H 
 
 i / 
 
 w 
 
 LIBRARY 
 
 OF THK 
 
 University of California. 
 
 <^. oC^^L^^C-y-T^ 
 
 Accession No. ^y3 ^^ • Class No. 
 
Digitized by the Internet Archive 
 
 in 2007 with funding from 
 
 IVIicrosoft Corporation 
 
 http://www.archive.org/details/bimetallismexamiOOIIoyrich 
 
Bimetallism Examined. 
 
 REPRINTED FROM THE ** ^totlSL 
 
 "STATIST" Press, 51, Camion Street, London. 
 
 1894- 
 

 (^^3^^ 
 
 WYMAN AND SONS, LIMITED, 
 
 PRINTERS, 
 
 63, 65, & 67, CARTER LANE, DOCTORS COMMONS, 
 
 LONDON, E.C. 
 
PREFACE 
 
 The following papers have all appeared in The Statist, 
 and are now collected and republished, in the hope that 
 they may be of service to those who, without being 
 professed students of currency questions, yet desire to 
 understand the Bimetallist controversy. The method of 
 discussion, I am painfully aware, has grave drawbacks. It 
 makes systematic treatment irn|)ossible. It imposes such 
 limits as render exhaustive analysis and exposition un- 
 attainable. And it demands brevity so strongly that it 
 tempts to an omission of necessary qualifications. But I 
 venture to think that it has counterbalancing advantages. 
 It compels the writer to avoid technical language, which too 
 often only serves as a veil to hid^ poverty of thought. It 
 requires him to use plain words intelligible to everybody. 
 It obliges him to avoid prolixity, to disregard what is un- 
 essential. It urges him to array the strongest and most 
 telling arguments ; and it does ,not impose such a strain 
 upon the attention of the reader as a book does. The 
 articles having originally appeared at intervals of a week 
 apart, and having been addressed to a more or less varying 
 body of readers, had to be complete, each in itself ; or, at 
 all events, had to be intelligible without reference to what 
 had gone before and therefore needed to have a beginning, 
 middle and end. Consequently the reader may take up 
 or lay down the pamphlet without losing the thread of 
 the argument. Yet I venture to hope that there will be 
 found enough of continuity of thought running through 
 the papers to justify their republication in the present 
 form, 
 
 T, U 
 
BIMETALLISM 
 
 REPRINTED FROM "THE STATIST. 
 
 THE THEORY OF VALUE.*— I. 
 
 The accepted theory of value, I venture to think, is largely re- 
 sponsible for the discredit into which political economy has fallen ; 
 it confuses thinkers and it misleads the public. How widespread 
 is the dissatisfaction with it is proved among other things by the 
 keen attention excited by the speculations of the Austrian school. 
 The theory briefly stated is that value depends upon supply and 
 demand conditioned by the cost of production. The cost of 
 production, however, does not directly affect value. It determines 
 whether a thing is or is not to be produced in the future, but, ex- 
 cept very indirectly, it has no bearing upon value. If the cost of 
 production is increased, either a substitute will be found and the 
 thing will go out of use, or production will be transferred to some 
 other place where the cost is less — provided the desire for it is not 
 keen. But if there is a very strong desire for it the value, of 
 course, will increase. In that case, however, the value is deter- 
 mined by the strength of the desire, not by the cost of production. 
 In short, the introduction of the cost of production is supereroga- 
 
 * From 77/^ .S/a/zV/ of November ii, i8q^. 
 
( 6 ) 
 
 tory if the rest of the theory is correct. The first objection to the 
 theory that will naturally occur is that supply is a physical quantity 
 and demand a mental state, and that there cannot be a quantitative 
 relation between a physical quantity and a mental state. A non- 
 natural meaning, therefore, must be given to the word " demand " 
 to enable the theory to bear criticism. But even if this be done the 
 theory is unsatisfactory, for every day's experience proves that it 
 does not fit in with the facts. It is not, for example, the supply 
 actually offering in the market, nor even the supply known to 
 exist and believed to be saleable, that alone affects value. The 
 prospect of an increase or a decrease in the supply often has a 
 more powerful influence, as, for example, the state of the growing 
 crops. To make the theory, therefore, even approximately accu- 
 rate, instead of " supply " simply we should say the supply actual, 
 potential, and prospective. But the potential and prospective 
 supply at all events can only be estimated, and, therefore, it is not 
 supply, but the estimate of supply, that affects value. Now let 
 us turn to the word " demand," and the first thing that strikes us 
 is that the very strongest of all demands has no influence what- 
 ever upon value — as, for instance, the demand of the penniless all 
 over the world for food, clothing, and dwellings. To get over 
 this objection it has been suggested that for the word " demand " 
 should be substituted the phrase "effective demand," which is very 
 much like saying that a demand affects value when it affects value. 
 What is, of course, meant by the phrase is the purchasing power 
 of those who demand. But the purchasing power can be nothing 
 more than the supply of other things which those who demand 
 have at their disposal, so that our analysis of the theory brings us 
 to this, that the value of a thing is determined by the relation 
 between the estimate of the supply of that thing and the estimate 
 of the supply of all other things offering for it. Can there be a 
 quantitative relation between two guesses ? 
 
 It may be objected by those who hate to be disturbed in their 
 opinions that the above is mere hair-splitting. I submit that it is 
 much more, and I proceed to show that the accepted theory does 
 
( 7 ) 
 
 not account for the facts. Between 1865, when the Civil War 
 ended, and 1879, when resumption was effected, there was a mar- 
 vellous growth of wealth and population in the United States. On 
 the other hand, from 1870 downwards, there was a very consider- 
 able reduction in the incontrovertible paper money, yet that money 
 did not rise to its legal par until the very eve of resumption, the 
 very end of 1878. Then the success of the measures taken for 
 carrying out resumption, and of the negotiations for the re-funding 
 of the interest-bearing debt so powerfully impressed the imagina- 
 tion of the world that paper rose to par automatically. Yet, in 
 1878 the Bland Act was passed, requiring the purchase and coin- 
 age of not less than two million dollars worth of silver every 
 month. The Treasury, too, had accumulated a considerable 
 amount of gold, and it was decided that the mints were to be open 
 to the free coinage of that metal. The currency, whether metallic 
 or paper, was thus on the point of being enormously increased ; 
 and yet, with this increase plainly in view, the paper money rose 
 to par. It is plain that this was due neither to supply nor to 
 demand, but was simply the result of a change of opinion. 
 Again, the gold premium in Buenos Ayres rose in the autumn of 
 1 89 1 to about 360. It fell in the autumn of the following year to 
 about 165, and it has risen this year to over 260. There was no 
 such contraction of the currency between the autumn of 1891 and 
 that of 1892 as would account for so extraordinary a rise m the value 
 of the paper money as actually took place, nor has there been since 
 such an increase in the currency as would explain the fall. The 
 movements have been due simply to opinion. The peaceful 
 election of President Saenz-Pena and his quiet installation in 
 office filled everyone at home and abroad'with hopes that the Con- 
 federation was entering upon a period of recuperation and pros- 
 perity. The political troubles since have disappointed those hopes 
 and inspired grave fears ; and the paper money has fluctuated in 
 value with the hopes and the fears. Once more, while the 
 Sherman Bill was under discussion in the United States Congress, 
 .there sprang up a great speculation in silver, and the price rose 
 
 B 2 
 
( 8 ) 
 
 from about 43^d. per ounce to 54^d. per ounce, a rise of about 
 25^ per cent. The Bill became law in July, 1890, and actually 
 came into force in the middle of August. The highest price 
 touched by silver was in the first week of September, when the 
 Act was in operation not quite three weeks. Clearly the rise was 
 purely speculative — was due, that is, not to supply nor to demand, 
 but to the belief of the speculators that the value of the metal 
 was about to be maintained at a very high figure. From the first 
 week of September, 1890, the price fell with few interruptions, 
 until, in June of this year, it touched 3od., from which it has since 
 recovered to about 34d. The fall was as manifestly due to 
 opinion as the previous rise had been. The world, generally, 
 made up its mind that the United States experiment must fail, 
 and, therefore, in spite of all the American Government, the great 
 mining companies, and the speculators could do, the silver market 
 broke in the way we have seen. Still another instance is furnished 
 by the rapid fluctuations in the price of wheat during 1891. 
 Between the end of March and the middle of May there was a rise of 
 about 9s. per quarter. Then there was a sharp fall, then there was 
 another rise — the highest point being reached in September. There 
 was another fall and another rise, but after December, 1891, there 
 was a steady downward movement. These fluctuations are explained 
 by varying news as to the prospects of the crops all over Europe, 
 and especially in Russia, during the summer ; in the autumn and 
 in the winter, by the reports concerning the quantities of grain 
 available for export. Here, again, we see values regulated neither 
 by supply nor by demand, but simply by opinion, every change of 
 the latter being quickly reflected in the markets. Lastly, every 
 careful observer of the Stock Exchange is aware that a skilful 
 operator may, and frequently does, buy a great amount of stock 
 without very much influencing prices. Usually he employs more 
 than one broker, and the brokers so cleverly buy and sell that the 
 market is confused, and is not quite sure what is going on. An 
 unusually great demand may in this way be satisfied without such 
 a change in prices as would seem inevitable. And, similarly, a 
 
( 9 ) 
 
 very large amount may be sold without such a fall as beforehand 
 would certainly be predicted. On the other hand, if it is noised 
 abroad that a great capitalist whose judgment is respected is buy- 
 ing largely there is sure to be a rapid rise. 
 
 THE THEORY OF VALUE.*— H. 
 
 The standard works on Political Economy say that everything 
 which is capable of gratifying a human desire, and which is ex- 
 changeable, has value. Has it ? To enjoy the good things of 
 this world without working for them is a strong human desire ; 
 and power to compel men and women to work for one without 
 paying them gratifies that desire, while obviously men and women 
 are exchangeable. Therefore, until a recent date in the history 
 of the world, men and women were almost everywhere made 
 slaves, and were bought and sold just as cattle are. But now, 
 outside of the possessions of Spain, slavery is prohibited in all 
 civilised countries. Thus we see that men and women had value 
 in the economic sense of the word almost everywhere formerly, 
 and that they have not value now in most parts of the civilised 
 world. Again, in primitive communities land has not value in 
 the full economic sense. It belongs to the clan, or tribe, or 
 village community, and the members of the community have the 
 usufruct of it. Often it is redistributed amongst them at stated 
 intervals; but it is not marketable, it is not private property, it 
 cannot be alienated either by the community or by the clan chief. 
 The land, in fact, is occupied but it is not owned, properly speak- 
 ing; it is rather like the air and the sunshine. In still more 
 primitive states it is not even fully occupied. The nomad tribes 
 
 * From TJie Statist of November i8, il 
 
( lo ) 
 
 move according to the seasons from district to district. Mostly 
 the nomad tribes return to the same places at the respective sea- 
 sons, but they have not our conception of ownership. Their 
 claim more nearly resembles that of the dog to his special corner. 
 To take a third instance, the right of presentation to an ecclesias- 
 tical benefice is property in England ; it has value and is bought 
 and sold. In many other countries to attempt to deal in it would 
 be considered sacriligeous. Up to a few years ago, furthermore, 
 commissions in the army were, in the same way, property, and 
 were openly dealt in; they have now ceased to have value. 
 Lastly, all kinds of public offices, including Judgeships, formerly 
 were matters of bargain. But traffic in such offices now is con- 
 sidered corruption, and is rigorously put down in civilised coun- 
 tries. Surely that is not an accurate definition which is true in 
 Cuba and not in England, which was true formerly, but is so no 
 longer, which is true in the present, and was not true in the past. 
 A definition to be worth anything must be true always and 
 everywhere ; a single exception proves it to be incomplete. The 
 generally accepted definition of value, then, is clearly incomplete. 
 It leaves out something essential, something that differentiates 
 value from mere utility, as well as from utility combined with ex- 
 changeability. I venture to think that economists generally have 
 misapprehended the real nature of value because they have not 
 paid due attention to its subjectivity. 
 
 Every competent economist, of course, would admit, if chal- 
 lenged, that value is subjective, that it is not a something inherent 
 in external objects, but is attributed to them by us. But none of 
 them give importance to the fact, and most would expressly deny 
 that importance is due to it. They would say that what we call 
 the qualities of external objects are all subjective, and so, no 
 doubt, they are, but not in the same sense. For example, the 
 hardness of a piece of iron is always the same, provided heat is 
 not applied ; it does not vary with our moods. But the value of 
 a thing does vary with our moods. A caprice of fashion lifts a 
 thing into sudden estimation and drops it just as quickly — a 
 
^ " ) 
 
 fabric, a garment, a colour, a piece of old china. The crinoline 
 and the chignon of a few years ago are not of the same value 
 now as they were then, simply because fashion has changed. It 
 has been well said that the history of civilisation is the history of 
 inventions, and the history of inventions from one point of view 
 is the history of the introducing and discarding of values. There 
 are countless multitudes of things that were once of high value 
 and that now have little or none. The armour, so indispensable 
 to the mail-clad knight, and the manufacture of which gave em- 
 ployment to so large a proportion of people in the middle ages, is 
 now only an object of curiosity. The windmills so frequent in 
 English scenery represent a dying industry. The domestic spin- 
 ning-wheel, though still to be found in the cottages of remote 
 districts and in backward countries, has gone completely out of 
 use everywhere else. These are but a few illustrations ; there are 
 countless others, some of which we are acquainted with only in 
 museums, some are known solely through the writings of ancient 
 authors, the memory of others is so completely lost that when a 
 specimen is dug up by the explorer of some ruin its use can only 
 be guessed at. It may be said that invention creates or destroys 
 demand, and that it is demand which determines value. Even if 
 that could be admitted — and it cannot — it would be beside the 
 point. If we were to stop at saying that a man is killed by 
 poison, or a knife, or a bullet, we should never get at the mur- 
 derer ; nay, there would be no such crime as murder on the 
 Statute Book, and consequently there would be no such criminal 
 as a murderer to be punished. 
 
 Invention, however, is only one of the causes that bring about 
 a great change in values. Closer communication between distant 
 countries — itself a consequence of invention — has likewise a potent 
 influence. Tea and coffee were unknown in Europe a few centuries 
 ago ; now they have become necessaries of life, and have driven 
 beer from the breakfast table. The change of habit has added 
 immensely to the value of land and the remuneration of labour 
 in the Far East and in South America, while it has kept down the 
 
( 12 ) 
 
 value of land in Europe by lessening the consumption of European 
 grain. A change in religion has likewise a considerable influence 
 on values. The Reformation, for example, destroyed the trade in 
 priests' vestments in this country ; the High Church revival has 
 brought it to life again. In an exclusively Hindoo community the 
 flesh of the cow has no value for human food ; nor has the flesh 
 of the pig in an exclusively Mohammedan ; and it is obvious that 
 if ever vegetarianism becomes universal, meat will cease to have 
 value, and not only will the butcher's trade be destroyed, but 
 so also will all the industries dependent upon the fattening of 
 cattle. In the same way, if ever total abstinence becomes uni- 
 versal, the liquor trade will be destroyed, and so will the 
 cultivation of the vine and of grain for both brewing and 
 distilling. The development of the moral sense likewise has a 
 powerful influence upon values. I have referred above to slavery. 
 Last century the Government of this country was thought to have 
 gained a great public advantage when it acquired a share in the 
 Spanish slave trade ; in the present century our Government 
 induced other States to join with it in keeping a squadron on the 
 West Coast of Africa to put down the slave trade. In a single 
 century the change of opinion has converted what used to be re- 
 garded not only as a gainful but as a legitimate traffic into a crime 
 against humanity. In short, every great change in the habits of a 
 people must have a most important bearing upon all values. 
 
 If the foregoing argument be admitted, it follows that in the 
 same country the same thing may have very great value at one 
 time, and little or no value at another. In like manner at the 
 same time the same thing may have great value in one country 
 and little or none in another. An adult European would hardly 
 stoop to pick up the glass beads which are so highly prized in 
 Central Africa that the natives will exchange ivory for them. On 
 the other hand, the ivory is valued so little in Africa that it is freely 
 exchanged for the glass beads ; and yet it is in such estimation in 
 Europe that men brave all the dangers of African travel to obtain 
 it. Similarly the cowries which pass as money in India have no 
 
( 13 ) 
 
 value here. Even amongst civilised countries the same phe- 
 nomenon may be observed. For example, a bank note which is 
 everywhere taken at home at its nominal value- has no currency 
 abroad. Value, then, varies with our moods, varies likewise from 
 country to country, varies, moreover, in the same country from 
 time to time ; and yet the thing to which it is attributed has al- 
 ways, and everywhere, precisely the same physical qualities. It is 
 equally exchangeable and equally capable of gratifying a human 
 desire. Clearly, therefore, everything which is exchangeable and 
 which can gratify a human desire has not value, for things that 
 have had value have lost it, and things that had no value have ac- 
 quired it. Equally, clearly, value is a function of opinion, and of 
 opinion, too, which varies from time to time, and from place to 
 place, I venture to submit, then, that value is given by the local 
 and temporary opinion which selects from the mass of exchange- 
 able things capable of gratifying human desires those best suited 
 at the time and in the stage of civilisation to do so. 
 
 THE THEORY OF VALUE.*— HI. 
 
 From the foregoing it appears that it is not utility which gives 
 value, nor utility combined with exchangeability, but it is the local 
 and temporary opinion which selects from the mass of exchangeable 
 things capable of gratifying human desires those best suited at the 
 time and in the stage of civilisation to do so. Selection by opinion 
 is the first essential of value. The second essential is inaccurately 
 and deceptively described by English economists as exchange- 
 ability. I submit that exchangeability does not confer value ; 
 and that neither does scarcity. What is really essential is 
 appropriability — if I may coin a word — or the capability of being 
 appropriated. It is quite true that what is exchangeable is 
 
 * From 77^^ 6'/a/zV/ of January 13, 1894. 
 
( 14 ) 
 
 usually also capable of being appropriated. But it is not the mere 
 fact that it is exchangeable which confers value ; it is the fact that 
 the thing has been appropriated and that nobody can, therefore, 
 get it without giving something for it — at least peacefully and 
 according to law. So again, it is not scarcity which confers 
 value, though the Austrian School, which is in absurd estimation 
 in this country just now, has revived that exploded fallacy. 
 
 The most useful of all things — or at all events the most indis- 
 pensable of all things — are, first, the air we breathe, without which 
 we could not live for a single moment ; secondly, the rays of the 
 sun, which give to our earth the warmth and light, without which 
 life — at all events as we know it on this planet — would be im- 
 possible ; and thirdly, the rain which gives the moisture, without 
 which there could be no vegetation, and consequently there could 
 be no food to maintain life. But of these three indispensably 
 useful things two do not exist in superfluity. Rain, for example, 
 is often so scarce that vast tracts of the earth suffer from drought, 
 and in the more backward countries the drought leads to disastrous 
 famines. Again, sunshine is certainly not in superfluity either in 
 the Arctic or Antarctic circles, in both of which there is no sunshine 
 for half the year. On the other hand, limitation of supply, or 
 scarcity, or whatever. other word be preferred, does not necessarily 
 confer value. Up to the other day our turnpike roads had value. 
 Nobody could use them, at least with a vehicle of any kind, with- 
 out paying for their use. But the turnpike roads have now been 
 freed, and they no longer have value. Yet the turnpike roads are 
 just as limited in supply now as they were before. It is not 
 limitation of supply, or scarcity, then, which confers value, and it 
 is not superfluity which prevents value from arising. What really 
 does give value is appropriation. Happily no man, or class of 
 men, or community, has ever yet been able to appropriate the 
 sunshine or the rain, and to say to all the rest of mankind that 
 they shall enjoy neither unless they pay for the privilege. There- 
 fore the rain and the sunshine are free, not because they are un- 
 limited, as has been just shown, but because nobody has ever yet 
 
( 15 ) 
 
 been able to appropriate them. If the rain-making inventions, 
 of which we have heard so much of late, ever succeed, doubtless 
 the Governments of each country in the world will take to them- 
 selves the right of working the inventions, and the Governments 
 then will be able to charge for rain, which thereby will acquire 
 value. But rain will not, if the idea is realised, be more limited 
 in supply or scarcer than it is now ; on the contrary, it will be 
 much more plentiful, for the Governments will be able to bring on 
 rain when they please. 
 
