 and yet Mexican pesos containing 377 grains of pure silver, Alfonsinos containing 7.9 per cent less, and Spanish-Filipino coins of lower denominations containing 11.2 per cent less pure silver to the peso, all circulated at the same value, and that a value running at times over 20 per cent above the bullion value of the Mexican peso. The cheaper coins could not drive out the dearer because there were not enough of them; or, stated differently, the Mexican pesos, because of the monetary demand and of the limitations on the quan- tity of the circulating media, were worth more in the Philip- pines than they were outside. CHAPTER II THE CURRENCY PROBLEM OF THE MILITARY GOVERNMENT ALTHOUGH the Spanish fleet in Manila Bay was 'de- stroyed by Admiral Dewey May i, 1898, not until August 13 did the American troops approximately n,ooo in number under General Wesley E. Merritt land and take active possession of Manila. About a week later nearly 5000 more American soldiers arrived. On August 26 the command of the American forces in the Philip- pines was transferred from General Merritt to Major General E. S. Otis, who held the position of Military Gov- ernor of the Philippines until succeeded by Major General MacArthur in May 1900. By the time of the outbreak of the Filipino insurrection early in February 1899 the num- ber of American troops had increased to nearly 21,000. Although troops of the volunteer army began to return home as early as June 1899, the insurrection required the bringing out of more troops, both regular and volunteer, and by November 1900 the American military force in the Philippines amounted to about 70,000. The field of oc- cupation for some time was limited to the city of Manila and certain of its immediate environs, but after the out- break of the insurrection it was gradually extended to other cities and sections. The important commercial cities of Iloilo and Cebu were occupied in February 1899, and the Island of Negros was occupied two months later. According to our best authority on recent Philippine his- tory, the late James A. LeRoy, the occupation of all the civilized provinces of northern Luzon was completed about 254 CURRENCY PROBLEM OF MILITARY GOVERNMENT 255 December i, 1899, and by June 1901 the occupation by the American army was virtually extended to "all the old seats of Spanish authority, with the exception only of a few outposts on the border of or within the territory of the unchristianized inhabitants; and, indeed, American troops occupied, outside of the provincial capitals, in- numerable towns which had never seen a command of Spanish soldiers, but only native constabulary under Spanish officers/' 1 Financial provision for this large American army re- quired the local expenditure of much money both for wages and for supplies, while the administration of civil affairs by the military authorities called for additional large ex- penditures, and involved the taking over by the Military Government of the Spanish revenue system and its gradual adaptation to the new conditions. This promptly brought the military authorities face to face with a new problem, for the handling of which they had had neither training nor experience. It was the problem of adjusting their fiscal arrangements to a currency system based upon a fiduciary silver coin standard. The problem was by no means an easy one, and in its solution the Military Government had the advantage of practically no expert assistance. An article in the Manila Times, which figured in official correspondence 2 during the summer of 1899, well expressed the feeling of many fiscal officers of the army. It began as follows: "For perversities, complexities, difficulties, and im- possibilities, Manila is one of the most wonderful places on the face of the earth, and it would seem that all the 1 LeRoy, The Americans in the Philippines, II, pp. 156 and 195. 2 Edwards, Currency and Exchange in the Philippines, pp. 15-16 (House Docs., s6th Congress, 26. Sess., 1900-01, LXXIV, Miscell. Doc. No. 160). Cited hereafter as Edwards. This is a compilation of official correspondence concerning currency matters in the Philippines from the time of the American occupation in 1898 to November 20, 1900, prepared by Clarence R. Edwards, later chief of the Bureau of Insular Affairs in the War Department. 256 THE PHILIPPINE CURRENCY REFORM natural cussedness of the climate and all the artificial ec- centricities of the place and people are concentrated in the currency. It was bad enough in the old days, and it seemed as if it could not be worse, but now, for our sins, we are given practical proof that it could be worse, for it is. . . ." The problem was not one of finding a satisfactory cur- rency system for the permanent use of the Islands, for in the early days of the American occupation it was commonly believed that the United States would not permanently hold the Philippines, and the Treaty of Paris was not proclaimed until April n, 1899 ; nor was it the problem of providing even temporarily a satisfactory system for the 7,000,000 people scattered throughout the Archipelago. Most of the native and Chinese population knew little or nothing about currency matters, and they were very well satisfied with the existing system, except as regards the in- adequacy of the supply of small change. The immediate problem was merely that of providing a temporary modus operandi as regards currency for the fiscal affairs of the Military Government. Later of course the problem as- sumed a different character. Broadly speaking, one may distinguish three possible plans, each of which had its advocates, although it cannot be said that there was any division of intelligent public opinion into three definite camps. Opinions were too con- fused for that. The three plans were as follows : Exclusive Use of United States Currency for Fiscal Operations of Government One plan was for the Government to go over quickly in all its fiscal arrangements to the exclusive use of United States currency. Shortly after the occupation of Manila, large supplies of United States currency had been brought to the Philippines for the purposes of paying the army and navy and the purchase of local CURRENCY PROBLEM OF MILITARY GOVERNMENT 257 supplies. This money the paper and silver but not the gold was slowly working its way into circulation. 1 The law fixed the pay of American soldiers in United States currency, the funds with which to pay the soldiers neces- sarily came from the United States, and represented by far the largest single item of expenditure of the Military Gov- ernment. A substantial part of the wages of the soldiers, moreover, needed to be transmitted home on a United States currency basis. 2 Americans were familiar with United States currency and did not understand " the unstable and fluctuating Filipino currency." All fluctu- ations in the gold value of the local silver currency were attributed to silver. During the writer's 'two and a half years in the Philippines he never heard the faintest sug- gestion that some of these fluctuations might possibly be due to variations in the value of gold. As a matter of fact, in the world's markets, silver, measured in purchasing power over commodities, was more stable in value than gold during the years 1898 to 1901 inclusive. 3 Further- more, a large proportion of the Americans in the Philip- 1 The Chief Paymaster of the Philippines reported that for the fiscal year ending June 30, 1899 there had been shipped to him from San Francisco : gold coin, $5,030,500; paper currency, $500,000; and silver, nickel, and copper coin, $273,800. House Doc., 56th Congress, ist Sess., V, p. 248. The gold disappeared from circulation very quickly. " Payments were made almost exclusively in gold prior to January i, 1900, but since that time the greater portion has been in United States paper currency." Annual Rep., Chief Paymaster, Division of Philippines, 1900. House Doc., 56th Congress, 2d Sess., VI, p. 136. 2 Of the money disbursed to the troops in March 1899 by the paymaster's department about a third came back to the department either for deposit or for the purchase of drafts on the sub-treasuries in the United States. 8 For these years the variations in the value of gold as measured by the reciprocals of the Sauerbeck index numbers of prices in England and the value of silver as measured by these index numbers converted to a silver basis at the average market prices of silver were as follows : Value of gold : 1898, 156.2; 1899, 147.0; 1900, 133.3; I 9 I > 142.8. Value of silver: 1898, 69.0; 1899, 66.0; 1900, 62.0; 1901, 64.0. The world's production of silver at this period was much more stable than that of gold. Cf. Ann. Rep. Dir. Mint, 1914, p. 267. s 258 THE PHILIPPINE CURRENCY REFORM pines could not see any reason why the American dollar should not at once follow the flag. The great obstacle to the Government's depending upon United States currency exclusively was the fact that practically all the business of the Philippines, the buying and selling of merchandise, payment of wages, the loans, deposits, and foreign exchange operations of the banks, all were on a local currency basis. This local currency was emphatically the money of the country, and, regard- less of what the Government should do in the matter of its own fiscal operations, must continue to be so for some time to come. It would have resulted in loss and much hard- ship and have been provocative of bitter resentment on the part of the natives to have compelled them to buy United States currency at the banks and exchange shops with which to pay taxes and other government dues, and to sell at these same banks and exchange shops for local currency the United States currency they received from the Government in payment of wages and for supplies. Ex- change shops are usually not popular, and in the Philippines their unpopularity was aggravated by the fact that they were owned largely by the Chinese. Moreover the people did not think in terms of United States dollars, but in terms of local pesos, and any attempt to force rapidly the United States dollar into common use would have caused confusion and maladjustments in prices, wages, and money contracts. 1 The Filipino like most Orientals has a great respect for custom, "for what has been"; he had none too great con- fidence in the new invaders of his country, and this was no time to antagonize him needlessly. It might have been possible to extend to the Islands the United States currency system, but it would have been necessary to do it slowly. 1 For a further discussion of this subject, see infra, pp. 303-304. CURRENCY PROBLEM OF MILITARY GOVERNMENT 259 Use Local Currency {or Fiscal Operations of Government The second plan, and the one that probably would seem the natural one to most students of monetary science, was to recognize frankly the status quo as regards the Philippine monetary system until such a time as the United States should withdraw from the Islands, or, having decided to remain, should undertake a permanent reorganization of the entire currency system. After all, the number of American soldiers in the Philippines represented a very small percentage of the entire population, and as the American control should be extended to other places than Manila it would be increasingly difficult to make the American dollar follow the flag. The obstacles, however, to the exclusive use of local currency by the military authorities were very great. In the first place there was the legal difficulty that army salaries were by law payable in United States currency. Assuming that this difficulty could have been overcome either by a liberal interpretation of the law or by new legislation, the question arose : Where would the Military Government obtain the local currency with which to make its immense payments? The Military Government's receipts from taxes and public dues represented a very small part of its expenditures. The army had to be paid out of funds drawn from the United States. There were two possible ways by which the army could supply itself with local currency. One was to obtain it from the Manila banks against the sale of drafts on United States Govern- ment funds in America. The other was for the Military Government in the Philippines (or the War Department in the United States) to undertake the purchase abroad of Mexican pesos and their shipment on army transports to the Philippines. To the first plan, which the banks favored, there was the serious objection that the Government would be placed 260 THE PHILIPPINE CURRENCY REFORM at the mercy of the banks and might be exploited by the manipulation of exchange rates. There were at the time three commerical banks of consequence in Manila: the Spanish-Filipino Bank, a local institution which had been closely affiliated with the Spanish Government and had enjoyed a monopoly of the note-issue privilege, but which had little foreign exchange business except with Spain; the Manila branch of the Hongkong and Shanghai Bank- ing Corporation, a large English corporation with branches scattered throughout the Orient and with branches also in London and New York, and with its head office in Hong- kong; the Manila branch of the Chartered Bank of India, Australia, and China, an English corporation similar to the preceding one, with headquarters in London, and branches scattered throughout the Orient and one in New York. The Government's exchange operations would almost neces- sarily have been conducted through one or both of these two large English banks. As will be seen later, 1 the mili- tary authorities in the Philippines early came to distrust these foreign banks, and believed that they connived to exploit the Americans. Regardless of the adequacy or inadequacy of the reasons for this distrust, the distrust existed and was an insuperable obstacle to any plan for de- pending largely upon the banks for army funds. At best it would have been an anomalous action for the United States Military Government in the Philippines, at a time of war or insurrection, to have placed itself so completely in the hands of two foreign banks. How different would have been the situation had the United States had at that time a great central bank like those of the European coun- tries, or had it had the present federal reserve system ! Either could promptly have established branches in the Philippines, and aided the Government in its fiscal oper- ations. The proposal that the military authorities themselves 1 Cf. appendix A, pp. 383-85. CURRENCY PROBLEM OF MILITARY GOVERNMENT 261 should undertake directly the importation of Mexican pesos was repeatedly urged in certain quarters but was not received with favor in Washington. 1 It is very doubt- ful whether the fiscal officers of the Philippine Military Government, those of the War Department at Washington, or even those of the Treasury Department were properly qualified to go into the highly sensitive silver market, and "play the game" of purchasing Mexican pesos against the great oriental exchange banks. Moreover, unless the Govern- ment used this privilege merely as a whip over the banks to keep them from exploiting it, the procedure would need to be a continuing one, since the fact that the Military Gov- ernment was compelled to secure its income from outside the Philippines would have led to a continual importation of Mexican dollars by the Government, regardless of the state of the local money market. This would have had the effect of keeping the local currency circulation continually redundant, and the same phenomenon would doubtless have occurred that occurred in the case of United States currency, 2 i.e. the banks would have been exporting Mexican pesos commercially to relieve a redundant circulation, at the very time that the Government was causing redundancy by bringing in Mexican pesos with which to make army dis- bursements. Another difficulty which would have had to be over- come had the Military Government placed its fiscal op- erations upon a local currency basis was one in connection with the transfer of funds to the United States by soldiers. For expenditures in the Philippines local currency was more widely accepted than United States currency, and, except as regards articles imported from gold standard countries, was probably more stable in its purchasing power. To the extent that the soldiers spent their money in the Islands local currency was the preferable money; but this was not true as regards the money that the soldiers saved 1 Cf. Edwards, pp. 10-12, 18, 19, and 38. 2 Cf. infra, pp. 264-65. 262 THE PHILIPPINE CURRENCY REFORM or sent to their families in America. A Mexican peso bought practically the same amount of local supplies in the Philippines when exchange with United States currency stood at Pfs. 1 2.27 to $1.00 as when it stood atPfs. 2.00 to $1.00 ; but in the latter case it could be transferred home as approximately $0.50, and in the former only as $0.44. Had the Government placed wages upon a local currency basis, it would almost certainly have been compelled to adopt some such plan as that followed by certain of the large European banks and commercial houses in the Orient, which agreed to transfer to the home land on request a certain part of the wages of their European employees on a fixed exchange basis with gold. 2 1 Executive order No. 66 issued by the Civil Governor August 3, 1903 made the official designation for local currency " Pfs.," that for United States currency "$," and that for the new United States Philippine currency which had just begun to be placed in circulation " P." These symbols will be used throughout the remainder of this paper. See Executive Orders and Proc- lamations, 1903, p. 89. 2 This plan is of sufficient importance to deserve a brief description. The following description was given to the writer in 1904 by the manager of the Manila branch of one of the large English exchange banks : An amount equivalent to about 32 per cent of the regular salary is given to Euro- pean employees each year to allow for the depreciated gold value of the dollar. The origin of this allowance was as follows: Salaries in the early days were fixed in Mexican dollars before the gold value of that dollar had depreciated through the fall in the price of silver. As a result of this depreciation, employees of the Bank found the gold values of their incomes rapidly declining and requested that their salaries be fixed upon the gold basis. The directors of the Bank maintained that although the purchasing power of the Mexican dollar over imported goods or in the home land had greatly depreciated [?], its purchasing power in the colonies themselves and other places throughout the Orient over local produce, labor, etc., had not materially declined. They reasoned that the employees of the Bank ex- pended about one half of their salaries for house-rents, domestic foods, other purely local supplies, and servants, and that the other half was sent home or invested in goods imported from gold-standard countries. They accordingly agreed to permit all European employees of the Bank to purchase sterling drafts of the Bank to the amount of half their salaries at the rate of three shillings and four pence to the dollar. These drafts could be commuted into local currency at the rate of the day if the employee wishes to spend this exchange allowance in the Philippines. CURRENCY PROBLEM OF MILITARY GOVERNMENT 263 Use of Both United States Currency and Local Currency for Fiscal Operations of Government The third plan was a combination of the other two, i.e. the adoption of both local currency and United States currency. Being confronted with the horns of an awkward dilemma the Military Government adopted the proverbial Anglo- Saxon course and tried to seize both of them, a course which as a permanent arrangement would have been in- tolerable, but which as a makeshift for a few years was endurable, thanks largely to the unusual stability of the silver market during the fiscal years 1899 and I9OO. 1 It is difficult to describe, at once briefly and accurately, the plan followed, because different departments of the Military Government followed quite different plans, and the same department often shifted from one plan to an- other. During the entire period of the Military Govern- ment and the early part of that of the Civil Government there was confusion in the matter of the ratio in which one currency should be computed in terms of the other in receipts and expenditures and in the accounting of fiscal officers. 2 Paymaster-General A. E. Bates, in a letter to the Secretary of War, October 17, 1900, said: 3 1 The range between the highest and lowest London price of silver for the two years was only 7.8 per cent. Cf. chart, p. 251. 2 A letter of the Military Auditor to the Secretary of the Military Gov- ernor, October 23, 1899, said : "At the present time there are four different rates of conversions. 1. The rate telegraphed from Washington to the chief quartermaster of this department and used in the quartermaster's department here, $0.474 in gold for i Mexican dollar or peso. 2. The rate used by the subsistence department, $0.481, a rate formerly in use by that department, and ordered continued by the Governor-General in the Philippines. 3. The rate used at the custom-house in the payment of employees whose salaries are fixed in gold, $0.50. 4. The bank rate, to-day $0.485, necessarily used by the Treasurer should he have* to deposit gold and take credit in Mexican. . . ." Edwards, p. 36, 3 Edwards, pp. 61-62. 264 THE PHILIPPINE CURRENCY REFORM "The difficulties in connection with the confused state of the currency in the Philippines arise in adjusting and auditing the accounts of the collecting and disbursing officers in the Islands by the auditor in Washington, where all accounts are required to be stated in terms of United States currency. The Insular Government has no diffi- culty as long as they receive and pay out the money of the Islands at its nominal value. There is no difficulty with the departments of the army as long as ... they confine their transactions exclusively to the United States currency. The trouble arises when it is necessary to use money for the purchase of supplies or the payment of native labor, and with the individuals who receive their pay in gold and are obliged to convert it into the currency of the country." Into the details of this confused situation we need not go. The reader who is interested in them will find a mass of correspondence on the subject carefully collected by Clarence R. Edwards in the pamphlet on Currency and Ex- change in the Philippines, already cited several times. Here we shall concern ourselves only with a few of the chief events. The first and most important fact to note is that the paymaster's department of the army maintained itself throughout the entire period upon a United States cur- rency basis. Its receipts were in United States currency, and were mainly obtained by direct shipment from America, at first of gold and silver coin, and later largely of paper currency. This United States money acted in one respect like an ordinary bank check it performed one exchange operation and then died, so far as the Philippines were concerned. The paymaster having received it from the United States paid it to the soldiers; and the soldiers ex- changed it at the exchange shops or banks for local cur- rency. The banks could not pay it out in any considerable quantities in the course of business; they accordingly allowed it to accumulate for a time, and then sent it CURRENCY PROBLEM OF MILITARY GOVERNMENT 265 back to America. A not uncommon occurrence during 1898 and 1899, the writer was informed on good authority, was for an army transport bringing millions of dollars of United States currency to Manila to pass a liner returning to the United States with a similar amount of the same kind of currency which the banks were sending back be- cause they could not use it. After September 26, 1899 considerable amounts of United States currency were obtained by the Government from the banks and merchants by the sale to them of drafts on the United States subtreasuries at par, thereby avoiding the necessity of bringing so much United States money to the Philippines. 1 It is difficult to see why this practice could not profitably have been resorted to earlier and more extensively . During the fiscal year 1900 there was disbursed in the pay- ment of troops in the Philippines $14,640,000, of which $6,407,000 was received during the year in the form of shipments from the United States and $2,605,000 was ob- tained from Manila banks in exchange for funds placed to the credit of the Manila banks' agents in New York. 2 The usual practice of the other departments of the Military Government, whether their functions were mili- tary or civil, was to use local currency. On June 3, 1899 General Otis wrote: "With the exception of the disbursements of the pay de- partment nearly all receipts and expenditures of money incident to the transaction of army business here are con- fined to the currency of the country. ... All contracts, verbal or written, on which funds are disbursed and Which affect labor, rentals, and supplies procured in the Philip- pine market are made and executed as regards the expendi- ture of money upon the prevailing currency basis, and 1 Cf. Ann. Rep. U. S. Paymaster-General, 1900, in House Doc., 56th Con- gress, 2d Sess., HI, pp. 931-32 ; also Edwards, pp. 6-8, 19, 31-32. 2 An itemized statement will be found in House Doc., $6th Congress, 2d Sess., VI, p. 137. 266 THE PHILIPPINE CURRENCY REFORM amounts due are paid from the public civil funds at the pre- vailing market rates; hence this class of business is not affected in any wise by the varying rates of exchange." 1 To the above rule, however, there were some exceptions in addition to the paymaster's department. They were: the pay of civilian clerks brought from the United States, the disbursements of the commissary department, 2 and domestic and foreign postal fees. 3 Later, arrangements were made for the acceptance of United States currency (in addition to local currency) in payment of custom duties, internal revenue taxes, and various public fees, at official valuations fixed from time to time in local currency. 4 This was not the case, however, during the early days of the Military Government, 5 and complaints were occasionally made that in the matter of tax payments the United States Government was discriminating against its own money. 6 1 Edwards, p. 6. 2 Ibid., p. 12. 8 Cf. General Order No. 38, U. S. Military Government in the Philippines, Aug. 22, 1899. Local currency was also received at the post office, but at rates based upon the quarterly valuations of foreign coin issued by the U. S. Director of the Mint. Cf. Edwards, pp. 15, 28, and 29. 4 Infra, pp. 272 and 279-80. 6 Edwards, p. 15. 6 The difficulties in making satisfactory adjustments in the case of opera- tions and accounts involving the two currencies were partly met by General Order Number 65 issued under direction of the War Department, April 10, 1899. It provided that, The money accounts of disbursing officers of the United States army, "whether for purchases or services, will be stated in the currency under which the indebtedness is incurred, i.e., foreign silver or gold, or United States currency. "If the agreement calls for either foreign silver or gold the account shall be stated in those currencies, respectively. When in silver, the total amount will be reduced to its equivalent in the gold currency in use in the country in which the indebtedness is incurred at the rate of exchange which may govern at the time, and from this gold currency into United States currency at the current rate of exchange at the date of payment. . . . "The amount in United States currency having been arrived at, authority- is hereby given for checks to be drawn therefor by disbursing officers to their CURRENCY PROBLEM OF MILITARY GOVERNMENT 267 Efforts of Government to Maintain a Two to One Ratio To the student of monetary science some of the most suggestive features of the monetary history of the Philip- pines during the early years of the American occupation concern themselves with the relations existing between the Government and the banks, and more particularly with the efforts made to hold the local currency at a gold value of $0.50 to the peso or, as it was commonly expressed, at a rate of "2 to i." On August 19, 1898 the three commercial banks, namely, the Hongkong and Shanghai Banking Corporation, the Chartered Bank of India, Australia, and China, and the Spanish-Filipino Bank, by the managers of their Manila branches, wrote to Brigadier General F. V. Greene as follows: "Owing to the large amount of American gold being offered us for exchange into Mexican currency, and further, the big sterling letters of credit advised us in favor of the paymasters and others which we understand will be re- quired in Mexican dollars, as this is the only acceptable coin in use amongst the natives, and for general trading pur- poses, while we are anxious to give the soldiers and your Government every assistance by being in a position to quote an exchange of not worse than 2 Mexican for $i gold, we own orders in United States currency and by them exchanged at local fiscal agencies of the United States where possible, or at local banks, for the neces- sary amount in the coin required to pay the creditor in the money originally agreed upon, and authority is hereby given for such exchange where the creditor declines to accept check payable in currency of the United States. "The vouchers for accounts will be made to show the debt as actually in- curred, in the coin in which payment is made, and the reduction from this coin to United States currency, the rate of exchange being stated on the voucher, and the amounts stated on abstracts and account current in United States currency. . . ." Edwards, p. 20. Cf. infra, p. 288-90. This order has been quoted at length because it represents the general policy followed until some time after the establishment of civil government in the islands a policy, however, to which there appear to have been ex- ceptions. 268 THE PHILIPPINE CURRENCY REFORM shall be quite unable to preserve this basis of exchange should there be any scarcity. In view of this, and in order to give every facility for the exchange of United States gold currency, we may require to import clean Mexican dollars, duty free, and shall be obliged if you can see your way to grant us the necessary authority. And we agree to maintain a rate of exchange of not less than two Mexican dollars for one gold dollar to the extent of our import of Mexican dollars:' 1 Upon the same date General Greene replied: " Your prop- osition is approved by General Merritt, and you are authorized, until further notice, to import Mexican dollars free of duty on the conditions therein stated. 2 " The action repealed the Spanish legislation of 1877 P ro ~ hibiting the importation of Mexican pesos, 3 and from this time until January 14, 1904^ with the exception of a short period during the Boxer trouble in China, 5 there was a vir- tually free movement of Mexican pesos into and out of the Philippines. In other words the Philippines passed from a fiduciary coin standard to a silver standard, with the Mexican peso as the unit of value. A glance at the chart on page 251 will show that for nearly two years after this arrangement, more precisely until July 1900, when the Boxer outbreak occurred in China, the price of silver and sterling exchange rates in Manila were exceptionally stable. During this period the extreme range of sterling exchange fluctuations was be- tween a maximum of 24^. (equivalent at par exchange between New York and London to $0.494) and a minimum of 22\d. (equivalent to $0.456) a range of 7.7 per cent as compared with one of 25 per cent for the preceding 23 1 Report of Taft Philippine Commission, 1900, p. 85. The italics are mine. 2 Ibid, p. 86. Italics are mine. 3 Cf. supra, pp. 247-48. 4 Cf. infra, p. 335. 5 Cf. infra, p. 269. CURRENCY PROBLEM OF MILITARY GOVERNMENT 269 months and approximately 18 per cent for the succeeding 23 months. Under the authority thus obtained the banks made heavy importations of Mexican pesos, and gave out local currency in exchange for United States currency or United States currency in exchange for local currency, at varying rates, always maintaining a substantial margin of profit between their buying rate and their selling rate, but at no time until the end of July 1900 giving less than two Mexican pesos for one dollar of United States currency. During that time the banks' buying rate for American dol- lars varied between a maximum of Pfs. 2.07 and a minimum of Pfs. 2.00, but during by far the greater part of the period it was below Pfs. 2.05.* The range of fluctuation, it will be seen, was less than half that of sterling exchange rates. In so far as United States currency circulated, it usually did so at the rate of 2 to i. The latter part of July 1900, there was a substantial rise in the London price of silver and in the silver exchanges, due chiefly to the demand for Mexican pesos for the pay- ment of troops and the purchase of supplies incident to the military operations in connection with the Boxer troubles in China. 2 The agio above the equivalent of a 2 to i rate which the maximum sterling exchange rate in Manila of the period gave was very small, i.e., less than i| per cent, rep- 1 A table of the bank rates for the period is given in the Report of the Taf t Philippine Commission, 1900, p. 86. 2 Sterling rates in Manila for four months paper rose from a maximum of 24d. for June to 24^. for July, 24^. for August, 2$\d. for September, and 25-ifyf. for October the October rate being the highest. To convert these rates to a telegraphic transfer basis about |402 211.696 1901 79,965 142,033 221,998 1 See Colonial Office List, 1903, pp. 309-11 ; and Huttenbach, The Silver Standard and the Straits Currency Question, pp. 9 and 10. 2 Min. Evid. App., S. S. Com. Rep., pp. 130 and 131. 400 THE STRAITS SETTLEMENTS CURRENCY REFORM TRADE WITH GOLD STANDARD COUNTRIES (British dollars, thousands) YEAR EXPORTS IMPORTS TOTAL EXPORTS AND IMPORTS 1891 68,910 44,895 113,805 1892 74,693 43,436 118,129 i893 89,538 68,547 157,085 1894 104,971 88,613 193,862 1895 105,394 88,468 193,862 1896 104,698 89,936 203,634 1897 114,878 99,59 J 214,469 1898 129,394 124,387 253,78i 1899 157,145 133,346 290,491 1900 174,621 154,994 329,6i5 1901 176,808 150,776 327,584 While the figures show a healthy growth of trade in general, it is noteworthy that the greater proportion of the foreign trade at the close of the period was with gold standard countries, that the trade with those countries was a rapidly growing one, that its growth was more than commensurate with that with the silver standard countries, and that despite the severe handicap given to the import trade with gold standard countries by a falling exchange, the reported imports from those countries had been for some time larger than those from silver standard countries, while the growth of the former had been much the more rapid. As would have been expected, the exports to silver standard countries lagged far behind those to gold standard countries. While it is doubtless true that most of the trade with gold standard countries appeared in the colony's trade statistics, and that a considerable part of what Mr. August Hutten- bach called the "Hinterland trade" with silver countries did not appear, and while Mr. Huttenbach may have been correct in maintaining that dollar for dollar the trade with the silver standard countries was somewhat more impor- CURRENCY PRIOR TO REFORM OF 1903 401 tant to the colony than that with the gold standard coun- tries, it was none the less true that the Straits' foreign trade both actually and prospectively should logically have placed it among the gold standard countries long before 1903. Other Disadvantages of Silver Standard Another serious disadvantage of the existing silver stand- ard, the Committee believed, was the discouragement to the investment of foreign capital in the Colony, due to the apparent, and in many cases real, decline in the sterling value of capital invested in the Colony. These facts, together with the element of uncertainty and speculation which was brought into business by a fluctuating exchange, the feeling that exchange had fallen to the point beyond which a further fall would cease to be profitable to the export trade, and the movement on the part of neighboring countries toward the gold basis, forced the Committee to the conclusion that the time was ripe for placing the Straits Settlements, the Federated Malay States, and Johore upon a gold standard. Various Plans for Introducing the Gold Standard Three principal methods of making the change to the gold standard were considered. The plan suggested by the Singapore Chamber of Commerce in 1897 was believed to be impracticable for the reasons already stated. 1 The introduction of the Indian currency system, which was recommended by five members of the local currency com- mittee in 1893, involving as it did a change in the unit of value from the dollar to the rupee, the adoption of a cur- rency which would be controlled largely by another coun- try, and whose bullion value was far below its face value, found comparatively few supporters in 1903, whatever may have been the merits of the plan ten years before. 1 Supra, pp. 395-96. 2D CHAPTER II A CURRENCY REFORM PLAN ADOPTED THE plan finally recommended by a unanimous vote of the Straits Settlements Currency Committee may best be described in the Committee's own words : " A special Straits dollar of the same weight and fineness as the British dollar at present current in the East [gradually to be substituted] for the Mexican and British dollars, the latter dollars ... [to be] demonetized as soon as the sup- ply of the new dollars is sufficient to permit of this being done with safety. Under this plan it will be necessary for the Straits to obtain a considerable supply of the new dollars, and as soon as this is received, the new dollars 'should be made full legal tender concurrently with the Mexican and British dollars, and steps should be taken to put them into circulation. The first supply of new dollars might be obtained ... by remitting to one of the Indian mints a portion of the coin reserve of the currency commis- sioners to be melted down and converted into the new Straits dollars, and this process might be continued until practically the whole of the coin reserve is converted into new dollars " Simultaneously with the arrival of the first supply of the new dollars and with the making of them legal tender, the import of Mexican and British dollars should be temporarily prohibited and the export of the new dollars should also be prohibited. As there is ordinarily a large import of Mexican and British dollars into the Straits, and subsequent export of them, we think it likely that when their import is prohibited there would be a tendency toward a considerable drain of these coins from the Straits Settlements, and if the new dollars are freely supplied, the 402 A CURRENCY REFORM PLAN ADOPTED 403 change of currency might be completed without any great delay. " When the currency is so largely composed of the new dollars as to justify the measure, the Mexican and British dollars should be finally demonetized and the Straits Settlements would then be in the position in which India was when the change of standard was undertaken in that country, with, however, the very important advantage that there would not be an enormous proportion of the new coins either hoarded or circulating in foreign countries, which might, by being thrown into circulation, indefinitely delay the establishment of the gold standard. " After the Straits Settlements had arrived at this stage, the procedure might be exactly the same as it was in the case of India, i.e., after sufficient Straits dollars had been coined to meet the requirements of business in the Colony and the adjoining States, the coinage of dollars would cease until the exchange value of the dollar had reached whatever value in relation to the sovereign might be decided on by the Government as the future value of the Straits dollar. After this stage is reached the Straits Government would issue the new dollars in exchange for gold, and at the fixed rate. " When the gold standard is established, it would not be indispensable that any gold coins should be made legal tender in the Colony and the States. But the Government should be prepared not only to give in exchange for a sover- eign such a number of dollars as are hereafter declared equivalent to a sovereign, but also to give sovereigns in exchange for dollars at the same rate so long as gold is available, or to give bills on the Crown agents in London based on the fixed rate of exchange." 1 The Committee expressed the opinion that it was "de- sirable that the standard of value and the currency of the Straits Settlements and the Federated Malay States should continue to be identical, and they hold the same opinion with regard to Johore." 1 S. S. Cur. Com. Rep., pp. 12 and 13. 404 THE STRAITS SETTLEMENTS CURRENCY REFORM The above recommendations of the Currency Committee were first published in Singapore on May 7, 1903 and were adopted in toto by the legislative council on May 29. They accordingly represent the law under which the new currency was established. Heavy Shipments of Mexican and British Dollars to the Straits On September 25, 1903 an ordinance was passed author- izing the Governor in Council, subject to the approval of the Secretary of State, to issue an order prohibiting the importing, circulating, or holding in one's possession of cer- tain coins to be specified in the order, after a date fixed therein, under penalty of heavy fines and the forfeiture of the coins thus illegally used or held. As soon as it became evident that the importation of Mexican and British dollars into the Straits Settlements was likely to be prohibited when the new Straits dollars for which they were to be exchanged began to arrive, sterling exchange rose in the Straits as compared with neighboring countries, and a strong tide of Mexican and British dollars began to flow from Hongkong, the Philip- pines, China, French Indo China, and other neighboring countries toward Singapore. The market was so flooded with this money that considerable currency exportations were soon found profitable. New Dollars Placed in Circulation The new dollars which were coined at the Bombay mint began to arrive early in October 1903. Nearly every boat coming to Singapore from Colombo after the first of October is said to have brought several hundred thousand of them. They were placed in circulation through the instrumentality of the treasury and the banks. The authorities immediately took steps to effect the sub- A CURRENCY REFORM PLAN ADOPTED 405 stitution of the new coins for the British and Mexican dol- lars. On October 2, 1903 there were issued under au- thority of the "coin import and export ordinance, 1903," two orders in council, 1 the one prohibiting the importation of British and Mexican dollars into the Colony 2 from the third day of October 1903^ the other prohibiting the ex- portation from the Colony of the new Straits Settlements dollars from the same date. 4 As a result of the monetary isolation of the Straits Settlements arising from these or- ders, merchants experienced for some tune considerable difficulty in settling trade balances with other countries. 5 Old Dollars Demonetized By the end of the summer of 1904 the bulk of the old currency had been withdrawn from circulation, and on 1 Cf . Report on Stability of International Exchange, 1903, p. 294. 2 The Federated Malay States and Johore were excluded from the ap- plication of these orders. Ibid. 8 At a later date, when a considerable part of the old currency was being tied up in the process of recoinage, and there was in consequence a scarcity of currency to meet trade demands, the Government authorized the banks to import certain amounts of British and Mexican dollars for temporary use, on condition that they should be reexported as soon as the scarcity of money arising from the recoinage should be over. In September 1904 the Governor in Council, in response to an urgent petition of the Singapore Chamber of Commerce, issued an order exempting, until the Chinese New Year, British North Borneo, Labuan, and Sarawak from the operation of the order pro- hibiting the importation of British and Mexican dollars into the Straits Settlements. 4 This latter order was evaded to a considerable extent. It is said that several hundred thousand of the new dollars for some time passed back and forth between the Straits Settlements and China. The order was suspended for a time, but was again put into operation on February 13, 1906. At one time about two million of the new dollars were exported to Hongkong, where they brought a premium of between three and four per cent ; and at another time, when it was feared that an excessive number of the new dollars had been coined, the Governor permitted the exportation of some five hundred thousand dollars to Hongkong on condition that they be chopped so that they could not be returned. Cf. supra, p. 351. 6 Cf. Report of the Singapore Chamber of Commerce for the Year 1904, pp. 5, 101-105. 406 THE STRAITS SETTLEMENTS CURRENCY REFORM August 31 the Governor, acting in accord with powers granted him under an order in council of June 25, 1903,* issued a proclamation removing the legal tender quality from British and Mexican dollars and providing that they should thenceforward not be receivable in payment of government dues. On that date the old dollars ceased to be exchangeable for the new at government offices. " Thus, [said the chairman of the Singapore Chamber of Commerce, in his address before that body on September 22, 1904,] the second important step has been smoothly and successfully effected, and there is cause for congratulation that the ground has been cleared for the succeeding stages of the currency scheme. The careful guidance of the scheme so far by the Government, notwithstanding its characteristic difficulties, must meet with cordial appreciation on the part of the mercantile community." 2 The work of withdrawing the old coins and of recoining them was greatly facilitated by the fact that the Govern- ment possessed in its currency note reserve a large supply of the old dollars, which it was able to commence shipping immediately to the Bombay mint for recoinage, and by the further fact that it was able to use this reserve as a sort of continuing fund during the entire process of the recoinage. 3 Other circumstances of importance which assisted the Gov- ernment in expediting the recoinage were the facts that the recoinage was effected at the comparatively near-by 1 This order will be found printed on pp. 291 and 292 in the Report on the Stability of International Exchange, submitted by the Commission on International Exchange to the Secretary of War, October i, 1903. Cf. also article on "Money, Weights, and Measures" in the Singapore and Straits Settlements Directory, 1899, App., pp. 19-21. 2 Ibid., p. 5. 3 The Government's note guarantee fund consisted in part of coin and in part of securities. The average circulation of government notes for January 1904, which was a typical month, was $16,503,167, and of this amount $10,231,006 was secured by coin. Cf. Report of the Commissioners of Currency for the Straits Settlements for January 1904. A CURRENCY REFORM PLAN ADOPTED 407 city of Bombay, and that, as the result of the heavy influx of the old dollars in the summer of 1903, the local banks were oversupplied with these coins and shipped them in large amounts to Bombay for recoinage on the account of the Government without interest charge. Recoinage Completed The recoinage was completed about November 1904. The total number of British and Mexican dollars sent to the mint to be converted was 35,372,541, and the total number of Straits dollars minted therefrom was 35,4oo,576. 1 The result of the recoinage was therefore a gross profit of 28,035 dollars, which must be deducted from the total ex- pense of reminting, amounting to 788,180 dollars, thus leaving a net expense of 760,145 dollars. 2 By the end of November 1904 the new dollars had been almost com- pletely substituted for the old in the Colony's circulation, 3 and the Government was confronted with the task of raising the dollar to "whatever value in relation to the sovereign might be decided on" as the permanent gold par. 1 There was in addition a withdrawal from circulation of about $250,000 in redundant small change, which was recoined into 5o-cent pieces. 2 Economist, LXIII, Part II, p. 1672. 8 Report of the Singapore Chamber of Commerce, 1904, pp. 4-5. CHAPTER III RAISING THE DOLLAR TO TWENTY-EIGHT PENCE THE course of appreciation is shown in the following chart and in Appendix A. 1 PENCE 88 ? 6 85 24 US STRAITS SETTLEMENTS. CURRENCY REFORMS OF 1903-1908 It will be seen that Singapore rates fluctuated closely in harmony with the price of silver and with Hongkong exchange 2 down to about March igo4, 3 and that from that 1 Pages 460-61 . 2 Cf. supra, pp. 351-52- 3 The rise of Singapore exchange above Hongkong exchange and above the bullion value of the dollar between July and October 1903 was due to the 408 RAISING THE DOLLAR TO TWENTY-EIGHT PENCE 409 time forward until the fall of 1904 they fluctuated with those rates, although at a considerably higher level. From December 1904 to February 1905 the average bullion value l of the Straits dollar was actually higher than the average sterling telegraphic transfer rate in Singapore. The decline in the price of silver in March and April 1905 was not accompanied by an appreciable decline in Singapore exchange, and from that time forward the divorce of the Straits dollar from the silver standard may be considered to have been effective. On January 29, 1906 the Governor in Council issued an ordinance supplemented by an executive order declaring the sterling value of the new dollar to be two shillings and four pence. 2 Soon after this action had been taken telegraphic rates settled down on a level of 2&%d., and continued on or about that level during the next five or six months. About that tune sovereigns were being imported in considerable quantities by the banks, and the result was a fall in sterling telegraphic transfer rates to 27rfd. With the opening of the year 1907 the rate again rose above 2&d. Before discussing the reasons which led to the adoption of a two shilling and four pence dollar, and the effect of its adoption upon the trade of the Straits Settlements, it will be well to consider briefly the conditions existing in the Straits Settlements during the period while the dollar was being raised. anticipated redemption of British and Mexican dollars by the Government at par in the new dollar, and, as pointed out previously (supra, p. 404), was the reason for the heavy influx of British and Mexican dollars into the Straits Settlements at that time. The supply finally became so excessive that exchange was forced down below bullion point between October 1903 and January 1904, and the dollars were reexported in considerable quantities. 1 By "bullion value" is meant the value of the fine silver content of the dollar in London, according to the London price of standard silver for prompt delivery. 2 For the procedure followed in "fixing" the value of the dollar, see infra, pp. 416-17. 410 THE STRAITS SETTLEMENTS CURRENCY REFORM A Period of Excessive Speculation in Exchange The depressing influence upon trade of an appreciating unit of value is too familiar to require discussion. Mr. Balfour did not greatly overstate the situation when he declared that a slow appreciation of the standard of value "is probably the most deadening and benumbing influence which can touch the springs of enterprise in a nation." x The history of Europe during the dark ages and the history of Europe and America during the period 1873-97 are stock examples of this influence. The appreciation of the Straits dollar differs in many respects from the ordinary example of an appreciating currency. In this case the appreciating unit circulated in a country very limited in area, whose trade was preeminently foreign rather than domestic. The rate of appreciation was very rapid 2 and, unlike those cases of appreciation resulting from a rise in the value of the material from which the money unit is coined, was clearly perceptible to the public. 3 It is an undisputed fact that the period of appreciation the period from the summer of 1904 to January 29, 1906, when the sterling par of the dollar was declared was one of speculative activity, and that in the lat- ter part of this period, that is, after August 1905, the speculation was so widespread and so intense as to in- terfere seriously with nearly all legitimate business en- terprise. 1 Quoted by Francis A. Walker, The Relation of Changes in the Volume of the Currency to Prosperity, in Discussions in Economics and Statistics, H, p. 235. 2 Cf. chart p. 408. 3 The appreciation of the rupee in India is hardly a parallel case. The gold par to be adopted was known in advance, while the amount of the ap- preciation above the minimum gold value possessed by the rupee prior to the announcement of the Herschell Committee's scheme in 1893 was very small. Cf. supra, pp. 3233 and 50. RAISING THE DOLLAR TO TWENTY-EIGHT PENCE 411 In order to make clear the character of this speculation, a word of explanation concerning the banking business in the Straits Settlements is desirable. The banking business in the Straits Settlements, as well as in the Philippines, 1 Hongkong, Shanghai, and most of the other port cities of the Orient, is largely confined to foreign exchange oper- ations. By contracting in advance for the purchase or sale of exchange at a definite rate, merchants were ac- customed to insure themselves against losses from fluctu- ations in silver during the interim between purchase and sale of merchandise, while the banks in turn protected themselves by covering their forward purchases of local bills by contracts for the forward sales of bank paper and tele- graphic transfers, and vice versa. An exporter, for ex- ample, knowing in January that in the course of a few months he would have a cargo of produce to ship to the London market, went to his banker and made a contract to deliver sometime in the course of the next three, four, or six months, as the case might be, sterling bills covering the value of his anticipated shipment, at a rate of exchange agreed upon. In the Straits Settlements the exporter usu- ally had an option of at least two months, i.e., a right to deliver his bills at any time within two months, and frequently he had an option of five or six months. After the fixing of his exchange the exporter often obtained ad- vances from the bank, usually in the form of an overdraft, secured by the pledge of the produce to be exported. In the same manner importers made contracts months in advance, fixing rates of exchange for the purchase of bank paper or telegraphic transfers with which to make remit- tances for anticipated importations. It has been pointed out that, although the sterling rate at which the Straits dollar would be fixed was not declared in advance, as had been the sterling rate in India, in the 1 A more detailed account of the method is given in the discussion of the Philippine currency reform, supra, pp. 292-98. 412 THE STRAITS SETTLEMENTS CURRENCY REFORM case of the rupee in 1893, it was generally believed that a rate of two shillings would be adopted. This appears to have continued to be the popular belief at least as late as the latter part of the year 1904, when the sudden advance in the price of silver made it evident that a two-shilling dol- lar containing 416 grains of silver .900 fine would be in great danger of the melting pot. Here then was a situation which appeared to the merchant who was inclined to speculate as "a sure thing." The value of the dollar, he reasoned, was bound to rise, and its gold par was certain to be fixed in the probably not distant future at a sterling value ma- terially higher than the one it then had, and at least several per cent higher than its bullion value, whatever might be the price of silver. A merchant contracting in August for the delivery of sterling bills in November or December would have the benefit of whatever appreciation might take place in the dollar in the interim, and, in case his bills should not be ready for delivery at that time, he could presumably cover at a profit by the purchase of bank paper or telegraphic transfers. As a result of this situation all classes of people began to speculate for a rise in exchange. Sterling bills 1 were of- fered to the banks in large quantities in the summer of 1905 for forward delivery. Nearly every merchant who had the remotest prospect of having any bills against possible ex- ports during the next six months or so rushed into the mar- ket to fix his exchange. Many sales are said to have been made simply on a margin without reference to anticipated exportations. Little attempt was made to cover. Ster- ling rates naturally rose rapidly as a result of this demand for dollars, and it soon developed that a certain foreign bank was underbidding all the other banks by about one sixteenth of a penny, and was in consequence doing the 1 There was also considerable speculation on the Indian exchanges, par- ticularly by Indian merchants and the so-called "chitties" or Indian money lenders. RAISING THE DOLLAR TO TWENTY-EIGHT PENCE 413 lion's share of the business. This bank, with a branch in Singapore and a sub-branch at Penang, seemed to have under its control a large part of the available supply of dollars. Soon, however, there began to be misgivings as to whether exchange had not gone unreasonably high; all sorts of rumors were afloat ; and it was not long before there was a sudden break in the rates, everybody wanted cover, there was a clamor for bank paper and local bills, and down exchange came as rapidly as it had previously ad- vanced. Here likewise the one bank that had done the bulk of the business when exchange was rising overbid its competitors when exchange was falling, and continued largely to control the market. The manager of this bank said to the writer that his plan of operations involved prac- tically no risk. He knew, he said, that the dollar would not be fixed at a lower rate than two shillings, and, when silver rose, that it would be fixed at a considerably higher rate, for the Government would certainly not fix the dollar at a lower value than five or six per cent above bullion point. These facts he appreciated very early, and he was the first to follow them to their logical conclusion. At first for a short time he overbought sterling, anticipating a fall in the price of silver. He began to oversell as early as the fore part of 1904, and early in the spring of that year his over-sales amounted to a very large figure. He kept his heavy figures on this side of the ledger until he gained a virtual control of the market in the summer of 1905, and this control he practically maintained until January 1906. There were at least seven such cycles of exchange fluctu- ations of greater or less duration between August i, 1905 and February i, 1906. Throughout the month of January 1906 the money market was in a condition of panic, and toward the latter part of the month, about the time of the Chinese New Year, i.e., the 25th and 26th, the panic was feverish and intense. There was at this time the usual 414 THE STRAITS SETTLEMENTS CURRENCY REFORM heavy demand for money to meet the Chinese New Year's liquidations, 1 in addition to the demand to meet the many exchange contracts which were then coming due. The bank which during the previous six months had largely controlled the exchange market, which had to some ex- tent dictated terms to the other banks, and upon which speculators had generally relied, found temporary difficulty itself in making collections and in meeting its obligations, and was forced to beg assistance from the other banks in order to take up its contracts. The assistance was finally given, but only on onerous terms. A number of the strong- est local houses were threatened with bankruptcy, and it was evident that a supply of dollars must be forthcoming from somewhere or there would be a general collapse. Exchange rates fluctuated so rapidly during this period there were sometimes five or six quotations a day such varying rates were quoted by the different banks, and business was done so extensively on rates different from those publicly quoted, that it is impossible to give any ade- quate idea of exchange fluctuations for the month. The following figures, however, will give a suggestion of the frenzied state of the market. On January 3 sterling tele- graphic transfers were quoted in Singapore at 25. 2fd., on January 5 at 25. 3r^-> a difference of over 2j per cent; on January 10 the rates cabled to Manila by one bank varied from 25. ^^d. to 2S. ^d., a difference of 1.8 per cent during the day; on January 15 the rate opened at 2S. 4^/. and closed at 25. 3-0^-, a difference of 1.7 per cent; on January 18 the rates cabled to Manila by one bank varied from 25. 2}%d. to 25. 4^., a variation of nearly 4 per cent during the day. 2 These examples, the writer believes, are 1 All debts to Chinamen are supposed to be settled by the time of Chinese New Year. 2 A chart showing the variations in the opening daily rates for the month of January is given in The Straits Settlements Financial Reports and State- ments for 1906 (p. 8). It shows that the extremes of the month were RAISING THE DOLLAR TO TWENTY-EIGHT PENCE 415 typical. If they give a wrong impression, it is in under- stating the case rather than in exaggerating it. The manager of one of the leading Singapore banks informed the writer that daily exchange fluctuations in Singapore during January sometimes varied by as much as five per cent. In individual cases, of course, business was trans- acted at all sorts of extravagant rates. The excitement became so intense that the Government was finally forced to take action sooner than it had intended. In the latter part of January, when the Governor returned to Singapore from a trip to Labuan, he made a statement before the council, the purport of which is said to have been as follows: " He had been surprised to learn that, during his absence from the Colony, there had been a sharp rise in exchange, and his opinion was that this was very largely due to specu- lation upon the intention of the Government with regard to the rate which would ultimately be fixed for exchange between silver and gold. This was a matter which no one was entitled to speculate upon; it was one which the Govern- ment was certainly not in a position at present to make a statement about. As every one was aware, the course of the silver market had been so peculiar that it was impossible for the Government at present to say for certain what the market would be six months hence. Six months ago it was 2 6 d. Today it was over 30^. Would anybody have the boldness to say that six months hence it would not be 26d. again, or that it might not be 34^.? Under these cir- cumstances, it appeared to him that those persons who were speculating on the intentions of the Government were in- dulging in a very dangerous operation, in which they might very likely burn their fingers. He could only say that it was the intention of the Government and he thought this 26$ on January 2, and 28^ on January 12 a difference of 7.3 per cent. In six days the rate fell 5.9 per cent, i.e., from 28^ on January 12 to 27 on January 18 ; it then reacted 3.7 per cent, i.e., to 28 on January 19. 41 6 THE STRAITS SETTLEMENTS CURRENCY REFORM was the opinion of everybody interested in the trade of the place to fix the dollar at as low a value as possible con- sistent with security. That was all he was in a position to say on the matter. Whether the point would be higher or lower than the existing rates, he could not at present state ; the facts were not before him on which to form an opinion; but he could say that it was the intention and desire of the Government that the dollar should be fixed at as low a value as possible consistent with safety." 1 In the latter part of January authority was sought of the Home Government to fix exchange immediately. There was some delay, however, in obtaining this authority, and when it was finally received, about January 26, the state of the exchange market was such that it was considered inex- pedient to declare the rate at once. On Saturday Janu- ary 27 the Government sought to steady the market 2 by asking for bids for the cable transfer to London of 100,000. None of the bids received were accepted, but the hint was said to have had the desired effect. 3 Rate Fixed at Twenty-Eight Pence On January 29, 1906 the Governor in Council issued an Ordinance declaring that " it shall be lawful for the Commissioners to issue notes in exchange for gold received by the Commissioners at Singa- pore at a rate of exchange to be notified by an order of the Governor in Council with the previous approval of the Secre- 1 Statement furnished the writer by a local manager of one of the large Eastern exchange banks. 2 This procedure led to considerable unjust criticism of the Government on the ground that, knowing in advance what the fixed rate would be, it was endeavoring to beat the market by taking advantage of the higher market rate then prevailing before declaring its fixed rate. No criticism could have been farther from the truth. 8 Straits Settlements Financial Report and Statements, 1906, p. 8. RAISING THE DOLLAR TO TWENTY-EIGHT PENCE 417 tary of State and the Commissioners may invite tenders for the issue of notes in Singapore against telegraphic transfers in favor of the crown agents for the colonies in London and may at their discretion accept any tender which affords sufficient margin above the rate fixed by such order in council to cover all charges including interest which may be incurred in remitting to Singapore the equivalent in gold at the fixed rates of the notes issued for such tender. . . . " The sum so received in gold shall form part of the note guarantee fund and may be invested by the Commissioners in accordance with the provisions of this ordinance or used by them for the purchase of silver to be minted into Straits Settlements dollars. . . . Provided that the whole of the profit on such minting shall be carried to a separate gold reserve fund and not form part of the note guarantee fund." * Pursuant to the above ordinance the Governor in Council issued an order on the same day, declaring "that from and after the date of this order the Currency Commissioners may issue notes in exchange for gold received by them at Singa- pore at the rate of sixty dollars for seven pounds sterling." 2 Two shillings and four pence, the public were accordingly given to understand, would be the permanent sterling par of the dollar, unless future advances in the price of silver should make the raising of the dollar to a higher par seem desirable. The Governor, however, refused to commit him- self as to the absolute permanency of the two shilling and four pence par. With the issuance of the above order the money panic stopped, for it was thenceforth possible to obtain from the Government dollars in unlimited quantities by the presenta- tion of sovereigns in London. When the horizon cleared, 1 Ordinance No. i of 1906, entitled, "An Ordinance further to amend 'The Currency Note Ordinance, 1899.'" 2 Government Gazette Extraordinary, XLI, No. 5 (January 29, 1906), p. 290. 2E 41 8 THE STRAITS SETTLEMENTS CURRENCY REFORM it was found that several of the principal banks, and one in particular, had large supplies of dollars in their vaults. Between July 1905 and February 1906 the gold value of about fifty million dollars (inclusive of government notes and of subsidiary and minor coins) had been raised from approximately two shillings to the dollar to two shillings and four pence, an appreciation of over 16 per cent, representing an increment to the gold value of the coun- try's currency during that time of over eight hundred thousand pounds sterling. This advance is in a small de- gree to be accounted for by the rise in the price of silver ; and the increased value of the notes was dependent slightly on the fact that the Government transferred several hun- dred thousand dollars from the general treasury funds to the note guarantee fund to help make good the decline in the dollar value of the sterling securities held in that fund. The Government had at that time established no gold re- serve fund, however, and the above advance is to be ex- plained mostly on the ground of a relative contraction of the currency supply. This difference between the bullion value of the new dollars (at which, approximately, they originally circulated) and their money value a differ- ence which under other methods of currency reform would have accrued to the public treasury as seigniorage profit and would have furnished a substantial part of a gold re- serve fund found its way largely into the pockets of a few speculators. I say "a few" because here, as in most cases of the sort, the great majority who dabbled in the speculation are said to have lost. A large part of the profits went into the vaults of the foreign bank mentioned above, whose local manager had carefully planned the exploitation of the currency scheme as early as the fall of 1903. This local manager apparently had for the ac- complishment of his purpose a large part of his bank's assets, and he played a very shrewd and successful game, RAISING THE DOLLAR TO TWENTY-EIGHT PENCE 419 albeit one which would hardly come in the range of ordinary conservative banking. The Government's action in offering to give government currency notes for sovereigns, at the rate of two shillings and four pence to the dollar, it will be observed, did not necessarily fix the gold value of the dollar, but merely marked an upper limit to its possible appreciation an upper limit like that established by the Indian Govern- ment in June 1893 when it offered to give rupees for sov- ereigns at the rate of 16 pence. 1 No action was at first taken providing for the giving of sovereigns for dollars, although such action was contemplated as soon as a suf- ficient supply of gold could be accumulated. 2 Principle of Gold-Exchange Standard Rejected The provision of the ordinance of January 29, 1906 authorizing the "issue of notes in Singapore against tele- graphic transfers in favor of the crown agents for the colonies in London " was meant to be of a temporary and emergency character. Under ordinary conditions the only method of obtaining dollars from the Government was expected to be through the presentation of the actual sovereigns in Singapore. The Government had no inten- tion (so the Governor informed the writer in February 1906) 1 Supra, p. 35. 8 With reference to the subject of the redemption of notes in gold the Governor is reported to have said : "If the Government were to hold out to the public the immediate prospect of giving gold for notes, and some one came along with notes and demanded gold and Government was unable to pay, people would say :. ' Here you are holding out that you are prepared to give gold for notes, and the first time you are asked to do so you fail to do it.' They [i.e.. Government] must first of all get something of a gold reserve before they could hold out any prospect of being able to give gold in exchange for notes, and that time had certainly not yet arrived. As soon as they had a gold reserve they would be prepared to consider the public as far as possible and give gold for notes when required." Singapore Free Press, January 30, 1906. 420 THE STRAITS SETTLEMENTS CURRENCY REFORM of adopting the principle of the gold-exchange standard which had recently been adopted in the Philippines and had been legally authorized for Mexico. 1 It was said that neither the home authorities nor the officials in Singapore were in favor of that plan. The objections urged in various quarters in Singapore to the adoption of the gold-exchange standard were: (i) That it would unduly interfere with the business of the banks. (2) That it would encourage banks to work on dangerously low cash balances, knowing as they would that they could obtain dollars of the Government on a moment's notice by the purchase of cable transfers on Singapore from the crown agents for the colonies in Lon- don. (3) That there would be danger of the Government's notes depreciating unless they were redeemable in gold in the country itself. (4) That the monetary circulation of the Straits Settlements was too small to make the plan feas- ible there. (5) That the plan would require a larger re- serve fund than would otherwise be necessary, because the Government would be compelled to keep a reserve both in London and in Singapore; and that in each place the reserve would have to be large, because drafts on the fund through the sale of telegraphic transfers would not give the Government any such warning in advance of the demands liable to be made as would enable it to replenish the reserve. The above arguments, all of which were urged upon the writer either by officials or business men in the Straits Settlements, did not appear to be conclusive for the fol- lowing reasons, which may conveniently be stated in the same order as the objections, (i) If the rates for the sale of government drafts were fixed at the "gold points," as they presumably would be under the gold-exchange stand- ard, and if only drafts of large amounts were to be sold by the Government, redemption by the sale of drafts would 1 Cf. infra, pp. 531-32. RAISING THE DOLLAR TO TWENTY-EIGHT PENCE 421 not interfere appreciably more with the business of the banks than would redemption in coin. Under these circumstances the banks themselves would be the prin- cipal purchasers of government drafts, as they had been in the Philippines, 1 and such drafts would be pur- chased and forwarded merely in lieu of the shipment of sovereigns. (2) The sale of telegraphic transfers, while desirable in the interest of currency elasticity, is by no means a necessary feature of the gold-exchange standard. If the Government were opposed to making a minimum legal reserve requirement of banks, it could limit its sales of drafts to demand drafts or even, if need be, to short-time drafts. (3) If government notes were redeemable in silver dollars on demand, and if the silver dollars were redeemable in gold exchange on demand, depreciation would be impossible in a country where the people had the confidence in the Govern- ment which they had in the Straits Settlements. (4) The system of the gold-exchange standard is better suited to a country with a small circulation than to one with a large circulation. It is evidently easier to maintain a small reserve abroad than a large one, and the functioning of a small reserve under the gold-exchange standard is less likely to be a disturbing factor in the money market where the reserve is located. (5) It was not probable that the Straits Settlements would require so large a reserve under the gold-exchange standard as it would under the strict gold standard contemplated. Under either system it would need a sovereign reserve and a dollar reserve. Under the strict gold standard both reserves would be located in Singapore; under the gold-exchange standard the dollar reserve would be located in Singapore and the sovereign reserve in London. The sale of cable transfers is not a necessary part of the system, as above pointed out ; and, even if it were, the movement of market rates of ex- 1 Ann. Rep. Treas. Phil. Islands, 1913, p. 25. 422 THE STRAITS SETTLEMENTS CURRENCY REFORM change would ordinarily give ample warning of a demand for dollar drafts or sovereign drafts. Emergency cases, if such should arise, could be met through the temporary transfer of funds to the gold reserve from the security por- tion of the note guarantee fund, or through the transfer of dollars to the credit of the Home Government in Singapore in exchange for an equivalent amount of sovereigns placed to the credit of the Straits Government in London. 1 A prolonged and severe drain upon the reserve fund, which in a country like the Straits Settlements would be an extremely improbable contingency if the Government withdrew from circulation dollars presented in the pur- chase of government drafts, could of course always be met by the forward sale as bullion on the London silver market of the redundant dollars piling up in the Government's dollar reserve in Singapore. The gold-exchange standard would probably enable the country to get along with a smaller gold reserve than would the system contemplated, inasmuch as it would keep gold coins out of circulation and the demands upon it would be limited to the requirements of meeting foreign trade balances the only monetary use to which the dollars could not be applied. The Straits Settlements, inasmuch as it is a country for whose trade requirements silver coins are better adapted than gold, and a country which is anxious to maintain its reserve at as small an expense as possible, would in fact seem to be a place peculiarly adapted to the gold-exchange standard. The premiums which the Government would realize on its sale of exchange, together with the interest it would obtain on that part of its reserve deposited abroad, would doubt- less yield sufficient profit, as in the Philippines, to pay the expenses of administering the currency system and to pro- vide in addition a substantial annual increment to the gold reserve. 1 This is a procedure extensively followed in the Philippine Islands. Cf. supra, p. 368. RAISING THE DOLLAR TO TWENTY-EIGHT PENCE 423 Later we shall see how the logic of events forced the Straits Government to adopt the principle of the gold- exchange standard which at this time it contemplated rejecting. 1 1 Infra, pp. 450 -58. CHAPTER IV RESULTS OF RAISING DOLLAR TO TWENTY-EIGHT PENCE Now that the events leading to the declaration of the 28 pence par have been described, it will be well to in- quire concerning the effect of the establishment of this new unit of value upon the trade of the Straits Settlements and upon the relations between debtors and creditors and their respective equities. Domestic Trade First let us consider the purely domestic trade. It is a principle of monetary science that a sudden alteration in the size of the unit of value does not result in an immediate and proportionate alteration in prices. Custom, which is to the world of people what inertia is to the world of things, tends under such circumstances to conserve existing prices. Time is always required for readjustment of the price level, and the transition from one price level to another often car- ries with it permanent results of far-reaching consequence. Domestic prices in silver standard countries respond very slowly, if at all, to fluctuations in the market price of silver. A Mexican dollar had nearly the same purchasing power in the domestic trade of the Philippine Islands in February 1903, when it had a gold value of 37 cents United States currency, that it had in October 1901, when it was worth 50 cents. Later, when the bulk of the money in circula- tion came to be the new money, prices seem to have been quite generally transferred from the old currency to the new 424 RESULTS OF RAISING DOLLAR TO 28 PENCE 425 without any material alteration. 1 When the American troops first introduced the United States dollar into the Philippines, the natives demanded as many American dol- lars for their produce and wages as they were accustomed to receive Mexican dollars, and in some cases they obtained what they demanded. In time, of course, there was a re- adjustment. In Porto Rico, after the American occupa- tion, the currency of the country, consisting of about 6,000,000 pesos of Spanish money, was retired from circula- tion by redemption in United States currency at the rate of one and two thirds pesos to one dollar of United States currency. The result was a marked rise in prices as meas- ured in gold values. 2 The Straits Settlements did not escape the application of this law. Prices and wages did not at once fall in proportion as the sterling value of the dollar rose. When the writer was in Singapore in February 1906 the complaint was heard on every side that the new two shilling and four pence dollar would buy no more in the Straits Settlements than did the old dollar a few years before, when it was worth a little over a shilling and six pence. If this was true, it meant a rise of prices, as measured in gold, of something like 50 per cent within three years. The evidence seems to be that there was considerable truth in the assertion, al- though it should be said that other forces besides those directly connected with the currency had been pushing prices upward. Wage earners for the most part were re- ceiving in February 1906 about the same number of the new dollars that they had formerly received of the old. The same was true of the salaried class in so far as their salaries were fixed in dollars. Many Europeans, however, a few years before had complained bitterly of the losses they were incurring by reason of the depreciation of the dollar, and had in consequence succeeded in having their salaries trans- ferred to a sterling basis. The raising of the dollar there- 1 Supra, pp. 344-45- 2 Supra, pp. 213-23. 426 THE STRAITS SETTLEMENTS CURRENCY REFORM fore led to a proportionate reduction in the salaries of this class as measured in dollars. Wholesale prices, especially of goods imported from gold standard countries, were showing a strong tendency to decline, and several of the better classes of retail stores were making price reductions on most lines of goods of from five to ten per cent. The great bulk of miscellaneous expenses, such as professional fees, hotel rates, livery rates, laundry charges, and the like, showed no evidence of being affected by the appreciation of the dollar. In general it may be said that the readjust- ment of prices took place very unevenly ; that in no case was there a prompt decline proportionate to the rise in the sterling value of the dollar; that the readjustment was most rapid in those lines where competition was keen, as in the case of wholesale prices, and least so where com- petition was weak and custom dominant, as in the case of wages. It will be observed that such an uneven alter- ation of prices must have had important consequences in the distribution of wealth among the different classes in the community. Foreign Trade Next let us consider the effect of the raising of the dollar upon the country's foreign trade. This trade may be divided into two parts : (i) the transit trade ; (2) the ex- port trade in local products and the import trade in for- eign merchandise for domestic consumption. Transit Trade. The Straits Settlements, commercially speaking, are first of all an entrepot of foreign trade. Singapore is a great distributing center between the East and the West. What sort of influence did the raising of the unit of value exercise on this transit trade? The actual size of a country's monetary unit, so long as it is stable in value, is a matter of little importance to its foreign trade. Any alteration, however, in the unit of value is likely to have temporarily a detrimental effect on RESULTS OF RAISING DOLLAR TO 28 PENCE 427 foreign trade. A period of currency reform is always characterized by a lack of confidence and by unsettled business conditions. Merchants know that important and subtle influences are exercised upon trade profits by altera- tions in a currency system and they are naturally reluctant to turn their merchandise even temporarily into the money of a country undergoing such a reform. An unfamiliar cur- rency system, no matter how good it may be, is an obstacle to foreign trade. When to these facts it is added, that in this particular case the monetary unit was to be raised artificially after an uncertain interval of time to an un- announced gold par, and ultimately to be maintained at this par by a gold reserve which it might take years to accumulate in sufficient quantity to become effective, it may well be imagined that foreign traders were inclined to be diffident. The writer found that merchants in the Straits Settlements were complaining that the raising of the dollar was driving away the transit trade. There seems to have been such a tendency. It is to be observed, however, that the raising of the dollar was only one of sev- eral causes contributing to this result. For some time there had been observed a tendency on the part of oriental coun- tries to deal more and more directly with Europe instead of through ports of entrepot. The "high freights fixed by the Straits Homeward Conference to Europe and extended to New York in August [1905] have contributed in a marked degree to the natural tendency for small ports to expand and establish direct steam communication with home markets." 1 The fact that the raising of the dollar was a force cooperating with other forces tending to reduce the Straits transit trade, or at least to lessen the rate of its growth, diminished the hope that the result would be but temporary. 2 For the 1 CL The [London] Times, Financial and Commercial Supplement, Jan. 22, 1906, p. 41. 2 The following quotation from the Singapore Free Press of February 8, 1906, concerning the trade with Siam, is apposite: "One of the most in- 428 THE STRAITS SETTLEMENTS CURRENCY REFORM next four years, i.e., until 1910, the Straits foreign trade was not satisfactory. 1 The official figures, however, do not differentiate the transit trade from the other trade. This fact and the existence of other disturbing factors, including new regulations in connection with the opium trade with India, make it impossible to draw any safe conclusions from the trade figures as to the long-time influence upon the transit trade of the rise in the Straits dollar. Export Trade in Local Products and Import Trade in Goods for Home Consumption. It is a generally accepted principle that a falling exchange has a tendency to favor export trade at the expense of import trade, and a rising exchange to favor import trade at the expense of export trade. 2 Prices and wages, as previously observed, respond teresting features of the Bangkok trade last year was the marked develop- ment of a tendency to send orders direct to Europe instead of to the Singa- pore middleman. In the past, the Chinese importer, a very important factor in the year's total, dealt invariably with Singapore or in a small measure with Hongkong houses. To-day, says the Bangkok Times, 'the saving of the middleman's profit has become a matter of some importance, and notwith- standing Singapore's advantage in being near at hand, the proportion of direct orders in the total has been growing for some time. This tendency has now been accentuated by the exchange difficulty, and it is doubtful if any improvement is to be looked for there.' " 1 Measured in dollars the total foreign trade of the Straits was as follows. It should be noted that the figures after 1905 are expressed in terms of a dollar more valuable in terms of gold. Figures are in millions. Average, 1901-05 1906 1907 1908 1909 1910 Imports 315.5 317-8 322.9 296.6 301.3 345-4 Exports 262.4 281.3 282.2 262.5 267.5 307-7 S. S. Ann. Reps., passim. As noted on the preceding page much of the trade with Siam is transit trade. For the years 1904-08 the trade with Siam and the Siam West Coast (in millions of dollars) was as follows : 1904 1905 1906 1907 Imports 28.1 30.8 33.5 30.0 Exports 16.4 16.2 18.2 17.8 S. S. Ann. Reps., passim. 2 The rates are assumed to be quoted in terms of foreign money, viz. the number of English pence to the Straits dollar. For discussions of this principle see infra, pp. 479-83, and supra, pp. 24-28. RESULTS OF RAISING DOLLAR TO 28 PENCE 429 slowly if at all to alterations in the value of the monetary unit as measured by the foreign exchanges. As a result, in a country like the Straits Settlements, an importer of mer- chandise from gold standard countries received practically the same number of dollars for his merchandise and paid for it practically the same gold prices for a short time after a rise or fall in exchange as before. If exchange went up, he therefore tended to profit by the higher gold value of the local dollar, and if it went down, per contra he tended to lose. The exporter in like manner continued for a time after an alteration in exchange to pay essentially the same wages and the same prices for the produce he exported as before, and to obtain the same gold prices for his exports. He accordingly tended to profit to the extent of a fall in exchange and to lose to the extent of a rise. These gains and losses were of a temporary character, and sooner or later readjustments took place. In the long run the prosperity of the export trade and of the import trade are inseparably linked together, because it is the one that pays for the other. The extent of these temporary profits or losses, as the case may be, the length of time during which they are realized, and the persons to whom they accrue, depend upon the comparative strength of the markets and of the different parties to the transaction. Take, for ex- ample, the case of a rising exchange. Where competition among the importers of a given commodity is keen, or where the price in the importing country is for any other reason weak, local prices will soon fall on a rising exchange and the consumer will be the benefited party. Where compe- tition among importers is weak in the importing country, or the price of the commodity is for any other reason strong, the importer will reap the benefit of a rising ex- change. 