 In the standard English works on Political Economy, the power 
 of appropriation, which so largely contributes to confer value, is 
 called exchangeability. It is by no means a good word, but it is so 
 well established in the science now that it is not worth while to 
 try to displace it. Those, however, who really wish thoroughly to 
 understand the meaning of the word " value," must clearly bear 
 in mind that it is the power of appropriating to one's own use and 
 of excluding others from the use of a thing, which mainly con- 
 tributes to give value. Of course the thing must have utility. If 
 a person cared nothing for the thing or what it could do for him, he 
 would not take the trouble to appropriate it. In a sense, then, 
 utihty is the basis of value. We should ourselves prefer to say 
 that utility " conditions " value, and that even with utility value 
 cannot exist unless a man can appropriate the thing to his own 
 use. Having appropriated it, he excludes other people from its 
 use, and if other people wish to share in the use, or to acquire the 
 use of it, he can insist upon a price or a return, or an equivalent. 
 Value, therefore, from one point of view, is rather the opposite to 
 utility than a consequence of it. So far as those who are excluded 
 are concerned, at all events, value is a charge. To those who 
 have appropriated a thing, on the other hand, value is a benefit. 
 But, of course, as already said, the thing must have utility, must 
 contribute, that is, in some way or other to the gratification of a 
 human desire, or nobody would care either to appropriate it or to 
 purchase or hire it from others who had already appropriated it. 
 Utility, therefore, is a condition of value, but it no more enters 
 
( -6 ) 
 
 into the definition of value than existence. A thing cannot have 
 value unless it exists, and precisely similarly it cannot have value 
 unless it has utility. But mere utility, no matter how combined 
 with other things, does not confer value. What first and mainly 
 contributes to confer it is the opinion local and temporary that a 
 thing is best qualified to gratify a human desire. And what in 
 the second place contributes to confer it is not scarcity, but 
 capability of appropriation. 
 
 THE THEORY OF VALUE.*— IV. 
 
 Value being given by the local and contemporary opinion as to 
 the things best suited to gratify human desires, relative values are 
 determined by the local and temporary estimates of the probabili- 
 ties of obtaining those things in sufficient quantities ; and the 
 estimates are in each case themselves determined mainly by the 
 strength of the desires and by the efficiency of labour. At first 
 sight it may seem contrary to all experience to say that the strength 
 of the desires is one of the main factors in determining the values 
 of things. If it were, it may be objected, food and drink would 
 be the dearest and diamonds among the cheapest of commodities. 
 But a fuller consideration of the phenomena, not in the more 
 advanced countries only but in all communities throughout the 
 world's history, will, I venture to think, change the first impres- 
 sion. In the most primitive communities we know of, men pass 
 their time in gorging, sleeping, hunting, fishing, and fighting. 
 The efficiency of labour is at the lowest, production is likewise at 
 the smallest, and consequently there are exceedingly few values. 
 Hardly anything but those which gratify the strongest desires is 
 
 * From 77/^ 67ai!'/i'/ of December 9, 1893. 
 
. ( ^7 ) 
 
 produced. Even in those communities there is not a complete 
 equality of condition. There is, therefore, some little superfluity. 
 The strong are able to gratify desires not literally urgent at the 
 expense of the weak ; but speaking broadly it is true to say that 
 few things have value which do not gratify the strongest desires. 
 Every advance in knowledge increases the efficiency of labour, 
 and therefore each step forward in civilisation leads to a larger 
 production, and so brings into existence new values. As soon as 
 anyone obtains more than he needs for gratifying his strongest 
 desires, he is able to gratify weaker desires, and in so doing he 
 introduces new values. Everyone knows how invention cheapens 
 commodities. This is generally explained by saying that the cost 
 of production is reduced by the invention. I venture to submit 
 that that is a misleading way of putting the facts. It turns 
 attention from what is essential to what is accidental. What is 
 essential is that human desires are the same always and every- 
 where, in the savage and in the civilised man, that most of them 
 cannot be gratified in the savage state owing to the inefficiency of 
 labour, that everything which makes labour more efficient enables 
 new desires to be gratified, and that it is by making labour more 
 efficient that invention cheapens commodities — not l)y merely 
 reducing the cost of production. It is quite conceivable that a 
 reduction in the cost of production might be so great as to cause 
 the thing produced to lose value altogether. At the present time, 
 for example, diamonds are prized by the very wealthy because of 
 their rarity and cost, because, in short, very few can wear them. 
 If they could be produced so cheaply that the seamstress earning 
 only a few pence a day could buy them, they would lose all 
 attraction for the wealthy, and probably before long would cease 
 altogether to be worn. But an invention that cheapens a thing, 
 the desire for which is constant, acts altogether differently. 
 Every invention, for example, that has cheapened calico has 
 brought it into more extensive use. The reducing of the cost of 
 production, then, is a mere accident ; what is essential is the bring- 
 ing within the reach of the many of a thing desired by them all. 
 
( i8 ) 
 
 The strong desires affect values in two ways. Directly they 
 tend to make the things desired dear. In the savage state, as 
 already said, they prevent nearly all other things from having 
 value. But indirectly they tend to cheapen things, for they 
 compel the vast majority of mankind to employ themselves in 
 producing those things ; and as the efficiency of labour increases, 
 the things become more and more abundant, and so it becomes 
 possible for larger and larger proportions to gratify weaker desires. 
 In every stage of civilisation, however, the strong desires limit 
 values. Even in our own country the very poor are in a position 
 to gratify only the strong desires, and for them, consequently, 
 there are few values. The class immediately above them in 
 wealth is in a position to gratify a few more desires, and so on up 
 to the very wealthy whose surplus is exceedingly large, and for 
 whom, therefore, there are innumerable values. Economists 
 generally have too much confined their attention to the great 
 ■commercial communities, and even in observing these they have 
 not remarked sufficiently upon the different economic conditions 
 of the different classes ; otherwise they could not have so greatly 
 mistaken the nature of value, and especially they could not have 
 so utterly overlooked the important part played by the strength 
 of the desires. As civilisation advances and the efficiency of 
 labour increases it becomes more and more easy to gratify the 
 stronger desires. Then for a proportion of the population it 
 becomes possible to gratify weaker desires, and ultimately the 
 proportion so circumstanced increases, while at the same time the 
 most favourably-placed portion of the population is constantly 
 being enabled to gratify new desires. But this is only because 
 the strong desires compel the vast majority to devote them- 
 selves to producing what will gratify those desires. Here in 
 England the majority of the population is employed in rendering 
 services and in manufactures. In a few other rich countries a 
 very large proportion is similarly employed; but over far the 
 larger part of the world the vast majority is employed in pro- 
 ducing the necessaries of life. The strong desires, then, operate 
 
( 19 ) 
 
 in two ways. Directly they tend to make the things that gratify 
 them dear ; indirectly they tend to make them cheap by com- 
 pelling so many to produce them. Owing to this latter circum- 
 stance, and to the increasing efficiency of labour, the things that 
 gratify the strong desires tend to become cheaper and cheaper as 
 time goes on ; that is to say, experience enables people generally 
 to estimate that they will be able to gratify the strong desires at 
 such and such an outlay of their labour, and then the weaker 
 desires come into play. Usually in the more advanced countries, 
 the things that gratify the weaker desires are the dearest ; firstly, 
 because only a small proportion of mankind is engaged in pro- 
 ducing them. The very strong desires, as already said, compel 
 the vast majority to engage in producing the things that satisfy 
 thosie desires. The small minority left can be tempted into pro- 
 ducing other things only by the offer of higher and higher remune- 
 ration. Here again it will be seen that the strength of the 
 desires continues to operate. Secondly, it is usually found that 
 in regard to the things which gratify the weaker desires, we have 
 little or no means of increasing the efficiency of labour. A new 
 invention may enable us to produce a hundred times as much of 
 a given manufacture at a smaller cost ; but no invention has 
 ever taught us to turn a dullard into a genius. 
 
 The estimate of the probabiUty of obtaining a thing, then, is 
 mainly determined by the strength of the desire and the efficiency 
 of labour. It is a mere estimate, constantly in a state of flux, 
 and is modified by every circumstance that seems likely to 
 influence the efficiency of labour whether permanently or tem- 
 porarily — an invention, or reported invention, a flood, a drought, 
 a war, or a convulsion of nature. Where the efficiency of labour 
 is low, or where it may be neutralised by natural causes, the 
 strong desires every now and then assert themselves and almost 
 annihilate the values of the things which gratify the weaker desires. 
 For example, in a great famine almost everything but food loses 
 value. In the more advanced countries of the modern world we 
 draw our supplies from all parts of the earth, and in normal times, 
 
( 20 ) 
 
 therefore, do not know what the fear of famine is. But even in 
 the most civilised countries in abnormal times the values of most 
 things may practically be destroyed. In the latter days of the 
 siege of Paris, for example, what would not a man have given for 
 a good dinner ? 
 
 THE DEPRECIATION OF SILVER.*— V. 
 
 A MOST signal instance of the influence exercised by opinion upon 
 value, because of the widespread and unforeseen consequences, 
 both political and economic, likely to ensue, is presented by the 
 depreciation of silver during the past twenty years. In the course 
 of the last century, gold gradually came into very general use in this 
 country — so much so, that when the resumption of specie pay- 
 ments was carried out after the great war against Napoleon, it was 
 decided to adopt the single gold standard and to use silver, not 
 as a standard of value in future, but merely as subsidiary coin. 
 Gradually the preference thus shown for gold in the United 
 Kingdom began to exhibit itself upon the Continent likewise. 
 When the great gold discoveries in California and Australia took 
 place, the preference was quickened. Silver was exported largely 
 from the Continent to the Far East, and gold was imported to 
 take its place. The richer nations began to see that they could 
 establish a gold standard without very serious inconvenience to 
 themselves. The reader will recollect that, at the International 
 Monetary Conference held in Paris, in 1867, a very strong inclina- 
 tion was shown to adopt the single gold standard ; and no doubt 
 can be entertained by anyone who studies the matter carefully 
 and without prejudice, that, if the Franco-German war had not 
 
 * From The Statist of December 9, 1893. 
 
( 21 ) 
 
 taken place, France would very soon have given up bimetallism 
 and adopted the single gold standard. The war, however, did 
 break out, with the result that Germany imposed an indemnity of 
 200 millions sterling upon France. That indemnity enabled 
 Germany to establish a uniform monetary system throughout the 
 whole Empire, instead of the separate systems that the several 
 States had had previously ; and in doing this the German authori- 
 ties demonetised silver and adopted the gold standard. In 1873 
 the United States also demonetised silver and adopted gold. In 
 1878, it is true, it partly retraced the step by the Bland Act, and 
 it made a further backward step in 1890 by the Sherman Act. 
 But this year, as everybody knows, not only the coinage of silver 
 but the purchase of the metal has been completely stopped. As 
 a consequence of the sales of the German silver, the nations of 
 the Latin Union very soon closed their mints against the metal. 
 Last year Austria-Hungary adopted the single gold standard, re- 
 jecting silver, and this year India has closed her mints against 
 silver. Practically, therefore, silver has ceased to be a standard 
 of value throughout the civilised world ; and this has simply and 
 solely been in consequence of a slow change in the opinion of the 
 world. 
 
 The Bimetallists deny that the world has changed its opinion in 
 the manner here stated. They allege that the whole change has 
 been made by the Governments, and not by the people. If the 
 Bimetallists mean by this that the great body of the people have 
 not troubled their heads about the matter, I am not inclined to 
 dispute the statement. But if they mean that the Governments 
 acted on their own initiative, and not because of the impulse given 
 by the commercial classes, then I entirely disagree with them. 
 Governments, however meddlesome in other matters, are always 
 very careful how they interfere in business arrangements, and es- 
 pecially in monetary arrangements, and they do interfere finally 
 only because they are compelled to do so by the pressure of the 
 classes specially interested. The change has taken place, then, 
 because there has been a complete revolution in the opinion of 
 
 c 
 
( " ) 
 
 the banking, the financial, and the leading commercial classes 
 throughout the civilised world. And the remarkable thing is that 
 the advantage possessed by gold over silver does not seem great 
 enough to bring about so extraordinary a revolution. There is no 
 doubt, of course, that for international payments gold is a much 
 more convenient metal than silver. Even twenty years ago the 
 Latin Union rated silver to gold in the proportion of 1 5 ^ to i ; 
 and it needs no argument to show that it is cheaper, easier, and 
 more convenient to send abroad a ton of gold than fifteen-and-a- 
 half tons of silver. But, after all, the people who have to make 
 large gold international payments are not very numerous, and they 
 have not influence enough to compel Governments to change their 
 monetary systems. If, however, we look at the home business, it 
 is difficult to see why men have so generally preferred gold to silver. 
 No doubt it saves time and labour, both for bankers and for large 
 employers of labour, to handle gold rather than silver. But if the 
 large employers of labour save expense in paying in sovereigns and 
 half-sovereigns as far as they can, and if the bankers likewise save 
 expense, it is clearly far from convenient for the working classes. 
 The very first thing an ordinary working man has to do when he 
 is paid a sovereign is to change it into silver, for it is rarely that a 
 single payment of his amounts to a pound sterling. If, then, gold 
 is more convenient for the large employers and bankers, it is less 
 convenient for the working classes. And besides, all the advan- 
 tages of a gold circulation would be equally secured if one-pound 
 notes were used instead of sovereigns. So again it may be said 
 that it is much handier to carry about a few sovereigns than to load 
 one's self with an equivalent value in silver. But, in the first place, 
 it is not necessary to load one's self with silver, for notes would do 
 just as well ; and in the second place, very few men carry either 
 gold or silver to any considerable amount about with them ; what 
 payments they have to make they usually make by means of 
 cheques. The preference, then, is purely sentimental. It is just 
 like the preference for sovereigns over one-pound notes in Eng- 
 land, and it is not very easily explained by any real advantage that 
 
( 23 ) 
 
 gold has over silver. But the fact remains, nevertheless, that one 
 civilised country after another has demonetised silver and adopted 
 the gold standard ; and there is no answer to that. 
 
 This is the real and conclusive argument against the Bimetallists. 
 For over a century the world has been moving country by country 
 steadily in one direction, and it is useless to talk of turning it back. 
 No Government can act in opposition to the public opinion of its 
 own subjects. It may be said that the public opinion is that of 
 the wealthy, and consequently of a comparatively small class, that 
 the multitude may be educated and may compel the wealthy to 
 submit. That I hold to be utterly impossible, for no Govern- 
 ment, however autocratic it may be, can prevent people from 
 contracting to be paid in any manner they may choose to arrange. 
 Opinion has settled the matter, and opinion is sovereign not only 
 in matters of policy but in matters of economy also. If the Bi- 
 metallists choose to say that opinion is wrong, that the world is 
 ill-advised, that the whole movement has been a mistake, they, of 
 course, have a perfect right to their view of the matter. But they 
 do not alter the facts, and they cannot alter the facts by any amount 
 of preaching. 
 
 THE BIMETALLIC CONFERENCE.* 
 
 The Bimetallic Conference was undoubtedly an imposing de- 
 monstration, and shows clearly that the movement is gathering 
 strength. But for all that, it is doomed to failure. Mr. Balfour and 
 Mr. Courtney attempted to show that bimetallism is practicable. 
 I maintain, on the contrary, that it is impracticable, and that 
 
 * From The Statist of May 5, 1894 
 
 C 2 
 
( 24 ) 
 
 none of their arguments touch the heart of the matter. It is im- 
 possible by any arrangement whatsoever to maintain indefinitely a 
 fixed ratio of value between any two commodities, let them be 
 metals, or let them be what you please. And it is noteworthy 
 that no speaker ventured to offer any detailed scheme showing 
 how the idea could be carried out. No one ventured either to 
 take a vote on the ratio to be fixed. The whole history of the 
 modern world is full of examples of Governments endeavouring, 
 and endeavouring in vain, to establish such a ratio. But our bi- 
 metaUic friends point to the success of French bimetaUism as in- 
 disputably confirming their argument. I deny in the clearest 
 and most emphatic manner that it does anything of the kind. 
 French bimetallism and the Latin Union in their full integrity 
 existed for barely seventy years. At the end of that time bimetal- 
 hsm broke down hopelessly. During the seventy years I admit 
 freely that the variations in the value of gold and silver were not 
 very great ; but that was due, not to the existence of the Latin 
 Union, but to entirely different causes. The first of these great 
 causes was that the supply of silver did not very greatly increase 
 or decrease, and that the consumption of the metal also did not 
 very greatly increase or decrease. There was a fairly constant 
 relation between the supply and the demand. The second of the 
 great causes was that there was a remarkable and almost pheno- 
 menal change in the supply of gold. About 1848 the great gold 
 discoveries in California and Australia led to an extraordinary 
 increase in the supply of gold. About twelve years later, the 
 civil war in the United States caused a suspension of specie pay- 
 ments, and put an end practically to the consumption of gold as 
 money in that country. Then the Franco-German war led to the 
 suspension of gold coinage for some years in France. Thus 
 there was an enormous increase in the supply of gold, and a very 
 considerable decrease in the consumption of that metal. The 
 real reason, then, why the conventional ratio between gold and 
 silver was maintained from the beginning of the century until the 
 demonetisation of silver by Germany was, not that France main- 
 
( 25 ) 
 
 tained a bimetallic system, but that there was no great increase or 
 decrease either in the supply or the consumption of silver, and 
 that there was an extraordinary increase in the supply of gold, 
 and a very considerable decrease in the consumption of that 
 metal. The facts being so — and I challenge any fair-minded 
 man to dispute them— I submit that the Latin Union proves 
 nothing as to the practicability of bimetallism. 
 
 My next point is that the nations caruiot be induced to enter 
 into a Bimetallic Convention. In spite of the conversion of a few 
 weather-cocks like Mr. Courtney, who are stable in nothing, the 
 real scientific opinion of this country is against bimetallism, and 
 will continue to be opposed to it. Further, it seems incredible 
 that Germany, Austria-Hungary, and Russia will throw away the 
 fruits of all their sacrifices and all their efforts to get together a 
 great gold reserve. Ever since the middle of the century the 
 great nations of the Continent have been feverishly preparing 
 themselves for war, and one of the methods of preparation is to 
 accumulate a vast reserve of gold. Are we as reasonable men to 
 be asked to believe that the great military powers will throw away 
 the advantage which the possession of so much gold gives them, 
 and thus waste the exertions and the sacrifices of so many years ? 
 Suppose that the Governments could be induced, that they were 
 blind enough to give up a real advantage in pursuit of a shadow, 
 how could a ^imetalHc League be maintained? No country 
 could bind itself for ever-and-a-day to maintain bimetallism. 
 Even the Latin Union concluded its Convention only for a de- 
 finite number of years. But if the nations were to form a Bimetal- 
 lic Union for ten, or even for twenty years, what assurance would 
 there be that some of them would not break away at the end of 
 that time, as so many of them have broken away from commercial 
 conventions ? And if the Union were to be formed, and were to 
 be compulsory only for a few years, is it reasonable to suppose 
 that bankers would accept depreciated silver instead of the appre- 
 ciated gold to which they are entitled ? In The Statist I have 
 over and over again shown, when predicting last year's great 
 
( 26 ) 
 
 currency crisis in the United States, that the banks through- 
 out the Union had steadily refused to hold either silver or silver 
 certificates in their reserves to any extent worth speaking of, and 
 that it was the refusal of the banks to treat silver as the equivalent 
 of gold, and hold it in their reserves, which condemned the 
 American experiment to inevitable and certain failure. The event 
 has proved me right ; and I predict now with equal confidence 
 that if every great nation in the world were to enter into a 
 Bimetallic Convention for a definite number of years, bankers in 
 the great commercial centres, and especially the bankers of 
 London, would refuse to accept silver and hold it in their reserves, 
 and the Convention would break down as certainly as the Ameri- 
 can experiment failed. 
 
 There is one other point never to be lost sight of in the dis- 
 cussion of this matter. It is a point that was dwelt upon at great 
 length and with much fulness by Mr. Gladstone in the House of 
 Commons, and it is one that bears to be repeated again and again. 
 It is the real interest of this country in the question. England 
 is admittedly and demonstrably the greatest creditor country in 
 the world. She has lent immense sums to most other countries ; 
 she has invested immense sums in North and South America, in 
 India, in our Colonies, and elsewhere in industrial enterprise of 
 every kind ; and she has contracted for the most part when lend- 
 ing that she is to be paid both principal and interest in gold. Is 
 it conceivable that the investors of this country would without 
 compensation and for no advantage to themselves waive the con- 
 dition they have imposed as to repayment in gold, and consent to 
 receive depreciated silver instead? Does any sensible man of 
 business believe that Englishmen will do this ? Or would any 
 conscientious man, if called upon professionally to advise, recom- 
 mend a client to do so ? I unhesitatingly answer both questions 
 jn the negative. Bimetallists airily reply that there would be no 
 Joss, because silver and gold would be receivable everywhere at 
 jthe fixed ratio. To which I rejoin that that is a pure assump- 
 tion ; that in my opinion silver and gold would not be everywhere 
 
{ 27 ) 
 
 receivable at a fixed ratio ; that bankers, especially in the City of 
 London, would refuse to receive silver, would contract to be paid 
 in gold, would decline to hold silver in their reserves, and would 
 insist upon the condition which was so frequently introduced in 
 America while the Bland and the Sherman Acts were on the 
 Statute Book — for repayment in gold, and in gold alone. Besides, 
 there would always remain the fact that the Convention would be 
 terminable, that any party to it might withdraw at a certain time by 
 givmg a certain notice. Therefore, there would be doubts whether 
 the Convention would last, and every careful man, bearing this in 
 mind, would look askant upon silver, and would attach a greater 
 value than ever before to his gold contracts. Suppose that 
 English investors were so unwise as to waive their gold contracts 
 and to accept payment in silver ; and suppose, as a consequence, 
 that the United States and France were to succeed in pouring 
 into this country a large proportion of the unusable silver now 
 held by them, is it not at least possible that both the United 
 States and France would chuckle at our folly, and would give 
 notice to terminate the Convention when the time came? But if 
 English investors refused to waive their gold contracts, and if 
 English bankers declined to hold silver in their reserves, what 
 would become of a Bimetallic Convention, supposing the Govern- 
 ments were foolish enough to enter into one ? Clearly, bimetal- 
 lists have not thought out the subject. I would respectfully 
 recommend them, before airing their views again, to more deeply 
 study the obstacles to be overcome. 
 