1 Where the sellers of the article in the exporting country are in a position to control the price, either by 1 In such cases, of course, the profit may be realized in part by the im- porter, in part by the wholesaler, and in part by the retailer. 430 THE STRAITS SETTLEMENTS CURRENCY REFORM combination or otherwise, they may be able to reap the profit by advancing their prices as exchange rises. The same principle applies to the export trade on a rising ex- change. If competition among producers is weak and the demand for the commodity in question is strong, the bur- den of the advance in exchange may be shifted to the buyer or to the foreign consumer. Where the supply of labor employed in the production of the commodity is excessive and the wage earners are not organized, the burden may be shifted to the laborer. Where, on the other hand, the foreign market is weak and the labor supply limited or thoroughly organized, the burden may be shifted to the producer or to the exporting merchant. Let us apply these principles to the trade of the Malay Peninsula during the period of the appreciation of the dollar. Figures for the price movements of certain staple exports are given below. From them and other evidence the following conclusions may be drawn. PRICES OF CERTAIN STAPLE EXPORTS* TIN 1905 PURCHASED PRICE PER PICUL LONDON PRICE PER TON Month Tons High Low High Low $ $ s. d. s. d. January . . 3539 79-50 77.25 132 10 130 2 6 February . . 1510 77-25 76.50 131 129 12 6 March . 2I2O 80.375 76.625 134 15 129 10 April 3275 81.625 79.50 136 5 134 May. . . . 2565 80.375 79.00 136 2 6 132 15 June .... 2770 8i.75 79.625 138 17 6 135 2 6 July .... 2640 88.00 81.25 150 139 26 August . . . 1635 86.875 82.875 151 10 i47 5 September . . l62O 83-50 80.125 148 144 12 6 October . . . 2725 82.00 80.00 148 2 6 146 5 November . 2775 84.00 80.875 155 15 148 5 December 2 . . 3320 88.75 83.75 164 10 157 1 Based upon the Yearly Statement of the Singapore Chamber of Com- merce, 1905. 2 There was a further increase in the export of tin in 1906 amounting to RESULTS OF RAISING DOLLAR TO 28 PENCE 431 BLACK PEPPER 1905 PURCHASED PRICE PER PICUL LONDON PRICE PER POUND Month Tons High Low High Low $ $ d. d. January . . 1117 29.25 25.75 si 5f February . 935 26.55 25.00 Si Si March . . . 888 26.50 25-2S sf si April . . . 1357 26.375 25.70 5l Sf May. . . . 1615 26.25 25-50 Sf Si June .... H35 28.625 25-75 Sf 51 July. . . . 660 29.00 27.30 51 si August . 938 29.00 28.00 6 sit September . 631 28.25 25-50 6 sH October . . . 73i 26.375 24-75 Sit 5l November . 499 24-75 23-50 sH Stt December . . IS42 24.00 20.75 sH sf GAMBIER (not including Cube) 1905 PURCHASED PRICE PER PICUL LONDON PRICE PER HUNDRED- WEIGHT Month Tons High Low High Low $ $ s. d. s, d. January . . 2557 9-30 8-75 20 19 6 February . . 882 9.125 8-75 20 19 6 March . 2609 9.00 8-75 19 9 19 3 April . . . 1704 9.00 8.60 19 3 19 May. . . . 3530 8.85 8-575 19 18 9 June. . . . 1959 8.75 8.60 18 9 18 9 July. . . . 2189 9.00 8.65 18 9 18 9 August . . . 2312 9.00 8.50 19 9 19 6 September . . 2420 8-75 8-575 19 9 19 9 October . . . 3262 8-45 7-875 19 9 19 9 November . 3 2 05 8.10 7.875 20 3 19 9 December . . 3973 8.00 7.70 20 20 The rise of the dollar did not, as many anticipated, prove detrimental to the tin trade. Tin is the principal item of about $8,000,000 ; the average price per picul for the year being $89.90, an increase of 115 per cent over that of 1905. S. S. Ann. Report, 1906, P- 14. 432 THE STRAITS SETTLEMENTS CURRENCY REFORM export from the Malay Peninsula. The Federated Malay States were contributing about seventy per cent of the world's supply of tin. The production of that staple was constant and the market was strong ; as a result the tin merchant was able to shift the burden of the rise in exchange to the foreign consumer. The same was true to a lesser extent of tapi- oca. 1 On the other hand, pepper and gambier, two im- portant items in the Straits Settlements' export trade, had weak markets during the period of the appreciation of the dollar ; and this fact, accompanied by a strong competition among the producers of these articles, resulted in declining dollar prices and the imposing of the burden of the rise in exchange upon the exporter and the producer. The supply of labor was so scarce in the Malay Peninsula that the raising of the gold value of the dollar did not result in any appreciable reduction in wages among the laborers engaged in the production of articles for export. The import trade of the Malay Peninsula, aside from the transit trade, is made up of such a variety of com- modities and is in the hands of so many traders, that it is impossible to form any very definite opinion as to the effect upon it of the rise in exchange. As in the case of the export trade, different articles were affected differently, according to the conditions of their respective markets and the relative strength of the various parties in the trade. It may safely be said that the import trade received noth- ing like the stimulus that would naturally have been ex- pected from such a decided rise in exchange, and this for two reasons: (i) the unsettled condition of all kinds of 1 It is impossible to say what the course of tin and tapioca prices would have been in London, had the value of the Straits Settlements dollar not been raised, and to what extent the producers of these articles might not have realized additional profits under such a contingency. It may well have been that the rise in exchange merely hastened an upward movement of prices which would in time have taken place anyway. It should be noted, moreover, in this connection that exporters of such articles realized in some cases additional profits by speculating in their sterling bills. RESULTS OF RAISING DOLLAR TO 28 PENCE 433 business while the currency reform was in progress and, in particular, the unwillingness of merchants to replenish their stocks; and (2) the neglect of normal legitimate business on the part of business men for the purpose of en- gaging in exchange speculation. The business of the Straits Settlements during the year can hardly be said to have been slack ; it was, on the contrary, at least during the eight months ending January 31, 1906, active and exciting, and the volume of transactions was large; but this activity was principally confined to transactions either purely or largely of a spec- ulative character ; and if such transactions are eliminated, it may be safely said that business in the Straits during the period of appreciation was bad. This the writer found to be the general opinion among merchants of the colony. The Singapore correspondent of the London Times summed up the situation in his letter of December i, 1905 by saying: "Not for fifteen years has this Colony experienced such bad times, and even now signs of a revival are by no means hopeful." l Debtor and Creditor There is perhaps no consideration of more vital impor- tance in any currency reform than that of its effect upon existing debts. A debtor borrows purchasing power in the form of money and, in an ideal system, he would pay back the same purchasing power with interest, except to the extent that prices may have been modified in the interim by factors affecting the production of commodities, such as improved methods, exhaustion of natural supplies, and the like, in which cases the amounts repaid should be so altered that the gains or losses thus arising should be equitably shared between debtor and creditor. While such an ideal 1 The [London] Times, Financial and Commercial Supplement, January 22, 1906, p. 41. 2F 434 THE STRAITS SETTLEMENTS CURRENCY REFORM system is of course unattainable in practice, currency sys- tems should be so framed as to approach the ideal as nearly as practicable. A rapidly depreciating currency works a grave injustice to the creditor class ; a rapidly appreciating currency works an even more serious injustice to the debtor class. The bimetallic controversy which stirred up three continents for upwards of a quarter of a century found its raison d'etre very largely in the injustice to the debtor class resulting from a monetary regime in which the unit of value appreciated by something like 44 per cent J in the twenty- five years, 1873-97. In the light of these familiar principles let us look at the recent experience of the Straits Settlements. The follow- ing figures will show in a general way the appreciation of the dollar as compared with gold during the years 1902- o S : 2 APPRECIATION OF THE DOLLAR jgO2 STERLING TELEGRAPHIC TRANSFERS High Low Mean Average d. 22f 23l d. i8f d. 20| 1903 i94 23! 2I T 9 ff 22 If 1905 Jan.-June . . . July-Dec. . . . 26| 3A 23f 9 1 The index number of the Sauerbeck tables for 1873 is in, and for 1897 is 62. 2 Sterling exchange figures by months are given in Appendix A, pp. 460-61. The average annual sterling rates of exchange in Singapore for four- months bank paper for the period 1890 to 1901, as given in the annual reports of the Governor of the Straits Settlements, were as follows : 1890 . . 35. s$d. 1894 . . 2s. 2d, 1898 . . is. aid. 1891 . . 35. 2>d. 1895 . . 2s. i$d. 1899 . . is. I life. . 1900 . . 2S. IOrV- 1892 . . 25. loft/. 1893 . . 2s. 1896 . . 2S. 18 97 is. 1901 RESULTS OF RAISING DOLLAR TO 28 PENCE 435 APPRECIATION OF THE DOLLAR IN ITS RELATION TO CERTAIN STERLING RATES PERCENTAGE PERCENTAGE INCREASE OF Two SHILLING INCREASE or Two SHILLING DOLLAR OVER FOUR PENCE DOLLAR OVER High Low Mean Average High Low Mean Average 1902 7-3 30.6 I 7 .8 25.1 S 2 -4 37-4 1903 . . i.i 27.2 12.6 17.9 48.3 31-4 1904 . . o-S n-3 4.6 17-3 29.8 22.0 1905 Jan. -June . 0-5 2.4 1.6 17-3 19.4 I8.S July-Dec. . -9-9 1 0.8 ~ -5-I 1 5-2 17.9 ~ 10.8 A glance at the above table will show that debtors having time obligations in the old currency contracted between the years 1902 and 1906 suffered serious injustice in being compelled to settle those obligations at par in the new dol- lar. Those persons who contracted debts when the ster- ling value of the dollar was lowest and invested the bor- rowed funds in gold standard countries were the heaviest sufferers. Those who contracted obligations when the sterling value of the dollar was highest and invested the proceeds locally, and who settled their indebtedness be- fore prices and wages became adjusted to the new unit of value, suffered least. Between these extremes the in- justice suffered was of varying degrees. There were prob- ably few instances of time obligations in the Malay Penin- sula in which the debtor was not to some extent deprived of his property unjustly by reason of this artificial increase in the country's unit of value. 2 1 Decrease. z In considering the extent of the appreciation of the dollar during the period 1902-06 and the injustice thereby done to the debtor class, allow- ance should be made for two factors which to a small degree alleviated the situation of that class : (i) Those years were characterized by a slight de- preciation of gold in the world's markets, as evidenced by standard tables of price index numbers. (2) Eliminating fluctuations in prices arising from 436 THE STRAITS SETTLEMENTS CURRENCY REFORM But, it may be asked, did not the Government take measures to provide for the equitable adjustment of such time obligations? 1 To this question it must be answered that not only was no such action taken, but that there is no evidence that it was ever considered by the Straits Settlements Currency Committee which recom- mended the plan adopted, by the Governor and legislative councilors who put it into operation, or by the local cham- bers of commerce which rendered frequent assistance to the Government by their advice and recommendations. 2 Local officials and business men attempted to justify the Government's policy of inaction in this matter on a number of grounds. The following reply to the criticism above stated was made to the writer by a prominent banker in Singapore, and may be considered as fairly representative of the attitude of most local officials and business men on the subject : alterations in the unit of value per se, the general tendency of local prices was undoubtedly upward in the Malay Peninsula during this period. 1 Such measures have been taken in recent years in Samoa, Porto Rico, and the Philippines. They have received most careful consideration in the recent discussions concerning monetary reform in Mexico and China. The Philippine Government, in its currency reform, passed an act for the protection of the debtor class, authorizing debtors having time obligations payable in the old currency to tender payment in the new currency at such a rate of exchange as would fairly represent the value of the old currency in terms of the new on the date the obligations should become due. In de- termining this rate the debtor was directed to take into account the market price of silver, exchange rates in Hongkong, and various other factors which would be expected to throw light on the gold value the old currency would have had in Manila had it continued to circulate. If the creditor refused to accept the new currency in settlement of the obligation at a rate of ad- justment so determined and sought the enforcement of the original contract in any court, the law provided that, upon the establishment of the plaintiff's claim, "it shall be the duty of the court to render judgment for the plaintiff to recover as damages the lawful sum due to him, in Philippine pesos, in- stead of in the currency mentioned in the contract," the basis for comput- ing the damages being the same as that previously mentioned, according to which the debtor was to compute the amount of his local currency debt in terms of Philippine currency. Cf. supra, p. 339, and infra, pp. 506-508. 3 One of the members of the legislative council informed the writer that this subject was never discussed by that body. RESULTS OF RAISING DOLLAR TO 28 PENCE 437 " No action on the part of the Government for the protec- tion of the debtor class was necessary. Time obligations were contracted in the money of the country without refer- ence to its gold value, and should be paid dollar for dol- lar in the money of the country which should be legal tender when the obligations became due, regardless of any change that may have taken place in its gold value in the This argument represents an attitude which is perhaps natural to people who have been in the habit of dealing in a fluctuating currency. Even if it be admitted that per- sons entering into contracts for the payment of money covering a period of years knowingly assume the risks aris- ing from natural fluctuations in the unit of value, it does not follow that they can justly be expected to bear the burdens resulting from alterations in that unit which are artificial and which they could in no manner have antici- pated. In fact, debtor and creditor alike have reason to expect, as a matter of justice, that if the Government finds it desirable materially to alter the unit of value in which existing contracts are stated, it will at the same time see to it that debtors (in case the unit of value is raised) shall either be permitted to pay their obligations in the cur- rency in which they were contracted, or to commute them at equitable rates in the new currency ; and that creditors (in case the unit of value is lowered) shall in like manner be legally authorized to insist upon similar terms of settle- ment. There is no limit to the exploitation of one class for the benefit of another that Governments may sanction by altering the unit of value, if in so doing they pay no regard to the equities of existing contractual relations. The Government's policy of inaction in this matter was, however, defended on other grounds of a more substantial character, for which due allowance should be made in passing judgment on the course pursued. It was stated that the Straits Settlements are preeminently a trading 438 THE STRAITS SETTLEMENTS CURRENCY REFORM country, as contrasted with agricultural and industrial countries, and that the number of long-time obligations was in consequence relatively small. This is probably true, although no figures are available showing the extent to which such time obligations existed. It must be remem- bered, however, that the new currency was not limited in its circulation to the Straits Settlements proper, but was the money of the Federated Malay States and other depend- encies as well, and that the economic activities of these dependencies were not preeminently those of trade but rather of agriculture and mining. The number of such ob- ligations may possibly not have been great in the Straits Settlements currency area as compared with other countries ; but that fact gave scant comfort to those who suffered, and their number in the absolute was unquestionably large. The strongest argument urged in justification of the po- sition taken consisted in the statements that the debtor class in the Malay Peninsula had invested their borrowings principally in that territory, and that their investments were not of a character which are greatly influenced by the sterling value of the dollar; that the two shilling four pence dollar had little more purchasing power within the Peninsula than the old dollar possessed one, two, or more years before ; and that any measure which permitted the debtor to pay his debts in a number of new dollars smaller than the number of old dollars called for in the contract would have worked an injustice to the creditor, in so far as he should spend the money received within the terri- tory in which the currency circulated. This argument certainly has weight. There is no question that a law authorizing the commutation of time obligations on the basis of the gold value the British dollar would have had in the Straits Settlements, had its circulation not been dis- continued, would in many cases have worked hardship to the creditor class. When due allowance, however, is given to this consideration, the weight of the argument appears RESULTS OF RAISING DOLLAR TO 28 PENCE 439 to be in the other direction. The injustice referred to would have affected those creditors only who were paid during the short period of transition while prices were being re- adjusted to the new unit of value, and it would not have affected all of them, but only such as chose to reinvest their money in the Straits currency area during the short period before prices became readjusted. It appears, accordingly, that the Straits Settlements cur- rency reform was effected at the cost of a great temporary disturbance to the country's trade, both domestic and foreign, besides the permanent loss of some portion of its transit trade; and that it worked an injustice to the debtor class. Advisability of a Recoinage in 1905 and of a Two Shilling Par Without attempting to discuss the question whether it would not have been wise for the Straits to go immediately upon a gold basis instead of following the Indian plan, let us inquire whether it would not have been possible to eliminate largely the evil results experienced, and at the same time to preserve most of the important features of the Currency Committee's plan. Although the Currency Committee did not state in its recommendations at what sterling par the dollar should ultimately be fixed, the public generally believed, as pre- viously stated, that the par to be adopted would be about two shillings. It may be said authoritatively that this was the par the Currency Committee had hoped would be established, and that in this hope the officials of the Home Country and of the Colony heartily concurred. The defini- tive adoption of the two shilling par was postponed only because it was feared that the future course of silver might be such as to endanger the melting down of the dollars at that par. The weight and fineness of the dollar, once de- cided upon, seem to have been assumed to be unalterable. 440 THE STRAITS SETTLEMENTS CURRENCY REFORM The silver content of the dollar was the fixed thing, so the Currency Committee appears to have reasoned; the unit of value was the alterable thing ; this was to be adjusted to the coin, and to be fixed at such a rate as to allow a safe margin above bullion value. 1 But, one would naturally ask, why not reverse the procedure? The bullion value of properly secured fiduciary coins is largely a question of convenience. The bullion content should of course not be so small as to render the coins inconvenient to handle or to give undue encouragement to counterfeiting, nor so large as to endanger their being melted down. Within these limits, however, the bullion content of a fiduciary coin is a matter of comparative indifference. The unit of value, on the other hand, is a matter of the utmost importance. Alterations in the unit of value, by their uneven effects upon the prices of various classes of commodities and upon wages, and by the derangement they cause in the relations existing between debtor and creditor, profoundly affect the whole economic structure. Variations in the value of the precious metals have frequently compelled countries to alter the weight and fineness of their coins. Within a short time Japan 2 and the Philippines 3 have taken measures in this direction as a result of the rise in the price of silver. The Straits Settlements, however, afford the only instance in recent monetary history of a material alteration in the unit of value deliberately made to meet such a contingency. Suppose the British authorities had taken this view of the problem, what course would they have followed? In the first place they would probably have announced a two shilling par at the beginning as part of the regular scheme, although such an announcement would not have 1 Cf ., for the attitude of Mexico on this subject, Leyes y Disposiciones Rel- ativas a la Reforma Monetaria (Mexico, 1905), pp. 21-26; also infra, pp. 539-4I- 2 Kemmerer, The Recent Rise in the Price of Silver and Some of Its Mone- tary Consequences, in Quart. Journ. Econ., XXVI (1912), pp. 261-63. 3 Supra, pp. RESULTS OF RAISING DOLLAR TO 28 PENCE 441 been necessary. The procedure would otherwise have been essentially the same as that actually followed down to about November or December 1905. By that tune the Government had discontinued redeeming the old dollars and the work of recoinage had been completed. It was at that time, moreover, clearly evident that the silver market was such as to place a two shilling dollar containing 416 grains of silver .900 fine in grave danger of the melting- pot. As soon as this fact was realized the Government would have adopted the course later adopted by the Phil- ippines and Japan ; it would have taken measures for the immediate recoinage of the new dollars at a much smaller fine silver content ; and, inasmuch as this recoinage would have yielded a substantial seigniorage profit and as there probably would have been some reluctance at first on the part of the public to receive the lighter weight dollar as the equivalent of the old, it would have used this profit as the nucleus of a gold reserve fund, supplementing it perhaps by a temporary draft on the security portion of the note guarantee fund and by the floating of bonds sufficient to make the reserve adequate for immediate use. The new dollars would have been made redeem- able in gold or, better, in gold exchange, as rapidly as they were placed in circulation, and dollars would at the same time in like manner have been offered for gold or gold exchange. Under such a procedure there would have been little dislocation of prices ; the long period of specu- lation which so unsettled trade would have been largely eliminated ; the status of existing contracts would not have been materially interfered with ; and the country would have been established firmly on the gold standard by the autumn of 1905, with a unit of value better suited to its permanent needs than is the present one. Under these circumstances, the rise in the price of silver would have proved a boon to the Straits, as it did to Mexico, 1 rather than a handicap. 1 Infra, pp, 538-47. 442 THE STRAITS SETTLEMENTS CURRENCY REFORM To the above plan, when suggested by the writer to officials and business men in the Straits Settlements, four objections were urged : (i) the difficulty of calling in the new Straits dollars which by the autumn of 1904 had be- come very widely scattered, many of them having gone outside of the country ; (2) the expense of the recoinage ; (3) the expense of establishing a reserve; (4) the danger that the public would not accept a dollar of lighter weight. The first objection was superficial. In the autumn of 1904 the new Straits dollar was nothing more nor less than a silver standard dollar, which the Government had ex- changed at par for another silver standard dollar, and which carried its value with it in the silver it contained. The Government had received full value for these dollars when it placed them in circulation, and it would not have been a matter for Government concern if some of the subsequent holders of them should not have been willing or able to exchange them for new gold standard two shilling dollars. To the objection concerning the expense of recoinage it may be replied that the total expense of reminting 35,372,541 Mexican and British dollars was, according to official figures, $788, iSo; 1 that had the new coin sug- gested been made of the weight and fineness of the French five-franc piece (25 grams .900 fine), the Government would have realized on its recoinage if the seigniorage were sold as bullion at 30^. per standard ounce, a net profit in Straits dollars of about $2,000,000 or, in sterling, about 200,000 a substantial beginning for a gold reserve. To the objection of the expense of establishing a gold reserve fund it should be said that the Straits Settlements had no public debt in the autumn of 1904^ that the Colony 1 Cf. The Reminting of Dollars in the Straits Settlements, in [London] Economist, Oct. 31, 1905, p. 1672. 2 The Colony shortly afterwards contracted a considerable debt through the seizure, under the right of eminent domain, of the plant of the Tajong Pagar Dock Company. RESULTS OF RAISING DOLLAR TO 28 PENCE 443 was prosperous, and that the matter of the floating of a loan of a few hundred thousand pounds for an object so vital to the Colony's welfare should have been considered as a mere bagatelle. The last objection, viz. that the public would have been averse to receiving a lighter weight coin, deserves more careful consideration. It will be recalled that the scheme of currency reform recommended by the Singapore Cham- ber of Commerce in August 1897, which contemplated the use of Government currency notes during the period of recoinage, 1 was objected to principally because of the al- leged difficulty of inducing the native holders of the old dollars, especially those of the Federated Malay States, to exchange them for a paper currency with which they were not familiar. This difficulty, which appealed strongly to the Straits Currency Committee, 2 and particularly to its chairman, Sir David Barbour, whose opinion was based principally upon his experience in India, was taken less seriously by many of the best informed business men liv- ing in the Colony. 3 The following extract from an official report is in point : " The consent of the home authorities was obtained in 1898 to the issue of a government note currency for the Colony and the Federated Malay States, and steps were taken in that year to design and print the notes. . . . The new notes were first issued on ist May. [The amount in circu- lation by July 10 was $1,118,000, and by December 10 it was $3,820,000.] They at once circulated freely throughout the Colony and the Federated Malay States, and the amount issued was only limited by the supplies received from England." 4 1 Cf. S. S. Cur. Com., Min. Evid. Apps., pp. 107-10. 2 Cf. S. S. Cur. Com., Rep., p. 12. * Cf. Report of the Singapore Chamber of Commerce for the Year 1905, pp. v, vi ; and The Currency : Singapore Chamber of Commerce Letter to Government, December 17, 1902, p. 5. 4 Report of the Governor of the Straits Settlements, 1899, pp. 6 and 7. 444 THE STRAITS SETTLEMENTS CURRENCY REFORM These government notes at that time, as since, circulated widely throughout the Malay Peninsula. ' At the close of January 1906 their total circulation amounted to over $17,000,000, and they were extremely popular everywhere. This experience with government notes afforded reason for believing that little difficulty would have been ex- perienced in floating lighter weight silver coins. 1 British administration of the Straits Settlements and of the Fed- erated Malay States had been honest and capable ; this the Chinaman, the Malay, and the Indian knew well, and they all had the utmost confidence in the Government. A lighter weight coin backed by the Government and re- deemable in gold or gold exchange on demand would in all probability have passed quickly into circulation, although its introduction might have encountered temporarily a slight resistance. This opinion was substantiated by later events. 2 1 For a number of years the 25 gram Spanish-Filipino peso circulated throughout the Philippine Islands at par with the 27.07 gram Mexican dollar. It was a popular coin among the Filipinos and the Chinese, and no one seemed to question its value, although the Government never agreed to redeem it in Mexican dollars. Cf. supra, pp. 249-53, and 363. 2 Infra, p. 449- CHAPTER V RISE IN THE PRICE OF SILVER AND MEASURES TAKEN TO PROTECT THE CURRENCY THE new Straits dollar at a money value of 2%d. had a bullion par of 33^^., that is, with standard silver in Lon- don at 33T8<1. per ounce the dollar would have contained 2&d. worth of pure silver, viz. a dollar's worth. On January 29, 1906, when the 2&d. gold par was announced, the London price of prompt silver was 30^^., giving the dollar a margin above bullion par of about ten per cent. By October 1906, however, silver reached 32^^., which was within two per cent of bullion par, and the new coins were therefore facing the danger of the melting pot. Something had to be done promptly to protect them. The Govern- ment might have met the difficulty by still further raising the gold par ; since in fixing the 2&d. par it had expressly reserved the right to raise the gold par still higher if future advances in the price of silver should make such a course desirable. The question was before it, said the Acting Treasurer, " whether the margin should be provided by leaving the size and fineness of the dollar as it was and raising its value to say 30^. or leaving the value as it was fixed in January, and debasing the dollar. In view of the contracts entered into and the debts incurred on a dollar fixed at 2&d. so re- cently as January, and having regard to the obligations of the Government towards their own servants, the Govern- ment had no hesitation in adopting the bolder course of adhering to the value fixed and of reducing the bullion value of the dollar." 1 S. S. Fin. Rep. & Stats., 1906, p. u. 445 446 THE STRAITS SETTLEMENTS CURRENCY REFORM Secondary Measures for Protecting Currency Let us first consider secondary measures for meeting the situation, and then the principal one, i.e., recoinage. The first step, which was taken as early as February 13, 1906, was to put into operation again the order of October 2, 1903 prohibiting the exportation of the new dollars. 1 Such a measure in an entrepot of foreign trade like the Straits Settlements, with a small customs service, would have been very difficult to enforce if the silver value of the dollar should have risen appreciably above bullion par, and was consequently not relied upon as an important factor in the solution of the problem. The second step was to extend to other money the quality of unlimited legal tender. British sovereigns were made unlimited legal tender 2 and payable in the redemption of government notes at the rate of 28^. to the dollar after November 23, 1906. This action was taken " mainly with the object of enabling the Currency Commissioners to pre- vent any drain on the silver reserve," 3 of which the greater part was being remitted to England for recoinage. Fifty- cent pieces were made unlimited legal tender, instead of legal tender only to the amount of two dollars as formerly. 4 Being unlimited legal tender they could be paid out by the Government in redemption of its currency notes. 5 It has 1 The Acting Treasurer estimated that the melting and shipping point was i if per cent above the bullion par ; this he considered sufficient to cover "cost of transport (freight and insurance) to the purchaser, interest, and the cost of melting and refining to standard bars." S. S. Fin. Rep. & Stats., 1906, pp. lo-n. 2 Cf . order of King in Council dated October 22, 1906, and order of Governor-General of the Straits Settlements dated November 20, 1906. Thirty-seventh Annual Report of the Deputy Master and Comptroller of the Mint, 1906, pp. 104-105. 8 S. S. Ann. Rep., 1906, p. 6. 4 An order to this effect was issued by the Governor-General, November 23, 1906, under authority of an order of King in Council dated October 22, 1906. B Ordinance No. xxvi of 1906, amending sec. 4, par. 3, of The Currency Note Ordinance, 1899. RISE IN THE PRICE OF SILVER 447 been observed that the 5o-cent piece is a very popular coin in oriental countries. 1 It has a gold value nearer to the standard monetary unit of most European countries than the dollar, and is better adapted to the needs of poor countries than the more customary oriental unit of about twice its value. Inasmuch as two 5o-cent pieces con- tained about loi per cent less pure silver 2 than the dollar, they would circulate until silver rose proportionately above the melting par of the dollar. Further, currency notes of the denomination of one dollar were printed and put into circulation. They were -made unlimited legal tender, and proved very popular. 3 Recoinage The fourth and most important step was that of re- coinage. A reduction in the bullion value of the coins could obviously be brought about by (i) a reduction in fineness of the coins, leaving the weight and size unchanged ; (2) a reduction in the weight, leaving the fineness unchanged ; or (3) a reduction in both weight and fineness the plan adopted by the Philippines. 4 One of the chief advantages of the first plan was the fact that the size of the coins would be unchanged and the appearance only slightly altered and, as a consequence, the difficulty of bringing the new coins into ready acceptability by the public would be minimized. Against this plan was the obvious objection that a reduction in fineness from .900 to .800 reduced the bullion value of the coins by only n.i per cent, and afforded too small a margin of safety in view of the condition and prospects of the silver market. A reduction in the fineness of the dollar much below .800 was metallurgically undesirable. The second or third plans made possible a sufficient reduction in the bullion value of the coins to provide any margin of 1 Supra, p. 361. 2 They contained 419 grains of silver .800 fine to the dollar. 3 S. S. Ann. Rep., 1906, p. 6. 4 Supra, p. 361. 448 THE STRAITS SETTLEMENTS CURRENCY REFORM safety desired, but only at the expense of endangering the acceptability of the coins. It appears that the Government wavered between the first and second plans. In October 1906 it decided merely to reduce the fineness of the dollar from .900 to .800, leaving the weight unchanged. 1 But, because of the opposition of the Chinese, 2 the Government changed its plan and decided upon a 25 per cent reduction in the weight of the dollar, leaving the fineness unchanged ; and a 25^ per cent reduc- tion in the weight of the 5o-cent piece, raising the fineness from .800 to .9oo. 3 An order of the King in Council, dated February n, 1907, authorized the Governor to fix by proclamation the weight of the new dollar at 312 grains, .900 fine, and that of the 5o-cent piece at 156 grains .900 fine. 4 On March 4, 1907 Governor Anderson issued two proclamations 5 providing that the authorized changes in the dollar and the 5o-cent piece should go into effect at once. These changes raised the bullion par of the dollar from a London price of silver of 33 Ad. to one of 44%d. and that of the half dollar from 3 7 Ad. to 44^ . The new bullion par gives a gold ratio of 21.3 to i, the same as that of the recoined Philippine peso, a ratio lower than that of either India or Japan. 1 An order of the King in Council dated October 22, 1906 provided that .800 should be substituted for .900 as the fineness of the dollars coined after such date as may be fixed by the Governor. 2 "Both the Chinese advisory board and the Chinese chamber of com- merce were strongly against any reduction in the fineness of the dollar. . . ." S. S. Fin. Rep. & Stats., 1906, p. 12. 3 The 5o-cent piece, being now a coin of unlimited legal tender, was given the same fineness as the dollar. 37th Ann. Rep. Dep. Master & Comp. Mint, 1906, pp. 106-108. 4 This order in council also declared that "... the Governor of the Colony may at any time, with the approval of the Treasury and a Secretary of State, issue a proclamation fixing for the subsidiary coins below the de- nomination of fifty-cents ... a new standard of weight or milesimal fine- ness or both. . . ." Ibid., pp. 106-107. 5 These are given in Report of the Director of the United States Mint, 1907, pp. 197-99. RISE IN THE PRICE OF SILVER 449 As soon as the recoinage ordinance was issued measures were taken for beginning the work. Large quantities of coin on hand in the currency note reserve were shipped at once for recoinage, and other coins were shipped as rapidly as they could conveniently be withdrawn from circulation, the note reserve being used as a continuing fund to facili- tate the operation. During the fiscal year 1907 $10,767,500 of the new coins were received. They were not very popu- lar at first, and at the end of the year over five million of them were remaining in the hands of the Currency Com- missioners. One dollar notes were reported to be taking the place to some extent of the silver dollars. 1 By the end of the year 1909 the recoinage of dollars was practically completed, the total amount of new coins re- ceived being $19,006,872, "showing a surplus of $4,751,898 over the amount sent for reminting," 2 and yielding a gross profit of 33^ per cent. The increased supply of coins which would have resulted from the recoinage of all the old dol- lars would have been much larger than the needs of the country; and accordingly $3,000,000 were sold as bullion in 1907 (in addition to $1,000,000 of surplus subsidiary sil- ver, including $106,000 in 5o-cent pieces), 3 and $12,778,213 in 1910. From the 1910 sales $9,363,070 was realized, showing a loss from face value of about 27 per cent. The net profits upon the recoinage were turned into the Gold Standard Reserve Fund. 4 1 S. S. Fin. Rep. & Stats., 1907, p. 7. 2 Ibid., 1909, p. 6. 3 Ibid., 1907, p. 8. 4 This fund, which will be described later (p. 458), was created by section 73 of Ordinance No. i of 1906. 2G CHAPTER VI ADOPTION OF GOLD-EXCHANGE STANDARD IT has been noted previously 1 that although there was a provision in the ordinance of January 29, 1906 author- izing the issuance in Singapore of notes against telegraphic transfers in favor of the crown agents for the colonies in London, this provision referred merely to exchange in one direction, was looked upon as a temporary measure, and that as late as the latter part of February 1906 the Gov- ernment had no intention of adopting the principle of the gold-exchange standard as a regular and permanent method of maintaining the gold parity of its currency. How in the Straits, as previously in India, 2 the logic of events caused the stone which the builders rejected to become the head of the corner we shall now see. To understand this devel- opment it will be necessary to describe briefly the Straits currency note system ; for it was out of this system that the Straits gold-exchange standard developed, and it is chiefly through the currency note reserve officially known as the Note Guarantee Fund and not, as might more naturally be expected, through the Gold Standard Re- serve, 3 that the gold-exchange standard functions. The Straits Settlements Currency Notes The Straits currency notes of to-day, which represent by far the larger part of the circulating medium, are based upon the Currency Note Ordinance of 1899 and its nu- 1 Supra, pp. 416-20. 2 Supra, pp. 100-104, 11718, 122 and 127-29. 3 Infra, p. 458. 450 ADOPTION OF GOLD-EXCHANGE STANDARD 451 merous subsequent amendments. 1 This Ordinance author- ized the issuance of currency notes which should "be a promise on the part of the Government of the Straits Settle- ments to pay the bearer on demand the amount named therein," and provided that the amount required for such payment should be a charge on the moneys and securities in the hands of the Currency Note Commissioners. These Commissioners who were to constitute a board for the administration of the ordinance consisted of "the persons for the time being lawfully discharging the duties of Co- lonial Secretary and Treasurer and of one other person nominated by the Governor." The notes were made un- limited legal tender. 2 For the maintenance of their parity with the silver dollar a Note Guarantee Fund was created to be held in the Colony by the Commissioners. This Fund was divided in two parts: a coin portion which should be fixed at not less than two thirds of the Fund, 3 and an invested portion which should consist entirely (or chiefly) of British and colonial government securities. If the coin in the Fund should at any time fall below the fixed proportion established by the ordinance, the Commissioners were required to make up the deficiency by the sale of securities from the invested portion. 4 Part of the income from the securities was to be carried to a depreciation fund until such a time as any depreciation that might have oc- 1 Amendments Nos. xiii of 1903, iv of 1904, iii of 1905, i, v, xxiii, and xxvi of 1906, and xxvii of 1908. 2 They were not legal tender for payments by the Commissioners at their office, nor for payments by banks in the redemption of their bank notes. The law provided that one dollar notes should be legal tender only up to ten dollars. One dollar notes, however, were not issued until the latter part of 1906 and then they were made unlimited legal tender. Supra, p. 447. 8 Under certain conditions, the coin portion might be reduced from two thirds of the Fund to one half, by the Governor, with the consent of the Secretary of State in London. 4 There were some later qualifications to this rule, the chief of which for our purposes was a waiving of the rule in the case of a deficiency in the coin portion resulting from the temporary withdrawal of coin for purpose of re- coinage. Cf. Ordinance No. xiii of July 3, 1903. 452 THE STRAITS SETTLEMENTS CURRENCY REFORM curred in the securities should be made good and until a fund equal to at least 10 per cent of the invested portion of the Guarantee Fund should be accumulated. Decline in Dollar Value of Note Guarantee Fund The currency notes proved to be very popular, and by the year 1903, the year in which the currency reform was inaugurated, the average monthly circulation was over fifteen million dollars. With the raising of the Straits dollar to a 28^. basis there was obviously a proportionate shrink- age in the dollar value of the securities in the Guarantee Fund, including also those in the depreciation fund. The assets held by the Currency Commissioners were accord- ingly reduced, while the liabilities in the form of notes in circulation were not affected. For November 1906 the Commissioners reported the value of the securities in the Note Guarantee Fund " calculated at the latest known market rates of November 1906" at $8,011,066, and the original cost of these securities at $9,948,816, showing a difference of $1,937,750 or igj- per cent. The November 1906 value of the securities in the depreciation fund was $267,301, and their original cost was $333,539, a differ- ence of $66,238 or approximately 20 per cent. 1 While this depreciation was due chiefly to the raising of the ster- ling value of the dollar, a 28^. dollar being nearly 17 per cent more valuable in terms of gold than a 25. dollar, for example, it was due to a small extent also to a decline in the average sterling value of the securities since the date of their purchase. By using the depreciation fund, making substantial con- tributions from general revenues, 2 and taking all the cur- rent net income from the securities, 3 the Government suc- 1 S. S. Fin. Rep. & Stats., 1906, last page. 2 Ibid., p. 6. 3 Ordinance No. v of 1906. ADOPTION OF GOLD-EXCHANGE STANDARD 453 ceeded by June 1906 in reducing the deficiency in the in- vested portion to $757,697, and by June 1910 to $443, IO4. 1 Beginnings of Gold-Exchange Standard We are now in a position to consider the use of this Note Guarantee Fund in connection with the development of the gold-exchange standard. As previously noted, 2 the or- dinance and order in council of January 29, 1906 that fixed the gold value of the Straits dollar at 2%d. authorized the Currency Commissioners to give notes in exchange for gold at Singapore at the rate of 28^. and to accept tenders for the issue of notes in Singapore against telegraphic transfers in favor of the crown agents for the colonies in London 3 provided that such tenders should provide sufficient margin above the 2%d. rate to cover all charges including interest which might be incurred in remitting this gold to Singapore. The gold so received both in London and in Singapore was to go into the Note Guarantee Fund to be used by the Commissioners for the coinage of more dollars, 4 for the purchase of securities for the investment portion of the fund, and ultimately for redemption purposes. 5 "No advantage was taken by the banks of the facilities afforded them by the new ordinance to obtain a supply of local currency by sale of telegraphic transfers to Govern- ment, and gold was not tendered to the Currency Commis- 1 S. S. Fin. Rep. & Stats., 1906, p. 6 ; and ibid., 1910, p. 5. 2 Supra, pp. 416-17. 8 By Ordinance No. iv of March 18, 1904 and again by Ordinance No. iii of March 17, 1905, both promulgated before the Straits currency had at- tained a gold basis, the Currency Commissioners in Singapore were author- ized to issue notes in exchange for gold deposited in London or with the Com- missioners at Singapore, at rates to be officially determined. The writer has seen no evidence of any such gold deposits having been made prior to March 1906. 4 The profits on the coinage were to be turned over to a separate Gold Standard Fund created by Ordinance No. iii of March 17, 1905. 5 Supra, p. 419. 454 THE STRAITS SETTLEMENTS CURRENCY REFORM sioners in any considerable quantity until April, although a large amount was available in the Colony." 1 Gold was first tendered to the Commissioners for notes about the end of March, and by the end of August the amount in possession of the Commissioners was 954,730^ The Government, however, had little need of a large sup- ply of gold coin in the vaults of the Currency Commissioners in Singapore. It had not yet committed itself to redeem its currency in gold. The invested portion of its Note Guarantee Fund needed to be greatly increased in view of the great increase in the note circulation from $17,215,280 at the end of March 1906 to $24,786,105 at the end of August. Furthermore, in view of the deficiency in this Fund arising from the raising of the dollar to 28^., it was but natural that the Government should want to buy the securities promptly so as to yield the largest possible in- come. For the purchase of securities, however, the Fund needed to be in London, not in Singapore. Such a heavy demand for notes, moreover, was liable soon to lead to the necessity of purchasing more silver for coinage, and for this purpose likewise the funds would not be needed in Singapore but in London. The Commissioners accordingly shipped 210,000 to London for investment, and re- mitted to London through one of the banks approximately the same amount, 100,000 of which was invested and the balance of which was drawn against for the redemption of notes in Singapore. It was becoming more and more ob- vious that it was a cumbersome and needlessly expensive procedure to encourage the payment of gold coin to the 1 S. S. Fin. Rep. & Stats., 1906, p. 9. 2 Ibid. The first appearance of gold in the monthly statements of the Commis- sioners is in that of March 31, 1906, the amount being 1700. For the last day of subsequent months of 1906 the gold held was as follows: April, 158,221; May, 482,412; June, 767,354; July, 893,039; August, 9S4,73o; September, 744,730; October, 623,511; November, 453,334; December, 127,169. ADOPTION OF GOLD-EXCHANGE STANDARD 455 Commissioners in Singapore in exchange for notes, requir- ing the shipment of gold to the Straits, only to have it shipped back to London again at the Colony's expense. The genii of the gold-exchange standard seemed deter- mined to make a thoroughgoing demonstration of the advantages of their system; for the gold in the Note Guarantee Fund and the local currency in the banks and in circulation having reached their maxima in August, the tide began to turn in the opposite direction, and exchange rates declined to a lower level. The Government, antici- pating the danger of an undue depreciation in the dollar, which had only a few months before reached its 2&d. par, passed an ordinance in August authorizing the Commis- sioners to issue gold in exchange for notes, and to sell tele- graphic transfers on the crown agents in London at a margin sufficiently below the 2&d. par to cover all charges, including interest incurred in remitting gold from Singa- pore to London. 1 " During the latter part of November, and in December, there arose a large demand for gold in India and the banks drew on the gold in the possession of the Currency Commis- sioners for the purpose of shipment to India. Altogether 407,162 were taken out of the currency reserve for export to that country. As reminting operations were in progress and the Straits dollars in the currency note reserve were required for shipment to England, the Currency Commis- sioners refrained [for a time] from exercising the discretion they possessed under the Ordinance to give either gold or silver in exchange for notes tendered." 2 But when in December the limit of 125,000 of gold in the Note Guarantee Fund was reached, the Commissioners refused further to issue sovereigns in exchange for notes. Special means, however, were taken further to contract the currency so as to relieve the redundancy. 3 1 Ordinance No. xxiii of 1906. Cf. also infra, p. 459. a S. S. Fin. Rep. & Stats., 1906, p. 9. 3 Ibid., pp. o-io, 456 THE STRAITS SETTLEMENTS CURRENCY REFORM Through Ordinances i and xxiii of 1906 the Straits Gov- ernment had now provided means of selling drafts on reserves belonging to the Note Guarantee Fund, both in London on Singapore and in Singapore on London, and drafts in both directions were sold during the year. In this way the Government had introduced the essentials of the gold-exchange standard. The Acting Treasurer in his re- port dated June 18, 1907 gave the following statement of the Government's intentions : "The factors which determine the limits of the variations of the sterling value of the dollar are the cost to Government of bringing out gold to Singapore and the cost of sending gold to the central market of the world viz. : London. The intention of the Government is, in the case of any dearth of currency and in the event of gold not being avail- able in the Colony, to issue notes by buying telegraphic transfers payable to the crown agents in London and, in the case of any excess of currency and in the event of the currency gold reserve being exhausted, to draw in notes by selling telegraphic transfers payable by the crown agents in London. These limits have been fixed at 283^. (buy- ing) and 2ji^d. (selling) and they provide a sufficiently liberal margin for all contingencies including freight, in- surance, packing, shipping charges and interest. They will, therefore, mark the extreme high water and the ex- treme low water limit to the sterling value of the dollar and the Government may be expected to actively inter- vene whenever the dollar is within measurable distance of either of these limits." l This is a clear declaration of the Government's inten- tion to apply the principle of the gold-exchange standard whenever conditions in the Colony were not favorable for the Currency Note Commissioners to pay out gold coin in exchange for notes and notes in exchange for gold coin. 1 S. S. Fin. Rep. & Stats., 1906, p. 10, ADOPTION OF GOLD-EXCHANGE STANDARD 457 On December 2, 1908 there were passed some important amendments to the Currency Note Ordinance of 1899, which have a bearing upon the functioning of the Straits gold-exchange standard. 1 These amendments provided that "the proportion of gold to silver in the coin portion of the [Currency Note Guarantee] Fund shall as soon as practicable be raised to two of gold to one of silver," and that a part of the coin portion of the Fund as well as the invested portion might be kept with the crown agents for the colonies in London. It reaffirmed the provisions of the Currency Note Amendment Ordinances of 1906? with some slight changes, concerning the sale of exchange by the Commissioners in Singapore upon that part of the Note Guarantee Fund which was held by the crown agents for the colonies in London. Straits dollars, 5o-cent pieces (which were now unlimited legal tender 3 ), and currency notes were made receivable by the Commissioners in payment for such drafts, and the premiums were to be based, as previously, upon the shipping expenses for sov- ereigns between Singapore and London. The money re- ceived in Singapore in payment for the drafts was to be withdrawn from circulation so as to contract the currency, and was to be held in the custody of the Commissioners. On the other hand, dollars, 5o-cent pieces, and notes were made payable in the Colony in exchange for sovereigns paid into the Note Guarantee Fund with the crown agents for the colonies in London, 4 a sufficient premium being charged to cover the cost of shipping sovereigns from London. 1 Cf. Ordinance No. xxvii of 1908. 2 Supra, pp. 416-17. 3 Supra, pp. 446-47. 4 A new feature of this purchase of sterling exchange was introduced by the Currency Note Commissioners, September 15, 1909 (under authority of ordinance No. xxvii of 1908). Under it the Commissioners are prepared to purchase sovereigns in transit from Australia to England, payment being made "at 28d. seventeen days after the departure from Freeman tie of the vessel in which the sovereigns are shipped on receipt of telegraphic instruc- tions from the crown agents." S. S. Fin. Rep. & Stats., 1909, p. 6. 458 THE STRAITS SETTLEMENTS CURRENCY REFORM The premiums realized on this exchange, as likewise the net profits realized on the recoinage, were to accrue to the Gold Standard Reserve. 1 This Reserve, which is an in- vested fund, has little direct importance to the functioning of the gold-exchange standard. It serves chiefly as a sort of secondary reserve and guarantee fund for the mainte- nance of the gold parity. As previously observed, it is through the Note Guarantee Fund that the gold-exchange standard chiefly 2 functions. How the Gold-Exchange Standard has Worked The Straits Settlements differ from the Philippines 3 in experiencing normally a substantial variation in exchange rates during a calendar year. 4 In the Straits, therefore, the gold-exchange system normally functions in both di- rections, although it happens in some years, as for ex- ample in 1910, that exchange rules strongly in one direc- tion and that all the drafts sold by the Currency Note Commissioners are in that direction. Nearly every year gold coin is received by the Currency Note Commissioners in the Colony in exchange for notes given out; and likewise gold is given out in exchange for notes tendered. None the less by far the larger part of the gold portion of the Note Guarantee Fund is kept with the crown agents for the colonies in London, and this 1 Supra, p. 449. 2 There is an emergency provision in the Ordinance of 1908 that : "Sub- ject to the sanction of the Governor it shall be lawful for the Commissioners, whenever it maybe deemed necessary, to make use of any portion of the Gold Standard Reserve in the payment of currency notes." For a similar situation in India, see supra, pp. 100-108, 117120, and 135-38. 3 Cf. supra, p. 368. 4 The range of demand rates for the years 1908-10 were : Year High Low 5. d. s. d. 1908 24 2 3f 1909 2 4r 8 ff 2 3l 1910 2 4i\ 2 4| ADOPTION OF GOLD-EXCHANGE STANDARD 459 proportion appears to be a growing one. The figures for the gold received and paid out since 1907 so far as at present available are as follows : YEAR GOLD RECEIVED GOLD PAID OUT YEAR GOLD RECEIVED GOLD PAID OUT 1907 1908 1909 262,834 112,180 218,874 179,900 95,970 1910 1911 1912 307,090 556,312 608,505 43,300 703,998 698,545 S. S. Fin. Rep. & Stats., passim. The chief reason why such substantial quantities of gold are tendered for notes to the Commissioners in Singapore is probably the fact that the Government's "import point " for the sale of drafts on the Fund in Singapore, i.e., 28 A d., is under normal circumstances too high. Inasmuch as the banks have more than once been able to lay down gold in Singapore from London at 2&%d., they naturally at such times choose that method of obtaining currency in the Straits to the method of purchasing drafts. Under these conditions it would seem wise for the Straits Government to reduce their normal rate for the sale in London of dollar drafts on the Fund in Singapore to 2&%d. In a colony like the Straits Settlements, well supplied with a sound government-note currency of convenient denominations in which the public have full confidence, with an ample supply of silver coins, and with good bank- ing facilities, there is little justification for trying to keep gold coin in circulation. For purposes of maintaining the parity of the fiduciary unit with gold, and of regulating the currency supply to trade demands, the sale of drafts under the system of the gold-exchange standard is more efficient and less expensive. A still greater dependence upon this system in the Straits, rather than upon the direct use of gold in the Colony, would seem desirable. At present the tendency seems to be in that direction. 460 THE STRAITS SETTLEMENTS CURRENCY REFORM C/3 C/3 < g I ll pa ^ H P-l S w CO 173 I VOVOWVOVOVOCMCMMVOVOCN N VO W VQ MM N N 1 1 * iiunz EJJSUJ ^ njgntsjs MMMwOOHtwOO^OvO OvO>OOOOwcOfOfOMiHM M iT >!r)T ' 1 V 2 PVC^^OO ^"SJoc^XN^^oO L II s|| H ll r-M ll i.M l ^M 1 iv'iloio ' iuLi- M tr> ' JL ^ Mt^COt^^COOM^IHCOt^MUl ^S*)^ 10 N J^'^'|i' H ^ > 5s !t ^ HMMOO\OOOOOV O>00 O OOOOOOOMOOMCNCOMHO H CNCNMCNHCNCNCNCNMMHfN MMMM^ l/5 cy 5 MCOMO>avcO<*3t>.Meoco t?C?0)CNC?CN)C?CNCN m'^-' ^, Srug^gj,, ...SSfeiH Q APPENDIX A 461 \P 1 Tj-IH OO^IH O ffl <*5 MOO tOMOO i to rf rl- Ot !r>tOMOv r~ OM^ i- M vo rt O\ 6* VO vOOvO VO \OvO I* ( OOM r OO f0 OMMOOMOp fO rOOO M 00 tO <|0 ' , 11* K -g.s sS- W>0 -ill a rt o M <5 S^ ^ r. >T3'5'S S3168S M "| a !i8K IB S APPENDIX B PRINCIPAL REFERENCES CITED CHALMERS, ROBERT. A History of Currency in the British Colonies. London: Eyre and Spottiswoode, 1893. Colonial Office List. Annual. London: Waterlow & Sons, Ltd. Commissioners of Currency for the Straits Settlements. Monthly Reports. Singapore: Government. Commission on International Exchange. Report on the Introduction of the Gold-Exchange Standard into China, the Philippines, Panama, and Other Silver Standard Countries, etc. Washington: Superintendent of Documents, 1904. Report on Stability of International Exchange, etc. Wash- ington: Superintendent of Documents, 1903. Deputy Master and Comptroller of the Mint. Annual Reports. London: British Blue Book. Director of the Mint. Annual Reports. Washington: Superin- tendent of Documents. Economist, The London. Weekly. Passim. ERASER & COMPANY. Singapore Rates of Exchange. Published at Intervals for Outgoing Home Mails. Bound Annually. Singa- pore: Eraser & Company, Brokers. HUTTENBACH, AUGUST. The Silver Standard and the Straits Cur- rency Question. Singapore: Eraser & Neave, Ltd., 1903. KEMMERER, E. W. A Gold Standard for the Straits Settlements, I and II. Political Science Quarterly, XIX, 1904, pp. 639-649; and XXI, 1906, pp. 663-698. . Second Annual Report of the Chief of the Division of the Currency for the Philippine Islands. Manila: Government Printing Office, 1906. . The Recent Rise in the Price of Silver and Some of its Mone- tary Consequences. Quarterly Journal of Economics, XXVI, 1912, pp. 254-261. Singapore Chamber of Commerce. Letter (with Appendices) to Government, Dated December 1902. The Currency. Singapore: Eraser & Neave, Ltd., 1902. 46? APPENDIX B 463 . Annual Reports, 1903-06. Singapore: Fraser & Neave, Ltd. Singapore Free Press. Daily and Weekly Editions. Passim. Statistical Abstract for the Several British Colonies and Protectorates. Annual. London: British Blue Book. Statistical Tables Relating to British Colonies, Possessions and Pro- tectorates. Annual. London: British Blue Book. Straits Settlements. Annual Reports; also Annual Reports of the Federated Malay States. London: British Blue Books. Straits Settlements Currency Committee. Report, Minutes of Evi- dence and Appendices, 1903. London: British Blue Book. Straits Settlements. Financial Reports and Statements. Annual. Singapore: Government. Times, The London, Financial and Commercial Supplement. Passim. See also Bibliographical References on Indian Currency Reform, pp. 149-52. PART V THE MEXICAN CURRENCY REFORM, 1903-08 CHAPTER I INTRODUCTION MEXICO'S chief title to fame in the economic world in modern times has consisted in its silver production and its silver dollar. Until very recently Mexico has been the world's greatest producer of silver; while for the period under study, 1903-08, it was a very close second to the United States. Prior to the opening of silver mines in the United States about a half century ago nearly all the silver used in the civilized world had for generations come from Mexico and Spanish America. From these regions it is estimated that there came more than four fifths of the world's production for the period 1493-1850; while from the latter date to 1902 a careful estimate assigns to Mexico alone 107 million kilograms out of a total world production of 284 million. 1 Only an insignificant part of Mexico's silver production has been retained at home in recent years approximately 5 per cent 2 the rest being scattered over the entire world, civilized and semi-civilized. Regardless of its subsequent history, this silver, originally at least, went out in the form of Mexico's world-famed coin, the Spanish "piece of eight" 3 and its successor, under Mexican independence, the Mexican 1 This is the estimate of A. Piatt Andrew, based upon the data collected by Soetbeer, Lexis, and the directors of the mint in France and the United States. Andrew, The End of the Mexican Dollar, in Quarterly Journal of Economics, XVTII, 1904, pp. 324-25. 2 Cf. Werner Hegemann, Mexicos Ubergang zur Goldwahrung, p. 21 ; also Jaime Gurza, Apuntos sobre la Cuestion de la Plata en Mexico, in Comision Monetaria, Mexico, Datos para el Estudio de la Cuestion Mone- taria, pp. 57-63. 3 Since 1893-94 the exportation of uncoined silver has exceeded that of coined silver. For table of annual percentages see Gurza, op. cit., p. 60. 467 468 THE MEXICAN CURRENCY REFORM, 1903-08 dollar or peso, 1 a coin which still retains practically the legal weight and fineness 2 assigned in 1772 to the earlier Spanish dollar. 3 This coin is probably the most famous one in modern history, the only one which at all challenges it being the Maria Theresa dollar. Spanish milled dollars, as is well known, were by far the most important coins in the British colonies in America before the Revolution the coins, according to Thomas Jefferson, "most familiar of all to the minds of the people." 4 These coins circulated also in Florida, Cuba, San Do- mingo, Porto Rico, and the other Spanish Antilles. Even before 1600, it is said, they circulated in the Philippine Islands, and had become familiar at such Chinese ports as Canton, Ningpo, and Amoy. Students of American monetary history know that the United States silver dollar in the Mint Act of 1792 was modeled after the Spanish milled dollar, and that the average silver content of that 1 Throughout this paper the word peso will usually be employed for the Mexican coin in preference to dollar and will be designated by the symbol "P", in order to distinguish it from the United States dollar, which is fre- quently mentioned and for which the usual symbol is used. Centavo will be used to refer to the hundredth part of the peso, while cent will be used for the hundredth part of the dollar. For the sake of clearness the above terms and symbols will be substituted in quotations, except where the context clearly makes such substitution unnecessary. 2 The Mexican peso of the period under study contained a legal gross weight of 27.073 grams (417.8 grains), and a legal millesimal fineness of .90278, giving it a fine silver content of 376.96 grains, i.e., 78.53 per cent of an ounce Troy or 101.8 per cent of the fine silver content of a United States silver dollar. 3 Despite the frequent debasement of the coins of other nations, the Spanish-Mexican peso has been subject to few important changes during its history. No coin of long history better deserves the name "an honest dollar." According to William Graham Sumner, from 1497 to our own time this peso as a world coin was only reduced by about 5.9 per cent in its pure silver content. Sumner, The Spanish Dollar and the Colonial Shilling, in American Historical Review, III, 1898, p. 617. Cf. also Robert Chalmers, Colonial Currency, pp. 392-93. 4 Cf . Jefferson, Notes on the Establishment of a Money Unit and of a Coinage for the United States, in Report of the International Monetary Conference Held in Paris, 1878, pp. 437-43. INTRODUCTION 469 Spanish coin as estimated by Alexander Hamilton in his Report on the Mint was one of the important factors probably the most important one determining the size of the unit of value we have had ever since. The Mexican peso or its predecessor was the best known silver coin in the United States during the greater part of the first half of the nineteenth century, and did not cease permanently to be unlimited legal tender in the United States until 1857. During the greater part of the last century this coin had an extended circulation in the West Indies and South America, and until recently has been the coin of com- merce par excellence in the Orient. 1 It still has a large circulation in China. In very recent times it has served as a model, so far as weight and fine silver content are concerned, for the ill-fated Hongkong dollar, the Japanese yen, the British dollar, the Philippine peso of 1903, the French piastre de commerce, and the Straits Settlements dollar of 1903. Detailed consideration of this interesting history, how- ever, is beyond the scope of the present study. The above facts will be sufficient to furnish the necessary background and to enable the reader better to understand some of the features of the recent reform, such as the strong popular prejudice in Mexico in favor of the old peso, the reluctance to discontinue its coinage or change its design, and the alleged difficulty of prohibiting the reimportation of these pesos and controlling their supply in Mexico in case they should be given a monopoly value in the home circulation. This preliminary part of our discussion may be fitly concluded by an extract from an address by Mexico's able finance minister, Jose Yves Limantour : " Our country finds itself in an exceptional position, in part, because from its mines are extracted one third of the 1 Cf. J. D. Casasus, El Peso Mexicano y sus Rivales en los Mercados del Extreme Oriente. Published in Com. Mon. Mex., Datos, etc., pp. 1-18. 470 THE MEXICAN CURRENCY REFORM, 1903-08 world's total production of silver ; in part, because this in- dustry, second only to agriculture, is the most important national industry ; and in part, because silver, in addition to the role which as merchandise it plays in our foreign commerce, serves as our domestic monetary standard and as the measure of all other values ; and finally, because that element of our wealth represents two fifths of our exports, and is therefore the prime factor in the payment of the articles which we purchase abroad and in the settlement of our trade balance." 1 1 Cf . Comision Monetaria, Mexico, Actas de las Juntas Generates y Docu- mentos a ellas Anexos, p. 10. Hereafter cited as Com. Mon. Mex., Actas, etc. CHAPTER II ECONOMIC CONDITIONS IN MEXICO IMMEDIATELY PRE- CEDING THE REFORM OF 1903-08 PRIOR to the reform of 1903-08 the currency system of Mexico was based upon the law of November 27, 1867, which had introduced the decimal monetary system. The preamble of this law stated its object to be the estab- lishment of a uniform system of currency without making any essential modifications in the value of the monetary unit. 1 The law continued the Mexican peso at its pre- vious weight and fineness as the unit of value. 2 The peso, 1 Cf. United States Special Consular Reports, XIII, Money and Prices in Foreign Countries, in House Docs., 54th Cong., 2d Sess., 1896-97, XXXII, pp. IH-I2. 2 There were certain government charges in connection with the bringing of silver to the mints and having it coined, some of which explained in part the small divergences which nearly always existed between the money value of the peso and the value of its fine silver content. These charges were summarized as follows by United States Minister Ransom in his report of September 26, 1896 : "First. A tax of 2 per cent (erroneously called the coinage tax). Second. Three per cent internal-revenue tax. Third. Assay charge of P 2.50 for bullion weighing not more than 32 kilograms, and P 5 for ore. Fourth. For smelting, when necessary, 10 cents per kilogram. Fifth. Refining, when necessary, P 1.50 per kilogram. Sixth. Separating, when necessary, P 1.25 per kilogram. "The first, second, and third charges are collected on all bullion brought for coinage as well as on all metals for exportation, whether in bullion or ore. The fourth is collected on bullion for exportation and coinage when smelting is necessary. The fifth and sixth are collected on metals brought for coinage when refining and separating are necessary." Ibid., p. 1 1 2. A good historical account of the various government charges imposed on production, coinage, sale, and exportation of the precious metals will be found in Prosper Gloner, Les Finances des Etats-Unis Mexicains, pp. 265- 310. 472 THE MEXICAN CURRENCY REFORM, 1903-08 together with the silver subsidiary coins of proportionate weights and the same fineness, continued to be unlimited legal tender. Contrary to the common belief, Mexico had been for over two centuries prior to 1904 (i.e., since 1675) legally a bimetallic country, 1 in which there was free and unlimited, although not gratuitous, coinage of both gold and silver. This situation was continued by the law of 1867, which provided for the free coinage of gold coins of denominations varying from i to 20 pesos and weighing 26.1115 grains .875 fine to the peso, thereby containing 22.848 grains of fine gold, 2 and giving a mint ratio of approximately i6J to i. 3 All gold coins as well as all silver coins were unlimited legal tender. This ratio ap- peared to be very favorable to gold for some time prior to 1875. As a matter of fact, however, it was usually un- favorable, when coinage fees, taxes, transportation charges, and other expenses were all taken into account, and the amount of gold coin in actual circulation appears always to have been small. Nearly every year from 1873 to 1905 witnessed the coinage of some gold at the Mexican mints, 4 but this coin does not appear to have gone into general circulation. Therefore, whatever the Mexican currency system was in law, it was de facto a silver standard system. Monetary statistics of Mexico until recent years have been very unsatisfactory, and even at the beginning of the present century there were no reliable figures as to the amount of money in circulation. A "monetary census" officially made in 1903^ on the basis largely of 48,000 letters of inquiry, to which replies were received from only 12,000, accounted for about 61.7 million pesos of coin in Mexico; of which in round numbers P 483,000 were gold, 1 Hegemann, p. 2. 2 Ann. Rep. Dir. Mint, 1901, p. 406. 3 Cf. Special Consular Report, 1896-97, op. cit. p. 112; and Hegemann, p. 6. 4 Ann. Rep. Dir. Mint, 1902, p. 217 ; and passim, 1903-06. 6 Comision Monetario, Mexico, Datos Complementarios, etc., pp. 39-45 ECONOMIC CONDITIONS IN MEXICO 473 P 58, 145,000 were silver pesos, P 2, 972,000 were fractional silver coins, and P 62,000 were copper. Adding to this the estimated amount concerning which no replies were received, the investigators arrived at a minimum of Pi 00,000,000 and a maximum of Pi 20,000,000 as their final conclusion. 1 The above estimate, however, mejely covered metallic money and did not include bank notes. At the end of December 1902 the bank note circulation of Mexico was in round numbers 86 million pesos. 2 Adding this bank note circulation to the mean estimate for metallic money, we arrive at P 196,000,000, or say P 200,000,000, as the total amount of money in circulation in I903. 3 After having been upon a de- facto silver standard for so many years, and having prospered for the better part of a .generation as the country had never prospered before, why did Mexico give up the silver standard for a gold standard ? The chief reasons for this action may be considered under the rubrics : government finance, foreign trade, and the investment in Mexico of foreign capital. 4 Government Finances While the pressure on government revenues resulting from the declining gold value of silver was nothing like so great in Mexico in 1903 as it was in India a decade before, and while Mexican finances were in a better condi- 1 The estimate divided this sum as follows : public offices P 4,000,000, credit institutions P 5 1,000,000, mercantile establishments P 35, 000,000, farms and factories P 10,000,000, and individuals P 20,000,000. Ibid., pp. 42 and 45. 2 Comision Monetaria, Estadistica Bancaria, pp. 577 and 524. 3 The legal reserve requirement of banks of issue against notes was 50 percent. Cf. J. Favre, Les Banques au Mexique, pp. 40-41. Cf. also infra, pp. 526-28. 4 In taking up these topics at this point, it should be noted that the data concerning them were incomplete and unorganized when the Mexican Mone- tary Commission was appointed in February 1903. A considerable part of the data here used was collected by the Commission. Cf. infra, p. 497. 474 THE MEXICAN CURRENCY REFORM, 1903-08 tion on the whole in 1903 than were those of India in 1893 nevertheless the financial burden imposed upon the Mexican Government by the declining price of silver was a very real one. The chief item in this burden was the interest on the gokj debt. In 1899 negotiations were completed with certain European and American banking houses for the conversion of Mexico's entire foreign debt into "a five per cent consolidated external gold loan due within forty-five years at par by semi-annual drawings, which may be increased after the year 1909, . . . or retired by purchase in the market if same can be made under par. Principal and interest of the bonds [are to be] payable in gold. . . . Bonds are secured by a special hypothecation of 62 per cent of the import and export duties of the Republic of Mexico." 1 The total public debt of Mexico on June 30, 1902 was P 432, 516,595, and of this sum P 238,960,000 represented the foreign debt (consolidated 5 per cent) payable in gold. 2 Much of the latter was incurred for public works, notably railroads and other productive enterprises. 3 Expressed in United States money the gold debt of Mexico was approxi- mately $109,000,000, and the annual interest charge was approximately $5,450,000. The larger part of this debt had its origin at times when a Mexican peso was worth in 1 A detailed historical account of Mexico's public debt down to 1894 will be found in Gloner, op. cit., pp. 51-154. For later figures by -years, see El Economista Mexicano, published weekly in the City of Mexico, passim. For an itemized statement of the debt, see Com. Mon. Mex., Actas, etc. 1904, pp. 153-54. An analysis of the debt, as it stood in 1902-03, will be found in English in, International Bureau of the American Republics, Mexico, Geographical Sketch, Natural Resources, Laws, Economic Condi- tions, Actual Development, Prospects of Future Growth, 1904, in House Docs., 58th Cong., 3d Sess., LXVI, No. 145, Part 5, pp. 303-04; here- after cited as Int. Bur. Am. Reps., Mexico. It is from the last refer- ence that the above quotation is made. 2 The gold debt was computed at the rate of 22^. (45.6 U. S. cents) to the peso, the rate adopted in the budget of 1903-04. 3 Cf. Com. Mon. Mex., Actas, etc. pp. 153-54. ECONOMIC CONDITIONS IN MEXICO 475 gold much more than it was in 1902 ; in fact most of the gold debt dated back to a time when the peso was worth in the neighborhood of a United States gold dollar. The fact, therefore, that this gold debt amounted to P 238,960,000 instead of approximately half that sum was due chiefly to the appreciation of gold from about the year 1873 to the early nineties. A similar situation existed with refer- ence to the interest charges, because the interest rate in gold did not decline proportionately to the rise in the silver price of gold. There was no great change in the principal of the public debt between 1896 and 1903. If we assume it to have stood at $109,000,000 during this period, 1 it would have required the following sums in pesos to have paid the interest at the average gold value of the Mexican peso as measured by New York exchange : 2 YEAR AVERAGE GOLD VALUE OF PESO AMOUNT REQUIRED TO PAY $5,450,000 (U. S. Cents) Pesos 1896 52.4 10,410,000 1897 46.8 11,650,000 1898 46.1 11,820,000 1899 48.2 11,300,000 1900 48.5 11,240,000 1901 47-3 11,520,000 1902 41.9 13,010,000 1903 42.2 12,910,000 There were two obvious disadvantages in this situation. One was the impossibility of the Government's framing a 1 It actually varied between about $109 and $114 million. Int. Bur. Am. Reps., Mexico, pp. 302-05. 2 Figures for 1896 to 1902 inclusive were computed from figures for New York exchange quoted in terms of pesos to the $100. Com. Mon. Mex., Datos Estadisticos, etc., table No. 37. For 1903 the rate was computed from figures compiled for the author by the National Bank of Mexico. Cf . infra, P- 549- 476 THE MEXICAN CURRENCY REFORM, 1903-08 well-balanced budget because of the uncertainties of ex- change. An unexpected fall in the gold value of silver would greatly reduce an anticipated surplus, or even trans- form it into a deficit ; while an unexpected rise would have the opposite effect. The second disadvantage arose from the fact that one of the chief sources of Mexican federal revenue was customs duties on imports. These duties were collected in silver or on a silver basis, and silver had been declining rapidly in its gold price, the decline having been particularly pronounced since the fore part of 1901 (see chart on page 535). Such a decline in the price of Mexico's chief article of export, with consequent rise in the gold exchanges, therefore cut into the customs receipts in two ways : first, by tending to cause a decline in the amount of goods imported and, second, by reducing the gold value of the duties paid on such goods as continued to be imported. 1 These difficulties were partly met by the device of a sliding scale of customs duties, 2 a device which increased the rate of duties as exchange rose, but ipso facto tended still further to lessen importations. In proposing this measure Secretary Limantour explained its purpose, saying that important government services should not be com- pelled to suffer because of fluctuations in the gold price of silver, and "considering that the bulk of the revenue from import duties is assigned to the service of the foreign debt, the ob- vious course seems to be to establish by means of carefully 1 President Diaz said on September 9, 1896 : "There is another point of view. The foreign debt of the country is payable in gold. The duties on imported merchandise are collected in silver, or on that basis. The high rates of exchange, together with the decrease in our customs collections . . . have caused a considerable shrinkage in this source of revenue." Quoted by Matias Romero, Mexico and the United States, p. 567. 2 Cf. Diario Official, Nov. 24, 25, and Dec. i, 1902. The law went into operation Jan. i, 1903. See also U. S. Consular Reports, LXXI, 1903, pp. 176-78. ECONOMIC CONDITIONS IN MEXICO 477 prepared enactments a close relationship between that branch of revenue and the rate of exchange, in such manner that the burden of taxation will increase or diminish in pro- portion to the amounts necessary to meet our indebtedness in gold." 1 Foreign Trade As in the case of the other countries studied, fluctuations in exchange caused serious disturbances in Mexico's foreign trade. By far the greater part of this trade was with gold- standard countries, and the ups and downs of the price of silver were very important factors in determining the profits realized. Figures are not available for the high and low exchange rates in Mexico on any gold-standard country for the ten years preceding the currency reform, but inasmuch as there was free coinage of silver and as Mexican exchange there- fore normally followed fairly closely the fluctuations in the price of silver, one may obtain a fair idea of exchange fluctuations by referring to the fluctuations in the price of silver. These are given in the following table, also the average monthly exchange rates in Mexico on New York. The figures of the table require little explanation. Annual ranges in the London price of silver during the ten years 1893-1902 varied from 21.3 per cent in 1893, the year of the closing of the Indian mints and of the repeal of the Sherman Silver Purchase Act, to 5.7 per cent in 1896. Even this minimum annual range, however, was sufficient to eat up the entire annual interest on an ordinary investment. For the entire period the range was 44 per cent, using the high rate (38! d.) as the base, 78.7 per cent if one uses the low rate (2iH^O as the base. Judging annual variations in Mexican exchange rates on New York by average monthly rates, i.e., calling the highest average monthly rate for 1 The [London] Economist, 1902, p. 1930. 478 THE MEXICAN CURRENCY REFORM, 1903-08 s s cd s| 1 *:.*, G COO I Ji, d X o J. JL o JL o T J d v. M^I IN * iiliilisii OO M M i-i cOtOfOcO _ H -* O>vO < M 8 a 'S co J 1 S g S 6^ Q 2=5 -^X5 |^S *lt l^-i -I- ECONOMIC CONDITIONS IN MEXICO 479 the year high and the lowest low, we find a similarly large annual variation. The highest range, i.e., 15.9 per cent, was in 1902 (although those of 1893 and 1897 were very nearly as high) ; while the lowest range, i.e., 3.9 per cent, was in 1898; the range for the ten- year period was 41.8 per cent, or very nearly as large as the range for the price of silver. In some months the fluctuations in the price of silver were very large, as for example, June 1893 (21.3 per cent) ; September 1897 (12.8 per cent) ; and February 1894 (10.4 per cent) ; while in other months it was very small, as for example July 1894 and February 1897 (both 0.2 per cent). There were few months, however, during the entire period in which the fluctuations were not sufficient to be real items in all substantial foreign trade operations. Influence of Rising Exchange upon the Returns Received for National Products In connection with Mexico's foreign trade one important factor leading to the demand for currency reform was a growing conviction on the part of thinking people that the decline in the gold value of the peso, as expressed in rising exchange rates, was resulting in the exploitation of Mexico for the benefit of foreign countries ; or, in other words, in a tendency to require her to give too many of her own prod- ucts in her export trade for the foreign products she received in exchange in her import trade. This subject is one that received careful consideration from the Mexican Monetary Commission in I9O3- 1 It was ably treated in a memorandum submitted to that Commission by the mem- bers of the American Commission on International Ex- change, which was appointed by the United States Secre- tary of State to confer with representatives of the Mexican 1 Cf. Com. Mon. Mex., Actas, etc., pp. 67-106. 480 THE MEXICAN CURRENCY REFORM, 1903-08 and Chinese Governments. Upon this subject the reason- ing of the American Commissioners was as follows : " The fall in the gold price of silver permits goods to be sold abroad for a falling gold price, so long as wages and the cost of materials at home remain unchanged in terms of silver, [since the exporter receives a continually larger number of local pesos for each gold unit, i.e., dollar, pound, etc., which he receives abroad for his product]. It is this in- fluence which enables a country with a depreciating cur- rency to underbid its rivals in selling its products in markets where gold is the standard. There are perhaps certain temporary benefits in this condition, in extending and de- veloping the trade of the exporting country. It is an im- portant question, however, whether the continuous depre- ciation of the standard may not reach a point which will soon result in the surrender of a given quantity of domestic goods to foreign purchasers in exchange for a continuously declining quantity of foreign goods." 1 Figures for the value of Mexico's exports in terms of pesos showed a great increase from 1882 to 1902, rising from P 29.2 millions in 1882 to P 75.7 millions in 1892, and to P 168.0 millions in I9O2. 2 If one measured this increase, however, in terms of gold instead of in terms of silver it did not appear anything like as large, particularly the in- crease since 1892. In 1882 the gold value of the exports was $26.1 millions, in 1892 it was $63.3 millions, and in 1902 $74.1 millions, the respective average gold values of the silver peso for those three years having been $0.894, $0.837, an d $0.441. In terms of percentages the increases in the exports were as follows : 1 The Influence of Falling Exchange upon the Returns Received for National Products. Argument submitted by Messrs. Charles A. Conant, Jeremiah W. Jenks, and Edward Brush, to the Monetary Commission of the Republic of Mexico, April 18, 1903. Published in Stability of Exchange etc., by the Commission on International Exchange of the Republic of Mexico, 45-46. Hereafter cited as Infl. of Fall. Exch., etc. 2 Cf. Infl. of Fall. Exch., etc., p. 46; also Com. Mon. Mex., Datos Es- tadisticos, etc., table No. 2. ECONOMIC CONDITIONS IN MEXICO 481 YEAR SILVER VALUES GOLD VALUES 1882 100 100 1892 259 242 1902 575 284 Measured in gold, therefore, it will be seen that after 1892 the value of the exports increased very slowly, i.e., only about a million dollars a year, or less than 17 per cent in 10 years; as compared with $3.7 millions a year, or 142 per cent for the preceding 10 years. The American Commissioners next took up the question whether the increase in the quantities of the goods exported had merely kept pace with the small increase in their gold value or had been greater or less. 1 Aside from the precious metals, which the Commissioners considered separately, they found six important articles of export representing 29 per cent of the total merchandise exports of 1892 and 27-^ per cent of those of 1902, for which comparable figures were available. They were copper, coffee, beans, fresh fruit, ixtle, and dyewoods. For all of these items except dyewoods gold prices were lower in 1902 than in 1892. Computing the value of the 1902 exports of these articles in terms of their respective gold prices in 1892, the Com- missioners found that at these prices the articles would have been worth $16.9 millions, whereas their actual value at 1902 prices was but $10.8 millions, a loss of 36 per cent. Assuming the same percentage loss on the other merchandise exports (exclusive of silver) the Commissioners arrived at an aggregate loss of $22.5 millions gold. 2 The exports of silver for 1902 computed at the gold prices of 1892 would have been $22.7 millions gold more valuable than they actually were. Adding these two items together we arrive 1 Infl. of Fall. Exch., etc., p. 47. 