( 29 ) 
 
 the ratio fixed between silver and gold. But that was due to an 
 extraordinary combination of circumstances. Firstly, the pro- 
 duction and the consumption of silver neither increased nor 
 decreased very much, while there was an almost unprecedented 
 increase in the production of gold, and there was an extraordinary 
 decrease in its consumption owing to the suspension of specie 
 payments first in the United States and then in France. Thus 
 to maintain the French ratio, not only was it necessary that all the 
 countries then using silver should remain silver-using ; it was also 
 necessary that an almost unprecedented production of gold should 
 take place. Will any reasonable man say that we have a right to 
 expect in the future for seventy years, or even for ten years, such 
 an unlooked-for combination of favourable influences ? 
 
 It is one of the surprising things connected with the bimetallic 
 agitation that so many intelligent men fail to see the real bearing 
 of this appeal to the Latin Union experience. To my mind, it 
 appeals as clear as the sun at noonday that the appeal establishes 
 in the most conclusive manner the impracticability of bimetallism. 
 With all the favourable influences during the first three-quarters of 
 the century, the very instant there was a disturbance of the old 
 arrangements, the whole house of cards toppled together. Ger- 
 many having imposed upon France what was then thought a crush- 
 ing war indemnity, proceeded immediately to demonetise silver 
 and to adopt the single gold standard. As soon as she began to 
 carry out her policy, the ratio established between gold and silver 
 came to an end, and the divergence has been widening every year 
 since. Very quickly the Latin Union suspended the coinage of 
 standard silver pieces, which has never been resumed since ; and 
 one after another a number of States have followed the example of 
 Germany, so that practically at the present moment silver has 
 ceased to be a standard of value throughout the civilised world. 
 Is not this as strong a proof as could be produced that only by an 
 accident could bimetallism be made to work even for a few years, 
 and that it is in the highest degree improbable that any combina- 
 tion of accidents would make it work for many years? But the 
 
( 30 ) 
 
 Bimetallists will not see the impracticability of their proposals, nor 
 will they recognise that Governments cannot be persuaded to fall 
 in with their plans. It has been pointed out above how very un- 
 likely it is that Germany, Austria-Hungary, and Russia — not to 
 mention our own country — will adopt bimetallism. But the Bi- 
 metallists insist that if our own country will lead the way all the 
 other countries will immediately follow. This is, no doubt, pay- 
 ing us a very high compliment, but we are not prepared to accept 
 the flattery. Again, the Bimetallists will not see that even if the 
 Governments could be persuaded there would still be the bankers 
 to deal with, that bimetallism could be adopted only for a definite 
 number of years ; that therefore, the danger would remain that it 
 might come to an end by-and-by, and as long as a fear of that 
 kind existed people would cling more fondly than ever to their 
 gold contracts. From every point of view, then, bimetallism is 
 impossible. It could not be made to work if adopted. It will 
 not be adopted because the Governments cannot be persuaded to 
 fall in with it, and if the Governments could be persuaded it would 
 be rejected by the bankers, and still more decisively would it be 
 rejected by investors. 
 
 The truth is that the Bimetallists are trying to turn back the 
 hands of the clock of time. Once silver was the standard all over 
 Europe. Gradually gold came more and more into use. During 
 the present century gold has been adopted as the sole standard — 
 first in England and afterwards by most other countries. The 
 result is, as already said, that although silver is a nominal 
 standard in the Latin Union and in the United States, it can no 
 longer be freely coined, and, therefore, has ceased to be a real 
 standard throughout the civilised world. All this may be regret- 
 table but life is too full of living problems to allow us time for 
 vain regrets. We have to accept accomplished facts, and it is an 
 accomplished fact that opinion has pronounced decisively against 
 silver and for gold. And it must never be forgotten that in 
 matters economic, opinion is as supreme as in matters political. 
 Bimetallists will reply, no doubt, that they have set themselves 
 
( 31 ) 
 
 to convert opinion. By all means let them endeavour to do so, 
 but it is not rash to predict that they will fail. A cult once 
 dead can never be brought to life again. Bimetallism was 
 a convenient and a natural stage in economic development. 
 Practically, as already said, silver was at one time the money of 
 Europe. Then, when gold came into use, it was almost inevit- 
 able that bimetallism should be adopted. But it was adopted 
 only for the purpose of facilitating the passage from the use of 
 silver to the use of gold. The passage has now been effected, 
 and it is certain that the nations will not go back to an obsolete 
 system belonging to a period of transition that has come to an 
 end. 
 
 THE LATIN UNION ARGUMENT.*— I. 
 
 As the part really played by French bimetallism — which is often 
 conveniently, though erroneously called the Latin Union — seems 
 to me to be widely misunderstood by Monometallists as well as by 
 Bimetallists, I think it well to set the facts in the light in which 
 they appear to my mind. French bimetallism was estabhshed in 
 1803, and in its full integrity it lasted until 1873, when it utterly 
 broke down, and free coinage had to be suspended. During the 
 whole of that time it is admitted by all who have studied the sub- 
 ject that the ratio between gold and silver was not strictly main- 
 tained, that there was always a premium on one or other of the 
 metals — generally about one per cent., sometimes two per cent., 
 and occasionally even three per cent. Intelligent Bimetallists 
 reply that they do not pretend that a ratio can be strictly main- 
 tained. All they assert is that the variations can be kept within 
 
 * From The Statist of May 19, 1894. 
 
1 32 ) 
 
 very narrow limits, and practically, therefore, stable values assured. 
 I venture to rejoin that they have not read the facts aright, 
 French bimetallism did not prevent wide variations. What it 
 really did was to facilitate the transition from one monetary system 
 to another ; in other words, to enable Europe to pass with less 
 friction than perhaps would otherwise have been possible from the 
 silver to the gold standard. Bimetallism in its very nature, as I 
 hope to show, is a temporary makeshift which is useful in a tran- 
 sition period, but which must inevitably break down when a 
 certain evolution has been accomplished. 
 
 During the great revolutionary war specie payments were sus- 
 pended in this country. But in 182 1 they were resumed, and 
 the single gold standard was deliberately adopted, silver being 
 made legal tender only up to 40s., for the rest being used only for 
 subsidiary or token coin. The English demand for gold to carry 
 out this plan was very great, and it practically resulted in draining 
 France of that metal. While this was going on the revolt of the 
 Spanish Colonies in America and the anarchy that ensued in- 
 terfered with mining and seriously lessened the output of gold. 
 When the change of standard in this country was completed the 
 United States began a somewhat similar change. The United 
 States was bimetallic in theory ; but originally it fixed the ratio 
 between silver and gold at 15 to i. By that ratio silver was over- 
 valued, and the consequence was that gold flowed away from the 
 United States, and silver remained the only money. In 1834 the 
 United States changed the ratio from 15 to i to 16 to i, when 
 apparently silver was undervalued. Silver consequently flowed 
 away from the United States and gold poured in. Thus up to 
 1848 the result of French bimetallism was to enable the United 
 Kingdom, in the first place, to carry out the resumption of specie 
 payments upon a gold standard ; secondly, to enable the United 
 States to substitute a gold for a silver currency ; and thirdly, to 
 leave the whole Continent with silver only. I do not apprehend 
 that these facts will be disputed ; but it may be worth while to 
 quote in support of them the following extract from the evidence 
 
( 33 ) 
 
 given by N. M. Rothschild, Esq., before the Committee on the 
 Bank of England Charter, July 24th, 1832 "Question: Does 
 the demand for gold from France produce a scarcity of money 
 in France ? Answer : No. Question : Why is that ? Answer : 
 Because gold is generally in private hands ; it is merchandise 
 there. Question : If there was a demand for silver from France, 
 would not that produce a scarcity of money in France ? Answer : 
 Certainly, because it is the coinage of the country." It will be 
 5een from this brief historical survey that up to 1848 bimetallism 
 Avas not operative in France, gold was not in circulation. It was 
 mere merchandise, held only by private persons. What really 
 determined the value of the metals was the reduction of the gold 
 supply by the revolutions in Spanish America, the demand for 
 gold for the United Kingdom and the United States, and the use 
 of silver by all the rest of the world. 
 
 At the end of 1847, the Marquis of Dalhousie was sent out as 
 (Governor-General of India. During his reign he annexed the 
 J*unjaub, Nagpore, Sattera, Jhansi, Berar, Oudh, and part of 
 Burmah, thus practically completing the Empire of India. Since 
 ithen, with the brief interruption of the Mutiny, the British Peace 
 has been successfully maintained. There has been an extraordinary 
 .development of the country, a great advance in prosperity, and a 
 marvellous absorption of silver. On November 26, 1892, there 
 •was published in Tke Statist a. Table showing the course of Indian 
 itrade during the thirty-three years ended with March, 1892. The 
 statistics are most remarkable, and will be found valuable by all 
 ,who care to understand the economic development of the world 
 during the period to which they refer. According to that Table, 
 'India absorbed during the thirty-three years 230^ millions sterling 
 ,of silver, being at the rate of just 7 millions sterling per annum. 
 In 1843 the first Chinese war opened five ports to European 
 trade, and the second and third wars extended European com- 
 munication with China. In consequence there was a vast increase 
 in the Chine3e demand for silver. In 1856 Japan was opened up, 
 .still further increasing the demand for silver for the Far East. 
 
( 34 ) 
 
 The opening up of these two great empires, and the growth of our 
 Australasian Colonies, gave vast commercial importance to Singa- 
 pore, for which also there has been a great increase in the demand 
 for silver. But while all this was going on there was no material 
 increase in the production of silver. It is as certain as anything 
 can be which has not happened that if the European consumption 
 of silver had continued on the scale previous to 1848 there would 
 have been an extraordinary rise in the value of silver ; in short, 
 silver would have gone up probably as much as gold has advanced 
 during the past twenty years. But the European consumption of 
 silver did not continue on the old scale. The construction of 
 railways, which had been so active here at home in the Forties, 
 was pushed rapidly forward on the Continent in the Fifties ; and 
 that together with the steamship and the telegraph, the opening 
 up of the Far East, the rapid settlement of the United States and 
 other new countries, and the long peace, vastly stimulated the 
 growth of wealth in France. As transactions became larger, gold 
 was felt to be more serviceable as money than silver. Meanwhile, 
 the discoveries of gold in California and Australia, following upon 
 those in Russia, towards the end of the first half of the century, 
 added during the next twenty years an enormous amount to the 
 gold supply of the world; and France, which up to 1848 had 
 been a strictly silver-using country, though theoretically bimetallic, 
 rapidly became a strictly gold-using country, though still theo- 
 retically bimetallic. In his famous report upon the payment of 
 the war idemnity by France to Germany, M. Leon Say states 
 that the coinage of gold in France from 1848 to 1871 in- 
 clusive exceeded 6,640 millions of francs, or somewhat more 
 than 265)^ millions sterling. If during this period France had 
 demonetised silver as Germany did a little later, no doubt silver 
 would' have fallen rapidly in spite of the extraordinary demand 
 for the Far East, because, as I have often insisted, opinion is 
 supreme in matters economic, and opinion would have been 
 alarmed if France had demonetised one of the metals. But 
 France, although she did not demonetise silver, practically disposed 
 
( 35 ) 
 
 of her stock to the Far East, and replaced it with gold. Gold being 
 cheaper owing to the new discoveries, and silver being dearer 
 owing to the demand for the Far East, it was a profitable transac- 
 tion. It was carried out quietly and the world was not alarmed. But 
 the result was that the transition of Europe from the silver to the 
 gold standard was so nearly completed that in 1867 a Conference 
 was held in Paris which decided in favour of the adoption of gold 
 as the sole standard of value. In all human probability, if the 
 war with Germany had not broken out, that decision would have 
 been acted upon ; silver would have been demonetised, and would 
 have fallen in value, as it has fallen in value since. But the Franco- 
 German war prevented France from carrying out her intention. 
 Still, the fact that France got rid of her silver, substituted gold 
 for it, and so prepared to adopt the single gold standard, proves, I 
 venture to submit, as clearly as anything can, that French bi- 
 metalHsm was merely a temporary expedient calculated to facili- 
 tate a transition from one monetary system to another, but con- 
 taining in itself the germs of inevitable dissolution. 
 
 THE LATIN UNION ARGUMENT.^— II. 
 
 I HAVE now shown, I hope to the satisfaction of all who are open to 
 conviction, that during the seventy years of its nominal existence in 
 its integrity, French bimetallism was never operative. Up to 1848 
 France was a silver-using country; afterwards it became gold- 
 using. In the earlier period gold was not in circulation, and the 
 mere fact that by law the Mint was open to the free coinage of 
 gold had no more effect upon the value of gold than the mere 
 fact that the London Tavern is open to customers has upon the 
 
 * From The Statist of May 26, 1890. 
 
( 36 ) 
 
 value of provisions. What really determined the value of both 
 gold and silver was, in the first place, the fact that until the dis- 
 coveries in California and Australia, only two countries — the United 
 Kingdom and United States — can be said to have been gold- 
 using; all the rest were silver-using. After the discoveries in 
 California and Australia, the enormous demand of France for 
 gold, and of the Far East for silver, kept up the values of both 
 metals. But the existence of bimetallism unquestionably was 
 serviceable in a period of transition. It probably prevented a 
 good deal of friction. In the meantime, it educated the world 
 in a preference for gold. In 182 1, our readers will recollect, the 
 United Kingdom adopted the single gold standard. In 1834 the 
 United States changed the existing ratio of silver to gold for the 
 very purpose of getting the latter metal, and in 1867 France 
 declared for the gold standard. Thus it is in the highest degree 
 probable that if the Franco-German war had not broken out 
 France would have demonetised silver, and the fall which we have 
 since experienced would have taken place. But the Franco- 
 German war prevented France from carrying out her idea and 
 gave an opportunity to Germany to forestall her. Germany was 
 so completely victorious that besides annexing Alsace and Lor- 
 raine, she imposed a money fine under the name of a war indem- 
 nity of 200 millions sterling upon France. 
 
 Germany immediately proceeded to reform her currency. In 
 the interest of her own unity that was a politic measure. But, of 
 course, she might have made her money uniform while preserving 
 the single silver standard. She decided however to demonetise 
 silver and to adopt the single gold standard. In doing this she 
 applied an unerring test to the practicability and the worth of 
 bimetallism. If it had stood the strain, then there would have 
 been much force in the arguments of its advocates. As it did not 
 stand the strain, but broke down instantly, it is proved to have 
 been utterly worthless. It was a mere form without any real 
 significance. The result of Germany's policy is instructive in 
 another way. It not only shows, as I have been insisting, that 
 
( 37 ) 
 
 bimetallism was unable to stand a serious strain, but it proves, as 
 also I have been contending, that the world had been educated 
 in a preference for gold ; for the instant Germany began to sell 
 silver on a considerable scale, the nations of the Latin Union 
 suspended the free coinage of the metal, showing clearly that 
 they looked upon silver as an inferior metal and would not have 
 it. It is often said that France was smarting under the disasters 
 of the war, and that she closed her mints against silver for 
 the very purpose of thwarting Germany. I do not dispute the 
 assertion, but I submit that it proves completely my position. If 
 France believed that silver was a superior metal to gold, she would 
 have very gladly taken it from Germany, and thought that she 
 had had a small part of the revenge she thirsted for. Even if 
 France had believed that silver was as good a metal as gold for 
 monetary purposes, what object could she have had in closing her 
 mints ? She would not have injured herself on the assumption 
 by taking the silver, and she would not have injured Germany by 
 refusing to take it, for silver would have remained in general 
 estimation. But France knew that silver was not equal to gold 
 for monetary purposes, and by closing her mints she did un- 
 questionably make the German reform more difficult than it 
 otherwise might have been. She caused the price of silver to fall 
 more heavily than it otherwise would have done, and so she com- 
 pelled the German Government after a while to stop its sales of 
 the metal. 
 
 There is no doubt, then, that the action of France did obstruct 
 the policy of Germany. The demonetisation of silver by Germany 
 would, in any case, no doubt have caused a considerable fall in the 
 value of the metal. The closing of the mints throughout the 
 Latin Union caused the fall to be much greater than it would have 
 been from the mere demonetisation by Germany. And the action 
 of both was intensified by the demonetisation of silver by the 
 United States in 1873. It has often been said that the Bill 
 adopting the single gold standard in the United States was smug- 
 gled through Congress. For the purpose of this article it is not 
 
 D 
 
( 38 ) 
 
 worth while to enquire whether it was or was not so. The only 
 thing of any real moment is that the single gold standard was 
 adopted in 1873, that in spite of all the activity of the Silver Party 
 since, the decision then taken has never been altered. The Bland 
 Act, it is quite true, instructed the American Government to buy 
 silver, and the Sherman Act increased the purchases largely. But 
 neither Act opened the mints of the United States to the free 
 coinage of silver ; and neither, therefore, returned to bimetaUism 
 in the full and proper sense. The Bland Act and the Sherman 
 Act have both been repealed. It is now twenty-one years since 
 the adoption of the single gold standard, and the decision then 
 taken is still the law of the United States. Therefore I am justi- 
 fied in saying that the American people had become confirmed in 
 their preference for gold. Thus the precedent set by the United 
 Kingdom in 182 1 has been followed by Germany and the United 
 States — not to mention Austria-Hungary and other countries — 
 explicitly and fully ; and it has been followed not quite so fully or 
 explicitly by the nations of the Latin Union. After a trial of 
 nearly a century the United States decided that bimetallism was 
 a mistake, and adopted the single gold standard. After a trial of 
 nearly three-quarters of a century, France came to the same con- 
 clusion. Can there be a stronger or more conclusive answer to 
 the BimetalHsts ? While the Western nations were thus one after 
 another giving up the use of silver, the production of the metal 
 began to increase immensely, and has gone on increasing every 
 year since in an extraordinary way. This, of course, adds greatly 
 to the depreciation. 
 
 But it is a mistake to say that the demonetisation of silver 
 by so many countries, and the adoption of the single gold standard, 
 together with the great increase in the production of silver — even 
 if we add the marked decrease in the production of gold between 
 1870 and 1887 — are the only causes of the unprecedented depre- 
 ciation of silver. It may well be doubted whether there is not 
 enough of gold for all practical purposes, were it not that so much 
 of the metal is diverted from the use of the arts, and from employ- 
 
( 39 ) 
 
 ment as money by the great military governments. Ever since the 
 Franco-German war, Europe has been preparing with breathless 
 haste for another great struggle. Since the recovery of France — 
 since, more particularly, the French army has once more gained a 
 belief in itself — the preparations have been pushed forward more 
 eagerly than ever. And amongst these various preparations, the 
 hoarding of war treasure in gold has taken a very prominent place. 
 Russia, as we know, has nearly loo millions sterling in gold. Yet 
 Russia does not even pretend that she is preparing for the resump- 
 tion of specie payments. The world insists upon believing that 
 Austria- Hungary decided to resume specie payments only to cover 
 the accumulation of a vast stock of gold for military purposes. 
 France holds in the Bank of France nearly 7 1 millions sterling in 
 gold. Germany holds nearly 35 millions sterling in gold in the Im- 
 perial Bank, and 6 millions sterling more at Spandau. To all intents 
 and purposes the gold held by Russia, Austria-Hungary, and the 
 Bank of France is completely withdrawn from monetary employ- 
 ment. As regards Russia and Austria-Hungary, it is clear that it 
 cannot be got at without the consent of the Governments ; and 
 the fact that bimetallism so far still exists in France, that the Bank 
 of France can pay at pleasure either in silver or in gold, enables 
 her to keep her hand upon the gold she has accumulated. The 
 Imperial Bank of Germany is less free : but it is supported by the 
 Government in discouraging gold withdrawals. The locking-up 
 of these vast sums, then, has contributed powerfully to the depre- 
 ciation of silver. And it would have raised the value of gold even 
 if bimetallism had not been given up by France. 
 
 D 2 
 
( 40 
 
 THE LATIN UNION ARGUMENT.*— III. 
 
 The Bimetallists advocate bimetallism in the hope and belief 
 that it would raise prices. On that point there can be no doubt, 
 for in fact their strongest argument for bimetallism is that the 
 demonetisation of silver has caused the crisis through which the 
 world is now passing, and that there cannot be really prosperous 
 trade until silver is restored to its old position as money ; that, in 
 short, the demonetisation of silver has caused the low prices. It 
 would be only natural to expect that they would take some pains 
 to assure themselves that high prices would result from the general 
 adoption of bimetallism. But they have not done so : and I 
 propose to point out now that, in fact, if bimetallism were to be 
 adopted by the world immediately, it would not necessarily bring 
 about high prices. High prices might result from the action of 
 other causes and might be contemporaneous with bimetallism. 
 But bimetallism alone would not cause high prices, and could not 
 do so. Fortunately I am able to show this from a chart published 
 the other day by Mr. Sauerbeck giving the course of prices from 
 1820 to the present time. Mr. Sauerbeck's statistics are based on 
 the system of index numbers, and they represent the average of 
 the prices of a large number of the principal commodities. There 
 is much dispute as to the correctness of the index number system, 
 but that need not be entered into here ; the only point that con- 
 cerns us is that Mr. Sauerbeck's industry, impartiality, and general 
 correctness are universally recognised. His figures will be readily 
 accepted by all parties, and they show clearly that the trend of 
 prices ever since 1820 has been downwards — with, of course, very 
 considerable, and sometimes very violent, fluctuations, 
 
 Mr. Sauerbeck takes the average of 1867-77 as 100. When the 
 
 * From The Statist of June 2, 1894. 
 
( 41 ) 
 
 average is above that there is a rise of prices ; anything below that 
 shows a fall. It may be mentioned that in 1800, taking the level 
 of 1762 as the basis, the average was 141 ; that it fell to no three 
 years later; that, with fluctuations, it gradually rose to 157 in 1809 ; 
 then dropped hardly without a break to 115 in 181 3; the following 
 year fell again, until in 18 16 it was as low as 91. I mention all 
 this only to complete the history of the century. During the war 
 there were so many disturbing influences at work that it would be 
 altogether unfair and misleading to affect to draw general con- 
 clusions from the statistics of that time. But it may interest the 
 reader, for all that, to know how prices actually moved during 
 the war. After 18 16 there was a rapid recovery, and in 1820 the 
 average was 120, as compared with 100 for the period 1867-77. 
 From this point Mr. Sauerbeck's statistics begin. The fall was 
 almost immediate and continuous until 1822, when the average 
 was barely loi. Then there was a very steady rise until 1825, 
 when the average was as high as 117. Then there was a sharp 
 fall, until in the next year the average was no more than 98^, 
 and the fall continued till 1832, when the average was only 89. 
 Then a rapid rise occurred, and in 1836 the average reached 102, 
 and in 1839-40 it went to 103. A fall then began and went on 
 until in 1844, when the average was as low as 83. After that there 
 was a slow rise until 1847, when the average was 95 ; a sharp fall 
 ensued till 1849, when the average was 74; fluctuations fol- 
 lowed for a couple of years ; then there was a rapid bound up- 
 wards till 1853, when the average reached 102 ; a slight decline 
 followed next year, then steadiness for a couple of years, and then 
 a further rise to 105 in 1857, after which there was a rapid fall till 
 in 1859 the average was 91 ; then a rise up to 1864, when the 
 average was again 105 ; a fall until in 1870 the average was 96 ; 
 a rise till 1873, when the average was in j and then after that an 
 unbroken fall, until in 1879 the average was 83 ; a rise till 1881 
 when the average was 88 ; then a fall, until in 1887 the average 
 was only 68 ; a rise in 1889 to an average of 72 ; and a fall last 
 year to 68. 
 
( 42 ) 
 
 Thus starting in 1820 with the average of prices at 120, we find 
 
 that there was a fall to loi in 1822, and a recovery in 1825 to 
 
 117. But after 1825 there is an almost continuous decHne till 
 
 1832, when the average was 89. In other words, in the period 
 
 1820-32 we have the highest average of prices, 120, and the 
 
 lowest, 89 — in the one case, the average being 20 above what is 
 
 regarded as the normal level of prices, and in the other being 1 1 
 
 below. We further observe that the average of prices never again 
 
 reached the high point of 1820 ; that even in 1825 it was 3 below, 
 
 and that after 1825 the average was never very much above what 
 
 is considered the normal level, except in 1873. After 1832 prices 
 
 remained below the normal level until 1836. Even then they only 
 
 went to 102. They dropped rapidly to 94 ; but in 1839-40 they 
 
 had risen to 103. But then they fell again, until in 1843 they 
 
 were as low as 83. A rise once more, till in 1847 they were 95, 
 
 but fell quickly, until in 1849 the average was as low as 74. 
 
 Starting, then, with the highest point reached, in 1820 (120), we 
 
 get in 1849 down to 74 — the highest point, as already said, being 
 
 20 above what is regarded as the normal level, and the lowest 
 
 26 below the normal level. After 1849 there are fluctuations, 
 
 and then there comes a sharp rise with the Crimean war ; 
 
 a sharp fall in 1857 — a year of crisis^ — a considerable rise 
 
 after that until 1864, when the average was about 105 ; a fall 
 
 in 1870 to 96; and in 1873 a rise to in. In 1820 the average 
 
 of prices was 20 above the normal level. In 1825 it was 117, in 
 
 1857, 105 ; in 1864, again 105 ; in 1873 it was in. But on the 
 
 other hand, in 1832 the average was as low as 89 ; in 1843 was as 
 
 low as 83; in 1848 was as low as 74; in 1851 was 75 ; and in 
 
 1858 was 91. It will be seen, therefore, that the average of prices 
 
 was in some cases considerably more under the normal level than 
 
 it was ever above the normal level, and that the years in which it 
 
 was under were as numerous as the years in which it was over 
 
 during the time that French bimetallism existed in its integrity. 
 
 It is notable, too, that in 1849 the average of prices was as low as 
 
 74, and that even last year the average was only 68 ; so that the 
 
( 43 ) 
 
 average last year was not so greatly under the average of 1849 ^^ 
 is generally supposed. Yet in 1849 French bimetallism was in 
 full vigour. Last year silver was discredited all over the world, 
 had ceased, in fact, to be a standard of value in any civilised 
 country. 
 
 Is it not evident from this brief review of Mr. Sauerbeck's 
 chart that the course of prices was not determined by bimetallism ; 
 was not determined by the employment of silver as standard 
 money ; was not determined even by the quantity of money em- 
 ployed in the world? — that what regulates prices is something 
 altogether different from either the kind of money employed or 
 the quantity of money in existence ? I do not deny that money 
 has an influence upon prices. But it is plain from the history of 
 prices from 1820 to 1873 that the influence of money upon prices 
 is much less powerful than the influence of other causes, and that, 
 therefore, it clearly follows that even if silver could be restored to 
 the position it occupied in the monetary systems of the world 
 before the Franco-German War, it would not be a necessary con- 
 sequence that prices should rise. Prices might rise or they might 
 not, or they might fluctuate violently ; but a mere increase in the 
 volume of money would not cause them necessarily to go up, and 
 would not maintain them if they were put up by speculation in 
 anticipation of a general rise. I propose to discuss, next week, 
 some of the causes that act upon prices. But I have thought it 
 useful here to point out that bimetallism while it existed did not 
 maintain high prices, in the hope that those who are clamouring 
 for a change in our currency system without having given long 
 and serious thought to the subject, and in the mere hope that 
 prices may thereby be made to rise, will reconsider what they are 
 doing. Both in the United States and in India we have had 
 lessons as to how tampering with the currency may injure the 
 prosperity of great countries. It is to be hoped that the lessons 
 will not be thrown away upon our own people. 
 
( 44 ) 
 
 THE THEORY OF PRICES *—L 
 
 In the foregoing I have shown from a chart, not certainly drawn 
 up in the interest of monometalHsm, that the movement in prices 
 since 1820 has been downwards; that between 1820 and 1873 
 there were very violent fluctuations, but that yet, in the most 
 inflated years, prices never reached the high level of 1820, while 
 in very depressed years they sometimes fell nearly as low as last 
 year's. From this it follows clearly that influences have been at 
 work all through the century tending to depress prices. And it 
 is not difficult to discover what those influences have been — 
 namely, the great mechanical inventions, which have completely 
 changed the economic condition of the world. " Price " is value 
 expressed in the standard money of a country. Therefore, prices 
 must be determined by two sets of causes : by those which affect 
 the values of commodities separately and generally, and those 
 which affect the value of the standard money of the country. But, 
 speaking generaUy, the former causes are the most powerful. 
 During the present century, at all events, I think no one who has 
 given attention to the subject will dispute that they have been far 
 more powerful than the purchasing power of the standard money 
 of the world. It may be worth while briefly to point out — with- 
 out any pretension either to exhausting the list or tracing the full 
 effect of these causes — what the principal of them were and how 
 they operated. 
 
 In the early part of the century locomotion was extremely 
 difficult, tedious, and costly. It took months to communicate 
 between Europe and the Far East. It took many weeks to com- 
 municate between Europe and Eastern America. And such 
 communications were not only slow, tedious, and costly, but they 
 
 * From 7'he Statist oi ]\\ne g, 1894. 
 
( 45 ) 
 
 were also uncertain, through the variableness of the winds, as well 
 as dangerous. Therefore it was necessary for merchants to keep 
 large stocks of commodities always in their warehouses. It took 
 so long a time to obtain fresh supplies that it was requisite to keep 
 stocks that would last many months — sometimes even a year or 
 more. Under these conditions prices were necessarily high. 
 Transport by land was exceedingly costly ; by sea it was less 
 costly, but it was tedious, long, and uncertain, and, therefore, the 
 cost of production was increased by the extremely heavy cost of 
 transport. When goods reached here they had to be stored in 
 great warehouses by wealthy merchants, and the merchants 
 necessarily required a profit upon their large outlay and lock up 
 of capital in thus keeping large stocks of goods always on hand. 
 So great a capital, in fact, was required by the merchants that 
 there was comparatively little competition, and the great merchants 
 had matters very much their own way. The introduction of the 
 railway, the steamship, and the telegraph, with such other changes 
 as the opening of the Suez Canal, have completely altered all this. 
 As has been often pointed out in commenting in The Statist 
 upon the constitution of the Bank of England, the great mercan- 
 tile houses are dying out. The functions performed by them are 
 becoming unnecessary. Everyone can now compete who has 
 even moderate capital or moderate credit. There is no need for 
 holding large stocks. A merchant can telegraph to any part of 
 the world for any supplies he requires in a few minutes. In a 
 week or so he can have his goods from America ; in a very few 
 weeks he can have them from India. Practically, New York is 
 now nearer to us than Dublin was at the end of last century, and 
 Bombay is far nearer than Lisbon was. The great merchant, 
 then, is rapidly disappearing. There is now no need for the vast 
 capital he formerly employed. Competition is as free in the 
 foreign as in the home trade, and the cost of transport has been 
 immensely reduced ; while the dangers of transport have decreased 
 in proportion, uncertainty having very nearly ceased. 
 
 The effect upon trade of the shortening and cheapening of 
 
( 46 ) 
 
 locomotion has been greatly heightened by the opening up of 
 China and Japan, itself largely the result of the new inventions 
 which have changed the face of the world. And the effect upon 
 trade has been still more heightened by the growth of new 
 countries. In the early part of this century the United States 
 consisted of only a narrow strip along the Atlantic Coast of North 
 America; now the States stretch from the Atlantic to the Pacific. 
 Every part of the country is served by railways, and though the 
 settlement is sparse, yet most of the Continent is settled after a 
 fashion. At the beginning of the century the colonising of 
 Australasia had only just begun. Now Australasia has as large a 
 population as the United States had when the war of 1812 
 broke out. Canada has grown almost as quickly as Australasia, 
 and so have our South African possessions. The growth of South 
 America has not been quite so satisfactory, but it has been very 
 remarkable for all that. The development of the new countries 
 was rendered possible only by the steamship and the railway. 
 Practically the great emigration from Europe did not begin until 
 the Irish famine of 1847. It received a new impetus from the 
 revolutions of 1848 upon the Continent, and it has gone on upon 
 an immense scale ever since. Some of the most enterprising of 
 the European populations have thus been transferred to the newer 
 countries of the world, have extended cultivation in a way never 
 dreamt of before, and by their competition with the old countries 
 have necessarily increased supplies of produce of all kinds in an 
 unprecedented way, and so have reduced prices. 
 
 While all this was going on, the inventions out of which it arose 
 were being improved and supplemented. Labour-saving machinery 
 helped to multiply manyfold the industrial energy of the European 
 settlers in the newer countries, and the perfection of machinery in 
 Europe enabled less labour to turn out far more manufactured 
 goods than before. Every year during the century some advance 
 in this way has been made ; and as these successive advances are 
 being added to one another, the command that mankind has now 
 over the forces of nature is out of all proportion greater than it 
 
( 47 ) 
 
 has ever been before in the history of the world. This in its turn 
 has necessarily reduced the cost of production. And in the mean- 
 time the great development of banking has stepped in to render 
 additional service in the increase of production and the cheapening 
 of prices. Every civilised country is now covered with a network of 
 banks, whose business it is to gather in small sums from depositors 
 and to lend those sums out again in the great industrial centres to 
 producers and transporters who may not have got enough them- 
 selves. The banks, it is quite true, are a mere conduit pipe 
 between the saving classes and the producing classes. But the 
 function they perform is not the less valuable or the less powerful 
 for that. Without them the business of the world could not now 
 be performed : with them the more thrifty classes have a new 
 incentive for saving, not hoarding as their grandfathers used to 
 do, and their savings are placed by the banks at the disposal of 
 everyone who is able to add anything to the wealth of the world. 
 Credit, in fact, has so supplemented capital that it is now the more 
 important and the more fruitful instrument of the two. And, 
 wisely used, credit necessarily tends to reduce prices, not only by 
 enabling new classes to compete, but by placing the obligation 
 upon those who get credit to turn over what they deal with rapidly 
 and frequently. The origin of the economic revolution effected 
 during the century is, I need not repeat, the new inventions ; and 
 of those inventions the most fruitful, and the most powerful by 
 far have been the railway, the steamship, and the telegraph, 
 enabling the more enterprising of the European populations 
 to transfer themselves and their energies from the older and 
 the slower countries to the newer, to open up those newer 
 countries, to extend cultivation, and finally bringing the newer 
 countries in point of time so near to the old that they have been 
 able to compete successfully with the older, and thus to reduce 
 extraordinarily the prices of all kinds of raw produce. But the in- 
 fluence of labour-saving machinery must not be overlooked, nor 
 that either of banking development. 
 
 The change in prices has been brought about mainly by lower- 
 
( 48 ) 
 
 ing the cost of production. It is quite true that the cost of pro- 
 duction does not determine values. But a lowering of the cost 
 of production enables the new producers to compete more actively 
 with the old ; and keen competition always results in a lowering of 
 prices. Thus, though the cost of production has directly nothing 
 to do with value, indirectly it has an enormous influence upon it, 
 inasmuch as it either stimulates or cripples competition. From 
 this brief sketch it will be seen that the whole tendency of modern 
 civilisation is to lower the cost of production, thereby to stimulate 
 competition, and as a consequence to reduce prices. This is leav- 
 ing out of account altogether the value of the standard money 
 in which prices are reckoned. But I may remark in closing that 
 the effect of the new inventions did not make itself fully felt until 
 after the Franco-German War. Railway building on a great scale 
 only began here at home in 1843-4. It did not begin upon the 
 Continent until the Fifties. It was later still in the United States 
 and in the newer countries. Roughly, it may be said that the con- 
 struction of the great main hnes continued from about 1843 to 
 about 1873, and that it was not until after the latter year that the full 
 effect of railway construction was felt by trade. Further, it is to 
 be recollected that the Suez Canal was not opened until 1869. 
 And lastly, it is to be borne in mind that the application of steam 
 to navigation and the great changes in marine construction are 
 more recent even than the railway. Some of the changes in 
 marine construction are quite new. The laying of the telegraph, 
 too, is recent. It was not until 1866 that Europe and America 
 were connected by telegraph. All that being so, it necessarily 
 follows that the fall in prices which was going on from 1820 
 onwards received a new impetus in the Sixties and Seventies, and 
 has become much more marked since. It is these causes and 
 not the breakdown of bimetallism which have occasioned the 
 great fall of the past twenty years. 
 
( 49 ) 
 
 THE THEORY OF PRICES.*— 11. 
 
 THE APPRECIATION OF GOLD. 
 
 Gold Monometallists contend that the new inventions which 
 have characterised the closing century fully account for the fall 
 in prices, and that when so simple and sufficient a cause can be 
 adduced, it is unscientific to bring in a more complex and more 
 doubtful cause. To that I reply that the cause is certainly not 
 simple, and that its action is not uniform. The prices with which 
 we are all dealing in this controversy are the wholesale prices of 
 commodities, and the new inventions of the century have affected 
 commodities in two ways. As I have endeavoured to show in 
 the foregoing, they enable capital to go farther than it formerly 
 did in producing, transporting, and distributing. To that extent 
 it is perfectly clear that the new inventions have lowered prices. 
 The money outlay being smaller, competition may be trusted to 
 ensure that the money return shall be smaller likewise. Secondly, 
 the new inventions have increased the efficiency of labour ; but if 
 the efficiency of labour has been increased as much in gold min- 
 ing as in the production of other commodities, then it is evident 
 that the mere increase in the efficiency of labour cannot have 
 changed prices at all. If the standard money of a country repre- 
 sented labour, it is unquestionable that the more efficient labour 
 became the more would the standard money be appreciated. But 
 the standard money of no country represents labour, and whether, 
 therefore, the standard money of a country is or is not appreciated 
 by the increased efficiency of labour, depends upon whether the 
 efficiency has or has not been increased in the same proportion 
 in gold mining as in other industries. But it will hardly be dis- 
 
 * From The Statist oi^ymo. i6, 1894. 
 
( so ) 
 
 puted that labour is not as efficient, or at all events has not been 
 as efficient, during the past quarter of a century or so in gold 
 mining as in other industries. 
 
 The mistake both of the gold Monometallists and of the 
 Bimetallists seems to me to spring out of their adherence to the 
 quantitative theory of money, which I venture to think is not 
 merely misleading, but is utterly wrong. Save in a few in- 
 stances in which the quantity of a thing cannot be increased, 
 such, for example, as paintings by the old masters, or where there 
 is a real monopoly, the value of a commodity is not determined 
 by the existing quantity, but by the cost of that portion of the 
 new supply which is most expensive to raise. Suppose, for in- 
 stance, that the people of the United Kingdom insisted upon 
 having every year 28 million quarters of wheat, and that 27 
 million quarters could be produced and sold at 20s. per quarter, 
 but that the last million quarters could not be sold at less than 
 24s. Then the price of wheat must be 24s. a quarter or some- 
 what more. We all know, of course, that the difficulties of pro- 
 ducers and intermediaries, mistakes for a while as to supply and 
 demand, accident and the like, may cause great fluctuations in 
 prices. The price of wheat might fall for a while considerably 
 under 24s., or might rise considerably over that figure, but it is cer- 
 tain that if the people of the United Kingdom insisted upon having 
 the full 28 million quarters every year they would have to pay 
 the price that would induce the growers of that portion which is 
 produced at the greatest cost to continue cultivating. So again 
 let us suppose that a manufacturer in one of the great manufac- 
 turing centres is employing at present a thousand workpeople; that 
 suddenly there is an increased demand for his goods, and that he 
 requires fifty workmen more. The wages he will have to pay will 
 not be determined by what he is already paying the thousand 
 men, but by what will attract to him the fifty men whom he 
 suddenly requires. And so it is with every commodity. But 
 gold is a commodity just as iron and tin, and the value of gold is 
 determined in precisely the same way. The return to the gold 
 
( 51 ) 
 
 miners must be sufficient to induce those who are engaged in rais- 
 ing the gold from the costliest mines to continue working. It is 
 perfectly true that gold mining is of the nature of a speculation, that 
 it has a peculiar attraction for certain minds, and that the owners 
 of mines are very reluctant to cease working because of the extra- 
 ordinary expense of reopening. It is quite possible, therefore, that 
 mines may be worked at a loss for a considerable time, but while 
 fully granting that, it is equally certain that men will not go on 
 working at a loss for a quarter of a century or more, and that 
 therefore they must get the usual return to labour and capital. 
 
 The Bimetallists reply to this, that while the theory is true 
 enough in regard to ordinary commodities, it is not true of gold 
 and silver, because of the enormous quantity of these two metals 
 existing in the world, and their extraordinary durability. Let us 
 then put the reasoning in a somewhat different way. We are 
 dealing, it will always be recollected, with the wholesale prices of 
 commodities, and in the wholesale markets it is notorious that 
 metallic money is hardly employed. A man goes to his banker 
 and raises a loan upon security. In 999 cases out of a thousand 
 he does not draw cash. The amount is credited to him in the 
 books of the bank. He buys commodities and rarely pays cash. 
 Probably he pays by means of a cheque. And the seller also 
 usually does not take cash. The price is credited to him either 
 in the books of the same bank or in the books of some other 
 bank. Similarly goods are bought by means of bills, and the bills 
 are settled through the Clearing House without the intervention of 
 cash, except to an infinitesimally small amount. It is unneces- 
 sary to extend the argument or to quote evidence. Everybody 
 knows that in this country metallic money is used very little — to 
 quite a small fractional amount in the wholesale markets, and 
 even on the Continent to a very small extent. But if the prices 
 of commodities are paid, not in cash, but in credit documents, it 
 is perfectly clear that the quantity of money cannot determine 
 those prices. They are clearly determined immediately by the 
 volume of credit, and ultimately they are governed by the value 
 
( 52 ) 
 
 of the standard money in which they are reckoned, although not 
 discharged. I submit, then, that whether we look at gold as a 
 commodity pure and simple or as the substance of our standard 
 money, it is not the existing quantity of it which determines its 
 value, but the cost of raising the most expensive portion of it 
 which is required at the time. 
 