2 Ibid., p. 49. 21 482 THE MEXICAN CURRENCY REFORM, 1903-08 at $45.2 millions, say $45 millions, 1 as the total loss suffered by Mexico in the gold value of her exports in 1902 when comparison is made with 1892. This loss, moreover, was not merely for a single year. Such losses had been occur- ring ever since the fall in the gold value of silver began, and their amounts had been growing rapidly since 1892. This, however, as the reader has doubtless already ob- served, is only one side of the story. Mexico's exports were paid for ultimately not in gold but in merchandise imports. Part of the period 1892 to 1902, i.e., 1892 to 1896, was a period in which gold prices the world over were rapidly falling, or, in other words, a period in which the value of gold was rapidly rising. A decline in the gold prices of Mexico's exports would have been a matter of small concern, if the gold prices of the foreign goods she imported had fallen as much or more. The important question was not how much gold, but how much merchandise, Mexico was receiving for a given quantity of the products she was exporting. This side of the question the Com- missioners found more difficult to answer, because the articles imported were of much greater variety than the articles exported, and were divided more minutely into classes by the tariff classification. In many cases, more- over, the imports were of such a character that it was im- possible to classify them in physical quantities, and they were entered in custom house money returns only by their money values. 2 Selecting ten groups of articles for which comparable figures were available for approximately the two dates, i.e., for the years 1893 an d 1902, articles repre- senting 18.66 per cent of the gold import values of 1893, the Commissioners found that these goods were worth $15.0 millions in 1902, and at 1893 prices they would have 1 In one place the Commissioners give the figure as $50 millions (p. 50), and in another as $40 millions (p. 51). The computations are at best very rough approximations as the trade figures themselves are far from reliable. 2 Ibid., p. 50. ECONOMIC CONDITIONS IN MEXICO 483 been worth $18.5 millions, representing a decline of 18.7 per cent, 1 as compared with a decline of 36 per cent for the articles exported. Extending this ratio of 18.7 per cent to the total imports for 1902, they found a total decline in gold values of $14.1 millions. Setting this gain in import values against the estimated loss of $45 millions on export values, we arrive at $30.9 millions as the net loss. The Commissioners' figures gave a net loss of $26 millions, but this they considered as probably too small, after a study of the prices of certain specified commodities exported to Mexico from the United States. 2 After making numerous qualifications, and pointing to the fact that many forces besides monetary forces were at work, the Commissioners concluded that Mexico had in recent years been expending a growing proportion of her own labor and intellectual effi- ciency in return for a given amount of foreign products ; and that if this were due even in part to the monetary system, as the Commissioners believed it was, it was an evil of the most serious character, 3 since it involved a pro- gressive impoverishment of the economic resources of the country and the needless enrichment of those with whom Mexico traded. 4 l lbid., p. 51. 2 Ibid., pp. 51-52. 8 Ibid., p. 55. 4 Only a few years before 1892 Mexico appears to have profited decidedly by the movements of the gold price of silver, if we can accept the figures of Franciso Bulnes. His computations showed that in 1875 the cost of Mexico's merchandise imports was $18.9 millions; and that for the same commodities in 1885 the cost would have been but $12.7 millions in conse- quence of the great fall in gold prices. This was a decline of approximately 34 per cent. Similar figures were computed for the value of Mexico's mer- chandise exports in 1875 at the prices of 1885, and the result showed a de- cline of only 6.8 per cent, and, if silver exports were also included, a decline of 14 per cent. But if Mexico's imports had declined on the average 34 per cent in their gold prices, and her exports had declined in their gold prices only 14 per cent, Bulnes thought, the country had little reason to complain of the price situation. Francisco Bulnes, Cris. Mon., p. 131 ff., quoted by Hegemann, op. cit., pp. 58-59. 484 THE MEXICAN CURRENCY REFORM, 1903-08 Investment of Foreign Capital The subject of the investment of foreign capital in Mexico played a very important role in the discussion leading to the monetary reform. Mexico was a comparatively unde- veloped country, rich in natural resources but with little home capital with which to exploit them. For generations foreign capital had been flowing into the country ; but while profits were often large, so also were risks, and the number of Mexican ventures involving large investments of foreign capital that had "gone on the rocks" was great. Since the recovery from the panic and depression of 1893-94, when Mexico suffered severely from the sudden drop in silver resulting from the closing of the Indian mints and the repeal of the Sherman Silver Purchase Act, the finances of the country had been rapidly improving, thanks largely to the enlightened policies of Finance Minister Limantour. Dur- ing the period 1894-1903 foreign investments in Mexico had been growing rapidly, particularly from England, the United States, France, and Germany. 1 How much they amounted to in 1903 no one knew, as no comprehensive stat- tistics had been collected. The task of computing such statistics was in 1903 assigned to a subcommission of the Mexican Monetary Commission, and from its report we can form an imperfect idea of the extent of these invest- 1 "The great drygoods houses and cotton mills are French, as is also much of the older capital invested in banking. The Spaniard, frugal and thrifty, handles the cattle and grain trade and sells groceries. Hardware and jewelry are the chosen field of the German. The newer banks and the dealing in machinery constitute a part of the American's activities. His money, with that of the English, has also taken up the heavy investments of mines, railroads and light, traction and power plants, although there is other European capital as well employed in investments of this nature. The opening up and breaking in of the hot country or tropical lowlands, from the developed fertility of which great results are anticipated, owes its recent advancement to the pioneering of the American." Morrill W. Gaines, Effects of the Silver Standard in Mexico, in Yale Review, XII, 1903, p. 278. On the subject of the history of foreign investments in Mexico from 1810 to 1904 see Hegemann, op. cit., chap. 4. ECONOMIC CONDITIONS IN MEXICO 485 ments. It should be noted that this subcommission ex- perienced great difficulty in securing data on the subject, and that its figures are far from complete. They repre- sent an "extreme minimum." Briefly, and in round numbers, they may be summarized as follows : l 000,000 (1) Foreign capital invested in banking, mining, agriculture, mercantile and industrial enterprises P 136.1 (2) Insurance companies of various kinds. Estimated by capitalizing at 5 per cent the estimated net profits 16.9 (3) Railroads, deducting government subventions of ^87.4 millions to foreign owned property 767.2 (4) Public debt 2 432.5 Total 1,352.7 Converting this to United States currency at the official rate of 22?d. to the peso, and counting $4.8665 to the pound sterling, we arrive at a total foreign investment in Mexico of $617 millions. In like manner the subcommission estimated the annual net payments due to foreigners for interest, rents, and profits, at P 49. 2 millions, which would be equal to $22.4 millions. 3 These investments fall into two broad classes from the standpoint of the currency problem : (i) direct investments made for the account of foreign capitalists; and (2) in- direct investments made for the account of Mexican pro- prietors in the form of loans to these proprietors. The first class was represented chiefly by the ownership of stocks in Mexican corporations, and by the individual or partnership ownership of Mexican properties of every 1 Com. Mon. Mex., Actas, etc., pp. 148-55. 2 Out of a total public debt of P 432.5 millions all but P 15.0 was held abroad, and most of this small sum held in Mexico was apparently owned by resident foreigners. Ibid., p. 154. 8 The conservative character of these estimates will be appreciated when it is noted that United States Consul-General Barlow, in a report in 1902, stated that the amount of United States capital invested in Mexico by 1,117 United States companies, farms, and individuals was in round numbers $500 millions. Internat. Bur. Am. Reps., Mexico, op. cit, p. 257. 486 THE MEXICAN CURRENCY REFORM, 1903-08 kind. Profits in these enterprises were not only realized but paid in local pesos ; and upon the shoulders of the foreign investor were placed the risks incident to a fluctuating exchange. When the gold value of the peso rose, i.e., when exchange fell, the foreign investor received more dollars, pounds, or francs for each P 100 of profits ; when the gold value of the peso fell he received less. Upon this point the subcommission concluded after a careful study of the facts : l " Since the rise in the exchanges, although gradual, has been none the less continuous, the capitalists who have invested their capital in Mexico are not able to withdraw it from the country because to convert it into gold would result in a considerable loss ; nor is it agreeable to leave it invested, because every day its gold value declines further. . . . Although these properties, such as stocks of banks and of industrial concerns, have risen in price in terms of pesos, and the dividends received have been growing, these in- creases have not been sufficient to compensate for the loss in the principal and interest, due to the declining gold value of the peso. 2 The second class of investments, i.e., "the indirect in- vestments," was represented chiefly by loans made in gold 1 Com. Mon. Mex., Actas, etc., p. 89. 2 An illustration is found in the profits of the Mexican Central Railroad. These profits per mile expressed in pesos and in United States dollars for the period 1891-97 were as follows : YEAR PESOS DOLLARS 1891 4169 3236 1892 4146 2896 1893 4322 2701 1894 4530 2351 1895 5069 2683 1896 5352 2837 1897 6552 3129 Com. Mon. Mex., Datos, etc., p. 68. ECONOMIC CONDITIONS IN MEXICO 487 and repayable principal and interest in gold. Its most im- portant forms were the gold bonds of the Government and of the railroad companies. Here the chief burden of a de- clining gold price of silver fell directly upon the shoulders of the Mexican people, since the obligations for principal and interest in terms of gold remained unchanged whether the peso was worth 50 cents or 40 cents. But in the latter case it would have required P 1 25 to meet the annual interest upon a $1000 five per cent gold bond, whereas in the former it would have required but P 100. To pay off the princi- pal at the former rate would have required P 2000 and at the latter P25oo. Inasmuch as the revenues from which the interest and principals of such gold debts were paid - revenues from taxes in the case of the government debt, revenues from railway freight and passenger services in the case of the railway debts, and from the sale of commodities and services in the case of the other business debts could not be increased in proportion as the gold value of the peso fell, debtors found it increasingly difficult to meet their obligations punctually, while creditors suffered from the resulting impairment of their debtors' credit and financial ability. 1 This situation was making it increasingly difficult to induce foreign capitalists to invest in Mexico, and, as we have seen, it was largely upon foreign capital that Mexico depended for the opening up and development of her great resources. Three evils, then, with their harmful effects upon different classes in the community, were the chief reasons advanced by those favoring the fixing of Mexican exchange at a definite par with gold. Summarizing, they were : (i) the uncertainties and the losses which an unstable exchange 1 From January 1901 to November 1902 the London price of silver fell from 2g&d. to 2i^d. "This sudden fall in the price of silver shook the foundations of all enterprises in Mexico, which were compelled to meet in- terest obligations on their foundation capital in gold. Those in the worst situation were the Mexican railroads." Hegemann, p. 1 20. 488 THE MEXICAN CURRENCY REFORM, 1903-08 brought to the government budget; (2) the inhibitions upon the import trade, and consequent rise in prices of im- ported goods, along with the overstimulation of the export trade resulting in the undue exploitation of Mexican re- sources for the benefit of foreigners; and (3) the inter- ference with foreign investments in Mexico and the in- creasing difficulty on the part of Mexicans of meeting the obligations in gold already incurred. Other evils might be mentioned, such as the speculative element an unstable exchange brought into business transactions, the disturbing influences it had upon local prices, and the tendency a declining gold value of the peso had to oppress the laboring classes through the fact that their wages tended to lag behind prices in the resulting upward movement. 1 Alleged Advantages of the Silver Standard It must not be supposed that intelligent opinion in Mexico was anything like unanimous in favor of a gold standard. Such was far from being the case, 2 although the great fall in silver of 1901 and 1902 appears greatly to have in- creased the sentiment in that direction. That Mexico had made remarkable progress under the silver standard there could be no question. 3 How far that progress could be 1 The Mexican Commission on International Exchange in the memoran- dum handed in June 3, 1903 (pp. 3-4) cited seven ways in which the low value of the peso and the violent fluctuations in exchange had injured Mexico. They all, however, are comprehended in the reasons given above. 2 As late as 1898 Matias Romero, Minister of Mexico to the United States, wrote : "Everybody in Mexico, that is, from the educated to the ignorant, from the rich to the poor, from the natives to the foreigners, and even the bankers who in other countries are decidedly favorable to the gold standard, are all in favor of silver. The Government holds the same opinion. As Mexico is now prosperous a large portion of the people attribute its pros- perity to the silver standard and are therefore decidedly favorable to the continuance of that standard." Mexico and the United States, pp. 576-77- 3 "A reason put forth, as being decisive against plans of monetary reform, is that the country has never been so prosperous and so well off as when the ECONOMIC CONDITIONS IN MEXICO 489 attributed to the silver standard, how far it was in spite of the silver standard, and how far the matter of the monetary standard was an affair of practical indifference, it was im- possible to say. Whether or not that standard would have been permanently and broadly beneficial, there seemed to be little question but that temporarily at least it was benefiting certain interests, and these interests were naturally favorable to its continuance. The limits of this book will permit no more than a brief summary of these supposed advantages : Advantage to the Silver Industry. In the fore front stands the advantage to the silver industry itself aside from agriculture, the chief industry of Mexico. Although the relative importance of exports of silver had been de- clining for seven years, the industry still was providing approximately half of the total exports. 1 To this industry the advantages of the silver standard were mainly two : (a) it provided through the system of free coinage an un- limited home market for silver at a fixed price; (b) it tended to keep wages constant in terms of silver (reducing them in terms of gold) although the gold value of silver was depreciating. 2 The advocates of a gold standard gen- erally seemed to take it for granted that, should a gold standard be adopted, it would be necessary for the Govern- ment to make some compensatory concessions to the silver industry. depreciation of the white metal was most pronounced. . . . Though it may seem paradoxical (thus to this day argue some of the advocates of the status quo) the fact is that the period of the country's greatest prosperity has been precisely that during which the price of silver was lowest." Finance Minister Limantour, Com. Int. Exch., Rep. 1904, p. 425. Cf. also British Diplomatic and Consular Reports, Mexico, 1904. *In 1885 silver constituted 70 per cent of the total exports; in 1890, 6 1 per cent; in 1895, 56 per cent; and in 1901,46 per cent. Com. Mon. Mex., Datos Estadisticos, etc., Table No. 4. 2 The chief disadvantage of the silver standard to the silver industry was the fact that many of its supplies, such as machinery and quicksilver, had to be imported from gold standard countries at an ever increasing silver expense. 490 THE MEXICAN CURRENCY REFORM, 1903-08 Stimulus to the Export Trade. 1 A second line of argument of which much was made was the familiar one, that a de- preciating unit of value stimulated the export trade by giving to the home producer an ever increasing number of pesos for each unit of gold paid him for his products ex- ported abroad. The total annual exports, exclusive of silver, measured both in pesos and United States dollars, and the average annual gold value of the peso in terms of United States currency, for the period 1884-85 to 1901-02, in round num- bers were as follows : 2 YEAR EXPORTS (PESOS) EXPORTS (DOLLARS) VALUE OF PESO (U.S. CENTS) 000,000 000,000 1884-85 13-9 I2.O 86.4 1885-86 14.8 12. 1 81.6 1886-87 16.3 12.9 79.0 1887-88 18.7 14.2 75-9 1888-89 22.2 l6. 4 73-9 1889-90 24.6 18.6 75-8 1890-91 27.9 23-4 83-7 1891-92 27-5 23.0 83-7 1892-93 32.6 21.4 65.7 1893-94 34-5 18.6 53-9 1894-95 46.9 24.1 51-4 1895-96 51-0 27-3 53-6 1896-97 58.2 29.4 50.6 1897-98 70.4 31-5 44-8 1898-99 81.2 38.3 47.2 1899-1900 94-7 45-i 47.6 1900-01 85-6 41.8 48.8 1901-02 108.5 47-9 44.1 1 Cf . report of the Fourth Subcommission of the Mexican Monetary Com- mission discussed later (pages 500-502) on the question : " Has the rise in foreign exchange rates protected and stimulated national production, and, if so, has this protection extended itself to producers and consumers alike? " Com. Mon. Mex., Actas, etc., pp. 68-88. See also Jaime Gurza, Influencia de la Depreciacion de la Plata sobre le 2 Based upon figures computed by the Mexican Monetary Commission, Com. Mon. Mex., Datos Estadisticos, etc., Tables Nos. i and 4. ECONOMIC CONDITIONS IN MEXICO 491 An examination of the table will show that exports measured in pesos moved in the opposite direction from the movement of the gold value of the peso, when that gold value was falling. Of the 17 years for which the table makes com- parisons possible, the gold value of the peso fell in 10 years, and in each of these years there was a substantial increase in the peso value of the exports. In six of the other seven years the gold value of the peso rose in one it was un- changed but in five of these six the peso value of the ex- ports also rose. The writer has calculated for these figures, according to the method of Karl Pearson, the coefficient of correlation. In conformity with the theory that a decline in the gold value of a silver or a fiduciary monetary unit stimulates exports to gold standard countries, the coefficient is the remarkably high inverse one of .867 a probable error of .0392. One obvious objection to this comparison is the fact that the exports are computed in terms of value instead of in terms of units of quantity, for which adequate data are not available, and that a decline in the gold value of the peso would of itself naturally be expected to find expression in higher prices, and hence, in larger export values as meas- ured in pesos. This objection is within limits a valid one, but it is weakened by two qualifications : (i) the well-es- tablished fact that down to the year 1892 the decline in the gold price of silver was chiefly an expression of a rise in the value of gold rather than of a decline in that of silver j 1 and Progreso de Mexico. Com. Mon. Mex., Datos para el Estudio de la Cues- tion Monetaria en Mexico, etc., pp. 63-9 ; E. Nasse, Das Sinken der Waren- preise wahrend der letzten 15 Jahren, in Jahrb. f. Nationaloek. u. Statistik, Neue Folge, Bd. 17, 1888, pp. 50 and 129; and Eugene Viollet, Le Proble"me de 1'Argent et I'Etalon d'Or au Mexique, Part i, chaps. 3-6; and Matias Romero, Mexico and the United States, pp. 596-604. 1 Cf. table based upon Sauerbeck's index numbers and the London price of silver showing in terms of purchasing power in England the variations in the value of gold and in that of silver annually, 1870-1903. J. F. Johnson, Money and Currency, p. 251. 492 THE MEXICAN CURRENCY REFORM, 1903-08 (2) the fact so often mentioned in these essays, that price changes in a silver or fiduciary standard country normally lag far behind changes in the gold value of the money unit. If we measure the exports in gold values instead of silver values, we find that of the ten years in which the gold value of the peso fell eight showed an increase in exports and only one a decrease. The coefficient of correlation for the move- ment of the gold value of the peso and the gold value of exports is .776 a probable error of .0628. This is a high inverse correlation, though considerably lower than the .867 found for prices measured in pesos. Despite these high coefficients of correlation, the writer believes that this statistical evidence is far from conclusive, and that the deductive argument affords the strongest ground for believing that a declining price of silver stimu- lated the Mexican export trade. The reason for this opinion may be stated in a few words. The population of Mexico was growing, and without any artificial stimulation whatever there would have been a normal tendency for exports to increase. According to the table they increased in terms of pesos in 15 of the 17 years 1 including five of the six years in which silver rose. 2 This fact coupled with the doubtful value of Mexico's trade statistics during the earlier years, and the fact that the figures are in values and not in units of quantity, make it appear wiser to rely chiefly upon a priori reasoning, and upon the testimony of those familiar with the particular export industries. These methods, 1 In terms of gold they increased in 13 of the 17 years. 2 According to the theory in its converse form a falling gold value for the peso should have inhibited imports. For the lo-year period 1892-93 to 1901-02 inclusive, for which import figures are given, while the gold value of the peso fell in five years and rose in four, the silver value of the total im- ports rose in eight years, including every year but one in which the gold value of the peso fell. However, in only two of the five years in which the gold value of the peso fell did the gold value of the imports rise ; while in all four of the years in which the gold value of the peso rose the gold value of the total imports also rose. Cf. Com. Mon. Mex., Datos Estadisticos, etc., Table No. 13. ECONOMIC CONDITIONS IN MEXICO 493 however, in the main substantiate the testimony of the crude statistics. The a priori argument that the declining value of the peso encouraged the production and exportation of agricultural articles was strong ; and the export figures for certain products such as heniquen, coffee, and beans were favorable to that conclusion. 1 On the other hand, the argument in favor of a continuance of the silver standard in Mexico because of the encourage- ment to the export trade resulting from the decline in the gold value of silver was weaker for Mexico than for most countries for two reasons : first, because approximately half of Mexico's exports consisted of the depreciating silver itself, whose production and exportation obviously was not stimulated by the decline ; and second, because Mexico in her recent development was largely dependent upon foreign countries for her supplies of machinery, quicksilver for the silver mining industry, 2 railroad materials, and raw cotton articles whose peso cost was greatly increased by the decline in silver. Protection to Home Industries. The common argument that a rising exchange, though perhaps beneficial to the export trade, is, per contra, harmful to the import trade, since it requires an ever increasing number of pesos to buy a given amount of foreign goods at fixed gold prices, was used by the advocates of silver as an argument for the silver 1 Cf. Romero, op. cit., pp. 596-604, and Com. Mon. Mex., Datos Esta- dfsticos, etc., Table No. 4. "Agricultural products have been diversely affected according to the nature of the several crops. No one can question that the production of fibre, particularly heniquen, has received a vigorous impetus and that that impetus is due largely to the rise in the rate of exchange. The same may be said of certain cereals, such as beans and chick peas, and of dried fruits, as well as of untanned skins, though extraneous causes have also influenced the upward movement. . . . Finally, coffee, tobacco, vanilla, and a number of articles which are exported on a small scale do not seem to have been bene- fited to a marked extent. . . ." Finance Minister Limantour, Com. Int. Exch., Rep. 1904, pp. 425-26. 8 Cf. Hegemann, pp. 62-64. 494 THE MEXICAN CURRENCY REFORM, 1903-08 standard. For, said they, this inhibition of imports pro- vides an effective protection to home industries. This reasoning placed in their hands nearly all the familiar weapons of the advocates of a high protective tariff, 1 the chief of which was the infant industry argument. It was claimed that the decline in silver was encouraging the building of numerous manufacturing establishments in Mexico, including cotton and woolen mills, and alcohol, paper, and cigar factories ; 2 and that it was causing American factories to establish branches in Mexico to supply the Mexican trade. The local traffic on Mexican railroads, moreover, was said to be benefiting at the ex- pense of the through traffic from the United States. "One of the leading directors of the Mexican Central Railroad," said Romero in 1896, "has informed me that about ten years ago the supplies imported to operate that road amounted to 60 per cent of all the material used, and that to save the loss on exchange, the Company has been following the system of manufacturing in Mexico all that they possibly can, and that the proportion of foreign sup- plies imported during the last year has been reduced now to 20 per cent, and that they have decided to use Mexican rails, as soon as they can be manufactured in Mexico. 3 1 Cf. Romero, pp. 596-600. 2 Cf. supra, pp. 47980. * Romero, p. 598. CHAPTER III COMMISSIONS INVESTIGATE THE SUBJECT OF CURRENCY REFORM FOR MEXICO Commissions on International Exchange. One of the first steps taken by Mexico in the direction of monetary reform was a move to obtain uniformity of action in certain matters on the part of silver standard countries. In this effort it secured the cooperation of China; and in January 1903 the two Governments submitted to the United States Government practically identical notes asking its coopera- tion in seeking a remedy for the evils arising from the ex- isting unstable exchange relations between gold standard countries and silver standard countries. The note * men- tioned sixteen silver standard countries whose total import trade in 1902 was $575,000,000, by far the larger part of which was with gold standard countries ; it showed how the declining price of silver put up barriers, analogous to tariff barriers in their effect, against that trade, to the detri- ment of silver countries and gold countries alike ; it referred to the interference of this decline in silver with foreign in- vestments in Mexico ; and pointed out the importance of silver and its by-products of gold, copper, and lead as mineral products in both Mexico and the United States. There was a disclaimer in the note of any intention of re- viving the question of bimetallism, or of bringing about any material changes in the currencies of gold standard countries. It was merely desired "that the governments of gold countries having dependencies where silver is used 1 Int. Exch. Com., Rep. 1903, pp. 38-47. 495 496 THE MEXICAN CURRENCY REFORM, 1903-08 and the governments of silver countries shall cooperate in formulating some plan for establishing a definite relationship between their gold and silver moneys, and shall take proper measures to maintain such relationship. " 1 The request was favorably received by the United States, and the appointment of an American commission was au- thorized by an Act of March 3, 1903. On April 21 Secre- tary Hay appointed as American Commissioners Hugh H. Hanna, Charles A. Conant, and Jeremiah W. Jenks. 2 The American Commission, together with the Mexican Com- mission, went to Europe and consulted with Commissions appointed by the Governments of Great Britain, Holland, Germany, and Russia. A two-volume report 3 was made by the Commission which contained many data of value to the Mexican Government in working out its plan of reform, and was also of use to other countries like the Philippines, Panama, and the Straits Settlements, which were at that time about to adopt a gold standard currency. The Mexi- can and American Commissions favored the gold-exchange standard for countries about to give up the silver standard, and upon the soundness of the Commission's general prop- osition in favor of the gold-exchange standard " there was universal agreement at every European capital where the subject was presented." 4 Except for Russia, all the coun- tries consulted favored the adoption of a relatively uniform ratio of about 3 2 to i in the currency systems to be estab- lished in the Orient by those countries and dependencies which were considering a change in their existing systems. The two Commissions did not succeed, however, in inducing 1 Int. Exch. Com., Rep. 1903, p. 41. 2 For letter of instructions to the American Commissioners, see ibid., pp. 46-47. 3 Commission on International Exchange, Stability of International Exchange, etc., 1903; and Report on the Introduction of the Gold-Ex- change Standard into China, the Philippine Islands, Panama, and other Silver-Using Countries, etc., 1904. 4 Int. Exch. Com., Rep. 1903, p. 33. CURRENCY COMMISSIONS 497 China to adopt a gold standard, nor did they succeed in inducing the various countries to buy their silver with such regularity as to bring about any appreciable results in permanently steadying the price of the white metal; although as to the wisdom of such a policy they reported there was agreement in each capital at which the subject was considered except in Paris. 1 Mexican Monetary Commission On February 4, 1903 President Diaz, through Finance Minister Limantour, appointed a Commission of 44 persons to investigate monetary conditions in Mexico ; and to re- port a plan of reform, if changes in the monetary system should be found to be desirable. 2 The Commission met on February 19 and organized for work. Pablo Macedo was elected President; Enrique Creel, Vice President; Louis G. Labastida, Secretary; and Jaime Gurza, Pro-secretary. Upon authorization by the Commission, President Macedo appointed four sub- commissions of ten members each "to study and report upon the four chief points of the questionnaire formulated by the Finance Minister,'' reserving until later the naming of a fifth subcommission, if needed, to take part in the deliberations of the other subcommissions, furnish them data, and integrate their work. 3 Each subcommission was free to organize its work as it saw fit. Any member was authorized to submit to the subcommissions or to the Commission his opinions or votes in writing, or to have them inserted in the report. The expression of individual opinion was encouraged by the Executive. Sessions were to be private, only such outsiders being permitted to at- tend as were invited to assist. 1 Ibid., p. 34. 2 Com. Mon. Mex., Actas, etc., pp. 1-4. 8 Ibid., pp. 5-6. 2K 498 THE MEXICAN CURRENCY REFORM, 1903-08 The work assigned to the four subcommissions respec- tively may be summarized as follows : First Subcommission. This sub commission was charged with the collection of detailed and reliable data concerning the importation of foreign commodities ; the exportation of Mexican commodities; the amount of foreign capital in- vested in Mexico, both temporarily and permanently; the amount of profits in interest, dividends, or other forms, which were annually remitted to foreign countries on the account of temporary or permanent foreign investments in Mexico; and the amount of the net annual balance against Mexico. 1 Second Subcommission. The work assigned to the second subcommission was concerned with the collection of in- formation relating to the mining industry in Mexico, with particular reference to silver mining. Among the sub- jects to be investigated were : mineral production of Mexico, including amounts and quality of metals produced, and their territorial distribution ; profits in mining enterprises, expenses of mining and refining, including an investigation of the number of laborers, their wages, and the cost of supplies, especially of supplies imported from gold standard countries ; and the advantages and disadvantages resulting to mining properties from the fall in the price of silver. Third Subcommission. The work assigned to the third subcommission is best summarized by the questions which it undertook to answer. They were : 2 1. What is the amount and character of the metallic money in circulation in Mexico ? 2. What is the direction of the monetary currents be- tween the different parts of Mexico, and what are the costs and customary methods of transporting money ? 3. Are the various kinds of metallic money, and the 1 Com. Mon. Mex., Actas, etc., pp. 17-18, 145-56. 2 Ibid., p. 122, CURRENCY COMMISSIONS 499 various denominations of bank notes which can be legally circulated, properly adjusted to the needs of the country ? 4. Is there any periodicity in the increase or decrease in the number of the principal classes of population in the Republic ? If so : (1) What are the causes of this periodicity ? (2) What are its principal effects upon : A. Bank discount ? B. Commerce? C. Agriculture? D. Industry ? E. Other transactions in general ? Fourth Subcommission. The program of the fourth subcommission was likewise outlined in the form of ques- tions. They were : 1 1. Has the rise in exchange protected and stimulated national production, and, if so, has this protection been beneficial equally to producers and consumers ? 2. What are the effects of the rise in exchange upon the bringing of foreign capital into Mexico ? 3. Is there a limit beyond which the continual decline in the gold price of silver or the rise in exchange will cease to benefit national production and come to have disastrous effects upon both producing and consuming classes? 4. What effects has the continual fluctuation in foreign exchange rates had upon all branches of public wealth, and especially upon commerce, the banks, and, in consequence, upon the money market, and in general upon all national in- terests? 5. Would it be possible to establish a more stable value relation between our monetary unit and the different mone- tary units of the foreign countries with which Mexico has commercial relations? The findings of the first, second, and third subcommissions need not be summarized here. They will be found in full 1 Ibid., pp. 67-112, 500 THE MEXICAN CURRENCY REFORM, 1903-08 in the Monetary Commissions's volume on Actas de las Juntas Generates, to which frequent reference has been made. Considering the limited time available for the subcom- missions ' work, and the extreme difficulty in a country like Mexico of collecting data of this character, the work was well done. The student of Mexican monetary problems is largely dependent for his economic facts upon the data gathered, organized, and corrected by these subcommis- sions. This material has already been extensively utilized in the present paper and is drawn upon liberally in the dis- cussion which follows. Conclusions of the Fourth Subcommission. From the standpoint of the study of the principles underlying the Mexican monetary reform the report of the fourth sub- commission is the most valuable. It covers 46 folio pages, 1 and its principal conclusions are summarized as follows : 1. That [during the period of rising exchange] national agriculture and cattle raising have progressed, increasing their production of articles of exportation and of home consumption. 2. That industries of every class have improved their condition, and new industries have been established ; and that prosperity has arisen not only for those who labor with raw materials of home production, but also for those who labor with raw materials of foreign production and with raw materials of home and foreign production combined. 3. That the industry of land transportation, although it has received increasing gross and net profits per mile, in terms of silver, has suffered a diminution in its net profits per mile in terms of gold. 4. That the production of the country's argentiferous mines has been increasing despite the effects which the advance in exchange rates would have been expected to have ; and that this advance has developed in an extraordi- nary manner the production of minerals containing gold, copper, and lead. 1 Com. Mon. Mex., Actas, etc., pp. 67-113. CURRENCY COMMISSIONS 501 5. That there has been an enormous increase in the prices of articles produced abroad, since the fall abroad in the gold prices of these articles has not been sufficient to counterbalance the results of the rise in exchange. 6. That rural and urban real estate has increased in price, partly by reason of the depreciation of the peso, partly by reason of the building of railroads, and partly by reason of the purchase of lands opened for cultivation. 7. That wages and salaries of the consuming classes have scarcely been affected, continuing with very slight ex- ceptions the same as they were before the decline in silver. The fourth subcommission, in view of the results ob- tained, concluded that, although it was clear that the rise in exchange had protected and stimulated national produc- tion, these benefits had been effected at the expense of the consuming classes. The producing classes of the country, it said, moved by sincere sentiment have applauded each new advance in foreign exchange rates, because under the protection of this advance they have obtained greater pros- perity. On the other hand, it said that "every advance in foreign exchange rates imposes an increasing burden upon the laboring classes, and, in general, upon all con- sumers who receive a salary or a daily wage." 1 Foreign capitalists who had invested in the country, the fourth subcommission found, had suffered considerable losses, although in terms of silver there were apparent gains. It declared its belief "that any measure that could be taken to change this con- dition of affairs and offer a guaranty of stability to foreign capitalists, would be extremely beneficial to the national interests, since nothing could contribute so much to the development of national wealth as an increasing investment of capital, and it is only from abroad that capital can come in abundance. 2 i Ibid., p. 88. a Ibid., p. 89. 502 THE MEXICAN CURRENCY REFORM, 1903-08 The subcommission expressed its strong conviction that in no case would national production permanently be bene- fited by a continual decline in the gold price of silver, and that there would always be a limit, "beyond which such a decline would turn into disaster for the producing and con- suming classes of the Republic such beneficial effects as the decline up to the present time has produced." : The belief was emphatically expressed that no one thing had caused greater disturbance and harm to the Republic than the continual fluctuation in foreign exchange rates ; 2 and the subcommission declared it to be its opinion "with- out a moment's hesitation" that Mexico should procure "the greatest possible stability in the exchange relation of its money and the money units of the foreign countries with which it cultivates commercial relations." 3 The Work of the Fifth Subcommission When the four subcommissions had made their reports, a fifth subcommission was created to devise definite recom- mendations for monetary reform and to plan ways and means for carrying them into execution. This fifth sub- commission consisted of the chairman of the Commission, the general secretary, and the chairmen and secretaries of the other four subcommissions. The vice president, Enrique C. Creel, and the pro-secretary attended the ses- sions of the fifth subcommission and took an active part in the discussions, thus making a de facto subcommis- sion of twelve members. 4 A plan of work was drawn up covering four broad subjects, and each subject was as- signed to a subcommittee of two or three members. The four subjects were stated in the form of questions, and each 1 Com. Mon. Mex., Actas, etc., p. 90. 2 Ibid., p. 93. 1 Ibid., p. 94. 4 Ibid., p. 158. CURRENCY COMMISSIONS 503 question was subdivided into a number of subsidiary questions. 1 Below are given the four main questions : 1. What is the monetary system whose adoption should be recommended to the Government? 2. What transitional measures should be adopted in order to put into force the system recommended? 3. What measures should be adopted in order to obtain stability in the international exchanges, upon the tentative assumption that the ratio to be adopted between gold and silver shall be 32 to i ? 4. Shall the adoption of special measures be rec6m- mended, as for example the abolition or reduction of taxes or other dues, in order to relieve not only the silver mines but export industries in general, of the burdens which might otherwise be imposed upon them by the monetary reform ? Upon all these questions but the third, with its various ramifications, there was substantial agreement. Upon the third question, however, which centered in the query whether or not a gold reserve fund should be established and used from the beginning, there was a sharp difference of opinion a difference which could not be reconciled by extended debates, and which finally found expression in a majority and a minority report. Leaving the subject of the reserve fund until later, we may here consider briefly the subcommission's recommendations, which later became the recommendations of the Monetary Commission, on the other important topics covered by the subcommission's deliberations. Recommends Abandonment of Silver Standard. There was only one dissenting vote 2 to the proposition that the Mexican mints should be closed to the free coinage of silver on private account. Favors a New Silver Peso and New Fractional Coins. Upon the question as to whether a new silver peso should 1 For the complete program of the fifth subcommission's labors, see ibid., pp. 158-59. 2 This was the vote of J. de Landero y Cos. See ibid., p. 187. 