 A certain annual supply of gold is always required, partly 
 because of the growth of wealth and population, partly because of 
 the loss through wear and tear and accidents, and partly because 
 of the consumption of the metal for the purposes of the arts. 
 During the past four-and-twenty years the amount of gold re- 
 quired has been exceptionally great, owing to the adoption of the 
 ^old standard by Germany and so many other countries. On the 
 other hand, the production of gold fell off immensely imme- 
 diately after the Franco-German war. It had been declining for 
 some years previously. It decreased all through the Seventies, 
 and, according to Herr Soetbeer, during 1 88 1-86 it averaged less 
 than ;^2o,ooo,ooo per annum. There having been, then, in 
 addition to the normal demand, an extraordinary demand for 
 supplying new currency for the countries that adopted the 
 gold standard, for hoarding, for war chests, and for India, it 
 follows that the value of gold must have risen. No serious man 
 would dispute that if the consumption of any other commodity 
 had immensely increased during twenty years, and the supply had 
 fallen off, there would have been a marked rise in the value. 
 And I have just been endeavouring to prove that gold conforms 
 in every respect to the laws that govern the value of all other 
 commodities. In these days of keen competition and of close 
 communication between all parts of the world, is it conceivable 
 that immense amounts of capital and labour would be employed 
 for a quarter of a century or so at a return less than could be ob- 
 tained from any other industry ? It is undisputed that wages, 
 generally speaking, have not fallen in the great industries of the 
 world since the Franco-German war ; but unless gold increased 
 in value wages must have fallen in gold mining, for whereas in 
 
( 53 ) 
 
 almost all other industries the return to the labourer — that is to 
 say, the return per man in production — has enormously increased, 
 the return per man in production in gold has unquestionably 
 greatly decreased. If, therefore, the labourer in a gold mine was 
 to get as good a wage as the labourer in other industries, he must 
 either have taken so large a proportion of the gold outturned as 
 to leave nothing to the capitalist, or a smaller gold return must 
 have given him an increased command over commodities gene- 
 rally. 
 
 THE THEORY OF PRICES.*— IH. 
 
 I HAVE endeavoured to show above that gold has appreciated, and 
 that its value is not determined by the quantity of the metal 
 already in existence, but by the cost of raising the most expensive 
 part of the required supply ; that prices are determined immedi- 
 ately by credit, and are regulated ultimately by the value of the 
 standard money of the country. It may be asked, " How does the 
 value of gold affect credit ? '"' The answer is simple enough. 
 The volume of credit at any time is determined by two sets of 
 causes — those which affect the persons who demand credit and 
 those which affect the persons who grant credit. Of these causes, 
 by far the most powerful is opinion — the temporary opinion as to 
 the solvency of people generally who are engaged in business, or 
 what is usually spoken of as the state of confidence in trade. 
 Unless there is confidence very few people will care to engage in 
 new enterprises or to extend old businesses. There will therefore 
 be very little demand for credit. And, similarly, bankers, who 
 are the great grantors of credit, will not care to give very much. 
 
 * From The Statist of June 23, 1894. 
 
( 54 ) 
 
 Confidence, then, or more generally and broadly speaking, opinion, 
 is the most powerful of all causes influencing credit. But in any 
 state of credit, whether good or bad, it is clear that the amount of 
 the bank reserves must have an influence upon it. In countries 
 like our own it is evident that, however good credit may be, a 
 banker can only lend in proportion to his resources. Leaving out 
 of account banks that are managed with criminal recklessness, all 
 bankers must and do keep some kind of reserve. The proportion 
 diflers from country to country, and even in the same country 
 there is much difference of practice in the keeping of reserves. 
 But every respectable banker keeps some reserve ; and it is clear, 
 therefore, that there must be a limit to the amount of credit he can 
 give. As soon as it seems to him that his reserve is becoming 
 dangerously small he must stop adding to the magnitude of his 
 loans and discounts. Consequently, the amount of the reserves 
 limits the amount of credit that can be granted, and, therefore, 
 when the standard money forming the reserves is scarce — or, 
 rather, when the new supplies of the metal forming the standard 
 money are smaller than usual — reserves tend to become small and 
 so to limit the volume of credit. 
 
 But it is often objected by gold MonometalHsts that if this were 
 so the rates of interest and discount would have been exceptionally 
 high during the past quarter of a century. Not at all. I venture 
 to submit, on the contrary, that when gold is appreciated, rates 
 must be lower than when gold is depreciated ; and this because 
 the smaller the reserves are the sooner they run down to the 
 danger point, and all the sooner, therefore, bankers put a check 
 to speculation by refusing to lend and discount. Everyone knows 
 how, when bankers think that speculation is becoming dangerous, 
 they call in loans. When they do that they may make rates dear 
 for the moment ; but they create a fear amongst speculators which 
 compels the latter to liquidate their accounts and so, for a consider- 
 able time afterwards, speculation is checked. To illustrate this 
 point, let us suppose that an extraordinarily rich vein of gold were 
 to be discovered, that the outturn were to be so immense that for a 
 
( 55 ) 
 
 considerable time a million sterling was sent in at regular intervals 
 from this new field to the Bank of England. Instantly the opinion 
 would spread that money was about to become unusually plentiful 
 and cheap, that prices must rise, that business must expand ; and 
 consequently everyone engaged in business would conclude that 
 if he bought goods then, he would be pretty sure to make a 
 profit. Speculation would consequently spring up both upon tne 
 Stock Exchange and in the ordinary commercial markets, business 
 would expand immensely ; and if the new supplies of gold con- 
 tinued on an extraordinary scale the banks would be in a position 
 to go on week after week, adding to the accommodation they give 
 their customers. The rise in rates that would follow might last 
 for a considerable time. Rates might reach five or six per cent., or 
 even more, and be maintained for a much longer period than we 
 have been accustomed to for the past twenty years. Now suppose, 
 on the other hand, that gold were to be taken away from the Bank 
 of England instead of being sent into it, and if it were to be 
 taken in large amounts, bankers would soon become apprehensive, 
 and would begin to call in loans. Every prudent business man 
 would then begin to lessen his commitments, and those who are 
 less prudent would be required to do so by the calling in of loans 
 by bankers. During the past twenty years the gold reserve of the 
 Bank of England, speaking generally, has been exceedingly small 
 in proportion to the immense volume of business done by this 
 country. Consequently the instant we have had a beginning of 
 really active speculation bankers have become apprehensive, loans 
 have been called in, and the rise has been checked. We have 
 never during this period had prices at their old level, because 
 bankers were not in a position to give credit in proportion to the 
 country's volume of business on the same scale as they were 
 before the Franco-German war. 
 
 But it may be asked — allowing for the sake of argument that 
 prices are determined by credit, and that the volume of credit is 
 limited by the amount of the reserves held by the banks — how 
 can the value of gold be so transmitted from the reserves to credit 
 
 E 2 
 
( 56 ) 
 
 as to affect prices ? The answer is not difficult to find. Gold 
 is required for four distinct purposes — for the arts, for hoarding, 
 for the general circulation, and for bank reserves. Gold used in 
 the arts tends, of course, to raise the value of the metal ; but, 
 except in that way, it does not affect prices. It is not employed 
 as money. Gold hoarded, in the same way, by increasing the 
 demand for the metal, raises its value. But while it is hoarded it 
 is out of the reach of trade just as much as if it were still in the 
 mines, and therefore cannot affect prices. Even the gold em- 
 ployed in the general circulation does not affect prices directly. 
 It is performing the function of small change, or token money just 
 as much as silver coins are. It is employed, it is true, in paying 
 wages, and it is also largely used in the retail trade. But, speak- 
 ing generally and roughly, it may be said that it is not used in the 
 wholesale trade. The only gold that affects prices directly and 
 immediately is that in the bank reserves. If the supply of gold 
 is large enough to meet the demand for the arts, for hoarding, and 
 for the general circulation, and yet to leave a liberal amount for 
 bank reserves, the reserves will be large, and consequently the 
 superstructure of credit built upon them will be large. If the 
 reserves be small, so will be the superstructure of credit built upon 
 them. Further, in the latter case gold will be eagerly sought for 
 everywhere, and the most expensive mines will be carefully 
 worked. The value of gold will therefore almost inevitably be 
 high. But prices are measured in gold although they are dis- 
 charged, generally speaking, by means of credit documents ; and 
 although it is very rarely that gold is actually used in making pay- 
 ments, still every business man who has a right to receive gold 
 may demand it in payment. Therefore prices may not be higher, 
 even though they are fixed by credit, than if they were necessarily 
 payable in gold. In other words, the credit prices will be mea- 
 sured in gold and will be regulated by the value of gold. 
 
( 57 ) 
 
 THE THEORY OF PRICES.*— IV. 
 
 LORD FARRER'S LETTER.! 
 
 I AM not sure that I rightly understand Lord Farrer's letter in 
 last Saturday's Statist. He is so kindly considerate that he did 
 not give himself room to fully explain his meaning. But if I do 
 understand him, I submit that his admissions dispose of his con- 
 tention. He writes : " The nexus, and the only nexus, between 
 an increase or a diminution in the quantity of gold for the time 
 being available for currency on the one hand, and wholesale prices 
 on the other, is to be found in the operation of that increase or 
 diminution on the state of the bank reserves." I know of only 
 one way in which the scarcity of gold can affect wholesale prices 
 through the bank reserves. It is, as I explained a fortnight ago, 
 firstly by limiting the bank reserves, secondly by limiting credit 
 thereby, and thirdly by lowering prices in consequence. But the 
 rates of interest and discount are simply the rent paid for the use 
 of loanable capital ; and the rent of loanable capital, like the rent 
 of land or of anything else, cannot be high when there is such a 
 scarcity of gold as makes all prices low. Speculation may be 
 likened to a railway train, which travels at a great pace when 
 stopped only at long intervals, and crawls along when stopped very 
 frequently. Speculation must be pulled up frequently when the 
 scarcity of gold so contracts the bank reserves as to make the 
 superstructure of credit raised upon them small. I venture to 
 think that Lord Farrer's mistake, as well of that of the gold 
 Monometallists generally, arises out of the use of the ambiguous 
 word " money," instead of " loanable capital." Through that 
 
 * From The Statist of July 7, 1894. 
 t See Appendix A. 
 
( 58 ) 
 
 error he is led to confound loanable capital with cash, when in 
 reality loanable capital is neither more nor less than credit. 
 
 In the last paragraph of his letter Lord Farrer writes : " If 
 therefore, during the period of low prices which has continued 
 during the last twenty years or more, we find that the supply of 
 gold in the bank reserves has been as abundant as ever, and that 
 the rates of discount have not been higher, and have not fluctu- 
 ated more than they did in previous years ; and if it cannot be 
 shown that the lowering of prices has been preceded or accom- 
 panied by a diminution in the gold reserves or a raising of the 
 rate of discount, a strong presumption — to say the least — is raised 
 that the low prices have not been due to an increased scarcity of 
 gold." This extract clearly discloses the ultimate cause of Lord 
 Farrer's error. During the past twenty years the volume of trade 
 of the whole world has increased immensely compared with the 
 preceding twenty years. How much the increase has been I 
 admit is very difficult to calculate. But that there has been a very 
 great expansion of trade, I presume no competent person will 
 deny. Unfortunately, the only statistics available to help us are 
 those relating to the international trade of the world. I submit, 
 however, that the international trade has not grown at all as rapidly 
 as the home trade of the more advanced countries. Our own 
 country has the greatest foreign trade of any nation in the world ; 
 and yet I do not hesitate to express my own opinion that our home 
 trade has expanded during the past twenty years more than our 
 foreign trade ; and I have no doubt at all that the home trade of 
 such countries as the United States, France, and Russia has 
 grown far more rapidly than their foreign trade. But, even if we 
 take the international trade of the world alone, it is incontestible 
 that the volume of the world's trade has expanded greatly during 
 the past twenty years. If Lord Farrer is prepared to admit that, 
 is he prepared to dispute that larger gold reserves are required now 
 to maintain the level of prices at the level of the twenty years 
 ended with 1873 ? Is he prepared to deny, further, that the bank 
 reserves have not increased during the last twenty years in any- 
 
( 59 ) 
 
 thing like the proportion in which the world's trade has expanded ? 
 If he admits the first proposition and cannot deny the two last, 
 does it not follow that the failure of the bank reserves to increase 
 — at least in the same proportion as the volume of the world's 
 trade — must necessarily have led to a contraction of credit, and so 
 to a fall in prices ? 
 
 During the past twenty years silver has been demonetised by 
 country after country, so that practically the civilised world has 
 come to depend upon gold alone for its bank reserves. Further- 
 more, the new supplies of gold from the mines had fallen off 
 greatly until three or four years ago. And, lastly, the consumption 
 of gold has immensely increased. Is it not reasonable to assume 
 that since silver has been discarded by so many countries as 
 standard money, since gold has been consumed in such increased 
 proportions, and since the new outturn of gold from the mines 
 had been falling off seriously for so long a time, it would not be 
 enough to have the same proportion of bank reserves to the 
 volume of trade which was thought to be sufficient in the preceding 
 twenty years ? Personally I have no doubt that the so-called 
 scramble for gold, which has exercised so great an influence upon 
 the opinion of the trading community all over the world, has made 
 it necessary to keep much larger reserves, and that, therefore, to 
 maintain the level of prices at the average of the twenty years 
 ended with 1873 we ought to have a much higher proportion be- 
 tween the bank reserves and the volume of trade than was sup- 
 posed necessary formerly. But I do not wish to push the point 
 too far, and I am willing, therefore, for the sake of argument, to 
 assume that if the bank reserves had grown in the same propor- 
 tion as the volume of the world's trade, both national and inter- 
 national, the level of prices would have been maintained. But it 
 is notorious that the bank reserves have not grown at the same 
 rate as the world's trade; and, consequently, I submit that a 
 decline in the level of prices was inevitable. 
 
 There is one other point to which I would like to invite Lord 
 Farrer's attention, and it is the difficulty of ascertaining what th€ 
 
( 6o ) 
 
 bank reserves are at the present time. If he will look at The Statists 
 tabular Appendix he will see that the Imperial Bank of Russia 
 holds over 56 millions sterling in gold, besides a mixed sum of 
 gold and silver. I presume he will grant that these 56 millions 
 sterling are not a " banking reserve " in the sense in which both 
 he and I employ the phrase. They are a hoard or a war treasure ; 
 but they are not a " reserve," kept in ordinary times to meet trade 
 contingencies. So, again, the gold held by the Austro-Hungarian 
 Bank is not a reserve in the proper sense of the term. When re- 
 sumption is completed it may become so ; but at the present time 
 it also is a hoard, not a reserve. Now let us come to the Bank of 
 France. It holds over 72 millions sterling in gold, and over 51 
 millions sterhng in silver — together over 123 millions sterling. 
 But I presume Lord Farrer will concede that the silver forms no 
 part of the Bank's reserve. It is coin locked up in the Bank of 
 France for the purpose of keeping the legal tender five-franc 
 pieces at their legal value. How much of the gold is a reserve ? 
 How much must be kept by the Bank of France in order to 
 assure the peoples of the Latin Union that the 160 millions 
 sterling of legal tender silver coin will be maintained at the mint 
 value ? How much, again, must be set aside as a war treasure ? 
 The French Government, unlike the German, does not hold gold 
 in any of its fortresses — or, at all events, it does not let the world 
 know that it holds a special war treasure. The real war treasure 
 is kept by the Bank of France. Suppose the great war which 
 Europe has been dreading for so long a time were to break out, 
 the expenditure would exceed anything the world has ever yet 
 known. Would it not be absolutely necessary that the French 
 Government should be able to lay its hand without an hour's 
 delay upon a vast sum which would be received everywhere abroad 
 as well as at home in payment for what it required ? Otherwise 
 the French Government would have to borrow on an unprece- 
 dented scale. And if Russia were the ally of France is it not 
 certain that France would have to provide unheard of sums for 
 Russia also ? How much, then, of the gold held in the Bank of 
 
( 6i ) 
 
 France must be ear-marked as war treasure which the Bank can- 
 not use in any way without the permission of the Government ? 
 And when we have made allowance for the war treasure and the 
 reserve against silver depreciation, how much gold remains as a 
 real banking reserve ? 
 
 One last point. What is the reserve of such countries as 
 Egypt, for example ? Is it not held by the Bank of England just 
 as much as the reserves of the Scotch and Irish banks ? Again, 
 what is the reserve of such countries as Argentina ? Is it also not 
 held by the Bank of England ? Is not, then, the reserve of the 
 Bank of England, which looks so immense to the unthinking just 
 now, a reserve not only for the United Kingdom, but for a very 
 large part of the outside world as well ? If Lord Farrer will add 
 up the gold held by the reserve-keeping banks of the world and 
 will then make allowance for war treasures, for depreciated silver, 
 and for the requirements of foreign countries which have no 
 reserves of their own, I venture to think he will find that the bank 
 reserves at the present time are not merely small but are very 
 small j and that when he takes into account, on the other side, the 
 vast growth in the world's trade and population, the burden of 
 debt that is hanging like a mill-stone round the necks of so many 
 states, and the fear of the most terrible war that the world has 
 ever seen, he will recognise that a fall in prices was inevitable from 
 the depletion of the bank reserves alone. 
 
( 62 ) 
 
 THE THEORY OF PRICES.*— V. 
 
 LORD FARRER'S SECOND LETTER.! 
 
 Lord Farrer, I hope, will pardon me if I say that his second 
 letter is disappointing. It purports to be an answer to the articles 
 I have been contributing to The Statist on the bimetallist agi- 
 tation, and more particularly to the article published a fortnight 
 ago. I appreciate the compliment, and am anxious to conduct 
 the controversy with fitting courtesy ; but I am bound in truthful- 
 ness to say that Lord Farrer has not takpn the trouble to under- 
 stand the argument he undertakes to refute. For instance, he 
 writes last Saturday : "Your own hypothesis is that the way, and 
 the only way, in which a diminution in the quantity of gold 
 available for currency can affect prices is through the rate of 
 discount." I hold the very contrary, and I have already written 
 two articles to disprove the proposition which Lord Farrer puts 
 into my mouth. My point is that the rates of interest and discount 
 cannot be high permanently while gold is scarce and dear, any 
 more than the rent of land or the prices of commodities, for, in 
 fact, interest and discount are the rent paid for the use of loanable 
 capital. I challenge Lord Farrer to show why the rent or con- 
 sideration paid for the use of loanable capital should be high, 
 except very temporarily, when the rent of land and the prices of 
 commodities are low. I go farther, and challenge him to show^ 
 how rates can be high when prices are low because of the scarcity 
 of gold. The truth is that the gold Monometallists, by using the 
 ambiguous and misleading word " money " when they mean loan- 
 able capita], have confused themselves, and have jumped to an 
 absolutely untenable conclusion. 
 
 * From The Statist oi]\\\y 2.1, 1894. 
 t See Appendix B. 
 
( 63 ) 
 
 Lord Farrer has taken offence because, very innocently, I said 
 what I have just repeated ; that the gold Monometallists have 
 confused themselves by using an ambiguous and misleading term. 
 I certainly had no intention to give offence, and it is far from my 
 wish to be uncourteous. But if Lord Farrer will allow me to 
 say so without taking umbrage I submit that his last Saturday's 
 letter proves that the misleading word has confused him. He 
 passes in a bewildering way from gold as a medium of exchange 
 to gold as the substance forming the reserves of the great reserve- 
 holding banks of the world — two entirely different thinojs which 
 Lord Farrer could not possibly confound, if he would drop the 
 use of the word "money" and employ instead either "loanable 
 capital "or "credit." Gold as a medium of exchange is simply 
 part of the currency of the world, and while it is circulating as such 
 it cannot also form part of the reserves. The currency of any 
 country may consist of either gold or silver or copper, or paper, 
 or of all four; but the gold, while it is in circulation, is performing 
 only the same function as token coins or credit documents. It is, 
 no doubt, a potential reserve. It may be withdrawn from the 
 circulation and locked up in the reserve-keeping banks ; but 
 while it is in circulation it is no part of the reserves. And when 
 gold is largely used as currency less of it is left for the bank 
 reserves. Surely Lord Farrer is aware that besides its use in the 
 arts, gold is employed in four distinct ways — as a circulating me- 
 dium, as a war treasure, as a hoard, and as a banking reserve. 
 And the fact that it is so employed does not prove that gold is 
 plentiful ; on the contrary, when the new outturn from the mines 
 is small it goes far to prove that gold is scarce. The larger the 
 hoards, the war treasures, and the circulating media, the smaller 
 are the supplies available for banking reserves. But I contend 
 that it is the banking reserves alone which affect prices, and that 
 the banking reserves have been so attenuated during the past 
 twenty years that the fall in prices was a necessary consequence. 
 Another instance of the confusion of terms is afforded by the 
 paragraph in Lord Farrer's last letter where he argues : " The 
 
( 64 ) 
 
 changes in the modes of doing business and the growth of credit, 
 make it possible, and even necessary, for an ever-increasing 
 amount of business to be done safely and properly upon the 
 basis of an ever-diminishing proportion of gold." Here he is 
 evidently thinking of gold employed in making payments. It is 
 perfectly true that in the progressive countries gold is employed 
 less and less in making payments. It is hardly employed at all 
 in the wholesale trade and upon the Stock Exchange, and it is 
 becoming less and less employed even in paying salaries and in 
 the retail trade. Cheques and other credit instruments are taking 
 its place. But the greater the development of credit, the more 
 important is it that the bank reserves should be large. I dissent 
 altogether, therefore, from Lord Farrer's proposition, and main- 
 tain that, if prices are not to fall, every growth of credit requires 
 a corresponding growth of the bank reserves. I grant, indeed, 
 that our own banks have been exceedingly remiss in the keeping 
 of reserves. The Bank Charter Act is barely fifty years old, yet 
 three times it has had to be suspended, and the need for a fourth 
 suspension would have arisen in 1890 were it not that the Bank 
 of England went begging for help to the Bank of France and the 
 Imperial Bank of Russia. That certainly does not prove the 
 necessity for, or the safety of, small reserves. 
 