504 THE MEXICAN CURRENCY REFORM, 1903-08 be coined or the existing peso continued and put upon a gold basis, there appears to have been some discussion, but the opinion of the subcommission was strongly in favor of a new peso. Of course the continuance of the old peso would have been cheaper, and there was much sentiment in Mexico in its favor. As pointed out at the beginning of this paper, billions of these pesos had been coined, and they had carried the name of Mexico upon "an honest dollar" into the marts of nearly every section of the world. At this time, however, the Mexican peso was rapidly disappearing as a coin in foreign countries. 1 Its designs were not artistic, and the coins were easy to counterfeit. None the less it had been thought impracticable materially to alter them, since to do so would endanger the acceptability of the coins among orientals. Moreover, the Mexican peso circulating in Mexico in the future was to be a fiduciary coin circulating at a gold value substantially above its bullion value ; and if the old pesos were continued in circulation, it was thought that there would be grave danger that large quantities of them would be smuggled in from the Orient to take advantage of their monopoly value in Mexico. 2 Ac- cordingly the fifth subcommission recommended the tem- porary suspension of the coinage of Mexican pesos, and the prohibition of their importation into Mexico. As a substitute for the old peso in circulation it proposed the coinage of a new peso of the same fine silver content as the old one but with a millesimal fineness of .900 instead of .90278. Fractional silver coins of the denominations of 50 cents, 20 cents, and 10 cents, and suitable minor coins of 5 cents and i cent were recommended. These fractional silver coins were to be .800 fine and all were to weigh 25 grams gross to the peso. They were, therefore, unlike the old fractional 1 See Andrew, The End of the Mexican Dollar, in Quart. Journ. Econ., XVIII, 1904, pp. 321-56. 2 Cf. Com. Mon. Mex., Actas, etc., pp. 161-62. CURRENCY COMMISSIONS 505 silver coins, to be of lighter proportionate weights than the peso and of a lower millesimal fineness. Upon this basis a peso in fractional coins would contain approximately 18 per cent less pure silver than the peso piece a good in- surance margin for the fractional coins in case a rise in the price of silver should threaten the peso pieces with the melting pot. 1 Favors Indian Plan for Attainment of Gold Standard. As the fundamental basis for the new monetary system the fifth subcommission recommended a fixed parity between gold and silver, the value of the gold unit to be based upon the average gold price of the Mexican peso in foreign markets during the preceding ten years, with an agio not to exceed ten per cent. 2 It recommended that the gold coins when minted should be .goo fine, and that an effort should be made to assimilate the unit with some important foreign monetary unit, preferably the American dollar a recommendation which meant that the monetary unit should be made as nearly as practicable the equivalent of 50 cents United States gold. Both gold and silver pesos were to be unlimited legal tender, while fractional silver coins were henceforth to be legal tender only in limited amounts. 3 The majority of the fifth subcommission declared that there were many reasons why the Republic should not go at once to the gold basis with gold coin in circulation. The two chief ones were: (i) Although Mexico produced 21.9 millions kilograms of gold during the fiscal year 1903, all of that production had been exported, and therefore, in order to get gold for monetary circulation, it would be neces- sary for the Government to buy it in the open market, and this would impose a heavy financial sacrifice upon the country. (2) Mexico, being one of the largest silver- 1 Cf. infra, pp. 538-42. 2 Com. Mon. Mex., Actas, etc., p. 201. 3 Ibid., p. 202. 506 THE MEXICAN CURRENCY REFORM, 1903-08 producing countries in the world, was interested in the maintenance of the value of the white metal, and for her to adopt outright the gold standard with gold coins in circulation would be to accentuate the decline in the price of silver ; first, because of the moral effect it would produce upon the weak and highly sensitive silver market ; and second, because substantial sums of silver would have to be withdrawn from circulation in Mexico within a short time, and the country's monetary demand for silver would be reduced in the future. 1 Throughout the transitional period no gold was to be coined. Although there was some difference of opinion upon this subject, 2 the majority reasoned that, if free coinage of gold were permitted, either gold would be brought to the mint for coinage or it would not ; in the latter case, the privilege would be of no account ; in the former, the introduction of new gold coins into circulation would inter- fere with the relative contraction of the currency which was looked upon as the sine qua non for raising the value of the silver pesos to the new gold par. 3 The Question of Justice between Debtor and Creditor. The question of justice in the settlement of preexisting contracts between debtor and creditor, after the new unit of value should be substituted for the old, was considered by the fifth subcommission in connection with the proposal to redeem the old currency in the new at a discount. On this subject the majority said : " The point of view of justice in the relations between debtors and creditors is also important. It is clear that debtors in paying old debts at par in the new peso which has a 1 Com. Mon. Mex., Actas, etc., p. 188. 2 Cf. opinion of Joaquin D. Casasus. Ibid., pp. 173 and 181. Mr. Casasus's dissenting opinions are very able. He was chairman of the fourth subcom- mission and a member of the fifth subcommission. His writings and the report of the fourth subcommission have been republished in both Spanish and English in a volume entitled La Reforma Monetaria en Mexico. 8 Com. Mon. Mex., Actas, etc., p. 197. CURRENCY COMMISSIONS 507 greater value in gold for commodities in international trade will be giving a coin of better quality, and therefore one held in greater esteem, than the old one, and that as a result creditors pro tanto will be benefited. It must not be for- gotten, however, that for the great majority of debtors and creditors, the better quality of the new coin will be, so to speak, neither tangible nor appreciable, since they have nothing to do directly either with the exchanges nor with international trade. They would, therefore, understand with much difficulty, if they understood at all, the reason for the discount on the old coins ; and in the meantime credi- tors (and who is not a creditor at least for a small salary or a petty wage?) would complain of an injustice irritating be- cause inexplainable. . . . " It will not be overlooked in truth by the enlightened and cultured part of the nation, that in time there will result a reduction in the cost of living ; . . . but at first there will be no such reduction, if one may judge by the universal experience of other countries, in salaries or wages a situation which incidentally will benefit the disinherited classes. Moreover, the reduction, coming as it will as the result of competition and not of impoverishment, will come slowly, and under conditions which will not be disturbing to any one, since the old debts will have been slowly liquidated. 1 In the interpretation of this recommendation of "a let alone policy" as regards existing contracts, and of the ultra optimistic reasoning by which it was supported, the reader will observe that such a policy was more easily justified in Mexico than it was in the Straits Settlements currency reform, 2 or than it would have been in that of the Philippine Islands. 3 A reference to the chart (page 535) will show that in the fall of 1903, when the Mexican Monetary Commis- sion was deliberating, the bullion value of the peso rose to a maximum of over 49 cents (United States currency) ; so that the margin between the peso's "natural value" 1 Ibid, p. 199. a Cf. supra, pp. 433~39- 8 Cf. supra, p. 339. 508 THE MEXICAN CURRENCY REFORM, 1903-08 shortly before the reform was expected to be inaugurated and the gold value to which it was ultimately to be raised by relative contraction was a very small one. The small- ness of this margin, the length of time which it was ex- pected would be required to raise the peso to its gold par, and the wide fluctuations in the gold value of the peso to which the country had long been accustomed, coupled with the reasons above cited by the fifth subcommission, appear to be sufficient justification for the failure to recommend the adoption of any plan to secure greater justice for the debtor by authorizing settlements in the new currency according to some plan of discounts based upon what the value of the old peso probably would have been had the currency reform not been inaugurated. Other Transitional Matters. According to the fifth sub- commission's recommendations, the National Government was to take reasonable action "to obviate, or at least to mitigate, the temporary loss or harm that may accrue to some of the interests connected with silver mining and the industries that produce articles for exportation, as a conse- quence of the stabilization of exchange." 1 In order to expedite the recoinage, and to free the Govern- ment from the necessity of buying silver with which to start coining the new money, it was recommended that the banks be authorized to substitute in their vaults, for a part of their legal metallic reserve, special exchange certificates to be issued by the Government, thereby releasing for re- coinage a continuing fund represented by the amount of the certificates. 2 The Question of a Gold Reserve Upon the essentials of the above recommendations, and some minor ones not mentioned here which can best be 1 Com. Mon. Mex., Actas, etc., p. 203. 2 Ibid., p. 198. A similar recommendation was made by the minority. Ibid., pp. 186-87. CURRENCY COMMISSIONS 509 considered in connection with the subsequent legislation, the members of the fifth subcommission were nearly unani- mous. We now come to the question of the immediate establishment and use of a substantial gold reserve, the crucial question upon which, with its related questions, the opinion of the Commissioners was strongly divided. Into the details of this long and ably-conducted controversy we cannot go. It will be sufficient to state the recom- mendations of the majority and those upon which there was widest agreement among the minority, and to give a brief summary of the principal reasons advanced in sup- port of each plan. The majority (i.e., 7 members) of the fifth subcommission recommended : that as soon as the Government should have in readiness enough of the new coins to begin putting them in circulation, it should direct that they be given out in exchange for such of the old coins as were legally circulat- ing in the country. The exchange was to be effected at par at as large a number of places as possible so as to ac- complish the conversion in the shortest possible time and to minimize public inconvenience. 1 The Government was to put into circulation only such an amount of the new pesos as should be necessary for the redemption of the old money ; and care was to be taken to prevent any excessive issue of fractional money. " When the exchange shall have been effected, the Govern- ment shall not place in circulation any additional silver pesos, without receiving in Mexico or abroad the equivalent in gold bars or gold coin at the established ratio, plus an additional amount sufficient to cover transportation, in- surance, and other expenses, if the delivery is made outside of the Republic." ! 1 Redemption at a discount, it was reasoned, would involve the Govern- ment in a moral obligation to redeem the new coins in gold an obligation which the majority did not think should be assumed at that time. Cf . ibid., p. 199. 2 Ibid., p. 202. 510 THE MEXICAN CURRENCY REFORM, 1903-08 While recommending that the Government begin to ac- cumulate a reserve out of surpluses and profits accruing from the minting of the new coins, the majority were op- posed to the Government's incurring any obligation what- ever for the redemption of the new money in gold. Their plan was the Indian plan of relative contraction, whereby they hoped to raise the gold value of the peso from bullion value to the new gold par; i.e., from an equivalent of 43 -J cents United States currency on December u, 1903, when their report was dated, to 50 cents, or an increase of 15^ per cent. "In principle/' they said, "no attempt ought to be made to bring about brusquely and without a transition period, by direct action of the Government, the legal parity be- tween gold and the silver peso. Private interests, which of necessity will be affected by the new monetary system, though temporarily, should be given an opportunity to adjust themselves to it gradually and spontaneously." 1 On this vital point of the disagreement, however, the majority wavered, for they declared : "Notwithstanding what has just been said, if the mere closing of the mints, and the other general measures which the Government may adopt in the direction above outlined, shall prove inadequate, and if the attainment of the legal parity between the gold and the silver peso shall be delayed longer than the Government judges prudent under the cir- cumstances : then the surest means for bringing about that parity will consist in increasing the amounts paid into the reserve fund by a sum sufficient to influence the interna- tional exchanges in the home .market. . . ." 2 This influence was to be exercised through the machinery of a gold-exchange standard. Referring to the above con- tingency, the majority said : 1 Com. Mon. Mex., Actas, etc., p. 203. J Ibid., p. 203. CURRENCY COMMISSIONS 511 "The object of the reserve fund is the sale, when deemed advisable, of gold drafts on foreign countries to satisfy the needs of international exchange, at rates that will im- prove the rates in the Republic's home market, with the constant aim of establishing gradually the legal parity between gold and silver pesos, or of maintaining this parity when once it has been established. " 1 The foreign drafts were to be paid for cash down in silver pesos, which were to be placed in the reserve fund and not to be paid out again except against gold deposited to the credit of the reserve fund either at home or abroad. The Minority Report. The report of the minority of the fifth subcommission favoring the establishment of a gold reserve fund was signed by four members, 2 and to their plan a fifth* member subscribed with the qualification that, though opposed to the monetary reform, he was in accord with the general features of the minority project, if the reform were to be made. Of the minority plan the chief features were as follows : A reserve fund amounting to 30 per cent of the sum of the new coins which were to be issued (i.e., a reserve of about P 40,000,000) was to be established, 3 part of which was to be kept in Mexico and part abroad. The reserve fund was to be accumulated gradually during the period of transition, which in no case was to exceed three years. It was to be a trust fund, separate from other government funds, and ad- ministered by a special commission. During the transition period the reserve was to be used to aid the gradual raising 1 Ibid., p. 203. 2 Ibid., pp. 182-87. 8 This reserve was to be obtained from four sources : (i) Extraordinary sources, either the nation's treasury reserves or the proceeds of a loan of a transitory nature ; (2) Seigniorage profits on the new coinage ; (3) Interest received from deposits in banks at home and abroad ; (4) Three per cent of the import duties which ought to be paid in gold, at the legal parity, this sum to be utilized for the amortization of the debt contracted, if it should become necessary to have recourse to a loan for the creation of the reserve fund. Ibid., p. 186. 512 THE MEXICAN CURRENCY REFORM, 1903-08 of the gold value of the peso by the sale of drafts on that part of the fund located in foreign countries, until exchange rates on New York and other foreign places should reach the legal parity plus 2 per cent; thereafter the fund was to be used to maintain stable international exchange rates at this level through the mechanism of the gold-exchange standard. 1 Arguments Advanced by Majority. In support of their "let alone" plan of relative contraction without the im- mediate use of a reserve fund, the majority offered the following line of argument : 2 The closing of the mints to the free coinage of silver and also of gold would place a positive limitation upon the currency supply. "Following this principle of limiting the quantity of money, a principle which in our judgment is demonstrated by the experience of all nations, and established by the teachings of economists, it is possible to disassociate the value of silver coins from their mere bullion value, and even to raise them, in comparison with gold, to the level of value established by law; provided only that the quantity of money in circulation be proportionate to the demand, or, in other words, that the quantity of money be not excessive, in relation to the needs which it is destined to satisfy. But what are these needs in the case of a given nation or people ? We believe that theoretically they are almost impossible to determine, since they depend upon causes complex and variable beyond measure, such as the number and character of the transactions into which money enters, the coefficient of rapidity of monetary circulation, which in a large degree depends upon the greater or less extent to which credit instruments in their manifold forms are employed, the degree of wealth and enlightenment of the mercantile community and of the people in general, and even the inclinations and preferences of people which are often unknown and for which even when known, it is not easy always to assign a satisfactory and rational explana- 1 Com. Mon. Mex., Actas, etc., p. 186. 2 Ibid., pp. 187-201. CURRENCY COMMISSIONS 513 tion. Experience therefore seems to be the only norm to follow in so delicate a matter ; and this is especially true in the case of Mexico, since we lack information concerning the most elementary facts of the problem." 1 The conclusion was that the only safe course to follow at the beginning was to close the mints and see what hap- pened, shaping future action to conditions as they should develop. It was admitted that a reserve fund would be the most efficacious means that could be adopted to secure legal parity with promptness; but this very promptness was declared to be the greatest drawback of the plan be- cause of the shock it would give to business, especially the silver industry and the export trade. Time was needed to make possible a gradual adjustment to the new conditions, and this would be given only by the slower plan of relative contraction. The suggestion of the minority, that the reserve might be used to bring about a gradual rise in the value of the peso with a certain degree of prearranged regularity, 2 was characterized as very dangerous, since it would place either in the hands of the government authorities or in a special body appointed by them the absolute control of the exchange market, and would lead to ruinous specula- tion in foreign exchange for a rise in the value of the peso. 3 It was argued further that the establishment of such a reserve fund would increase the public debt and be un- popular ; also that if a reserve should be established and, as a result of a strongly unfavorable trade balance, its amount should prove inadequate, or, of equal importance, if capi- talists should fear that it would prove inadequate, there would result a lack of confidence in the reform which 1 Ibid., p. 190. 2 Cf. plan adopted in England in 1819 on the recommendation of Ricardo for gradually bringing Bank of England notes back to par. A. Andreads, History of the Bank of England, p. 241 ; also A. M. Lindsay, Ricardos Ex- change Remedy, pp. 5-8. * Cf. experience of the Straits Settlements in 1905-06, supra, pp. 411-17. at 514 THE MEXICAN CURRENCY REFORM, 1903-08 would drive capital out of the country, and might cause the whole reform project to end in disaster. None the less, as we have seen, the majority wavered, and to be on the safe side recommended that the legislative measures to be passed for the execution of the reform should include the giving of authority to the Executive to create a gold reserve fund, should subsequent experience indicate that such a course was desirable. This recommendation the majority considered merely "a prudent course, like that of a commanding general, who considering victory sure by only using a portion of his forces, should decide not to bring all of his army into action, but rather to hold in reserve a portion of it, possibly the best portion, in order to be ready for unexpected emergen- cies, not arrogantly trusting that these emergencies would not rise, simply because he could not foresee them." 1 Arguments Advanced by Minority. The minority believed the plan of the majority to be dangerous, weak, and vacillat- ing. While they did not doubt that the value of the peso could ultimately be raised by relative contraction to the legal gold par, they believed that the process would be a long and economically painful one, as had been the ex- perience of India under the same plan between 1893 an d iSgS, 2 and they believed that the vacillation of the majority in the matter of the reserve fund would weaken public con- fidence in the reform plan, keep foreign capital from coming into the country, and in other ways interfere with the suc- cessful execution of the plan. Among the more important specific arguments advanced by the minority or by in- dividuals signing the minority report the following may briefly be cited. In Mexico any considerable relative contraction of the currency would be accomplished very slowly, and even 1 Com. Mon. Mex., Actas, etc., p. 196. 2 Cf. supra, pp. 35-69. CURRENCY COMMISSIONS 515 when the legal parity was once attained, there would be for a long time a danger that the gold value of the peso would again decline under the influence of recurring strongly unfavorable trade balances. The minority report was dated December 5, 1903. A reference to the chart (on page 535) will show that for that month the bullion value of the Mexican peso varied between 45.5 cents and 43.1 cents United States currency, the range for November having been 47.6 cents to 45.2 cents, and that for October 49.1 cents to 47.3 cents. The tendency therefore appeared to be downward. To raise such a peso solely by relative contraction to a 5o-cent level, and to establish it there securely, appeared to the minority a slow process. The annual coinage of silver in Mexico was large, varying from a minimum of PiS.i millions to a maximum of P3O.2 millions during the twenty years 1882-83 to 1901-02, the average being P24.2 millions. But nearly all of this coin was exported. In fact for three years of the period the exports exceeded the coinage, and for the twenty-year period the annual exports varied from Pio.9 millions to P 27.2 millions, the average being P 19.6 millions. This left an annual average net increase in the coin circulation of only P4.6 millions, 1 representing approximately 3^ per cent of the estimated total coin in circulation (i.e., of P 130 millions). 2 If closing the mints lessened the relative monetary supply only by this small amount each year, how long, the minority asked, would it require to raise the 1 The majority claimed that this figure (or more correctly the P 5 millions cited by the minority as the average annual increase for the past 25 years) was an understatement, since it neglected the substantial recent annual addi- tions to the net bank-note circulation, which had been during the preceding five years, 1898-1903, respectively, in millions of pesos (round numbers), n.8, 14.6, 15.0, 31.5, and 28.9. Cf. Com. Mon. Mex., Actas, etc., p. 194; also Com. Mon. Mex., Estadlstica Bancaria, in which detailed figures for bank-note circulation by months since 1882 will be found. But cf. infra, pp. 526-30. 2 Cf. memorandum of Joaquin D. Casasus, in Com. Mon. Mex., Actas, etc., p. 178. 51 6 THE MEXICAN CURRENCY REFORM, 1903-08 peso to the new gold par solely by rarefication. But this was only part of the story. Against rarefication three forces would continually be working: (i) a tendency for an increasing rate of monetary turnover ; (2) an ever in- creasing use of credit instruments as media of exchange ; and (3) the inhibiting effects upon business, and there- fore upon the growth of the demand for exchange media, resulting from the depressing influence of currency contrac- tion. Among the positive evils of such a long drawn out tran- sition period, the advocates of a gold reserve, having ref- erence to the experience of India, mentioned high and rising interest rates, slowly falling prices, slowly increasing burdens upon the export trade and upon silver mining, un- certainty in all lines of trade, lack of confidence in the Government, and the discouragement of the investment of foreign capital in Mexico. 1 They also laid emphasis upon the fact that because of the large amount of foreign capital invested in the Republic the balance of trade was normally strongly against the country, and that, with a fiduciary currency and no gold reserve, the country would be deprived of a means of settling unfavorable trade balances, and of elasticity in its internal circulation. With a gold fund, gold could be exported to settle trade balances, and this would contract the circulation by the amount of silver presented for the gold to be exported, thus making the adjustment an automatic one and maintaining an equilibrium in the currency supply. 2 A careful and far-sighted administration of the reserve, they said, would correct the irregularities of the strong seasonal swings which prevailed in Mexican exchange, and which would result in serious evils under the rigid system proposed by the majority. 3 1 Com. Mon. Mex., Actas, etc., pp. 182-87. 2 Ibid., p. 184. 3 Cf. G. Raigosa's memorandum, ibid., p. 170, CURRENCY COMMISSIONS 517 Mexico's financial condition was sound, and it was claimed she could well afford the expense of establishing a gold reserve at once, especially since a substantial part of the necessary funds would in a short time be obtained from seigniorage profits, interest on that part of the re- serve fund held abroad, and exchange premiums. To the argument of the majority that the use of a reserve fund to expedite the attainment of the legal parity would make the transition too sudden and cause harmful shocks to business, it was replied that, if properly managed, the various steps in raising the gold equivalent of the peso through the sale of drafts at declining rates on the gold reserve fund would not be great enough to cause serious disturbance in a country so accustomed to pronounced ex- change fluctuations as was Mexico. Furthermore, under the plan of the majority, as well as under that of the minor- ity, there would exist a tendency to speculate in exchange for a rise in the gold value of the peso, so that this argu- ment of threatened speculation was a sword that cut both ways. Confidence both at home and abroad in the success of the reform, the minority claimed, would be strengthened greatly by positive action at the beginning in the direction of building up and using an adequate gold reserve. On this subject they said, having reference to the wavering attitude of the majority : "The success of every currency reform necessarily depends upon the confidence which the public place in the new currency and in the certitude which it may entertain con- cerning the stability of its value. One cannot understand how these conditions could be fulfilled by the measures which the majority of the fifth subcommission have seen fit to recommend to the Government, since they hint at the possibility that the legal parity between gold and silver will not be secured by the plan they recommend, and outline subsidiary means that ought to be adopted in such a con- 518 THE MEXICAN CURRENCY REFORM, 1903-08 tingency. The majority of the fifth subcommission de- clares that in case the establishment of the legal parity between gold and silver is much delayed, the surest method of obtaining that parity would consist in adding to the gold reserve fund a sum sufficient to influence the home market in the direction of giving the desired stability to the rates of exchange. Therefore the majority un- doubtedly fear that the mere suspension of the free coin- age of silver will not suffice for the object proposed. Now does this declaration not move in the direction of destroy- ing in advance the confidence with which the public ought to be imbued in the success of the monetary reform about to be undertaken?" l In the judgment of the writer, the logic of the argument was in favor of the minority ; so likewise was the teaching of the Indian experience from 1893 to igo8. 2 Of like purport later, under similar circumstances, came the les- sons of the Straits Settlements reform of 1 905-06. 3 But the logic of unexpected developments in the silver market was with the majority. They builded better than they knew. How this happened will appear in the course of the narrative of events to which we shall now return. The Monetary Commission's Report On February n, 1904 the report of the majority of the fifth subcommission was formally approved as the report of the Commission. 4 Upon that date the Commission's full report was made to Finance Minister Limantour, and the Commission, having completed its labors after almost a year of work, was dissolved. 5 1 Com. Mon. Mex., Actas, etc., p. 184. 2 Cf . supra, pp. 35-69. 3 Cf. supra, pp. 410-19. 4 Com. Mon. Mex., Actas, etc., p. 235. 6 Ibid., pp. 236-37. CHAPTER IV A GOLD-STANDARD PLAN ADOPTED TFE Government took the report of the Commission under advisement, but no definite action was taken until May 21, 1904, when a preliminary decree was issued under authority of the budget law of that date imposing an import duty of P 10 per kilogram on Mexican silver pesos when imported in quantities greater than five pesos. This duty, which amounted to about 27 per cent, was not to go into effect until January i. On November 16, 1904 Finance Minister Limantour submitted to the Mexican Congress a bill embodying a plan of currency reform modeled closely upon that recommended by the Monetary Commission, 1 and in the preamble to the bill the Minister gave an admirable review of the entire currency problem in Mexico, and an explanation of the reasons underlying the various provisions of the bill. 2 Inasmuch as this bill, which was very brief, laid the foundations upon which the entire currency reform was constructed, it will be well to give it substantially in full. 3 ART. i. Authority is given to the Executive of the Union to reform the monetary laws of the Republic, deter- mining the kinds of money which shall legally circulate, the value, weight, fineness, and other characteristics ; including 1 El Economista Mexicano, Nov. 19 and 26, 1904. 2 The preamble and bill are given in full, in Secretario de Estado y del Despacho de Hacienda y Credito Publico, Seccion Cuarta, Leyes y Dispo- siciones Relativas a la Reforma Monetaria. This document will be cited hereafter as Leyes y Dispos., etc. An English translation is given in Int, Exch. Com., Rep. 1904, pp. 423-50. 'Leyes y Dispos., etc. pp. 31-32. 520 THE MEXICAN CURRENCY REFORM, 1903-08 the fixing of the limits of tolerance for their coinage and their circulation, and in general to make such regulations as he may judge necessary to perfect the country's mone- tary system, and to adapt it to the economic needs of the Republic. In the exercise of these powers the Executive will be subject to the following rules : A. The present peso containing 24.4391 grams of pure silver [corrected in the subsequent Act to 24.4388], and 2.6342 grams of copper, shall be retained and shall be un- limited legal tender. B. This peso shall be given a value equivalent to 75 centigrams of pure gold [i.e., 49.85 cents United States currency]. C. Fractional silver coins shall contain smaller quanti- ties of silver in proportion to their value than the peso. [Formerly, as we have seen (pages 504-505), their fine silver contents as compared with that of the peso were almost exactly proportionate to their respective values.] D. Fractional silver coins shall not be legal tender for sums larger than P 20 in one payment, and bronze coins in sums larger than one peso ; but the Government will desig- nate offices where the public may freely exchange for silver pesos fractional coins of silver or bronze when presented in sums of P 100 or multiples thereof. E. The mints shall not be obliged to coin precious metals presented to them, but the issuance of coins of all classes shall be reserved to the Executive ; and it may exercise this power in accordance with law and on such occasions and in such quantities as it may prescribe. F., G., H., and /. [These sections give authority to the Executive to reduce or otherwise modify the taxes, fees, etc. imposed by the Government on mining and on articles used in mining.] /. To organize offices, which, without loss to the public treasury, may advance money upon the security of silver bars, and to apportion to those interested facilities for the sale of said bars under the best conditions possible, and, with this end in view, to make suitable arrangements both in the Republic and abroad. A GOLD-STANDARD PLAN ADOPTED 521 K. To modify civil and mercantile legislation in matters concerning loans and the payment of money. L. To modify the precepts of the banking law, which are directly or indirectly connected with the circulation of metallic money, or which affect instruments of credit or exchange operations. LL. To create a committee whose functions shall be to regulate the monetary circulation, and to obtain, so far as possible, stability in the rates of foreign exchange ; and with this object the Executive shall have authority to confer upon this committee such powers as it considers suitable, and, at the proper time, to entrust it with the management of a special fund, which shall be established by the Executive. M. To issue all suitable regulations, such as are in- tended to repress and punish misdemeanors and crimes connected with the subject matter of the law ; to organize the services and the offices which may be necessary, and to defray the expenses incurred for any of the aforementioned purposes. To this end the Executive may discontinue or modify the present distribution of offices, their personnel, and the appropriations and disbursements authorized by the budget of expenditures. These were exceedingly broad powers for the legislature to confer upon the Executive much broader in fact than would be thought of in an Anglo-Saxon country but in Mexico in those days of President Diaz the Executive absolutely dominated the Legislature. We need not be surprised to learn that the plan proposed by the Finance Minister was adopted unanimously and without discussion by both houses of the Mexican Congress, 1 becoming law December 9, 1 904.2 The Existing Peso to be Retained This currency reform Act, or, more correctly, currency reform enabling Act, in the few positive provisions it 1 Hegemann, p. 147. 2 The text of the law is given in Leyes y Dispos., etc., pp. 39-41. 522 THE MEXICAN CURRENCY REFORM, 1903-08 contained, and in its implications, conformed with the recommendations of the Monetary Commission; the only important divergence being the provision of sub- section A. of Article i, providing for the retention in circulation of the existing Mexican peso, 1 whereas the Commission had recommended the coinage of a distinc- tively new peso. In support of his recommendations for the continuance of the old peso, Finance Minister Limantour called attention to the long-continued use of the existing peso in Mexico, and the urgency of respecting the traditional custom of the people. The desire to avoid any cause for alarm or distrust, he said, had caused the Executive to propose the retention of the present Mexican peso without any alteration, at least for some time, while the workings of the new system were being observed. He could see no reason for adopting the Commission's recommendation for a peso of the same weight but of a new design, involving the expense of the recoinage of the entire peso circulation of the country, ex- cept the desire to prevent the fraudulent reimportation of Mexican pesos from abroad. The danger of such fraudulent importation he believed to be very slight for two reasons. 2 The first was "the constant absorption of silver, and partic- ularly of Mexican pesos, by the countries of Eastern Asia. None of the white metal which penetrates into the interior of those regions ever comes forth again. It appears as if it were lost or destroyed, or modified in such a manner as to blot out all traces of itself." The second reason was the fact that the profit on smuggling would be too small to justify the expense and risks, the difficulty of reimpor- tation being enhanced by the fact that in the East many of these coins had been so "chopped" and otherwise marked by local banking establishments that their contraband 1 Even this provision was optional, since the Executive was authorized by the law to substitute a new peso for the old one if he should think desirable. 2 Leyes y Dispos., etc., pp. 22-23. A GOLD-STANDARD PLAN ADOPTED 523 character would quickly be revealed, were attempts made to smuggle them into the country. Reception of the Proposed Enabling Act The introduction in the legislature, November 16, 1904, of the bill which later became the enabling Act was im- mediately followed by a substantial rise in the gold value of the peso as measured by New York exchange rates (see chart on page 535). For the week ending November 12, 1904 the average rate on New York for bank drafts was 215 (i.e., P2i5 for $100, representing a value of $0.4652 to P i) ; it dropped to 2o8| (i.e., $0.4796 to P i) for the week ending November 26. Part of this advance in the gold value of the peso was doubtless due to the rise in silver at that time re- sulting from the Russo-Japanese war ; but it is noteworthy that the decline in the exchange rates began before the advance in silver, 1 and that the margin between the ex- change value of the peso and the bullion value was an in- creasing one. In addition to the favorable movement of exchange there was other evidence that the announcement of the plan in- 1 The situation is shown in the following table : DATE, 1904 BULLION VALUE OF PESO U. S. CURRENCY EXCHANGE ON N. Y. AVERAGE Week Ending High Low Average Rate Value of $100 Value of Peso Cts. Cts. Cts. P Cts. Nov. 5 46.41 46.08 46.34 215.62 46.38 Nov. 12 46.29 46.08 46.18 215.00 46.52 Nov. 19 46.29 46.18 46.27 209.00 47.85 Nov. 26 46.94 46.29 46.68 204.25 48.92 Dec. 3 47.27 46.61 46.99 203-75 49-09 Figures for bullion value are based upon daily quotations for London price of standard silver, prompt delivery. Figures for exchange on New York were furnished the writer by the National Bank of Mexico. 524 THE MEXICAN CURRENCY REFORM, 1903-08 spired the business community with confidence. The prices of Mexican securities the latter half of November tended upwards. 1 The London Economist said in its issue of No- vember 19, " There are grounds for believing that Mexico is getting into a vigorous stride of prosperity, which bids fair to overstep all earlier bursts of advance that the country has experienced in years gone by." 2 Reference was made in the article from which this quotation is taken to the prospects of the new monetary system being at once adopted, and the article concluded with a statement that "It is significant that the Mexico 3 per cent internal bonds, the interest upon which is payable in silver, have risen recently from about 24^ to 31^, the movement being based upon advanced speculation as to the adoption of a gold standard." El Economista Mexicano in its issue of November 26, 1904 quoted from a railroad authority writing in the Mexican Herald "the opinion that the monetary reform would notably stimulate the development of the railroad business in Mexico," 3 and giving as one reason the fact that the railroads had suffered greatly in the past because their incomes were in silver and a large part of their expenses were in money of the United States. Promulgation by the Executive oj the New Currency System The enabling Act was passed December 9, 1904. A series of executive decrees issued under its authority the latter part of March 1905 promulgated definitely the new currency system. 4 The most important of these decrees was the first of two decrees dated March 25, 1905. So closely did the decrees follow the recommendations of the Monetary Commission already discussed, that it is un- 1 Cf. figures cited by Hegemann, p. 147. * Page 1858. *Page 170. 4 These decrees and all others concerning the currency reform down to July 1906 are published in Leyes y Dispos., etc. A GOLD-STANDARD PLAN ADOPTED 525 necessary to review their provisions in any detail. Their chief points, however, may briefly be summarized as follows. They called for the raising of the peso by relative con- traction of the currency to a value equivalent to that of 75 centigrams of pure gold, and for the ultimate maintenance of the fiduciary circulation at a fixed par with gold by means of the principle of the gold-exchange standard. The existing Mexican peso was to be continued in circulation as unlimited legal tender money, but its free coinage for circulation in Mexico was to be discontinued after April 16, 1905.* To the Executive alone was given the privilege of having money coined. This meant that the privilege of free coinage was denied not only to silver, but for the time being also to gold. The new gold coins were to be .900 fine, issued in denomina- tions of ?5 and Pio, and to be unlimited legal tender. Unless otherwise ordered the coinage of gold money was to be limited to the quantity necessary to redeem the gold money of the old system which remained in legal circula- tion July i, IQ06. 2 From the date on which the law should go into effect (i.e., May i, 1905), and except in case of re- coinage, new silver money was to be coined only in exchange for gold coins or bars at the legal rate of 75 centigrams of pure gold to the peso, and the gold so received was to be used to purchase silver bars from which to coin the neces- sary silver pieces, until the amount desired should be pro- vided. 3 The existing subsidiary coins were to be withdrawn from circulation, and for them were to be substituted new subsidiary coins of lighter weights (i.e., 385.8 grains gross, to the peso instead of 417.8), and of lower millesimal fineness (i.e., .800 instead of .9028). Subsidiary coins were not to be issued except for the purpose of recoinage or in ex- change for gold at the legal rate. The Executive was 1 Ibid., pp. 48 and 53. 2 The amount of gold in the banks and public treasuries of Mexico at the end of 1904 as reported by the Director of the U. S. Mint in his Report for 1905 (p. 38) was but $8600. 3 Leyes y Dispos., etc., pp. 48-49. 526 THE MEXICAN CURRENCY REFORM, 1903-08 authorized to issue coins of nickel and bronze, but there was a strict limitation upon the amount. 1 The decree pro- hibited under heavy penalties "the employment as con- ventional symbols, in substitution for legal money, of counters, tallies, small plates, or other objects of any character whatever." 2 Restrictions Placed upon the Issue of Bank Notes The above-mentioned rigid limitations placed upon the amounts of money that could be coined, and the prohibition on the use of money substitutes, were of course motivated by a desire to prevent any increase in the circulating medium which would interfere with the operation of the plan of raising the value of the peso by a relative contraction of the currency supply. One difficulty that confronted the authorities in this connection was the danger that the de- sired rarefication of the currency would be prevented, or at least hindered, by increases in the issue of bank notes. The law of March 19, 1897 3 prohibited banks of issue from issuing bank notes in excess of three times their paid-up capital, the legal minimum capital at that time being P5oo,ooo. 4 It also provided that the note issue, together with the deposits 6 payable on demand or at not more than three days' notice, should not exceed "twice the holdings of the bank in cash and gold and silver bullion." The notes could not be issued in denominations less than P 5 and were not legal tender. They were redeemable on demand at the 1 Leyes y Dispos., etc., p. 49. 