 Lord Farrer cites at considerable length Dr. Soetbeer and Dr. 
 Neuman Spallart to buttress his assertion that gold has not been 
 scarce since 1873. Both authors were very careful in the collection 
 of facts, and I am quite ready to accept their figures as figures 
 only. But the inferences they draw are simply the inferences of 
 inteUigent men, and are worth no more than the conclusions 
 drawn by any other statistical students. In this particular case 
 I believe they are both utterly wrong, and in the article to which 
 Lord Farrer more particularly is replying I gave my reasons for 
 the opinion. Lord Farrer does not think it necessary to touch 
 upon those reasons, and yet I submit that no man can understand 
 the economic condition of the world during the past quarter of a 
 century who does not carefully discriminate between the gold held 
 
( 65 ) 
 
 as banking reserves, and the gold held as war treasures. For 
 example, the Government of Russia has at the present time 
 nearly loo millions sterling in gold, and yet that is not a gold 
 reserve, and there is no intention to use it as such ; at all events, 
 for many a year to come. Again, the Austrian and Hungarian 
 Governments have been withdrawing large sums of gold, chiefly 
 from the United States, during the past couple of years. In the 
 United States the gold was held by the Treasury and by the banks, 
 and was a banking reserve. In Austria and Hungary it is not a 
 bank reserve; it has been completely withdrawn from banking pur- 
 poses for the time being. Of course, if war does not break out, 
 and if Austria and Hungary carry through their monetary reform, 
 the gold will become a banking reserve. But at the present 
 moment it is not such ; it is either a war treasure or a hoard ac- 
 cumulated in preparation for the resumption of specie payments, 
 whichever way you may choose to look at the facts and interpret 
 the policy of the Austrian and Hungarian Governments. The 
 banking reserves proper are very small. What is really peculiar 
 about the monetary history of the past twenty years or so is not 
 the accumulation of vast bank reserves, for there are no vast bank 
 reserves anywhere ; but the accumulation of vast war treasures by 
 so many of the leading countries of the world in anticipation of 
 the struggle which they have been preparing for in every way 
 throughout the whole time. Just as they have been piling on 
 debt and taxes, and bringing under the cane of the drill sergeant 
 larger and ever larger proportions of the population capable of 
 bearing arms, so they have been withdrawing from the service of 
 trade more and more of the gold that would otherwise have gone 
 into the bank reserves. 
 
( 66 ) 
 
 BIMETALLIC FALLACIES.*— I. 
 
 Those who agree in the main with the argument laid down in the 
 foregoing articles will see now that in its very nature bimetallism 
 is impracticable. The Bimetallists deny this, grounding the de- 
 nial on the existence of bimetallism in France for about seventy 
 years within the present century. But, as I have shown, the ratio 
 of 1 5 ^ to I was never maintained during the seventy years ; 
 one or other of the metals was always at a premium. And 
 further, France was practically a silver-using country until some 
 time after the great gold discoveries in California and Australia, 
 when she became a gold-using country. But the bimetallists 
 reply that it is not pretended that a ratio can be strictly main- 
 tained ; all they assert is that wide fluctuations can be prevented. 
 It is true that the values of gold and silver did not fluctuate very 
 widely up to about 1873; but that was due not to French bimetal- 
 lism, but to the fact, firstly, that up to 1834 all the world was 
 practically silver-using, with the exception of the United King- 
 dom ; that from 1834 to the middle of the century all the world 
 was practically silver-using except the United Kingdom and the 
 United States; and that when gold began to be produced in 
 Russia, in the United States, and in Australia in vast quantities, 
 about the middle of the century, France became gold-using and 
 the Far East absorbed the silver discarded by France. A conclu- 
 sive proof that bimetallism was quite ineffectual is afforded by the 
 fact that the instant Germany demonetised and proceeded to sell 
 her silver, French bimetallism broke down. Thus the history of 
 bimetallism in France and in the Latin Union generally, confirms 
 in the most striking way the experience of the whole world from 
 the earliest times that it is impossible to maintain a fixed ratio 
 
 * From The Statist of June 30, 1894. 
 
( 67 ) 
 
 between the values of any two commodities, let them be what they 
 may. 
 
 That the Bimetallists themselves are not very confident of the 
 practicability of their panacea may be inferred from their inability 
 to agree upon a ratio. M. Cernuschi proclaims that the old 
 French ratio of 1 5 ^ to i must be maintained. But the English 
 Bimetallists disavow M. Cernuschi, and, in fact, allege that he is 
 a quack. It might be sufficient to say that until BimetaUists can 
 agree amongst themselves upon a ratio, the rest of the world need 
 not trouble with the matter. But I would like to ask in addition 
 whether any Bimetallist has seriously thought out how a fixed 
 ratio is to be established and maintained ? Clearly there are only 
 three ways: either the value of silver must be artificially raised, or 
 the value of gold must be artificially lowered, or both processes 
 must be combined. But I would ask : How is the value of 
 silver to be artificially raised ? The Bimetallists airily tell us that 
 if the mints of the great nations of the world are opened to the 
 free coinage of silver, the consumption of the metal will so in- 
 crease that its value will rise, and consequently the price. That is 
 a mere assertion which gives literally no information. The 
 Sherman Bill was introduced into Congress in the spring of 1890, 
 was passed in the middle of July in that year, and came into 
 operation on the 13th of the following month. While the dis- 
 cussion was going on a great speculation sprang up, and the 
 price of silver rose from about 446.. to 54^d. per ounce ; the 
 highest quotation being reached in the first week of September — 
 just three weeks after the Act came into force. From that 
 moment the price began to fall, and steadily declined until, a 
 little before the closing of the Indian mints last year, the price 
 was about 38d. During this period of nearly three years the 
 United States bought 54 million ounces of silver annually; India 
 imported about 7 millions sterling worth of the metal per annum, 
 and the Mexican mints were as active as they could be turning 
 out dollars for the supply of other parts of the Far East. Yet 
 with this enormous demand the price of silver fell from 54^d. to 
 
( 68 ) 
 
 about 38d. Is it not perfectly certain that, even if bimetallism 
 were adopted, the consumption of silver would not be greater for 
 a considerable time after the new system was introduced than it 
 was during the three years the Sherman Act was in force ? 
 
 It is evident to every careful observer that the currency of 
 the United States is at present redundant. Therefore, either 
 some of the paper money must be cancelled, or some of the gold 
 must be parted with, or some of the silver must be got rid of. At 
 the present time gold is being driven out very rapidly. If bi- 
 metallism were generally adopted, and there were to be a free 
 market for silver, we may reasonably conclude that the Americans 
 would keep their gold and get rid of as much silver as they could. 
 Therefore, for the early years of bimetallism America would be a 
 seller and not a buyer of silver. Furthermore, it is not probable 
 that with bimetallism India or the other countries of the Far East 
 would absorb more silver than they did during the three years 
 immediately preceding the closing of the Indian mints ; and it is 
 certain that Mexico could not absorb more silver. But Russia, 
 Italy, Spain, Portugal, and Greece have suspended specie pay- 
 ments and would not open their mints. Neither would the South 
 American countries generally. Consequently, the only fresh de- 
 mand there could be for silver under bimetallism, would be in the 
 countries which at present are gold-using. Does anyone seriously 
 beheve that the gold-using countries would get rid of their gold 
 and absorb the silver that America would be trying to sell, and 
 possibly France also ? There is another point. We have seen 
 that, with the enormous demand for silver caused by the Sherman 
 Act, the price fell to very nearly 3s. an ounce. Is it not probable, 
 therefore, that the whole demand of the world could be supplied 
 at 3s., or, at all events, at 3s. 3d. per ounce? Indeed, if the 
 Director of the United States Mint is right, silver could be pro- 
 duced much more cheaply, for he tells us that in 1893 the outturn 
 was 161 miUion ounces, against only 153 million ounces the year 
 before. But if the real value of silver is 3s. or 3s. 3d. per ounce, 
 with the greatest conceivable demand from the mints, how, I 
 
( 69 ) 
 
 would ask once more, do the Bimetallists propose to raise the 
 price to 5s., or 4s., or, let us say, 3s. 6d. an ounce? I would ask 
 any business man of experience. Is it possible by any artificial 
 arrangements of Governments to enable one small class of 
 capitalists and labourers to earn exceptionally high profits and 
 wages permanently ? Is it not as certain as anything can be that 
 competition would force the price down to nearly the intrinsic 
 value ? And if it did, how do the Bimetallists propose to raise it 
 artificially ? 
 
 BIMETALLIC FALLACIES.*— II. 
 
 A FORTNIGHT ago I asked how the BimetalHsts propose to raise 
 the value of silver, supposing all the great nations of the world 
 could be induced to adopt bimetallism; and I brought forward 
 some reasons to show that it would be impossible to put up the 
 value. That there would not be the slightest chance of getting 
 the countries which are interested in silver, and more particularly 
 France, to join in a universal Bimetallic League unless silver was 
 advanced in value seems unquestionable. The Bank of France 
 holds over 5 1 millions sterhng in silver at the mint price of the metal; 
 that is, on the old ratio of 15 j^ to i. If bimetallism were now 
 adopted, and silver was rated at its present market value, it is clear 
 that the Bank of France would lose more than half this whole 
 sum — more, than is to say, than 26 millions sterling. The effect, 
 therefore, of adopting the present value of silver by the French 
 Government would be to make the Bank of France hopelessly in- 
 solvent. It may be said that the loss would be assumed by the 
 nation. But what equivalent could be offered to France to induce 
 her to incur on account of the Bank of France alone a loss of 
 
 * From The Staiist oi ]\x\y 14., 1894. 
 
( 70 ) 
 
 over 26 millions sterling — especially as the loss on the silver out- 
 side the Bank of France would be at least as great ? 
 
 It is generally estimated that the legal tender silver in the 
 nations forming the Latin Union amounts to about four milliards 
 of francs, or 160 millions sterUng, at the ratio of 15^ to i. It 
 does not matter very much whether this estimate is too high by 
 10 or even 20 millions sterling; it is certain that the amount of 
 legal tender silver in the Latin Union is enormous, and the result 
 of adopting the present market ratio would be to reduce this legal 
 tender silver in value by more than one-half. Is it likely that 
 Italy in her present embarrassment would voluntarily incur the 
 loss of one-half of all the legal tender silver coined by her ? 
 France would, of course, be beiter able to face the difficulty ; but 
 what equivalent could be offered to France to induce her to 
 submit to so enormous a loss? It seems, therefore, that M. 
 Cernuschi is perfectly right when he says France never will enter 
 into a Bimetallic League unless the old ratio of 15^ to i is 
 adopted. And the Bimetallists themselves admit that if France 
 or any other great nation were to hold aloof from the League, 
 bimetaUism would fail. That being so, I ask again, by what 
 process could the value of silver be raised to double what it is at 
 present, or indeed could be raised at all appreciably ? 
 
 The only answer to this question by the Bimetallists that I have 
 ever seen is that if all the great nations of the world opened their 
 mints to the free coinage of silver an almost limitkss market for 
 the metal would thereby be created, and it would automatically 
 rise in value. It is almost inconceivable how intelligent men can be 
 so greatly misled by playing with words. The opening of the .mints 
 to any metal, no matter what, docs not create a market. The 
 mint simply receives from the holders of the metal bullion offered 
 to it, and places a stamp upon that bullion when coined to testify 
 that it is of the regulation weight and fineness. The mint does 
 not itself retain the coins ; it returns them to the person who sent 
 in the bullion, or his assignee, and it is the owner of the bullion 
 who has to dispose of the coins. It would be just as reasonable 
 
( 71 ) 
 
 to say that the tailors who work for an East End sweater buy 
 the cloth which they make into coats and waistcoats for the 
 sweater as to assert that the mint in putting its stamp upon either 
 silver or gold buys the metal from the owner. It is quite true, of 
 course, that the gold or silver while in the form of bullion is not 
 legal tender, and that it becomes legal tender when it is coined. 
 It is unquestionably in a more available shape for commercial 
 transactions when it is coined. For all that, the mere putting it 
 in a more available shape does not ensure that it will be freely 
 accepted. Every manufacturer knows that the goods he makes up 
 for sale very often cannot be got rid of. They are in an avail- 
 able shape for consumption, but for one reason or other a demand 
 for them does not exist : they are left upon his hands, and some- 
 times the consequent lock-up of capital is so great that the 
 manufacturer is ruined. And what happens in the case of manu- 
 factured goods may equally well happen in the case of manufac- 
 tured coins. 
 
 This is shown conclusively by the experience of the United 
 States Government from 1878 to 1890. In the former of those 
 years the Bland Act was passed, requiring the Secretary of the 
 Treasury to buy every month not less than two million dollars 
 worth of silver, and to coin it without delay into legal tender 
 pieces. Everything the Treasury could do was tried to force the 
 silver pieces into circulation, but without effect. After a time the 
 effort was given up, and silver certificates were issued instead of 
 dollars. So complete was the failure to get out the silver coins 
 that in 1890, when the Sherman Act was passed, the experiment 
 was given up. In the summer of 1892 the United States Senate 
 asked the Director of the Mint what was the number of standard 
 silver dollars then in circulation, and the answer was, 56,779,484. 
 The Senate further asked what was the number of standard silver 
 dollars then in the Treasury. The answer was, 357,189,251. 
 Thus, in the fourteen years immediately following the passage of 
 the Bland Act barely one-seventh of the legal tender dollars 
 coined under that Act had been got into circulation, in spite of all 
 
 F 2 
 
( 12 ) 
 
 the efforts of the American Government. If the American Govern- 
 ment so hopelessly failed — with all its prestige and authority, 
 in a country where silver is a great native production and 
 where there is a strong desire to protect native industry — what 
 chance is there in any other country that private persons and 
 trading companies could force silver into circulation even if 
 bimetallism were universally adopted? It may be rephed that 
 certificates or notes could be issued against the silver, as they 
 were in the United States. They were issued in the United States, 
 however, by the Government itself; and the proposal of ihe Bi- 
 metallists is not that the Governments of the world should buy 
 and coin silver and issue certificates against it, but that they should 
 throw open their mints to the free coinage of the metal. Private 
 holders of legal tender silver pieces, whether they were individuals 
 or companies, could not issue certificates ; and judging from the 
 experience of the United States Government, they could not them- 
 selves get the pieces into circulation. 
 
 The chief reason why the United States Government failed to 
 get the silver coin into circulation was the refusal of the banks all 
 over the Union to hold any considerable amount of silver in their 
 reserves. While I was predicting in The Statist the crisis that 
 occurred in the United States last year I showed again and again 
 by analysing the returns made by the national banks at various 
 times to the Comptroller of the Currency that as a matter of fact 
 the banks were boycotting silver. Any reader who has a file of 
 The Statist by him will see the figures set out in detail in the 
 issues of July 23, 1892, September 17, 1892, and November 26, 
 1892. In the last of those articles more particularly, I showed 
 that the silver coins and silver certificates together held by all the 
 national banks throughout the Union amounted to only between 
 one-eighth and one-ninth part of the gold and paper redeemable 
 in gold held by the banks. It will be recollected that silver was 
 just as much legal tender as gold in the United States at the time, 
 that gold was being shipped to Europe in very large amounts, 
 that it was being withdrawn from the banks as well as from the 
 
( 73 ) 
 
 Treasury, and that, therefore, it would have been much easier for 
 the banks to replenish their reserves by means of silver than by 
 means of gold. But, in spite of that, the banks boycotted silver 
 and exerted themselves to the utmost to increase their gold hold- 
 ings. What happened in the United States would happen in 
 Europe if bimetallism were adopted. The banks would refuse to 
 hold silver in their reserves ; silver coin consequently could not 
 be forced into circulation ; and, that being so, I ask once more 
 how the Bimetallists propose that the value of silver should be 
 raised if universal bimetallism were adopted ? 
 
 BIMETALLIC FALLACIES.*— III. 
 A FORTNIGHT ago I showcd reasons for believing that M. 
 Cernuschi is right in saying that France never will enter into 
 a Bimetallic Convention unless the old ratio of iS/^ to i is 
 adopted ; and I put the question which I had previously asked, 
 how the Bimetallists propose to raise the value of silver supposing 
 — what to me seems incredible — that the nations could be in- 
 duced to enter into a universal BimetalHc Convention, and to 
 agree to the ratio of 15^ to i. If the value of gold were to 
 remain as high, or nearly as high, as it is at present, and the value 
 of silver were to be somewhat more than doubled, it is clear that 
 tl%e object the Bimetallists generally have in view would be 
 defeated. Their contention is that there is not enough of gold 
 to supply the world's monetary requirements, that the conse- 
 quent fall in prices has inflicted ruinous losses and has brought 
 about the present depression. Therefore they propose that silver 
 should be rehabilitated in the hope and belief that prices would 
 
 * From T/ie Statist of July 28, 1894. 
 
( 74 ) 
 
 thereby be raised. But unless gold were considerably reduced in 
 value, this would not happen. In the Latin Union at present, 
 and in the United States there is a very large amount of silver 
 legal tender money and silver notes ; yet gold is the real standard 
 of value, and prices are regulated by the value of gold just as 
 much as in our own country. If, therefore, the value of gold 
 under a bimetallic arrangement were not greatly reduced, the 
 condition of all the world would be similar to the condition of 
 the Latin Union and the United States. Gold would practically 
 remain the standard of value, and silver would be a subsidiary 
 money no matter what hocus-pocus were applied. By what 
 process, then, I ask once more, do the Bimetallists propose to 
 lower materially the value of gold ? Personally I have no doubt 
 that we are on the eve of a fall in gold, or, what is the same thing, 
 of a rise in general prices. Distrust, occasioned by the unsatis- 
 factory condition of so many foreign countries, is delaying the 
 movement ; but that it will come before long I am convinced, 
 because the outturn of gold has increased very greatly during the 
 past few years, and the richness of the South African gold fields 
 promises that it will continue to increase for a considerable time 
 to come. But the fall in gold which I look for will be the re- 
 sult of causes operating upon gold alone, and not of any bi- 
 metallic arrangement. Whether silver will rise is questionable. I 
 am told that the processes of extracting silver ore from the 
 substances with which it is found have quite lately been so much 
 improved that the cost of production is materially reduced. I 
 have no knowledge on the point, and I simply repeat what I hear. 
 If it be true it is quite possible that silver may fall further ; at all 
 events it is very improbable that there can be much rise. There- 
 fore, even if I am right in the opinion that we are on the eve of 
 a marked rise in prices, the divergence from the old ratio between 
 gold and silver will remain nearly as great as ever. How do the 
 Bimetallists propose to contract the divergence ? 
 
 1 can think of only one way in which the value of gold can be 
 greatly lowered, and that is by inducing the gold-using countries 
 
( 75 ) 
 
 to greatly restrict their use of the metal and to take largely to 
 silver. How do the Bimetallists propose to induce the gold-using 
 countries to do this ? The history of the present century proves 
 that the world has gradually acquired a preference for gold and a 
 dislike for silver, and that one after another the civilised nations 
 have adopted the former as their standard and rejected the latter. 
 Further, the experience of the United States from 1878 to last 
 year shows conclusively that even where the Legislature, under 
 the influence of sectional feeling, restores silver as a standard 
 the capitalist classes, and more particularly the bankers, refuse to 
 act upon the legislation and thereby defeat it. How, then, do the 
 Bimetallists propose not only to persuade all the nations of the 
 civilised world to agree to bimetallism and adopt the old ratio of 
 15^ to I, but also to prevent the capitalist classes, and more 
 particularly the bankers, from rejecting the arrangement and 
 insisting upon payment in gold ? Have they ever asked them- 
 selves the question ? Or are they even aware of the obstacles 
 confronting them ? The Bimetallists are never tired of telling us 
 that bimetallism would have been adopted long ago, but for the 
 opposition of England. Any single great State holding out, they 
 admit, makes bimetallism impossible. Therefore, on their own 
 showing, the United States must enter into the Bimetallist Con- 
 vention if it is to be a reality. But the Constitution of the United 
 States expressly declares the freedom of contract inviolable. 
 Therefore, if the United States is to be a party to bimetallism, 
 freedom of contract in the fullest sense must be maintained. 
 Consequently, all the existing contracts for payment in gold 
 would remain valid and enforceable, and everyone would be free 
 in the future to enter into similar contracts. But to confine 
 ourselves for the moment to our own country — most of the loans 
 made in London are payable in gold ; not only State loans, but 
 also company loans. If the United States, so many of the 
 American railway companies, the central and southern American 
 countries, most European Governments and India, not to mention 
 China and Japan, have all to pay the principal and interest of 
 
( 76 ) 
 
 their loans in gold, how is silver to be made international money ? 
 or how is the value of gold to be reduced by a bimetallic arrange- 
 ment ? 
 