2 Ibid., p. 51. 3 For copy of law, see Charles A. Conant, The Banking System of Mexico, pp. 172-213. 4 A discussion of the limitations placed upon the issue of bank notes in Mexico will be found in Jean Favre, Les Banques au Mexique, pp. 39-42. 5 The word deposit here was given a narrow meaning which excluded current accounts arising from loans the largest part of the commercial deposits, using the word in the sense customary in the United States. Cf. law, chap. 2, arts. 16 and 17. A GOLD-STANDARD PLAN ADOPTED 527 head office of the issuing bank, but each branch was required only to redeem its own notes. Charters of banks of issue in no case could run beyond 30 years. Important special privileges, chiefly consisting of exemptions from taxation of certain kinds, 1 were conferred upon banks chartered under the law of 1897. The bank-note circulation of Mexico had grown very rapidly in the years immediately preceding the currency reform. At the end of January 1890 there were in the Republic five banks of issue having a total out- standing circulation of P2i.i millions, and against these notes and other liabilities these five banks held cash re- serves of P 15.1 millions, leaving an uncovered circulation of P6 millions. 2 By January i, 1905, about three months before the new currency decree was issued, the number of banks of issue had increased nearly fivefold, and the bank- note circulation had risen from P2i.i millions to P83-5 millions, 3 the cash reserves (exclusive of bank notes of other banks) having risen to P 76.8 millions. The increase in the uncovered circulation, therefore, was only slight, i.e., from P 6 millions to P 6. 7 millions. Meanwhile, however, deposits of various kinds, including current accounts, had increased from P25-3 millions January 31, 1890 to ?22i millions. 4 At the beginning of 1905 the paid-up capital of the banks of issue was P874 millions, so that taken together the total amount of notes outstanding was less than one third the limit fixed by the law of 1897, i.e., than an amount equal to three times the paid-up capital. Moreover, on the basis of legal reserve requirements the authorized limit of circu- lation of all banks taken together, without any increase of total reserves, would have been over sixty million pesos more than the amount outstanding, or a sum considerably greater than the total metallic circulation of the country 1 Conant, The Banking System of Mexico, p. 15. 2 Com. Mon. Mex., Estadistica Bancaria, pp. 214-15. 3 Conant, The Banking System of Mexico, folder No. 4 ; also pp. 54-59. 4 Psi4 millions of this sum are designated as "various debts," but ap- parently consist chiefly of active current accounts. 2M 528 THE MEXICAN CURRENCY REFORM, 1903-08 outside of the reserves of the banks of issue. Such a possi- bility for currency expansion clearly threatened the success of any plan of relative contraction through limitation of coinage alone. How did the Government meet this difficulty? It met it chiefly by means of the following measures, a brief men- tion of which will be sufficient, since the immediate result in each case was the obvious one. They were : (i) In- sistence upon a somewhat broader interpretation of the term deposits in connection with the provisions of the bank- ing law concerning legal reserves against deposits, thereby increasing the legal reserve requirements for banks of issue 1 and further limiting the issue of bank notes. (2) With- drawal from the banks of the privilege given them, under the Act of March 19, 1897, of counting silver bars as part of their reserves ; and withdrawal of the privilege of counting gold bars, until such a time as the free coinage of gold should be authorized. 2 Concerning the use of gold bars the pre- amble of the decree said that, while free coinage of gold did not exist, it would be contrary to the fundamental principle of the new currency legislation to permit banks of issue to count gold bars as part of their reserves ; since, although the owners of these bars would have the legal right to have them redeemed in silver coin, the privilege of substituting bars for money in one of its most important uses would be equivalent in a way to permitting the banks to increase arbitrarily the quantity of money in circula- tion. 3 (3) The imposition of a more rigorous govern- mental supervision of banks so as to insure a more effective enforcement of the law. 4 (4) Certain positive and direct measures to prevent the banks from unduly increasing their note issues. The decree of May 13, 1905 (art. 5) had pro- 1 Decree of May 13, 1905. Leyes y Dispos., pp. 129-30. 2 Ibid., pp. 129-31. 3 Ibid., pp. 129-30. 4 Ibid., pp. 131-32. A GOLD-STANDARD PLAN ADOPTED 529 vided that no new concessions should be made for the es- tablishment of banks of issue before December 31, 1909, and that those established after that date should not enjoy the immunities from taxation granted to those already estab- lished under the Act of March 19, 1897, an d further, that they should be subject to a special tax in favor of the Fed- eration of 2 per cent per annum upon the paid-up capital. The fact that the Executive had in his control the renewal of bank charters, and the authority to grant or deny appli- cations for the increase or diminution of capital, 1 gave him the whip hand over the banks. An order of September 15, 1905 2 tied to the authorization of further increases in capi- tal the condition that banks desiring such authority should obligate themselves, during a certain period to be deter- mined by the Finance Minister (and later fixed to terminate in I909), 3 neither to increase their note circulation without a corresponding increase in their metallic reserves, nor to decrease their metallic reserves without decreasing to the same extent their note circulation. 4 Two restrictions later placed upon banks of issue for the purpose of expediting the reform were : the order of August 28, 1906 forbidding banks to count the old coins that were being withdrawn as part of their legal reserves ; and that of June 10, 1907 restricting the amount of fractional silver that could be counted as reserve money to 5 per cent of the total reserve requirements. The Finance Minister said in explanation of this latter order that the amounts of fractional silver held by banks in their reserves had been 1 Art. u, sec. 3 of Bank Act. 8 Diario Official, Sept. 15, 1905. * Enriquez Martinez Sobral, La Reforma Monetaria, p. 179. 4 At a later date the Finance Minister said: "The apparent lack of elasticity in the bank-note circulation [from October 1905 to October 1906] was not to be wondered at, when one remembered that a large proportion of the banks recently pledged themselves to the administration not to increase their note circulation beyond certain limits without at the same time in- creasing in like degree their metallic reserves." Econ. Mex., XLIII, 1906, p. 248. 2M 530 THE MEXICAN CURRENCY REFORM, 1903-08 steadily increasing, and that the proportion generally ex- ceeded 10 per cent and in some cases ran as high as 40 per cent of the reserve. 1 Measures to Alleviate the Hardships Expected to Result to the Mining Interest from the Currency Reform It does not fall within the province of this book to discuss in any detail the numerous measures adopted by the Gov- ernment to alleviate the hardships to the mining industry, particularly to that of silver mining, which were expected to arise as the result of the closing of the Mexican mints to the free coinage of silver. From the beginning of the discussions concerning the reform the authorities had shown a disposition to protect these interests ; 2 and upon the same date, March 25, 1905, that the Executive issued the decree creating the new monetary system, it issued a second decree concerning taxes and privileges in the mining industry, 3 which granted to those interested in silver and gold mining tax exemptions, tax reductions, and other special privileges. 4 1 Institutiones de Credito. Leyes y Circulares, etc., 1908, p. 79. 2 Cf. supra, p. 489. 3 Leyes y Dispos., etc., pp. 57-62. " 4 This decree and certain subsequent ones, notably that of March 30, 1905, provided for : "[i] A reduction in the taxes imposed upon the precious metals, and a graduation of those levied on silver according to its market value. . . . [2] Exemption from taxes on certain parts of the productive process in the production of gold and silver. . . . [3] Reduction of property taxes on gold and silver mines. . . . [4] Exemption from taxes on machinery imported for use in the mining industry. [5] Exemption from taxes on important materials necessary for the work- ing of the mines. [6] The establishment of a public service through which the mine owners would be permitted to present their [gold and silver] bars to the mint in the City of Mexico, in order that they might be sold abroad for the account of the interested parties, under the most favorable conditions possible, with- out any commission charge whatever for the service, so as to assure to the miners the largest possible part of the sale price of the bars. Sobral, La Reforma Monetaria, pp. 180-81. Cf. also Viollet, Le Probleme de 1'Argent, pp. 208-14. A GOLD-STANDARD PLAN ADOPTED 531 The Reserve Fund The last topic that calls for attention in the monetary decree of March 25, 1905 is the action taken concerning the mooted question of a reserve fund. While the Execu- tive followed the recommendation of the Monetary Com- mission in not creating a reserve for immediate use in raising the peso to the new gold par, and in not assuming any obligation for the conversion of silver coins into gold in the future, it none the less took immediate steps for the creation of a reserve fund. Chapter 4 of the decree estab- lishing the new monetary system l created a fund entitled Fondo Regulador de la Circulation Monetaria, the funda- mental object of which was to "facilitate the adaptation of the monetary circulation, as regards the quantity of money, to the exigencies of a stable foreign exchange." It was apparently with the purpose of giving the Executive a free hand that the object of the Fund was expressed in such vague and general terms. 2 The Fund was to be a trust fund, separate from other government funds, and was to be obtained from the following sources : (i) An initial con- tribution of P 10,000,000 from the public treasury, which might be raised to Pi 5, 000,000 in case the Finance Minis- ter should consider such an increase necessary. (2) Cer- tain sums which the budget of expenditure would designate to cover losses from abrasion of coins as shown by the re- coinage. (3) Seigniorage profits, of which at the beginning the most important would be those arising from the re- coinage of a certain number of peso pieces into fractional coins. (4) Profits from foreign exchange operations. (5) Net profits on the coinage of pesos for exportation. (6) Other profits incidental to the regulation and mainte- nance of the Fund. The Regulator Fund so constituted was to be divided into 1 Leyes y Dispos., etc., pp. 52-53. 2 Sobral,pp. 174-75. 532 THE MEXICAN CURRENCY REFORM, 1903-08 two parts, one to be kept in Mexico and one abroad ; the former to consist of "metallic money and exceptionally of gold or silver bars destined for coinage ... to be held as a confidential deposit in the National Bank of Mexico or in some other establishment of first rank"; the latter to be deposited abroad in foreign banks or banking houses of high standing. To the Regulator Fund were to be charged only those expenses and losses which clearly arose from the deposit, movement, and location of the Fund, or from the foreign exchange operations in which the Fund was em- ployed. All other expenses, such as salaries, coinage ex- penses, and the like, were to be charged to other funds. 1 The Regulator Fund was not to be administered by the finance department of the Government, but by a special commission, which was created a few days later in the decree of April 3, iQO5, 2 designated as the Commission on Exchange and Money (Comision de Cambios y Monedd). The Com- mission was an honorary one and consisted of ten members including the Finance Minister, two other government officials, and seven non-official members. 3 Appointments were for one year. Upon the Commission the decree conferred large powers, the exercise of some of which, how- ever, were subject to the approval of the Finance Minister. 4 Subject to the broad provisions of the decree, the Com- mission's powers included the regulation of the quantities and denominations of the various kinds of money to be 1 Leyes y Dispos., etc., pp. 52-53. 2 Ibid., pp. 93-96. 3 The ten members were : the Finance Minister, the Treasurer-General of the Federation, the Director of the Mint, a representative of the National Bank of Mexico, one representative each from two of the principal banks of Mexico, and four voters to be appointed by the Finance Minister. The non-official members need not be Mexican. Ibid., pp. 93-94. 4 In general it may be said that the approval of the Finance Minister was required for operations involving substantial pecuniary responsibilities for the Government ; or operations taking place partly in foreign countries, such as the deposit of part of the Fund abroad, the arrangements for the sale of foreign drafts on the Fund, and the sale abroad of gold and silver for the account of mine operators. A GOLD-STANDARD PLAN ADOPTED 533 coined ; the purchase of bullion for coinage ; the establish- ment of federal offices for the exchange of money ; the ex- change of the new money for the old, and of fractional coins for pesos and vice versa; the placing of the new money in circulation ; the administration of the Regulator Fund, including its formation, investment, and use for the stabiliz- ing of exchange. Concerning the last named power the decree gave to the Commission authority to "employ the Fund for all banking operations, and operations in the ex- change of money, which appear to be conducive to the stabilizing of foreign exchange rates and to the satisfying of the demands of the internal circulation." 1 1 A detailed statement of the powers of the Commission is contained in the decree. Leyes y Dispos., etc., pp. 94-95. CHAPTER V How THE PLAN WORKED SUCH were the chief legislative and administrative measures adopted by the Mexican Government for the pur- pose of bringing about a relative contraction of the currency and, through the principle of scarcity value, of raising the gold value of the Mexican peso, and with it that of the new fractional coins, to a gold par of 75 centigrams of pure gold to the peso, and thereafter of maintaining it at that level. We are now in position to consider the question : How did the plan work? The monthly fluctuations in the exchange value and the bullion value of the Mexican peso for the period 1901 to 1908 are shown graphically on the following chart, the figures for which are given in Appendix A. 1 It has previously been noted 2 that about the middle of November 1904, when the currency reform enabling Act of December 9 was first introduced in the Mexican Congress, there was evidence that the proposed reform would be fa- vorably received by the business community both in Mexico and abroad* and that both Mexican exchange rates and the prices of Mexican securities reflected this attitude. A ref- erence to the chart will show that from the spring of 1904 until August 1905 Mexican exchange on New York ruled almost continually at rates that gave the peso an appre- ciably higher value as money than as bullion ; and that the exchange value of the peso, having risen in November and 1 Infra, p. 549. 2 Supra, pp. 523-24. 534 HOW THE PLAN WORKED 535 December 1904 from a value of approximately 46 cents United States currency to one of 49^ cents, partly under the influence of local conditions in Mexico but chiefly under that of a rising silver market, never again declined to its former level. In fact, even before the gold standard decree of March 18, 1905 was issued, the money value of the peso as measured by exchange rates seemed to have attained, MEXICAN CURRENCY BEFORM OF 1903-1908 though insecurely, a 49^ cent level, and to have become fairly well divorced from bullion value. As in the case of the Straits Settlements only a few months before, 1 the announcement of the plan to raise the value of the monetary unit by relative contraction of the currency led to a great influx of pesos into the country to take advantage of the anticipated rise in their value. This influx into Mexico began as early as November 16, 1 Cf. supra, p. 404. 536 THE MEXICAN CURRENCY REFORM, 1903-08 1904, and continued until January i, 1905,* when a decree of November 23, 1904 placing a prohibitive duty of Pio per kilogram on the importation of Mexico pesos went into effect. 2 Not only was there a substantial influx of pesos from without Mexico, but a fact of even greater importance was that the usual large exportation of pesos from Mexico ceased almost entirely. The exports of Mexican pesos were P 21 millions for the fiscal year 1902-03, P 18.6 millions for 1903-04, and only Pi. 8 millions for the period July 1904 to June i905. 3 This influx of pesos into a market that was apparently already oversupplied would be expected to render more difficult the process of raising the value of the peso by rela- tive contraction, and it doubtless had that tendency. But this effect was offset by several important forces, the chief of which were the following : (i) The great rise in the price of silver in the latter part of 1904, and the buoyant effect of this rise upon Mexico's silver industry. (2) The general business prosperity of Mexico at this time, and the rising confidence for the future conditions which appear to have been favored by the prospects of a gold standard currency. 4 1 "On the announcement of the passing of a bill in Mexico placing the peso on a fixed basis the price [of Mexican pesos per ounce] rose to 27^., and all the pesos that were available here [in London] were at once shipped tQ Mexico to take advantage of the premium obtainable over their intrinsic value." Pixley and Abell Circular, December 31, 1904. 2 Leyes y Dispos., etc., pp. 35-36. 3 Hegemann, p. 163. 4 The following quotations from two New York financial newspapers are apposite : " [The announcement yesterday that the new Mexican currency system was to be put into effect May i] was the subject of a great deal of discussion in the Street among men who have a financial interest in enterprises in Mexico, or who are familiar with the country. It was the universal opinion that within a few months at the longest, a large amount of American money will be invested in Mexico. ... It is known that for some time American capitalists have simply been waiting for a definite announcement as to when the new monetary system would become effective before increasing their in- vestments in Mexico or placing money there for the first time. It is the opinion of men here who are altogether familiar with Mexican affairs HOW THE PLAN WORKED 537 This caused an increased demand for currency. (3) The restrictions imposed by the Government on the expansion of bank credit, particularly in the form of bank notes. 1 (4) The withdrawal from active commercial use by the National Bank of Mexico of the P 10,000,000 representing the initial contribution of the Government to the Regulator Fund. 2 (5) The narrow margin between the bullion value of the peso for the period from November 1904 to Feb- ruary 1905 and the 50 cent gold par; and the result- ing confidence in the early attainment of the par, leading people to hold pesos for the prospective rise in their value and to speculate for a fall in exchange. (6) The fact that the period during which the peso was held at an exchange value much above its bullion value was a short one, and one not subject to serious trade vicissitudes. The great rise in silver the latter part of 1905 placed strong supports under the relatively high exchange value of the peso before that value had been threatened by any serious business storms or trade depressions. that not later than August or September, the increase in business in Mexico will become decidedly perceptible." Wall Street Summary, March 28, 1905. "During a recent conversation in Washington Joaquin D. Casasus, Mexico's Ambassador to the United States, told the writer that fully $100,000,000 of new foreign capital has been invested in enterprises in Mexico during the year just closing. Of this amount over $60,000,000 represented money invested in the stock of five or six banks in Mexico City and several interior cities of the Republic, which have increased their capital during the year. The balance of the $100,000,000 represents investments in industrial, mining, and railroad securities in Mexico. During the last six months the earnings of the railroads in that country have increased materially, and the officials in charge are unanimous in ascribing these favorable results to the adoption of the new monetary system." New York News Bureau, Decem- ber 14, 1905. 1 Cf. supra, pp. 526-30. 2 Conant, pp. 70 and 73. 538 THE MEXICAN CURRENCY REFORM, 1903-08 Great Rise in the Gold Price of Silver On April 7, 1905 the sharp decline in the London price of silver of the fore part of the year (see chart on page 535) reached its nadir with a price of 251^. per ounce, giving the Mexican peso a bullion value of 43.8 cents. This was 24 days before the Mexican gold standard decree of March 25 was to go into effect, and nine days before the Mexican mints were to be closed to the free coinage of silver. The price of the white metal, under the influence of silver purchases for India and the depreciation of gold, now began one of the most pronounced upward movements in its history. 1 From 25^^. per ounce on April 7 it rose to 26%d. on April 17, the day after the closing of the Mexican mints, representing an advance of 4.2 per cent in 10 days. It hovered about that level for slightly over a month, and then began an irregular but pronounced upward movement which continued until November 17, 1906. The bullion par of the peso, i.e., the price of silver per ounce at which its bullion content would be worth in London 75 centigrams of pure gold, was 28riM. As early as August 29, 1905 silver reached a point within 0.6 per cent of the bullion par ; on October 21 it reached bullion par ; and for the month of November it averaged 1.9 per cent above bullion par, reaching in that month a maximum of 4.8 per cent above. For every month of 1906 and every month of 1907 down to October the price of silver averaged well above bullion par, the average margin reaching 13 per cent for the month of November 1906, and the maximum margin reaching 14.5 per cent on the i7th of that month. The situation by months for the period 1905-07 is shown in the following table: 1 For a discussion of this rise, its causes and effects, see Kemmerer, The Recent Rise in the Price of Silver and Some of its Monetary Con- sequences, Quart. Journ. Econ., XXVI, 1912, pp. 215-84, especially 215-39- HOW THE PLAN WORKED 539 PERCENTAGE MARGIN OF HIGHEST AND AVERAGE PRICE OF SILVER IN LONDON ABOVE (OR BELOW) BULLION PAR OF MEXICAN DOLLAR MONTH 1905 1906 1907 HIGHEST AVERAGE HIGHEST AVERAGE HIGHEST AVERAGE January . . *i-9 *3-4 4-6 4.1 12.2 9-9 February *2.I *3-o 6-5 5-3 II. I IO.I March . . . * 4 .2 *7-4 5-2 3-3 10.9 8.2 April *7-9 * 9 .6 5-7 3-6 5-5 4.7 May .... *5-6 *7-8 8-5 7-i 7.6 5-4 June .... *6.2 *6. 9 7.6 4-5 7-4 6.8 July. . . . *S-6 *6.2 5-2 4.2 10.4 8-5 August . . . *o.6 *3-2 7.0 5-5 "S 9-5 September . . *o.6 *M 9.8 8.9 9.1 8.1 October . . . 0.0 *I.O 12.6 II. 2 6.8 *0.2 November . . 4.8 1.9 14-5 13.0 *3-o 6.x December . . 4.8 3-7 12.0 10.7 *7-5 *9-4 Year. . . . 4.8 *3-8 14-5 6.8 12.2 4.9 'Below. How the Mexican Government Met the Emergency and In- cidentally Placed the Currency System upon a Strict Gold Standard While this phenomenal advance in the price of silver came as a surprise to the Mexican authorities, it cannot be said that they were unprepared to meet it. The thorough- ness with which the Monetary Commission had gone into the entire subject of the monetary reform had not stopped short of formulating, though rather loosely, tentative plans by which to meet such an emergency, improbable though it seemed. Moreover, the sharp rise in silver the latter part of 1905 had been a further warning to the authorities to be prepared for such a contingency. The majority of the fifth subcommission had said in their report which was adopted as the report of the Commission : 540 THE MEXICAN CURRENCY REFORM, 1903-08 " The fourth subcommission, taking as its base the average price of the white metal for the years 1893 to 1902 inclusive, has supported with abundance of sound reasons the ex- pediency of adopting a ratio not below i to 36 nor above i to 32. No one combatted this opinion except Mr. Jose de Landero y Cos, to whom it appeared that not even the last of these ratios offered a sufficient margin to assure the maintenance of the new money at a value above its value as mere bullion, since the rise in the price of silver which had characterized the closing months of the present year 1 [1903], gave reason to fear because of its unusual firmness, that it would not only be maintained, but even accentuated, until it should approach or even reach the pro- posed ratio of i to 32." 2 Referring to the question as to what ought to be done if, subsequent to the putting into operation of the monetary reform measures, the gold price of silver were to rise to a point at which the bullion value of the new peso should become equal to, or even exceed, legal parity the fifth subcommission said : " Such a contingency cannot be judged impossible, when one considers the surprises which the constant fluctuations in silver have so often given to those who are best informed and most foresighted on the subject. For the solution of the problem there would be only two possible courses. Either to alter the legal parity ... or to go frankly and openly to a gold standard with the circulation of gold coin. Since the inconveniences of the former course leapt before us with all their sinister consequences, we accepted with- out disagreement or hesitation the second plan, making it the twelfth base in the plan of reform." 3 This base recommended that under such a contingency the Government should immediately demonetize the silver 1 See chart, p. 535. 2 Com. Mon. Mex., Actas, etc., p. 197. 3 Ibid., p. 200. HOW THE PLAN WORKED 541 peso, and introduce into the monetary system the gold standard with free coinage of gold and gold in circulation. 1 On November 16, 1904 Finance Minister Limantour in submitting to Congress the proposed enabling Act said : "For some months exchange rates on New York have rep- resented a gold value to the peso of from 46 to 47 cents ; although the price of bar silver has been relatively lower. Since, on the other hand, the tendencies of the white metal are not in the direction of its being much dearer, for there is no prospect either that its production will be diminished, or that the demand for it will be suddenly increased in any strong proportions, the present margin between the bullion value of the peso and the money value which we are under- taking to give it in our new monetary system, is sufficiently ample to remove the fear, at least for some time, that se- rious disturbances may arise from an advance in the bullion value of the peso above its legal parity. On the other hand, the margin is not so large as to inspire doubts that the peso may not be able to be raised without difficulty to the legal gold parity." 2 Despite this confidence, the Finance Minister had taken precautionary measures; for the bill which he submitted to Congress in November 1904, and which later became the Gold-Standard Enabling Act, gave the Executive au- thority "to permit the legal circulation for a limited period of the gold coins of other nations, fixing their value in Mexican money, in case the price of standard silver per ounce in London should rise above 28id.," the bullion par being 28ffd. ; and "to demonetize coins which in his judgment should be retired from circulation" ; to have gold coined when he saw fit; and "to modify civil and mer- cantile legislation in all matters connected with loans and the payments of money." 1 Ibid., p. 203. 2 Leyes y Dispos., etc., pp. 24-25. 542 THE MEXICAN CURRENCY REFORM, 1903-08 Measures to Protect the Monetary Circulation. With the high profits realizable from the exportation of silver pesos, which the bullion values of the peso after October 1905 suggest, one would have expected bullion dealers everywhere to collect pesos and to export them in large quantities. To prevent this the Commission on Exchange and Money wisely undertook to keep in its own control the matter of exporting pesos. Its problem and how it solved it may best be told in the words of its own admirable report. 1 11 The Commission immediately decided to take advantage of such a favorable conjuncture to undertake the task of demonetizing the Mexican peso, converting into gold the silver which it contained. ... In order to accomplish this end it would be necessary to proceed very rapidly, since it was impossible to predict how long the advance in silver would continue ; and at the same time with great caution, since it is known that the silver market is exceedingly sensi- tive, and the offer of silver even by a very small am6unt in excess of the demands of the day is sufficient to depress the market to a considerable degree. Without precipitation, therefore, but with inviolable firmness, following the fluctua- tions of the market closely and with anxious interest, the Commission began to realize upon the pesos which it held in the Regulator Fund. When it had disposed of these at remunerative prices, which happened soon, it made an arrangement with the banks according to which they undertook to turn over to the Commission their cash balances of pesos upon condition that they should realize upon them in London without loss, notwithstanding the great diversity of places in which the money was gathered. " It was the invariable rule of the Commission in the numerous operations of this kind which it undertook, to turn over all or nearly all the margin of profit which it realized to the banks which furnished the pesos for exporta- 1 Memoria de la Comision de Cambios y Moneda, que Comprende el Periodo Transcurrido de lo de Mayo de 1905 a 30 de Junio de 1909, pp. 12-14. HOW THE PLAN WORKED 543 tion, since it appeared that by proceeding in this way it not only complied with the demands of justice but best accomplished the purpose for which the Commission was created. That purpose was not to secure profit, but to contribute to the establishment and maintenance of the monetary circulation of the Republic upon sound and stable bases. " Another object pursued at the same time by the Com- mission in its conduct of this affair was to prevent banks and individuals from becoming interested in undertaking di- rectly operations for the exportation of pesos. To this end the services of the Commission were made essentially gratuitous. Thus the Commission prevented disturbances in the silver market which without doubt would have taken place if the offerings of Mexico had been multiplied in a disorderly manner and had not been turned into one channel, attention always being given to the circumstances of the moment. The Commission furthermore enjoyed facilities for conducting the business quickly, effectively, and cheaply, which were not available to all exporters." In this manner the Commission exported from Novem- ber 17, 1905 to September 24, 1907 the important sum of P 60,727,500, from which it was able to realize upon all but P 2,7io,ooo. 1 Notwithstanding all the efforts which have been alluded to, for conserving the Commission's control over the ex- portation of pesos, it continually feared that a time would arrive when its control would disappear, because it was cer- tain that if the high price of silver should persist, the spirit of gain and of speculation would induce many to undertake operations on their own account. The danger then would consist not only in the disturbances which would thereby be caused in the market for the purchase of silver, but also in the rapid retirement from circulation in the Republic of 1 Before this latter sum could be realized upon the price of silver declined so far that it became desirable for the Commission to have the coins returned to Mexico. 544 THE MEXICAN CURRENCY REFORM, 1903-08 large sums of pesos, thus producing quickly a dangerous contraction in the currency, since individuals would not find it to their interest to follow the invariable practice of the Commission of returning to the circulation in the form of gold the equivalent of the silver coins with- drawn. When in October and November 1906 the price of silver rose to an average of 11.2 per cent and 13.0 per cent, re- spectively, above bullion par, the exportation of silver pesos became so profitable "that commercial people of every class and persons not engaged in commerce undertook their ex- portation." 1 Figures cited by the Commission show that nearly sixteen million pesos were exported by private parties prior to November 19, 1906? Now we find Mexico's currency problem reversed. It is no longer the problem of creating a scarcity of money so as to raise the value of the peso to the gold par of 75 centi- grams of pure gold, but the problem of preventing a cur- rency scarcity and of keeping the peso down to the gold par for purposes of circulation. On every side fears were expressed lest the country would be denuded of its currency supply. The situation was made more serious by the facts that (i) at the time the pesos were being exported subsidiary coins were being withdrawn from circulation and recoined, also minor coins of nickel and copper; and that (2) there were in force strict limitations upon additional issues of bank notes which had been imposed to prevent an increase of bank-note circulation from interfering with the "rela- tive contraction of the currency." On November 19, 1906 a ten per cent duty was imposed upon the face value of silver coins exported, with the pro- viso that exporters would be exempted from the tax if within thirty days of the date of shipment they should turn over to the Commission for gratuitous coinage gold bars or foreign gold coins equivalent in value at the legal parity to 1 Hegemann, pp. 173-74- z Memoria, etc., p. 15. HOW THE PLAN WORKED 545 the pesos exported. There were exported, in accordance with the provisions of this law, down to the close of the fiscal year 1907-08, P 8, 264,447, 1 which, added to the net exportations made by the Commission for which gold was returned, total over P66,ooo,ooo. 2 The next step was to make every effort to expedite the coinage of all new kinds of Mexican money, gold, silver, nickel, and copper. To this end not only was the Mexican mint worked to its full capacity, but the mints of other countries 3 were also employed under the supervision of representatives of the Mexican Government. The amount coined at foreign mints was P 41, 6 10,123, and at the Mexican mint P 86,345,647, making a total coinage down to June 30, 1909 of 1*127,955,770 and representing 86.5 per cent of the total metallic money of the country. To take the place of the pesos which were being exported the Govern- ment coined a large number of 5o-cent pieces, 4 which were highly popular coins and not of sufficient bullion value to be exportable. Two measures adopted in 1905, before the rise in the price of silver had resulted in the exportation of much silver coin, proved helpful in the effort to provide promptly an adequate gold circulation. The first was an Act to encourage the keeping of domesti- cally produced gold at home. Mexico is an important gold- producing country (ranking only after South Africa, the United States, and Russia in 1908), and fortunately her product was increasing at the time the monetary reform 1 Ibid., p. 14. 2 On June 30, 1909 it was officially estimated that there was still in Mexico about twenty million of the old silver pesos out of a total metallic monetary stock of 147,950,242 pesos. Ibid., p. 17. 3 The foreign mints employed were those of Birmingham, England; Philadelphia (which coined 30,000,000 pesos of gold coin) ; New Orleans ; Denver ; and San Francisco. Detailed figures for the coinage will be found in Memoria, etc., App. No. 7. 4 Out of a total new silver coinage of P42,728,543, P 26,830,619 or 62.8 per cent consisted of 5o-cent pieces. Ibid. 2N 546 THE MEXICAN CURRENCY REFORM, 1903-08 was being effected. 1 An Act of June 19, 1905 reduced the stamp tax upon the value of bars of gold (as well as of silver) refined to a fineness of .999 or more, from i\ per cent to i \ per cent. 2 It is interesting to note that domestic gold to the value of over P 5 2, 000,000 was purchased by the Com- mission in the form of bars down to the close of the fiscal year i909- 3 The second measure was the adoption of the temporary expedient of issuing gold certificates against gold bullion in process of coinage. These certificates were authorized in the decree of December 22, 1905^ and their principal characteristics are well summarized by Sobral as follows : The certificates were issuable "in exchange for gold bars or foreign gold coins received for coinage ; or in exchange for silver pesos received for sale, the proceeds of which were to be turned into gold. They were payable to bearer at sight, but at the request of the interested parties might be made pay- able to order. Certificates were issued in denominations of a thousand pesos or multiples thereof, except when they were made payable to order ; but in no case in denomina- tions of less than a thousand pesos. They were redeemable 1 According to the estimates of the Director of the United States Mint, Mexico's annual gold product in terms of United States money at this time was as follows: 1905, $16,107,100; 1906, $18,534,700; 1907, $18,681,100; and 1908, $22,371,200. 2 Cf. Memoria, etc., p. 20. 3 Ibid., Appendix 9. 4 "In accordance with the wording of the decree the Commission must at all times keep in the National Bank gold to the amount of the gold certifi- cates issued. This it could do by means of the money in the Regulator Fund. Doubtless the Commission felt secure against a crisis, since the amount of the certificates issued was already held in the form of United States gold coin, and the Executive had authority from the Gold-Standard Act to make foreign gold money legal tender at any time. For national reasons it was decided not to adopt such a course unless necessary. (Cf. Memoria, etc., p. 16.) In case of the sudden presentation of gold certificates, however, redemption might be made in gold coin of the neighboring Republic, which enjoyed a good reputation in Mexico, and which, if made a legal means of payment, could be substituted for the new Mexican peso, since the American dollar was worth almost exactly two Mexican pesos." Hegemen, pp. 172-73. HOW THE PLAN WORKED 547 on demand, the Commission having the option to redeem in Mexican gold coin or in foreign gold coin ; and the Commis- sion kept a deposit in gold bars as a guaranty fund. Banks were authorized to count certificates as part of their reserves." * Although legally free coinage of gold did not exist, this issue of certificates in exchange for gold bullion amounted to nearly the same thing ; and as a matter of fact all gold presented was freely coined by the Commission. The restrictions upon the bank-note circulation were relaxed; and the total circulation increased from P8Q.5 millions August 31, 1905 to Pg6.o millions November 30, 1906. The National Bank of Mexico alone increased its circulation from P25.o millions to P34.o millions. 2 Final Results The measures just described proved effective. They provided the mechanism by which the great but tem- porary rise in the price of silver during 1905-07 carried Mexico quickly and unexpectedly to the gold standard, yielded a net profit of P 8 millions, 3 solved the vexed prob- lem of a gold reserve, eliminated the necessity of the gold- exchange standard, and transferred the country's stock of metallic money in a little over three years' time from one consisting almost entirely of silver coins to one in which P83 millions 4 out of a total of Pi 48 millions were gold, and in which Pi 28 millions represented new coins. 6 The story of the subsequent breakdown of this care- fully constructed gold standard during Mexico's recent unfortunate years of revolution does not fall within the province of this paper, nor are the materials yet avail- able to make possible an account of it that would be of any scientific value. 1 Sobral, pp. 191-92. 2 Economista Mexicano, Sept. 30, 1905, p. 589, and Jan. 5, 1907, p. 304. 8 Memoria, etc., Appendix, p. n. 4 Ibid., pp. 14-16. 6 Ibid., p. 7. B W !l M O H a O . ^4 < w O Q > H ag ^ I 8, R a a a 2. a R R R R 2> QOOOOOOOOOOO t-r^ dvd to ovo oooooooor^w o O NNMMCtCMW o'ddddd6 OOOOOOOOOOOOOOO O O O O O loiioiEiRsUisUi j-Tj-O <>d d O M ^ cj OO M OO O ^ *O *O t^ OO tOMOO p ? T l" u ? T: *" T f l O r *''O N M 5^- ^ ^ ^ v ^- v ^- v ^ v ^-^- ^ ?^- M O -^-00 O M ro >000 O ^^-^^Tj-Tj-TtttTr-^-^- 1 ^-? M POO ^90 oo ioooo OTJ-O POPJ MOO fNVOoOOOOOO TJ-VOM OOOOOO M POM M' TJ-TJ-uilOPOP) rOfOro^^tTj-^Ti-^-rJ-Tj-rJ-Tt- 3-00 O w ^- M-MNPOOOM ^rf * g, l 1i I" 8 i tl I! 549 APPENDIX B THE MEXICAN CURRENCY REFORM Principal References Cited ANDREW, A. PIATT. The End of the Mexican Dollar. Quarterly Journal of Economics, XVIII, 1,904, pp. 321-56. British Diplomatic and Consular Reports. Annual. London: British Blue Book. CASASUS, JOAQUIN D. La Question de FArgent au Mexique. Materiaux Presentes par Joaquin D. Casasus, Delegue du Gou- vernement Mexicain a la Conference Internationale Monetaire de Bruxelles. Paris, 1892. . La Reforma Monetaria en Mexico. Mexico City : Imprenta de Hull, 1905. Comision de Cambios Internationales de la Republica Mexicana. Memorandum of Conference between Delegations for the United States, China, Mexico, and Representatives of Great Britain, June 1903. Mexico City: Government, 1903. Comision Monetaria, Mexico. Actas de las Juntas Generates y Documentos a Ellas Anexos. Mexico City: Government, 1904. . Datos Complementarios para el Estudio de la Cuestion Mone- taria en Mexico. Mexico City: Government, 1903. . Datos para el Estudio de la Cuestion Monetaria en Mexico. Mexico City: Government, 1903. . Datos sobre Rentas de Fincas Urbanas en la Ciudad de Mexico. Mexico City: Government, 1903. . Estadistica Bancaria. Mexico City: Government, 1903. CONANT, CHARLES A. The Banking System of Mexico. National Monetary Commission. 6ist Congress, 2d Sess., Senate Docu- ment, No. 493. Washington : Superintendent of Documents, 1910. . Influence of Falling Exchange upon the Returns Received for National Products. Argument Submitted by Messrs. Charles A. Conant, Jeremiah W. Jenks, and Edward Brush to the Mone- tary Commission of the Republic of Mexico. London : A. E. Bailey, 1903. 550 APPENDIX B 551 Datos Estadisticos Preparados por la Secretaria de Hacienda y Credito Publico Especialmente para el Estudio de la Cuestion Monetaria. Mexico City: Government, 1903. Diario Official, Mexico. Government. Passim. Director of the Mint. Annual Reports. Washington: Superin- tendent of Documents. Economista Mexicano ; Seminario de Asuntos Economicos y Es- tadisticos. City of Mexico: Tipografia de "El Gran Libro." Passim. FAVRE, JEAN. Les Banques au Mexique, Organisation et Devel- oppement. Paris : Marcel Riviere, 1907. GAINES, MORRILL W. Effects of the Silver Standard in Mexico. Yale Review, XII, 1903, pp. 276-89. . The Price of Silver. Yale Review, XIV, 1905, pp. 18-37. . The Problem of Monetary Reform in Mexico A Sugges- tion. Yale Review, XII, 1903, pp. 346-59. GLONER, PROSPER. Les Finances de fitats Unis Mexicaines. Berlin : Puttkamer & Miihlbrecht, 1896. HEGEMANN, WERNER. Mexikos Ubergang zur Goldwahrung. Stutt- gart und Berlin : J. G. Cotta'sche Buchhandlung Nachfolger, 1908. International Bureau of the American Republics. Mexico, Geo- graphical Sketch, Natural Resources, Laws, Economic Condi- tions, Actual Development, Prospects of Future Growth, 1904. 