 The truth of the matter is that the Bimetallists have never 
 thought out the subject at all. They have taken up the extra- 
 ordinary notion that the opening of the mints provides a market. 
 When the error is pointed out they simply repeat that all debtors 
 will pay in the cheapest money, forgetting that there are two 
 parties to every contract, and that if it is an advantage to the 
 debtor to pay in silver, it is a disadvantage to the creditor, and 
 that, speaking generally, the creditor is the more powerful of the 
 two. It is he who is asked to grant a favour, and it is he, there- 
 fore, who can impose the terms of the contract ; while, as I have 
 just been showing, the United States Constitution insures that 
 every contract once made must be fulfilled in its integrity, or the 
 defaulter can be declared a fraudulent bankrupt. I would advise 
 the Bimetallists, then, to put aside their hardy assertions and airy 
 predictions and to address themselves to a conscientious study 
 of the difficulties of their own panacea. Firstly, the civilised 
 countries have, with or without reason, acquired a preference for 
 gold and a dislike for silver. How are those feelings to be over- 
 come ? Secondly, France and the nations of the Latin Union 
 insist, if there is to he bimetallism, upon the old ratio of 15^ to i 
 being restored. How is this condition to be compHed with? 
 Or what consideration can be offered to France and the other 
 nations of the Latin Union to induce them to depart from the 
 condition? Thirdly, the Constitution of the United States de- 
 clares the freedom of contract sacred. Do the Bimetallists sup- 
 pose that the people of the United States can be persuaded to 
 change that plank in their Constitution ? And if not, how can 
 bimetallism be made real ? Fourthly, the great majority of con- 
 tracts in the civilised world have been concluded in gold, and, 
 that being so, how can gold be made to cease from being the real 
 money of the world and the real standard of value ? 
 
( 77 ) 
 
 BIMETALLIST FALLACIES.*— IV. 
 
 The bimetalli st delusion has its root in the belief that prices are 
 regulated by the quantity of money in existence, meaning by 
 " money " legal tender coin. I have in the foregoing papers en- 
 deavoured to show that this is absolutely wrong, and I need not 
 go over the ground again here farther than to say that the Clearing 
 House returns prove in the most convincing way that coin enters 
 into payment for wholesale commodities only to a very trifling 
 extent ; that the payments, except for a small fraction, are really 
 made by cheques, bills, and other credit documents. It is to be 
 observed that the economic discussion about prices has reference 
 only to the wholesale prices of commodities. Retail prices are 
 not in question ; partly because they differ not only from town to 
 town, and from street to street, but from shop to shop. They 
 depend largely upon custom, the laziness of housekeepers, their 
 ignorance of business, their inability to judge the quality of what 
 they buy. But the chief reason why retail prices are put aside is 
 that they follow wholesale prices, haltingly and slowly, it is true, 
 but still to some extent. If Bimetallists were clearer minded they 
 would bear this fact in mind, and would recognise that in the 
 wholesale markets coin plays so small a part that practically it has 
 exceedingly little influence in determining prices. The more 
 intelligent Bimetallists are compelled to admit that credit does 
 affect prices as largely as coin. But even they try to belittle their 
 admission. For example. Sir David Barbour asks whether the 
 withdrawal of credit would have the same influence on prices as 
 the withdrawal of gold. If Sir David attaches the same meaning 
 to the word " withdrawal " in both cases, then I unhesitatingly 
 answer, undoubtedly it would. Since the beginning of the present 
 
 * From T/ie Statist of August 4, 1894. 
 
( 78 ) 
 
 year, to take an illustration, about 14 millions sterling in go'd 
 have been withdrawn from the United States. The value of the 
 exports from the United States immensely exceeds the value of the 
 imports into the States; therefore there is an enormous balance of 
 trade in favour of the United States. And yet gold is being with- 
 drawn from the country at an alarming rate. Unless there is borrow- 
 ing in some shape or other, by the Government by preference, it is 
 clear that the gold drain cannot be stopped at present, much less 
 that the gold withdrawn can be got back. Therefore the gold 
 exported from the United States is for the time being lost to the 
 country. If a similar amount of credit were as completely lost to 
 the country, then it is as certain as anything can be that the in- 
 fluence upon prices would be precisely the same. 
 
 To show that this is so, I would refer Sir David Barbour to 
 what happened in the City on the Baring collapse in 1890. The 
 Messrs. Baring Bros, had carried on perhaps the greatest accept- 
 ing business in the world, at all events one of the largest, 
 and the crisis of November, 1890, caused the disappearance 
 of the Baring acceptances. If Sir David Barbour will make 
 inquiries he will find that the withdrawal of the credits which 
 used to be afforded by the Messrs. Baring Bros, had quite 
 as powerful an effect upon prices all over the world as the with- 
 drawal of a similar amount of gold. Furthermore, all the great 
 financial houses were compelled to reduce the credits they used 
 to open to their customers and to accept upon a smaller scale, 
 some of them because they had lost so heavily that it was not 
 safe to continue on the old scale, others because the distrust was 
 so deep and so general that they did not care to run risks on the 
 old scale or felt that they themselves might suffer in reputation if 
 they were seen to be doing business very largely. Therefore, 
 the amount of credit given by London to the other countries 
 of the world has been greatly reduced since 1890, and as a 
 natural and inevitable result prices have come down lower 
 than they have hitherto been in the present century. If Sir 
 David Barbour and the Bimetallists generally could clear their 
 
( 79 ) 
 
 minds from the delusion of the quantitative theory they would see 
 from this and innumerable other instances that the withdrawal of 
 credit has quite as much effect as the withdrawal of gold upon 
 prices, and in fact that it is by restricting and compelling credit 
 to be withdrawn that the withdrawal of gold has an influence 
 upon prices at all. At times when the Bank of England's re- 
 serve is small and business is active, the withdrawal from the 
 Bank of a million sterling would send a thrill of apprehension 
 through the whole City, and would certainly have a paralysing 
 effect upon the Stock Exchange, while in all probability wholesale 
 prices would all come down. The lowest estimate I have seen of 
 the gold holdings of the United Kingdom put them at about 70 
 millions sterling. A withdrawal of one million out of 70 millions 
 would be, roughly, rather less than i ^ per cent. Can any sen- 
 sible man really believe that if it were the quantity of gold which 
 governs prices a decrease in the supply of about i ^ per cent, 
 would have the effect upon prices which historically it is known 
 such a withdrawal, and even a smaller withdrawal, has had upon 
 markets in this country? The quantitative theory can thus 
 be shown to be absurdly false by any number of arguments 
 drawn from various sides. It can be disproved completely by a 
 reference to the Clearing House returns, and it can equally be 
 disproved by the experience gained from the withdrawals of gold 
 from the Bank of England in past times. Similarly, what is going 
 on in the United States at the present time shows the untenable- 
 ness of the quantitative theory. The amount of gold that has 
 been shipped from New York since the beginning of the year is 
 large absolutely, no doubt, but it is not of commanding magni- 
 tude when compared with the whole volume of the currency of 
 the United States. And yet not only in the United States but 
 here in Europe the shipments are being watched with apprehen- 
 sion week by week, and people are asking anxiously. How will it 
 all end ? 
 
 One other evidence of the utter untenableness of the quantita- 
 tive theory is afforded by the range of prices in the United States 
 
( 8o ) 
 
 at the present time. Since 1879, when specie payments were re- 
 sumed, the United States has retained a very large part of the 
 gold raised at home, and it has imported immense amounts from 
 Europe, and even from Australia direct. Even allowing for the 
 withdrawals since 1890, the accumulation of gold in the United 
 States has been very large. From 1878, when the Bland Act 
 was passed, until 1890, when the Sherman Act took its place, the 
 Treasury bought silver and coined it into legal tender dollars at 
 the rate of two million dollars worth a month. From 1890 to 
 1893 the Treasury bought silver, paying for it in legal tender 
 notes, at the rate of 4^ million ounces every month. In addi- 
 tion to these vast amounts of gold and silver, the United States 
 has retained in circulation nearly 70 millions sterling of green- 
 backs, or Treasury notes issued during the war. And, lastly, 
 there are about 24 millions of bank notes in circulation. There 
 is thus an immense mass of currency in the United States — head 
 for head nearly twice as much as in the United Kingdom, and 
 even rather more than in France. And yet prices are not inflated 
 in the United States. During the past twelve months America 
 has exported immense quantities of all kinds of produce, and 
 sold its exports at the current European prices — clear proof that 
 the cost of production in the United States has not been so high 
 as to prevent that country from competing with other countries 
 in the European markets. It cannot be said that the money of 
 the United States is depreciated. Prices, therefore, are on the 
 gold basis because gold is the real standard of the country. And 
 yet the currency is, undoubtedly, inflated because it has been 
 artificially swelled by so much silver and notes. If the quantita- 
 tive theory were true prices ought to be extravagantly high in 
 the United States — so high that it would be impossible for the 
 American producer to sell in the European markets. I do not 
 suppose that those who have publicly committed themselves to 
 the errors of bimetallism will be convinced by any number of 
 arguments or illustrations or appeals to experience, let them be 
 ever so convincing in themselves. But the great public who are 
 
( 8i ) 
 
 desirous only to get at the truth will see, I hope, from what has 
 been just said, that the quantitative theory, unsound in principle, 
 is absolutely disproved by practice. An increase of the currency 
 does not raise prices. A withdrawal of credit has precisely the 
 same effect upon prices as a withdrawal of the standard metal ; 
 and, in fact, a withdrawal of the standard metal affects prices only 
 because it affects credit — it is credit and not coin which regulates 
 prices. 
 
 BIMETALLIST FALLACIES.*— V. 
 
 In contending that the Governments, if they all combined, could 
 enforce bimetaUism, the Bimetallists are practically maintain- 
 ing that Governments can work miracles. Gold and silver are 
 found in different parts of the world under very different 
 conditions, and in very different quantities. They are mined 
 at varying cost and they are esteemed in various ways. 
 The demand for them varies greatly from time to time, the 
 supply of them varies equally. In the time of Locke, silver 
 was so universally the money of the world that that philoso- 
 pher thought it the proper standard of value to be selected 
 by Governments. Now silver has been rejected by almost the 
 whole civilised world, and gold adopted as the standard of value. 
 Yet, in effect, the BimetaUists tell those who listen to their 
 lucubrations that Governments can overrule the laws of nature 
 and of the human mind, and not only fix the ratio between gold 
 and silver, but maintain it for ever and a day when once it is fixed. 
 How reasonable men can so delude themselves by a jingle of 
 words is one of the surprises of our time. " But," say the Bi- 
 
 * From The Statist of August ii, 1894. 
 
( 82 ) 
 
 metallists, " if all the Governments united to fix and maintain a 
 ratio there would be no object in opposing. Debtors would 
 gladly pay in silver, for bimetallism would lessen the burden of 
 their debts, and creditors would readily accept silver." Is it, I 
 would ask, because it would lessen the amount coming to them ? 
 " Oh, no," say the Bimetallists ; " creditors are debtors as well as 
 creditors, and what they would lose in their capacity as creditors 
 they would gain in their capacity as debtors " ; which is as much 
 as to say that since all men in business have to buy as well as 
 to sell, therefore, all men of business desire that prices should 
 be low ! Creditors, speaking generally, are not debtors to any 
 serious extent ; that is to say, their assets largely exceed their 
 liabilities, and, therefore, it is to their interest that their return on 
 their assets should be as large as possible. A gain upon the small 
 liabilities at the expense of the large assets would be a very 
 delusive gain indeed. 
 
 But is it true that if universal bimetallism were adopted people 
 would have no motive for refusing to accept it ? Clearly it is not 
 true ; the very opposite is true. Independent Governments can- 
 not bind themselves for ever and a day. Supposing, fgr the sake 
 of argument, that all the Governments could be induced to adopt 
 bimetaUism, it would be only for a term of years. All commercial 
 Conventions of every kind are limited in time, and' in the nature 
 of the case must be so. Probably, the term selected would be 
 ten years ; that is about the time which statesmen generally think 
 they are able to provide for. Every ten years, or so, the old 
 generation of statesmen passes away, and a new one comes into 
 existence, and with the new there come new conditions, new 
 wants, and new feelings. But it does not matter very much what 
 term of years might be decided upon. The Convention must 
 clearly be terminable some time, and if it were terminable people 
 generally would have the very strongest motives for refusing to 
 accept silver. There would be the possibility, to say no more, 
 that some of the nations might withdraw from the agreement. 
 ' No," the Bimetallists say, " that would be impossible. The 
 
( »s ) 
 
 adv^uatages of bimetalHsni would be so dear that if it were once 
 adopted it would never be departed from." I would remind those 
 who are so treiy codksure on this point diat Mr. Cobden was 
 equally certain when he aeg,o6ated the coauaerasd treaty with 
 Napoleon III. that the advantages of low duties would be §o phm 
 to the humblest understanding diat France would be oooreitedto 
 Free Trade, and that die comrersioo of Fcmoe would be UsSkmed 
 by that of all the world. I p res um e diat eren the most sdf- 
 complacent Bimetallists will not assert that diey are more prescient 
 than was Mr. Cobden. We all know liow completidy the event 
 has differed from Mr. Cobden's eipectatioo; and it is snrdy 
 possible, to say the least, that the ei^iectatioo of the Bimetallists 
 would be equally disappointed. But if the potssibility of silver 
 beii^ again rejected was always before the mind of men of 
 business, why should any reasonaUe man in the gold-usii^ 
 countries part with his gold and encumber himself with ^shrer ? 
 The Governments in particular would oeitainly not do so. Pre- 
 paring for war, they would condude that gold would be always 
 and everywhere aco^>table, but that it was impowibie to foresee 
 what mig^ happen with regard to silver. Thetefocc^ they would 
 go cm in the future as they are now doing in the present, accumu- 
 lating vast war treasures in gold. Similarly the bankers in all the 
 gold-using countries would decide that they could not go wioi^ 
 if diey kept to thev gold, but that they nugfat be landed in the 
 most disastrous consequences if tfa^ aco^ted siher to any oon- 
 :sderaUe extent Therefore:, we may be very sure that all cautioas 
 bankers would refuse to run the risk, and that siher would be 
 boycotted just at it was boycotted in the Unrted States under the 
 Bland and the Sierman Acts. Thirdly, I pointed oat last we^ 
 that accordii^ to the Bimetallists themselves bimetallism is im- 
 practicable imless all the great nations enter into d, and that if the 
 United States enter into it the inviolability of oontracts most be one 
 of its cardinal conditions; dierefoic;, all the gold nun^ra^^ now^ 
 existii^ would have to be observed. And what object under 
 heaven would any reasonaMe man have in w aiting his r%^ to 
 
( 84 ) 
 
 gold, and accepting a metal which, for at least the past twenty 
 years, has been so grievously depreciated ? 
 
 There is another and an exceedingly strong motive. I presume 
 that even the most sanguine Bimetallists do not hope that differ- 
 ences respecting gold and silver would immediately come to an 
 end if bimetallism were adopted. They know that gold is greatly 
 preferred now all over the civilised world. They know that the 
 vast majority of our own people are determined to keep to gold, 
 and to have nothing to do with silver. They surely cannot delude 
 themselves so completely as to hope that if the Governments by 
 some extraordinary combination of accidents could be induced 
 to adopt bimetallism all the preference for gold now existing 
 would disappear. But if it did not; if large numbers of people 
 continued to think that bimetallism was an absurdity, imprac- 
 ticable and doomed to inevitable failure, can Bimetallists per- 
 suade themselves that these people would not take care to in- 
 sist upon all payments to them being made in gold? If the 
 United States were a party to the arrangement the freedom of 
 contract would have to be maintained ; and, given freedom of 
 contract, is it not certain that every banker, and every great 
 capitalist, who has a preference for gold, and who disbelieves in 
 bimetallism, would insist on payment being made to him in the 
 metal he prefers ? All who came to this country to borrow would, 
 therefore, find that they were required to engage that the principal 
 and interest of the loans granted them should be paid in gold. 
 While the Sherman Act was in force one of the American Terri- 
 tories arranged with a syndicate in New York for a loan, and 
 applied to Congress for power to conclude the arrangement. 
 Congress insisted upon striking out the clause providing for pay- 
 ment in gold, and the consequence was that the loan was refused. 
 Precisely the same thing would happen here, under bimetallism, 
 supposing our Government went mad and adopted the system. 
 Everyone who wished to safeguard the interests of investors would 
 insist, when a foreign issue of cnny kind was to be made, upon a 
 clause being put into the contract that payment of both principal 
 
( 85 ) 
 
 and interest should be in gold. It would be easy to point out 
 many other very strong motives for refusing to accept silver ; but 
 I hops I have said enough to convince all people who are open 
 to conviction that there is not the least chance in the world that 
 bimetallis.n ever could be worked in this country, even if it were 
 adopted everywhere else. 
 
 BIMETALLIST FALLACIES.*— VI. 
 
 SIR DAVID BARBOUR'S CONTENTION.! 
 
 Sir David Barbour misses the point of the article to which he 
 replied in last Saturday's Statist. My contention in that article 
 was that if the word " withdrawal " is used in precisely the same 
 sense in the two phrases "withdrawal of credit " and "withdrawal 
 of gold," the withdrawal of credit has just as much influence 
 upon prices as the withdrawal of gold ; or rather, to speak 
 more correctly, the latter has an influence upon prices only be- 
 cause it reduces the volume of credit. Sir David also misunder- 
 stands my intention in referring to the shipments of gold from 
 New York this year. Since New Year's Day over 14^^ millions 
 sterling in the metal have been exported from the United States, 
 not because of an adverse balance of trade— for the value of the 
 exports is immensely greater than the value of the imports — but 
 because of the deep-seated distrust of the United States currency 
 which prevails all over Europe. For the time being, therefore, the 
 gold is absolutely lost to the American people. It may be got 
 back, of course, by Government borrowing or by a sudden change 
 in European opinion of the American situation. But for the 
 
 * From The Statist of August 18, 1894. 
 t See Appendix C. 
 
( 86 ) 
 
 time being the gold is lost. Now, if we are to compare the 
 effect of the withdrawal of credit upon prices with the influence 
 of such a withdrawal of gold as is going on from the United 
 States, we must take an instance in which the credit also is 
 absolutely lost for the time being. If the great London banks, for 
 instance, were to become dissatisfied with the rates ruling in the 
 Money Market just now, and were to curtail their loans and dis- 
 counts by 14}^ millions, everyone would understand that the 
 credit was there all the same, that it was merely a struggle to get 
 higher rates, and that people could get either loans or discounts 
 if they complied with the terms of the banks. Such a withdrawal 
 of credit is not comparable with the withdrawal of gold from the 
 United States. But the destruction of credit by the Baring crisis is 
 comparable, is exactly on all fours, with what is now going on in 
 the United States. Then the credit absolutely ceased to exist. 
 It was lost to this country and to all who were in the habit of being 
 accorded it previously. And the result proves as clearly as any- 
 thing can possibly do that a destruction of credit has as great an 
 influence upon prices as a loss of gold. 
 
 Sir David Barbour shows, if he will pardon me for saying so, 
 that he does not rightly understand the subject which he is treat- 
 ing of when he talks of the Baring crisis as the most marked 
 symptom of a disease, but not the disease itself. Does he mean 
 to imply, then, that the withdrawals of gold from the United 
 States are the disease and not the most marked symptom of it ? 
 Surely he must know — indeed, his own language proves that he 
 does know — that the Baring crisis was preceded by the most reck- 
 less speculation, and that the credit of the great house of Baring 
 Brothers broke down thereby. Vague, general language about 
 economic causes may cover a retreat, but it does not advance a 
 genuine discussion. The simple fact is that Messrs. Baring 
 Brothers had over-traded altogether, and abused their splendid 
 credit so that a collapse ensued. It was a breakdown of credit 
 in the clearest and most unmistakable way ; and the crisis that 
 has prevailed all over the world for the four years that have 
 
( 87 ) 
 
 followed, shows the far-reaching consequences of such a break- 
 down of credit. Now let us turn to the withdrawals of gold from 
 the United States. Are not they also symptoms of a disease ? 
 To speak in perfectly plain language, are they not the consequence 
 of the breakdown of credit ? The United States Government en- 
 gaged in a wild silver experiment. It brought the currency of the 
 country into utter disorder and, as in The Statist I ventured to 
 warn my readers for over a year would surely be the case, a crisis 
 followed. The gold shipments are a consequence of the dis- 
 trust that ensued, or, in other words, .of the breakdown of credit 
 The real disease is the same in both cases — rash speculation of 
 one kind or another, wild over-trading, financial experimentalis- 
 ing, general distrust, and paralysis of credit. It is the latter — the 
 paralysis of credit — that immediately has an effect upon prices. 
 Sir David Barbour professes himself unable to see what bearing 
 the gold movements from the United States and the condition 
 of the currency there have upon the argument in which we are 
 engaged. I trust that those who are not so much committed to 
 bimetallism will be able to understand it from this explanation of 
 my position. 
 