58th Congress, 3d Sess., House Documents, LXVI, No. 145, Part 5. Washington : Superintendent of Documents, 1904. International Monetary Conference Held in Paris in 1878. Report. Washington : Superintendent of Documents, 1879. JOHNSON, JOSEPH FRENCH. Money and Currency. Boston: Ginn & Co., 1906. KAERGER, KARL. Landwirtschaft und Kolonisation in Spanischen Amerika. 2 Volumes. Leipzig: Duncker & Humblot, 1901. KEMMERER, E. W. The Recent Rise in the Price of Silver and Some of its Monetary Consequences. Quarterly Journal of Economics, XXVI, 1912, pp. 215-84. Leyes y Disposiciones Relativas a la Reforma Monetaria. Mexico City: Government, 1906. Memoria de la Comision de Cambios y Moneda, que Comprende el periodo Transcurrido de i de Mayo de 1905 a 30 de Junio de 1909. Mexico City: Government, 1909. Mexico and the Silver Problem. The Economist, London, December 13, 1902, pp. 1930-31. Money and Prices in Foreign Countries. Special Consular Report, 552 THE MEXICAN CURRENCY REFORM, 1903-08 XIII, Part I. 54th Congress, 2d Sess., House Documents, No. 25. NASSE, E. Das Sinken der Warenpreise wahrend der letzten fiinfzehn Jahre. Jahrbuch fur Nationaloekonomie und Statistik, neue Folge, Bd. 17, 1888, pp. 50-66 and 129-81. ROMERO, MATIAS. Mexico and the United States. New York: G. P. Putnam's Sons, 1898. SOBRAL, ENRIQUE MARTINEZ. La Reforma Monetaria. 2 Edicion. Mexico City : Tipografia de la Oficina Impresora de Estampillas, 1910. SUMNER, W. J. The Spanish Dollar and the Colonial Shilling. American Historical Review, III, 1898, pp. 617-19. United States Consular Reports. Mexico. Washington: Super- intendent of Documents. Passim. VIOLLET, EUGENE. Le Probleme de 1'Argent et PEtalon d'Or au Mexique. Paris : Giard et Briere, 1907. WEYL, WALTER E. Labor Conditions in Mexico. Bulletin of the Department of Labor, No. 38, January 1902. Washington: Superintendent of Documents. INDEX Accounting difficulties of Government under dual standard in Philippines, 288-290. Adams, Frank Forbes, on silver and India's home charges, 22. Adamson, W., appointed member of Straits Currency Committee, 396. Aguilar y Biosca, cited, 246, 247, 248. Alfonsino peso coined for Philippines, 249. Allen, Charles H., quoted, 217-218. American soldiers, number of, in Philip- pines, 1898-1900, 254-255. Anderson, John, Governor of Straits Settlements, quoted, 415-416, 419. Andre"ades, A., cited, 513. Andrew, A. Piatt, mentioned, 3, 467, 504. Appreciation of gold or depreciation of silver, 1873-1893? 17-22. Appreciation of rupee, 1893-1898, ex- tent of, 56-62 ; and interest rates in India, 1893-1903, 66-69. Atkinson price index numbers for India, 57-59, 68. Balfour, Lord, cited, on bimetallism for India, 74-75. Bank of England, Resumption Act for, of 1819, cited in connection with Lindsay plan for India, 80; as a depository for Indian reserve funds, 129, 131-132; Governor of, quoted, 131-132. Bank of Porto Rico, bank notes of, trans- ferred to a U. S. currency basis and put in circulation, 205. Bank notes, in India, privilege of issuing withdrawn in 1861, 9; in Porto Rico, transferred to a U. S. currency basis, 205; in Mexico, restrictions placed upon, during period of currency reform, 526-530. Banks of Manila, agree to maintain exchange at not lower than " 2 to i " for privilege of importing Mexican pesos freely, 267-268; cooperate with Philippine Government in withdraw- ing local currency from circulation, 334-335 J unwillingness of, to receive U. S. currency deposits from public, 383-385. Barbour, Sir David, cited, 17, 40, 48-49; criticizes Lindsay plan, 91 ; appointed chairman of Straits Currency Com- mittee, 396. Barnes, Charles Ilderton, cited, 304. Bengal Chamber of Commerce in 1892 favors inquiry looking toward gold standard for India, n. Bernard, Sir Charles Edward, cited, 31. Bibliography, of Indian currency re- form, 149-152; of Porto Rican cur- rency reform, 230-241 ; of Philippine currency reform, 386-388; of Straits Settlements currency reform, 462- 463; of Mexican currency reform, 550-552. Bimetallism, advocated for India in 1898, 74-75; rejected by Fowler Committee, 75 ; the legal monetary system in Mexico to 1904, 472. See Quasi Bimetallism. Black pepper, price of, how affected by "raising" of Straits dollar, 431-432. Elaine, W., appointed member of Straits Currency Committee, 396. Blair and Robertson, cited, 245. Boxer trouble in China, influence of, on gold value of Mexican peso in Philip- pines, 269. British consular official, cited, in Porto Rico, 181, 212, 220, 221; in Manila, 252. British dollar, proposal to introduce in Philippines rejected, 274-275; cir- culation of, in Straits Settlements, 391. Brush, Edward, cited, 296, 480. Brussels Monetary Conference, 11-13. 553 554 INDEX Budgetary difficulties, in India under silver standard, 1423 ; in Philip- pines under silver standard, 281290; in Mexico under silver standard, 476; partly met in Mexico by sliding scale of customs duties, 476477. Bulnes, Francisco, cited, 483. Calcutta Chamber of Commerce, men- tioned, 7. Canje, Spanish word used to designate the substitution of U. S. currency for local currency in Porto Rico, 161, 205 ; influence of canje on debts, 210, on foreign trade, 210-212, on prices, 212- 219, on rents, 219-220; on wages, 220-222 ; were price and wage changes permanent? 223-224. Carroll, Henry K., Commissioner of U. S. Government to Porto Rico, cited, 159, 165, 172, 190, 208, 223. Casasus, Joaquin D., cited, 469, 506, 515, 537- Castellano, Tomas, cited, 160, 161-162, 164. Ceylon tea industry, influenced by price of silver, 25-26. Chalmers, Robert, cited, 4, 5, 6, 7, 9. Chart, showing monthly variations in exchange and bullion values of rupee in India, 1889-1899, 50, of Mexican peso in Porto Rico, 1890-1895, 158, of Porto Rican peso, 1896-1900, 167, of Mexican peso in Philippines, 1893- 1904, 251, of Philippine peso, 1904- 1907. 353. of Straits dollar, 1901-1909, 408, of Mexican peso in Mexico, 1901- 1909, 535- Cheetham, W. H., cited, 49, 53, 76. Christie, Thomas, cited, 76. "Circles," paper currency, in India, de- nned, 9. Circulation, monetary, increased in India during period of closure of mints, 52-54- Closing of mints to free coinage of silver in India contingently favored by In- dian Government, 12-13. Coinage system on gold standard, pro- posed for Philippines, 306; early formulation of plan by Philippine Commission, 307-308 ; repeatedly urged on Congress by Philippine Commission, 310-311. Cole, Alfred Clayton, Governor of Bank of England, cited, 131-132. Coll y Toste, Cayetano, cited, 156, 163. Commission on Exchange and Money, established in Mexico, 532; takes vigorous measures to protect Mexican peso in Mexico from melting pot, 542- 547- Commission on International Exchange, cited, 470-480, 495-496. Commodities, early used as money in Philippines, 245. Company's rupee, name changed to government rupee in India, 5. Conant, Charles A., cited, 224, 296, 304, 308, 349, 480, 496, 527. "Conant," meaning of term as applied to Philippine currency in 1903-1905, 33i. Confusion caused by various rates of exchange in Porto Rico, 171174. Contraction of currency in India, 1893 1898, absolute or only relative ? 7071 . Contracts in local currency, provision made for settlement of, when local currency is withdrawn from circulation in Philippines, 340342. Conversion of Porto Rican currency into U. S. currency, question of an equi- table rate for, 178-193. Convertibility of rupees into gold on demand, attitude of Royal Commis- sion on, 134-135. Cooper, Henry A., mentioned, 309, 311. Correlation coefficient, between bullion value and money value of rupee, 1894, 51 ; between value of Mexican peso and Mexico's exports, 1884-1902, 490- 492. Corwine, William R., cited, 169. Council bills, Indian, described, 36-37 ; sale of, practically suspended in 1893 by Secretary of State, 30-41 ; influence of suspension, on export trade, 42-43, on importation of silver, 43-47, on Indian government finances, 47-48; sale of, again practically suspended early in crisis of 1907-1908, 115-116. Counterfeiting, alleged danger of, in Porto Rico, 228; feared in case of slow conversion to U. S. currency in Porto Rico, 197-198; alleged danger of, for U. S. coins in Philippines, 305. Credit conditions in Porto Rico and INDEX 555 amount of outstanding indebtedness in 1899, 181-183, 189. Creel, Enrique, mentioned, 497. Crisis of 19071908 in India, 113123; Indian Government's currency policy during, criticized, 120-123; effect of, upon India's monetary reserves, 118- 119. Criticism of Porto Rican currency reform plan, 225-235. " Crore," meaning of term, 17. Currency notes, net circulation of, in India, annually, 1898-1908, 100; issued against sovereigns and later against silver bullion deposited in London, 100-104; currency notes of Straits Settlements described, 450452. Currency Note Commissioners of Straits, 451- Currency Note Guarantee Fund, of Straits, 451-452 ; decline in gold value of, caused by "raising" of Straits dol- lar, 452. Currency reform, in India, agitation for, 7-8; period of agitation divided into three parts, 8 ; currency reform plan, India, adopted in 1893, 32-34. See also table of contents. Davis, General George W., cited, 156, 162, 163, 164, 176, 179, 208, 214, 217, 220, 221, 230. Debtor and creditor, equities between, in Porto Rico, 180-193; little discussion of, after passage of Foraker Act, 210; adjustment of outstanding debts in Philippines at time of currency reform, 3iS 339J how equities between debtors and creditors were affected by Straits currency reform, 433 ; question of equities between debtor and creditor in Mexican currency reform, 506508. Debt, public, of India, 15-17 ; of Straits Settlements, 442; of Mexico, 474-475. Declining exchange, influence of, upon India's export trade, 24-28. De Ford and Company, bankers, assist in redemption of Porto Rican currency, 204, 224. Demand for money, in India, 1893-1898, no satisfactory data for measuring, 54. Depreciation of silver or appreciation of gold, 1873-1893? 17-21. Dinwiddie, W., cited, 173. Discount rates in India, 1888-1903, 66- 69. Division of Currency, created in Philip- pine Treasury, 318. Domestic drafts sold by Philippine Government, 363-364. Domestic trade in Straits Settlements, how affected by currency reform, 424- 426. Domestic wholesale prices, in Porto Rico, how affected by currency re- form, 212-213. Doraiswami, S. V., cited, 131. Drafts on U. S. subtreasuries sold by Military Government in Philippines to banks, 265. See also Exchange, and Domestic Drafts. Dual currency used by Military Govern- ment in Philippines, 263-300; diffi- culties of, arising from different value ratios between two currencies, 263-266 ; " 2 to i " ratio, efforts of Government to maintain, 267-279; financial losses to government under, 282-287; ac- counting difficulties under, 288-200; foreign trade difficulties under, 290- 298. "Ear-marking" India's reserve gold at Bank of England, 131-132. Economic progress of India, 18991908, 96-99. Economic results of Porto Rican cur- rency reform, 210-224. Edgeworth, F. G., cited, 10. Edwards, Clarence R., cited, 255, 264. Egozcue, Manuel, cited, 197. El Impartial, Spanish newspaper of Mayaguez, P. R., cited, 176, 215, 216. Exchange rates, in India, decline of, after closing of mints, 50-51 ; explanation of decline, 51-54; how variations^in, are related to changes in price level, 62-66 ; in Philippines, official rates between U. S. currency and local currency, tabulated, 281 ; foreign exchange rates in Philippines, effect of fluctuations in, upon import and export trade, illus- trated, 292-298; exchange rates in Singapore on London, 1891-1901, 398; extreme fluctuations in Singapore ex- change during currency crisis of 1906, 414-415 ; monthly rates in Singapore 556 INDEX and Hongkong on London, 1902-1905, tabulated, 460-461 ; monthly rates in City of Mexico on New York, 1903- 1908, tabulated, 549. Exchange, speculation in, in Porto Rico in 1898, 174; in Straits Settlements in 1905-1906, 412-415. Exchange value and bullion value, of Porto Rican peso, 1890-1895, tabu- lated by months, 235-236; same, 1896-1900, 237-238; same, for Mexi- can peso in Philippines, 1893-1904, charted, 251 ; same, for Straits Settlements dollar, 19011909, charted, 408; same, for Mexican peso in Mexico, 19011909, charted, 535. Exportation, of silver coin and bullion, from Philippines prohibited, 355 ; of silver dollars from Straits Settlements prohibited, 405, of Mexican dollar from Philippines taxed, 275, tax re- pealed, 277-278; exportation of Mexi- can dollars from Mexico taxed, 544- 545- Export point, of new Philippine coins in 1905-1906,351. Export trade, of India, 1875-1892, 23; was it stimulated by declining ex- change? 24-28; export trade of Porto Rico large in proportion to home trade, 192-193, 21 1 ; export trade of Straits Settlements, proportions of, to gold and to silver standard countries, 1891- 1901, 399-400; how affected by Straits currency reform, 428-433 ; ex- port trade of Mexico, extent to which stimulated by decline in gold price of silver, 479-483, 490-492. Europeans in India, suffer hardship from falling exchange rates, 29-30. European War, measures for meeting war emergency as regards Indian cur- rency, 146147. Falling exchange rates, in India, inhibit- ing influence of, on import trade, 26- 28; cause hardship to Europeans in Indian service, 29-30; influence of, on Indian Commerce, 23-29 ; influence of, on Mexican Commerce, 479-483, 490-492. Farrer, T. H., cited, 33. Favre, J., cited, 473, 526. Fiduciary standard, in Porto Rico prior to American occupation, 156-169; in Philippines, 1877-1898, 251-253; dis- continued in Philippines, 268. Fifth subcommission of Mexican Mone- tary Commission, work of, 502-518. Fisher, Irving, cited, 19. Foraker bill, history of, 199-202 ; pro- visions of, concerning Porto Rican currency, 200; discussion of currency provisions of, in Congress, 201 ; be- came law April 12, 1000, 202. Foreign exchange rates. See Exchange Rates and Exchange Value. Foreign trade, of Porto Rico, how af- fected by canje, 210-212; of Philip- pines, how influenced by silver stand- ard, 290-298 ; proportion of, with gold standard and silver standard countries, respectively, 1900 to 1903, 291 292 ; of Straits Settlements, with gold standard and silver standard countries, 1891 1901, 399400; how affected by cur- rency reform, 426433 ; of Mexico, unset tlement of, due to silver standard, 477; extent to which benefited by fall in gold price of silver, 479-483. See also Export Trade, and Import Trade. Forward exchange contracts, in Philip- pines, 296-298; in Straits Settlements, 411. Fourth subcommission of Mexican Mone- tary Commission, conclusions of, 500- 502. Fowler Committee, occasion of appoint- ment of, 55 ; work of, 72-73 ; report of, 72-94; rejects proposal for bi- metallism for India, 75; rejects pro- posal for India to return to silver standard, 77 ; attitude of, toward a gold circulation for India, 93, toward a gold reserve, 9394; favors con- tinuance of 1 6d. par, 94. Fractional coins, in India, 5 ; for Philip- pines, provisions concerning in Philip- pine Civil Government Act, 309-311. Fraser and Company, brokers, cited, 461. Fraud, temptation to, caused by dual currency system in Philippines, 289- 290. Free coinage of silver, in India to 1893, 5. Frewen, Moreton, cited, on influence of declining exchange upon foreign trade of Hakodate, Japan, 24-25. INDEX 557 Fritze, H. C., cited, igi. Fritz Lundt & Co., cited, 235. Gaines, Morrill W., cited, 484. Gambier, price of, how affected by "raising" of Straits dollar, 431-433. Gloner, Prosper, cited, 471, 474. Gold, appreciation in value of, 1873- 1893, 19-21 ; circulation of, in India, encouraged by Government, 108-110, arguments in favor of encouraging, 130141, arguments against encourag- ing, 141-142 ; rupees to be given for, in India, at rate of i6d. to the rupee, 35 ; payment of, in India, by Gov- ernment, in exchange for rupees, 100- 110; payment of, in exchange for rupees, temporarily discontinued in crisis of 10071908, 116; heavy demands for, in India in 1007-1008, for hoarding, 121, 128 ; used in Philip- pines as money as early as 1627, 245. See also Gold Coin, and Gold Reserve. Gold certificates issued in Mexico, 546- 547- Gold coin, early circulation of, in In- dia, 4; legal tender in certain prov- inces of India, 4 ; legal tender quality removed from, in India, in 1835, 5-6; amount of, in circulation in India, 1800-1835, 6; efforts of Gov- ernment to introduce into India's circulation, 6-7 ; agitation for circula- tion of British sovereign in India, 7 ; coinage of, at Bombay mint, contem- plated, iio-in; movement for coin- age of, in India, 143-144 ; attitude of Royal Commission on, 144-145 ; driven out of circulation in Philippines by 1884, 247 ; gold coins of U. S. and gold bars authorized to be sold and bought by Philippine Government for Philippine coins, 322; gold coin of U. S. authorized to be substituted for pesos in Philippine silver certificate reserve, 356-357 ; gold coins in Mex- ico, 472, 545-547- Gold debt of India, 15-22; of Straits Settlements, 442 ; of Mexico prior to 1904, 474-476. Gold drafts, redemption in. See Gold- exchange Standard, and Lindsay, A. M. Gold-exchange standard, proposed for India and rejected, 89-92 ; beginnings of, in India, 100-104 ; development of, in India, during crisis of 1907-1908, 117118, 122123; established in Philippines, 310-320; functioning of, in Philippines, explained, 319-322 ; beginnings of, in Straits Settlements, 417; principle of, rejected in Straits Settlements, 410-420; reasons given in Straits Settlements for rejection of, discussed, 420422 ; gradually adopted in Straits, 452, 453~4S8; how func- tions in Straits, 458-459; contem- plated for Mexico, 509, 531-532. See also Lindsay, A. M. Gold reserve, amount and location of, advocated for India under Lindsay plan, 85-89; Gold Reserve Fund established for India, 104-107; through influence of Secretary of State for India made an invested "secondary reserve" instead of a redemption fund, 106-107; Gold Reserve Fund in India transformed into Gold Standard Reserve, 107-108; Gold Standard Reserve in India before and after crisis of 1007-1908, 119, found too small, 125-137, location of, in London, recommended by Royal Commission, 127-129; larger propor- tion of gold to securities needed in India's Gold Standard Reserve, 131- 133; movement in favor of keeping a larger proportion of India's Reserve in form of "ear-marked" gold in Bank of England, 131-132; Gold Standard Fund authorized for Philip- pines, 318; rates for drafts sold by Government on Fund, 319-321, 356; considerations concerning proper size of Fund for Philippines, 367-369; in- vestment and deposit in banks of part of Fund by Philippine Government, 369-373; criticism of Philippine Government's recent administration of Gold Standard Fund, 375-382; gold reserve for Mexico, debate over advisability of, 508-518. Gold Standard Fund. See Gold Reserve. Gold standard, proposals for, in India, in 1893, 13; proposals for, without a gold currency, 77-92 ; proposals for, in Philippines, and attitude of dif- ferent classes of people toward, 298- 558 INDEX 299 ; plan for gold standard for Straits Settlements recommended by Singa- pore Chamber of Commerce in 1897, 394-3Q6; various plans for introduc- ing, into Straits Settlements, 401 ; plan recommended by Straits Cur- rency Committee, 402-403; plan adopted for Straits Settlements, 404; gold standard system adopted for Mexico, 519-526. See also table of contents. Government finances, bearing of, on movement for establishment of gold standard, in India, 14-22; in Philip- pines, 281-290, in Straits Settlements, 398-399, in Mexico, 473-479. Government notes, in India, character of, 8-10. See also Currency Notes. Government rupee, origin of, in India, in 1862, 5. Gradual introduction of U. S. currency into Porto Rico, favored by Secretary Gage, 194-195; objected to by many, 195, 199- Greenbacks, experience with in U. S. cited, 63-64. Greene, General F. V., agreement of, with Manila banks concerning main- tenance of exchange and importation of Mexican pesos, 267-268. Gresham's law, how it operated in 1903- 1904 in Philippines, 328-333. Gurza, Jaime, cited, 490-491. Half-cent piece, advocated for Porto Rico, 233. Hanna, Hugh H., cited, 496. Hanna, Philip C., cited, 195. Harden, Edward W., cited, 248, 301. Harrison, F. C., cited, 6, 9, 10, 15. Hegemann, Werner, cited, 467, 484, 487, 521, 524, 536, 544, 546. Henry, General Guy V., cited, 172, 173, 174, 175- Herschell Committee, appointment of, 13; work of, 13-14; defects in Indian currency system found by, 14-32 ; ac- cepts with modifications currency reform plan of Indian Government, 32-33- Hill, E. J., cited, 304, 312. Hoards and ornaments, in India, value of, affected by closure of mints, 45-46. Hollander, Jacob H., cited, 207. "Home charges," of India, in 1892, analyzed, 15 ; amount of, increased by depreciation in gold value of silver from 1873 to 1893, 1 6, 21-22. Hongkong and Shanghai Banking Cor- poration, mentioned, 267, 461. Hunt, William H., cited, 218. Huttenbach, August, cited, 400. Ide, Henry C., mentioned, 308, 339. Importation of Mexican currency and other local currency into Philippines prohibited, 335. Import trade, of India, 23; of Porto Rico, 193 ; of Straits Settlements, 399- 400; of Mexico, 482-483. See also Foreign Trade. Indian exchange rates, fluctuations in, 1880-1899, charted, 50. Indian Government, currency reform proposals of, in 1898, 72-73; criticizes Lindsay plan, 89 ; proposes to contract currency by melting rupees, 92-93. Indian mints, closed to free coinage of silver, 35-36; proposal to open, to free coinage of gold, iio-m, 143- 145- Indian plan for attainment of gold stand- ard, favored for Mexico, 505. Indian prosperity, 1899-1907, causes large offerings of gold to Government to secure rupees, 95-100. Indian public debt, a factor in movement for gold standard, 15-16. Indian reserve money, loaned in London market, 130; deposited in selected London banks, 130-131 ; criticism of policy of loaning and depositing, and charges of favoritism in regard to, 131. Indian revenues, increase of, to meet losses from falling exchange, difficult, 31-32. Ingot reserve, established in India, 107 ; transferred from Paper Currency Reserve to Gold Standard Reserve, 108. Investment of foreign capital, in Mexico, extent of, 484-485 ; different types of investments, 485-486. Japan, falling exchange stimulates export trade in, 2426. Jenks, Jeremiah W., cited, 296, 311, 480, 496. INDEX 559 Johnson, G. W., appointed member of Straits Currency Committee, 396. Johnson, Joseph French, cited, 491. Jones, H. D. C., mentioned, 251. Kemmerer, E. W., appointed "expert adviser" to Philippine Government in work of currency reform, 317; appointed Chief of Division of Cur- rency, 318; cited, 28, 70, 313, 349, 538. Keynes, J. M., cited, 66, 70, 124, 141- 142. Labastida, Louis G., mentioned, 497. La Carres pondencia, daily newspaper of San Juan, P. R., cited, 205, 207, 208, 209, 214, 21$, 2l6, 219, 220, 221, 222, 228. La Democracia, daily newspaper of Ponce, P. R., cited, 215. Lakh, defined, 17. Landero y Cos, J., cited, 503, 540. Land revenue, Indian, largely fixed by settlements covering long periods, 31- 32. Landron, Rafael Lopez, cited, 155-156, 159, 162, 164. Law, Sir Edward, cited, 104-505. Leake, W. M., mentioned, 76. Legal tender, gold coins, in India, 4-6; legal tender provisions of Philippine Coinage Act, 315; removal of legal tender quality from local currency in Philippines has little influence on its circulation, 330; legal tender quality given Mexican, British, and certain other dollars in Straits Settlements in 1867, 391-392, removed, 406. Le Roy, James A., cited, 252, 254-255. Limantour, Jose", Finance Minister of Mexico, cited, 488-489, 493, 522, 541. Lindsay, A. M., publications of, on Indian currency reform, 79-80 ; formu- lates plan of a gold standard without a gold currency for India, 80-88; objections raised to Lindsay plan and Lindsay's replies, 89-92; Lindsay, cited, 513. See also Gold-exchange Standard. Local currency, proposal to use for fiscal operations of Military Government in Philippines, 259; difficulties in so using, 259-263 ; used in Philippines by most departments of Military Gov- ernment, 265; difficulties experienced in Philippines in withdrawing from circulation, 324-346; "2 to i" rate advocated for redemption of, 325 ; amount of, in circulation, estimate of, 325; heavy exportation of, in 1903, 327; drives new gold standard cur- rency out of circulation almost as rapidly as latter is introduced, 327-332. Lodge, Henry Cabot, cited, 309. Lubbock, Sir John, plan of, for reopening Indian mints to free coinage of silver, 76. MacDonell, Sir A. P., mentioned, 53. Macedo, Pablo, mentioned, 497. McKinley, President, issues order Jan. i, 1809, giving Porto Rican peso an official rating of 60 cents United States currency, 174, 178. Manchester manufacturers, attitude of, toward certain proposed taxes in India, 31. Manila ordinance requires merchants to post rate-cards showing terms on which they receive different currencies, 329- 330. Manila Times, cited, 255-256. Mansfield Commission, mentioned, 7. Masayoshi, Matsukata, cited, 26. Mexican and British dollars, shipped in large quantities to Straits in anticipa- tion of currency reform, 404 ; importa- tion of, prohibited, 405 ; demonetized, 405-406. Mexican Commission on International Exchange, cited, 488. Mexican currency, 1867 to 1903, 472-473. Mexican dollar. See Mexican peso. Mexican Monetary Commission, ap- pointed, 497; organization of, and apportionment of work of, 497-499; conclusions of 4th subcommission of, 500-502 ; work of sth subcommission of, 502-518; adopts recommendations of sth subcommission and is dissolved, 518. Mexican peso, made legally current in Porto Rico hi 1879, 156; drives out Spanish coins, 156; importation of, into Porto Rico, prohibited hi 1886, 157 ; monthly fluctuations in exchange and bullion value of, in Porto Rico, 1800-1895, 157-158; smuggled into 5 6 INDEX Porto Rico, 158-150; importation of, into Philippines, conditionally author- ized, 268; heavy importations of, by Philippine banks, 269; value of, in- creased by Boxer uprising in China, 268-269; appreciates in Philippines above $0.50 in its gold value, 270; some facts in history of, 467-469; new Mexican peso with new fractional coins recommended for circulation in Mexico, 503-505, recommendation for, rejected by Government, 521-523; exchange and bullion values of peso in Mexico, monthly, 1901-1909, charted, 535- Mexican silver money, used in Philip- pines early in igth century, 246; importation of, into Philippines, pro- hibited in 1877; smuggling of, into Philippines, 248. Mexico, a large producer of silver, 467 ; famous for silver dollar, 468-469; economic conditions in, preceding currency reform of 1903-1908, 471- 494. Military government of U. S., currency regulations of, in Porto Rico, 171-177 ; currency problem under, in Philip- pines, 254-277; authorizes Manila banks to redeem U. S. currency at "2 to i" on its account, 272-275. Mill, John Stuart, cited, on relation of money supply to price level, 61-62. Mining industry in Mexico, measures to alleviate hardships to, caused by currency reform, 530. Mitchell, W. C., cited, 64. Mohur, gold, circulation of, in India in 1835, 6. Molesworth, Guilford L., cited, 46. Money, of Straits Settlements, "cor- nered " by a representative of a foreign bank, 412-415. Monopoly value, principle of, as applied to currency, exemplified in India, 38- 66; in Porto Rico, 157-167 ; in Philip- pines, 251-253. Mortgages on country and city property in Porto Rico, number of, and rates of interest on, 1880-1898, 189. Nasse, E., cited, 491, 497. National bank notes of U. S., discrimina- tion against, in Porto Rico, 176-177. National Bank of Mexico, cited, 549. Nicholson, J. Shields, cited, 140. Note Guarantee Fund in Straits Settle- ments becomes basis of gold-exchange standard, 453~458. O'Conor's index numbers for retail prices of food grains in India, 1893-1898, 60-61. Paper currency, in India prior to 1892, 8-10 ; great increase in circulation of, in India, since 1908, 136. See also Paper Currency Reserve, and Currency Notes. Paper currency reserve, for India, largely held in London, 100-104 ; amount of, for India, before and after crisis of 1907-1908, 118; authority given in 1913 to increase fiduciary portion of, to R 140 millions, and to invest the additional R 20 millions in sterling securities, 136-137 ; further increase in fiduciary portion of, recommended, 137. Paton, Federico G., cited, 162, 163. Paymaster's department of Military Gov- ernment of Philippines uses U. S. currency exclusively, 264-265. Penny, an important coin in Porto Rico, 213-214. Pfs., P, and $, use of these symbols, in discussion of Philippine currency reform, 262. Philippine banks, import Mexican pesos freely after August 1898, 269; fail to comply with their agreement with Government to maintain exchange at not less than Pfs. 2.00 to $i, 270, criticism of Philippine Government for failure to enforce compliance, 271 ; agreement of banks to purchase on government account U. S. currency at rate of 2 to i, 272, results of agreement, 273- Philippine currency, problem of, in U. S Congress, 308-313; provisions con- cerning, hi Philippine Civil Govern- ment Act, 300-311; Philippine Coin- age Act signed by President, 313, provisions of Act, 314-315 ; Philippine Gold-Standard Act, 317-319. See also table of contents for Part III. Philippine gold reserve, provision con- cerning, in Coinage Act, 315. INDEX 561 Philippine Gold-Standard Act, 317-319. Philippine gold-standard coins intro- duced into circulation, 316; become basis for government business, 316- 317- Philippine government salaries, put on new currency basis, 333. Philippine silver certificates, provisions of Coinage Act concerning, 315; sub- stitution of gold for silver as part of reserve of, 356-358. Philippine taxes, fees, fines, government salaries, etc., put upon new currency basis, 333. Porter, Robert P., cited, 156-157, 181, 182, 186, 194, 195. Porto Rican bank notes, prior to Ameri- can occupation, 165; placed upon U. S. currency basis, 205. Porto Rican currency, prior to 1879, 155 156; reform of, in 1895, 159166; condition of, at time of American occu- pation, 167-169; question of reform- ing, in U. S. Congress, 190-202. See also table of contents of Part I. Porto Rican currency reform. See analytical table of contents of Book II. Porto Rican peso of 1895, circulates at a higher gold value than Mexican peso, although of lighter weight and not re- deemable in gold, 166-168; exchange value and bullion value of, 1896-1900, charted, 167. See also Porto Rican Currency and table of contents of Part I. Prices, in India, 1893-1899, 58-60; 18991908, 9799; how changes in general prices are related to changes in foreign exchange rates, 62-66; in Porto Rico, how affected by currency reform, 212-219; protests against rising prices in Porto Rico, 214217; were price changes in Porto Rico per- manent, 223-224; effect of Philippine currency reform upon prices in Philip- pines, 345-346; effect of Straits Settlements currency reform upon prices in Straits, 424-426. Probyn, L. C., cited, 35 ; favors a gold standard for India without a gold currency, 77 ; currency reform plan of, 78-79; plan of, rejected by Fowler Committee, 79. 2O Profits, on Porto Rican recoinage of 1895-1896, 164-165; on Philippine recoinage of 1906-1907, 365-367; on Straits recoinage of 1906-1907, 449. Protection to home industries, in Mexico, claimed to be given by decline in silver, 493-494. Public debt. See Debt, Public. Quasi Bimetallism in Philippines, 278- 282. Raigosa, G., cited, 516. "Raising" rupee to i6d., plan for, put into operation, 35; how plan for, worked, 38-71. Ralli, Stephen A., cited, 26. Rate of conversion, for substituting U. S. currency for Porto Rican currency, debate over, 179-191 ; oo-cent rate of, adopted for Porto Rico, 191-193; was the oo-cent rate of, for Porto Rico, a wise one? 225-228; a "2 to i" rate of, advocated for Philippines but rejected by Government, 325-327. Recoinage, of Philippine coins minted under Act of 1903, 359-362 ; substitu- tion of new coins for old in Philippine circulation, 362-363; profits realized on recoinage, 365-366; recoinage of Straits dollar, 447-449. Redemption of Porto Rican currency in U. S. currency, 203 ; amount and kinds of Porto Rican currency redeemed, 204 ; kinds and denominations of U. S. currency paid out, 205 ; procedure of paying out large denominations of U. S. money in exchange for Porto Rican money criticized, 207 ; inade- quate number of exchange offices, 207-209. Reed, H. R., cited, 8, 118. Reed, M. F., cited, 134. Regulator fund for Mexican currency. See Reserve Fund. Rents in Porto Rico, how affected by currency reform, 219-220. Reserve Fund. See Gold Reserve. Retail prices, how affected by currency reform, in Porto Rico, 213-219; in Philippines, 344-346 ; in Straits Settle- ments, 424-426. Reverse council bills, sold during crisis of 1907-1008 in India, 122. 562 INDEX Ricardo, David, cited in defense of Lindsay plan for India, 80-81. Romero, Matias, cited, 488, 491, 493, 494. Root, Elihu, mentioned, 308. Rothschild, Alfred D., cited, 16. Royal Commission on Indian Finance and Currency, cited, 124, 127, 128, 129, 130, 131, 132, 134, 135, 136, 137, 138, 140, 144. Rupee, origin of, 4 ; many varieties of, in 1 8th century in India, 4; silver rupee of Indian Government made standard unit of value throughout India, 5; given a gold value of i6d., 35-37; coinage of, in India, 1899-1908, 100; coinage of, temporarily suspended, in November, 1907, 126 ; rupee portion of Indian Gold Standard Reserve trans- ferred back to Paper Currency Re- serve, 132-133 ; a gold lo-rupee piece advocated, 144. Russell, H. B., mentioned, 6, 75. Rutherford, H. K., cited, 25. Rx., meaning of symbol, 16. Salaries, of bank employees, how com- muted to allow for depreciation of local monetary unit, 262. See also Government Finances, and Wages. Savings bank notes in Ponce, P. R., 165. Secretary of State for India, suspends sale of council bills in 1893 with harm- ful results, 39-47; temporarily sus- pends sale again in crisis of 1907-1908, 115116; diverts seigniorage profits in India from Gold Standard Reserve to railway capital expenditures, m- 112. Seigniorage profits, realized by Philippine Government on recoinage of 1906 1907, 365367, by Straits Government in recoinage of 1906-1907, 449; di- verted by Secretary of State for India from Gold Standard Reserve to rail- way capital expenditures, 111-112. Seixas, A. M., mentioned, 186. Sherman Silver Purchase Act of 1890, influence of, on Indian currency situa- ^tion, 12, 15-16, 38-39. Silver, decline in gold value of, at time of closing of Indian mints in 1893, 38; decline in gold value of, 1901-1903, 376-277 ; rise in gold value of, in 1905- 1906, threatens driving new Philip- pine coins to melting pot, 349-354; requires government action to protect Philippine coins from melting and from exportation, 355-359; rise in silver causes similar situation and ultimate recoinage in Straits Settlements, 445- 449 ; decline in gold price of, extent to which stimulates export trade in Mex- ico, 490-493 ; coefficient of correla- tion for gold value of Mexican peso and Mexico's export trade, 491-492 ; claim that decline in price of silver protected home industries in Mexico, 493-494; rise in gold value of silver in 1905- 1906 threatens Mexican peso in Mexico with melting pot, 535 ; early considera- tion by Mexican authorities of such a contingency, 539-542 ; measures taken to protect peso from melting pot, 541- 547 \ Silver industry in Mexico, extent to which benefited by silver standard, 489. Silver standard, imposes heavy financial burdens upon Indian Government, 14- 17; return to, by India, favored by some, 76; rejected by Fowler Com- mittee, 77 ; established in Philippines in 1898, 268; influence of, on Philip- pine government finances, 282-291 ; causes losses and uncertainties in Philippine budget, 283-289; causes accounting difficulties in Philippines, 289-291 ; causes difficulties in connec- tion with Philippine foreign trade, 290-298; silver standard with new U. S. silver coins proposed for Philip- pines, 300-301 ; dissatisfaction with, in Straits Settlements, 393-394; re- form plan for, suggested by Singapore Chamber of Commerce in 1897, 394- 396; alleged advantages of silver standard in Mexico, 488-494; aban- donment of, in Mexico, recommended by Mexican Monetary Commission, 53> 5!8. See also table of contents. Singapore Chamber of Commerce, rec- ommends plan of currency reform for Straits Settlements in 1897, 394; plan is rejected, 395-396; writes Colonial Secretary in 1902 favoring fixity of exchange, 396. Sixteen pence rate for rupee a representa- tive one in 1891-1893, 36; assimilates INDEX 563 Indian currency conveniently to that of England, 37 ; difficulty of clinching in India in 1897-1898, 55. Sliding scale of customs duties, in Mexico, to meet revenue losses due to declines in silver, 476-477. Sobral, Enriquez Martinez, cited, 529, 53i, 547- Soler, Carlos M., subgovernor of Spanish Bank of Porto Rico, cited, 168, 170, 186-187, 196, 197. Sovereign, British, agitation for circula- tion of, in India, 7 ; made receivable in payment of government dues in India, 7; together with half-sovereign made receivable in payment of government dues in India at rate of i6d. to the rupee, 35; circulation of, in India, encouraged, 7, 143-144; coinage of, at Bombay mint, contemplated, 110- 1 1 1 ; attitude of Royal Commission on circulation of, in India, 144145. Spanish- American War demoralizes Porto Rican exchange, 160-170. Spanish copper coins, sent to Porto Rico in 1895 and later punched to prevent exportation, 164. Special treasury agent, quoted concern- ing work of exchanging U. S. currency for Porto Rican currency, 203, 206- 207. Speculation in exchange, excessive in Straits Settlements during period of "raising" dollar, 410-416. State Bank for India, proposals for, dis- cussed by J. M. Keynes, 124. Straits Settlements Currency Committee, appointed, 396 ; hearings and evidence taken by, 397 ; recommendations of, 402-404. Straits Settlements dollar, given a gold value of 2%d., 409. See also table of contents of Part IV. Straits Settlements currency notes. See Currency Notes. Sumner, William Graham, cited, 468. Taft, W. H., cited, 303-304, 3"- Tawney, James A., cited, 301. Taxation measures to drive local currency out of circulation in Philippines, 336- 340 ; effect of, 341-344. Tin, prices of, how affected by Straits Settlements currency reform, 430-432. Transit trade of Straits Settlements, 426 ; how affected by currency reform, 426- 428. Twenty-eight pence gold par, fixed for Straits Settlements dollar, 416-417. Two shilling gold par, advisability of, for Straits dollar, 440-441 ; suggestion of plan that would have been suitable for attainment of, 441-444. "Two to one" rate between U. S. cur- rency and local currency in Philip- pines, efforts of Military Government to maintain, 267-280; proposed as rate for withdrawing local currency from circulation, 325, rejected, 326-327. United States currency, brought to Porto Rico by American army and business men, 171 ; various value ratings of, with Porto Rican currency and result- ing confusion, 171-174; President McKinley issues order making 60 cents U. S. currency official rating for Porto Rican peso, 174; difficulties in making oo-cent rate effective, 175-177; plan to introduce U. S. currency system into Porto Rico, 178; question of an equitable rate of conversion, 178-193 ; how transition to U. S. currency basis should be effected, 193-199; problem of Porto Rican currency reform in U. S. Congress, 199-202; limited use of U. S. currency in Porto Rico prior to canje, 229-230 ; procedure followed in introducing, into Porto Rico, 203- 207, criticism of procedure, 207-209, a different procedure suggested, 228- 233; proposal to use U. S. currency for fiscal operations of Military Gov- ernment in Philippines, 256-259, ex- tent to which so used, 257, difficulties in using, 258. United States paper currency inter- changeable with Philippine pesos at government treasury, optionally with Government, 322; discrimination against, in Philippines, 270 ; advocated by many as the currency for the Philippines, 301-302; arguments in favor of, for Philippines, 302-303; arguments against, for Philippines, 303-306; United States currency deposits by public objected to by Manila banks, 383-385. INDEX Viollet, Eugene, cited, 491. Wages, how affected by currency reform, in Porto Rico, 220-224; in Straits Settlements, 425, 432. Webb, M. de P., cited, 131. Welty, Frank M., cited, 237. Westland, Sir James, criticizes Lindsay plan, 90-91. Weymouth, T. G. J., mentioned, 165. Whelpley, J. D., cited, 188. Wiener, Clarence, cited, 172, 174. Wilson, James, Indian index numbers prepared by, 21. Wilson, Sir Guy D. A. Fleetwood, cited, 140. Wolcott Commission, cited, 74-75. Printed in the United States of America. E following pages contain advertisements of books by the same author or on kindred subjects. A History of Currency in the United States BY A. BARTON HEPBURN, LL.D. Chairman of the Board of Directors of the Chase National Bank, formerly Comptroller of the Currency, ex-Superintendent of Banks of the State of New York, ex-President of the New York Chamber of Com- merce and ex-President of the New York Clearing House New edition, cloth, 8vo t $2.50 The purpose of this volume is to place before the public all the essential facts as to currency, coinage and banking, from the wampumpeage of the colonies to the notes of our Federal Reserve Banks as well as the indispensable political history connected therewith. " Nobody who follows financial subjects can afford to be without this book . . . libraries ought to have it, men of busi- ness should study it, and would find pleasure in doing so, many legislators are in especial need of reading, learning, and inwardly digesting it." New York Times. "No more authoritative work upon the currency of the United States ever has been issued than that written by A. Barton Hepburn ... the book should be carefully read by every banker or other persons interested in finance." Boston Herald. THE MACMILLAN COMPANY Publishers 64-66 Fifth Avenue New York The Purchasing Power of Money BY IRVING FISHER A Study of the Causes Determining the General Level of Prices. An Kipbnatinn of the Rise in the Cost of Living between 1896 and 1911 NcuEti&m. drift, to, 505 *oge?, 2.25 "Hie book is a logical, dear-cut and incisive study of the facts anrf prim Ij4r*> of a, question aflJM'ilug tJM> welfare of "***, ami it is not too much to say that it is a distinct contribution to *et**mr literature. Certainly no student or nader in the fidd of erommks can afford to pass it by unread." Boston Eaaami Transcript, " A notably original and suggestive study of the causes about periodic changes in the level of prices." No* York 5m. and his book, with its thorough patient student of pofitkal economy." Daily Nan. "One of the most important eonomk works of recent years." -In connection with die recent talk of gold production as the rf Ugh prices there is much of Tame and ID umina tkxi in this sdentific, yet readable waA-" Record Herald. THE MACMILLAN COMP.\XY 64-66 Fifi Avezue New York Practical Problems in Banking and Currency Being & number of selected addresses delivered in recent years by prominent bankers, financiers, and economists. Edited by WALTER HENRY HULL With an Introduction by the Hon. C. F. PHILLIPS, of New York Cfcrt, Svo, 596 pages, Jjrfo A compilation of addresses delivered since 1900 before associations of bankers throughout the country. The addresses are grouped under the following heads: General Banking; Banking Reform and Cur- rency ; Trust Companies. Public Finance BY C. F. BASTABLE Professor of Political Economy in the University of Dublin TKnlE&ti** 0*1, *t, TSopag*. fc.jo CONTENTS State Economy Cost of Defence Justice and Security Adminis- trative Supervision Education, Religion Industry and Commerce Expenditure Central and Local Expenditure The Economic Re- ceiptsThe State Domain The Industrial Domain The State as a Capitalist State Property Taxation : General Features, Distribu- tion, Land Taxes. Capital and Business Taxes, Personal and Wages Taxes, Property and Income Taxes, Direct Consumption Taxes, Internal Taxes on Commodities, Customs Duties, Taxes on Communicants and Acts, Taxes on Successions State Treasures Public Indebtedness The History of the English Debt Public Credit and Public Debt Theories Forms of Public Debt Redemption and Conversion of Debt Local Indebtedness Financial Administration and Control. 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