 But, Sir David Barbour says. If it be true that the total cir- 
 culation of the United Kingdom (gold and credit) amounts 
 in round figures to 6,ioo millions sterling, is it not clear that 
 the withdrawal of the loo millions of gold which are now 
 held in the United Kingdom would have an infinitely greater 
 influence upon prices than the withdrawal of loo millions of 
 credit ? Except under the most extraordinary circumstances, it 
 certainly is true. But it is true not because the quantitative 
 theory of value is correct, but because the gold forms the banking 
 reserves upon which the whole of the credits are based, and that 
 if the banking reserves were to be dissipated the credits would 
 rest upon no foundation. The loo millions of gold which, ac- 
 cording to the hypothesis, are held in this country are employed 
 partly in the ordinary circulation and partly as banking reserves. 
 That portion which is in the ordinary circulation has no more 
 
 G 2 
 
( 88 ) 
 
 influence upon wholesale prices, with which alone we are con- 
 cerned here, than the token silver money or the Irish and Scotch 
 bank notes, which are not legal tender. It is the portion of the 
 gold which is employed as banking reserves that really affects 
 prices, and it affects prices only because it is a guarantee that the 
 credits rest upon a solid foundation. The gold in the banking 
 reserves in normal times is not employed. It is held as a reserve 
 for emergencies, and when an emergency arises all credit would be 
 utterly destroyed if no gold existed in the banks. Directly, then, 
 the gold in the banking reserves does not affect prices, because it 
 is held idle and is not intended to be employed in making pay- 
 ments. But its disappearance would cause consternation, because 
 every contract implies that if necessary the payment shall be dis- 
 charged in the legal tender money of the country. It is very sel- 
 dom that the legal tender money is required, but it must be 
 held by the banks as an assurance that it can be had if it is 
 really needed. To make his argument really relevant. Sir David 
 Barbour ought to have asked, not whether the withdrawal of 
 the whole of the gold in the United Kingdom would or would 
 not have a greater effect upon prices than the withdrawal of a 
 sixtieth part of the credit, but whether the withdrawal of all the 
 gold would or would not have a greater effect upon prices than 
 the destruction of the whole of the credit. 
 
 BIMETALLIST FALLACIES.*— VII. 
 
 It is curious how difficult it is to make the ordinary man see that 
 the word " money " has a great many different meanings, and to 
 induce him to distinguish between those meanings in his reason- 
 ing. I have frequently pointed out in the course of these articles 
 
 * From T/ie S^atis^ of August 2^, 1894. 
 
( 89 ) 
 
 that " money " is often used to signify loanable capital, as, for 
 example, in such phrases as " the Money Market," " the value of 
 money," and " the rates for money." In all these cases we do not 
 speak of coin or cash or currency; what we really are thinking and 
 talking about is loanable capital. The gold Monometallists, by 
 confounding "money" in this sense with "money" in the sense 
 of currency, are led into several of their mistakes ; and the Bi- 
 metallists are equally in error. They frequently confound these 
 two different senses in which the word money is employed. But 
 even when we talk of money in the narrower sense — in the sense 
 of coin, or currency, or cash — we ought to distinguish between the 
 various uses to which it is put and the different functions it per- 
 forms. And it is important to do so, because the influence of 
 money upon prices is regulated by the function which the money 
 performs. I have called attention once or twice already to the 
 fact that money is sometimes hoarded up. Formerly, it was very 
 common indeed for thrifty people to put away money, in actual 
 coin, in an old stocking, or in a bed-tick, or in the seat of a chair, 
 and so on ; and in backward and semi-civilised countries the same 
 thing is done still. Money when so hoarded is withdrawn al- 
 together from the uses of trade, and can have no more influence 
 upon the course of prices than the metal of which it is composed 
 had while it was originally in the mines. Again, money is accu- 
 mulated in war treasures, and while so accumulated it likewise is 
 withdrawn from the uses of trade, and can have absolutely no in- 
 fluence upon the course of prices. Thirdly, money is used in the 
 ordinary circulation of the country; and fourthly, it is used as bank 
 reserves. Few people who think at all can be blind to the fact 
 that money when hoarded, or locked up in a war treasure, is out 
 of the service of trade, and therefore can have no influence upon 
 prices. But the Bimetallists generally labour under the delusion 
 that money circulating amongst the public affects wholesale prices, 
 whereas it does not. 
 
 The gold sovereigns and half-sovereigns which circulate in this 
 country are doing precisely the same kind of work as bank notes 
 
( 90 ) 
 
 and silver and copper token coins. They are, in fact, doing the 
 work of token coins, and have absolutely no influence upon prices. 
 I have referred again and again to the fact that in the wholesale 
 markets — with which alone we are concerned in economic dis- 
 cussions about prices — money in the form of coin and bank notes 
 enters only to a trifling extent ; that payments or settlements are 
 really made by means of bills and cheques and other credit in- 
 struments. The sovereigns and half-sovereigns which circulate 
 amongst the public are used to a large extent, no doubt, in paying 
 wages ; and to a still larger extent in the retail trade. Most men 
 who have business of any considerable importance make their 
 payments by means of cheques. It is chiefly women who carry 
 gold sovereigns about, unless, as already said, where they are re- 
 quired for paying wages ; and in these cases they are used for the 
 convenience of the employers, not for that of the employed. In- 
 quire into the fact, and you will find that almost as soon as he 
 receives it, the ordinary labourer changes the sovereign paid him 
 as wages — for it is seldom that a single purchase of his amounts 
 to so much. It stands to reason that the man who earns little 
 more than a pound a week must make his purchases in small 
 amounts, and consequently must require to change the sovereign 
 almost at once. Therefore, the sovereigns and half-sovereigns 
 used for paying wages are used for the convenience of the em- 
 ployers, partly to reduce the bulk of the coin which has to be 
 carried from the bank, and partly to save labour in counting out 
 the money. The sovereigns so used, then, simply take the place 
 of shillings and half-crowns and florins, and they do so because it 
 is more convenient for the employers. The amount of money 
 that is thus actually in circulation is not in the least influenced by 
 the course of prices ; it is determined entirely by the numbers of 
 people employed, and by the rate of wages. When trade is active 
 and employment very full, wages are usually high, and therefore 
 there has to be an increase in the circulation, simply because the 
 amount of money paid weekly by employers to their workpeople 
 is larger than usual. That active trade and good employment 
 
( 91 ) 
 
 lead to a rise in prices is true enough ; but they do this not because 
 the circulation is larger, but because the working classes earn more 
 than at other times, and consequently have more to spend. The 
 Bimetallists, however, are unable to see that money in circulation 
 — what we may call currency — has no effect upon prices ; that it 
 is used almost entirely in the payment of wages and in the retail 
 trades, and consequently that it does not require to be legal tender. 
 A one-pound note in Scotland or Ireland is just as effective in the 
 payment of wages and in purchases in the retail trades as the 
 sovereign ; and yet the one-pound note is not legal tender. If, 
 then, a mere increase of the currency, as the Bimetallists fondly 
 dream, would affect prices, it is folly of them to clamour for so 
 costly a material as silver. Paper would serve their purpose 
 equally well, and would be far cheaper for the State. 
 
 The only money which really does affect prices is that which is 
 contained in the banking reserves. That must have a legal tender 
 character, for the banks must pay in legal tender because their 
 reserves are called out only when their own credit is more or less 
 in danger. A bank deals in credit, and it is through its credit 
 that it operates upon prices. But it has to safeguard that credit 
 by keeping a reserve upon which it can fall back in times of emer- 
 gency. In the first place, then, the money constituting the bank 
 reserves must be legal tender, whereas the money in the currency 
 of the country need not be so. It is mere waste to circulate such 
 a mass of sovereigns and half-sovereigns as are circulated in this 
 country when one-pound notes would do as well without the legal 
 tender character. Further, the money constituting the banking 
 reserves must have a value of its own, absolutely independent of 
 the stamp of the Government or of the credit of the institution 
 issuing it, if it is to be a real money and is to maintain its value 
 in all seasons of crisis. Where specie payments are suspended, 
 notes issued either by the Government or by the State bank take 
 the place of real money to a certain extent. But almost invariably 
 these notes get depreciated, and though they have to be used by 
 the banks for their reserves they are not real money all the same. 
 
( 92 ) 
 
 Wherever the banking system is sound, and the country has bo7id- 
 Ude money, that part of it which constitutes the banking reserves 
 must not only be legal tender, it must have intrinsic value ; whereas 
 the money circulating amongst the public need have neither a 
 legal tender character nor intrinsic value. A paper note issued 
 by a bank without privileges of any kind would serve just as 
 well as gold money, provided the bank had really good credit — as, 
 for example, the Scotch banks have. In short, the only real money 
 a country need have is that required for the banking reserves. 
 And a country with an ideally perfect banking system and with a 
 due sense of the wisdom of economising cash would have no 
 other standard money. If money was so economised ; if all the 
 banks of the civilised world kept adequate reserves and money 
 was not wasted in the circulation, then there would be plenty of 
 gold for the world's purposes, and prices would be regulated by 
 the ebb and flow of credit. 
 
 THE ECONOMIC INFLUENCE OF THE 
 WAR PREPARATIONS.*— I. 
 
 Lord Farrer's letters to us lately and the bimetallist agitation 
 combine to show that the public generally has failed to grasp the 
 economic influence exercised by the war preparations of the grc^at 
 military nations. Certain aspects of this influence have been noted 
 again and again, but the full measure seems to have escaped general 
 observation. And yet it is clear that these preparations have 
 exercised a paramount influence on the world's development for a 
 quarter of a century. It may be worth while, therefore, to call 
 special attention to the subject, and to point out in a little detail 
 
 * P>om The Statist of September 8, 1894. 
 
( 93 ) 
 
 some of the principal ways in which the influence has made itself 
 felt. Firstly, ever since France set herself resolutely to reorganise 
 hsr army after the disasters of the struggle with Germany there has 
 been an intermittent fear of a great European war. In 1875 the 
 danger of a renewal of the conflict between Germany and France 
 became very real — indeed, was only averted by the intervention at 
 Berlin of Russia and the United Kingdom. During the Russo- 
 Turkish war the danger was equally imminent. The Penjdeh 
 collision again brought war within measurable distance. And the 
 Schnabele incident once more excited alarm all over the Continent. 
 For some few years now apprehension has been less keen, and 
 the confidence of the business community in the maintenance of 
 peace has been undoubtedly greater. But for all that there is a 
 latent dread that any accident may precipitate a general conflict. 
 While this feeling has lasted for over twenty years now it is inevitable 
 that enterprise should be held in check. For a very long time the 
 fear was so great that few people cared to engage in any business that 
 could not be concluded in less than a year, and the consequence 
 was that many important undertakings which would have conduced 
 to the well-being of the world had to be postponed. Business 
 lived from hand to mouth, which meant, of course, that profits 
 were small and activity slight. Furthermore, year by year more 
 and more of the male population of the Continent is being with- 
 drawn from productive enterprise and kept under arms during the 
 most impressionable period of life. The production of the world 
 thereby has been curtailed. If the immense masses of men kept 
 under arms since the Franco-German war had been employed in 
 industry, they would have produced something or other that would 
 have exchanged for the things that have in fact been produced. 
 Thereby they would not only have added directly to the wealth of 
 the world, but they would have made more profitable the enter- 
 prises that have been carried on. And, thirdly, the necessity for 
 maintaining such vast masses of men in unproductive employ- 
 ment has wasted the world's resources. 
 
 Fourthly, the millions of men kept under arms the vast ex- 
 
( 94 ) 
 
 penditure upon munitions of war of all kinds and on fortificationSy 
 and the immense stores that have been accumulated and renewed 
 have compelled the Governments to increase enormously the taxes 
 and to pile debt upon debt, thereby further augmenting taxation. 
 Italy furnishes the most striking illustration of the consequences. 
 Of course, the financial difficulties of Italy are not due to military 
 preparations alone. Very many other causes combine — corruption, ' 
 bad administration, extravagant outlay upon public works, bank- 
 ing mismanagement and dishonesty, reckless speculation and 
 unwise protection have all contributed powerfully. But allowing 
 for all that in the fullest degree, the excessive armaments main- 
 tained have undoubtedly weighed very heavily upon the kingdom. 
 Russia and Austria-Hungary are suffering less, but they are 
 suffering much for all that. Germany is better able to bear the 
 strain than the other countries mentioned, but the burden on 
 Germany is still very great. Even in France, with all her wealth 
 and all the thrift of her people, the military policy is felt grievously. 
 The smaller States have been compelled to act more modestly; but 
 there is no doubt at all that the strain upon the smaller States, 
 too, is very great. The Spanish army and navy are out of propor- 
 tion, for instance, to the resources of the country, and the Balkan 
 States — Roumania, Servia and Bulgaria — have to keep up far 
 greater armies than their development warrants, simply because in 
 no other way can they hope to maintain their national indepen- 
 dence. Fifthly, the waste of inventive genius during the past 
 quarter of a century has been lamentable. If the ingenuity which 
 has been devoted to the invention of quick-firing rifles, of smoke- 
 less powder, of artillery of great range and piercing power, of 
 grmour to resist the heaviest metal, of bullet-proof garments, 
 and the like had been employed in introducing some great new 
 industry, or in perfecting labour-saving machinery, how much 
 would the well-being of the world have been promoted ! 
 
 Perhaps, however, the way. in which the military preparations 
 have told adversely upon the economic development of the world 
 most profoundly is seen in the accumulation of vast war treasures. 
 
( 95 ) 
 
 For some time before the Franco-German war the production of 
 gold had been falhng off. The decrease was still more marked 
 in the Seventies, and in the first six years of the Eighties it became 
 more decided still. While this was going on several of the lead- 
 ing nations of the world demonetised silver and adopted the gold 
 standard. Under any circumstances, therefore, gold would have 
 become scarce and the prices of commodities would have fallen. 
 But just while the -production of gold was declining in the most 
 marked way, and while the nations were competing with one 
 another for the metal for purely monetary purposes, the great 
 military nations began to withdraw it in vast amounts from the 
 service of trade and to lock it up in Treasuries and State banks as 
 a precaution against the dreaded European struggle. It is singular 
 how little most of those who have been writing and talking about 
 currency during the past twenty years have given attention to this 
 most remarkable phenomenon of our time. Yet nobody who 
 studies the matter closely can doubt that the accumulation of war 
 treasures has intensified to a most serious degree the fall in prices, 
 and so has deepened the malaise, the unrest, and the discontent 
 which are everywhere surging around us. There are many con- 
 tributory causes, no doubt, of Socialism and Anarchism. But 
 personally I have little doubt that the war preparations are among 
 the most potent, and that of these again the war treasures are not 
 the least operative. 
 
 For example, Russia has accumulated about loo millions sterling 
 of gold. The Austro-Hungarian Bank holds nearly 13 millions 
 sterling. These two sums are clearly not bank reserves. The 
 latter — the Austro-Hungarian — may become a bank reserve by- 
 and-by, but at present it is not so. When we come to France 
 and Germany it is impossible to say how much the war treasures 
 amount to. The German Government holds six millions sterling 
 in the fortress of Spandau ; but how much of the gold in the 
 Imperial Bank of Germany, and in the Bank of France is a war 
 treasure no one can say ; but that a large part is everyone knows. 
 Passing to the smaller States, it is notorious that all of those look 
 
( 96 ) 
 
 upon part of the gold held as a war treasure. It is certain, there- 
 fore, that the war treasures in Europe alone amount to something 
 between 150 and 200 millions sterhng. 
 
 THE ECONOMIC INFLUENCE OF WAR 
 PREPARATIONS.*!— II. 
 
 There is published in The Statist to-day a letter signed "X," in 
 which the above estimate of the war treasures in Europe is called 
 in question. If I were at liberty to give the name of our correspon- 
 dent, he would be recognised as one of the most eminent men in 
 the City, who speaks with special authority on the subject of which 
 he writes. He undoubtedly has opportunities for learning the 
 intentions of the Treasuries and State banks all over Europe, and 
 therefore what he says is entitled to great weight. But in the 
 absence of his exceptional information I see no grounds for 
 modifying my estimate. I speak, of course, with due deference, 
 and admit that in this matter " X " is better placed to know the 
 truth than I am. 
 
 As regards Russia, it has always hitherto appeared to me in- 
 credible that the very able men who of late years have administered 
 the finances of that country are under the delusion that in lock- 
 ing up gold which nobody can get at, they are helping to raise the 
 value of the rouble. If they are, it is another illustration of a 
 phenomenon, common enough yet always surprising ; namely, 
 the union of very weak reasoning faculties with great administra- 
 tive capacity. A promissory note is equal to gold when it can be 
 exchanged for that metal at the option of the holder. But the 
 holder's estimate of the worth of the note is not in the least 
 affected when he is told that the issuer has plenty of gold to 
 redeem it, but intends to take good care not to pay away the 
 
 * From The Statist of Sept. 22, \\ 
 t See Appendix D. 
 
( 97 ) 
 
 metal. The Russian Government has a very rich gold field. How 
 can it believe that gold in the Imperial Bank, in the Treasury, 
 and wiih its agents abroad raises its credit more than the gold in 
 its own mines, or the vast resources of which it disposes ? The 
 real reasons why the credit of Russia stands so high are the steady 
 growth of the population, the immense resources of the Empire, 
 the rapidity with which it has recovered from the famine of 1891, 
 the scrupulous care with which it has always fulfilled its pecuniary 
 obligations, the readiness of France to lend what it requires, and 
 so on. At the present time the Russian Government has gold 
 enough to resume specie payments if it so chose. But it does 
 not choose, and therefore I submit with deference that it shows 
 that the gold is not held at the service of trade. From the purely 
 military point of view the Russian Government is right in its action 
 The Czar is well known to be intent upon peace ; but he is making 
 every possible preparation for war if it is to come, and amongst 
 his preparations not the least important is the accumulation of 
 such a vast amount of gold. If war were to break out, and the 
 gold was not held, the Russian Government would have to borrow 
 at the very outbreak of hostilities. But it is extremely probable 
 that it could not borrow either in Germany or in London ; and it 
 would hardly be politic to borrow in France, for France, on the 
 hypothesis, would have need for large amounts of gold, and it 
 would not be expedient, therefore, to call upon her to supply 
 Russia as well as herself. The 100 millions sterling now held are 
 ample for all probable requirements. Every expenditure at home 
 could be paid for in paper ; it is only abroad that gold would be 
 needed, and before so large a sum as 100 millions sterling was 
 spent abroad, in all likelihood the result of the war would be deter- 
 mined. Either Russia would have gained such advantages that 
 she would be able to levy requisitions and in large measure to 
 make the war self-supporting, or she would have been driven back 
 into her own interior provinces. In the latter case, the possession 
 of a large amount of gold would simply tempt the victor to impose 
 a ruinously heavy indemnity. I submit, then, that the policy 
 
( 98 ) 
 
 of the Russian Government is clear, that it has been well thought 
 out, and that it is admirably adapted for the purpose in view. 
 
 Turning next to Austria-Hungary, I venture to think that its 
 motive in accumulating so large a reserve is equally evident. The 
 army of Austria-Hungary is by no means equal to that of either 
 Germany, France, or Russia. Her fortifications are incomplete, 
 her population is not homogeneous. In the event of a great war 
 her credit would hardly be so good as that of the three other 
 Powers named. Yet if she did not possess a large war treasure 
 she would have to borrow at extreme disadvantage. But the 
 Government of Austria-Hungary is pre-eminently cautious. It 
 might suit a Bismarck to tell the world frankly that he was accumu- 
 lating gold as a precaution against war, but neither the Emperor 
 Francis Joseph nor his advisers are likely to be as candidly 
 cynical. To them, a pretext would strongly commend itself, and 
 what better can there be than the resumption of specie pay- 
 ments? But I must say, with deference, that it seems to 
 me incredible that such prudent and able men would choose 
 a time of feverish war preparations for resuming specie pay- 
 ments. If the war cloud passes away no doubt resumption 
 will take place; if it bursts, the most critical cannot blame the 
 Austro-Hungarian Government for suspending the operation and 
 returning to inconvertible paper. Coming, in the third place, 
 to France, I admit the force of " X's " argument. The Bank of 
 France undoubtedly requires a very large reserve, not only 
 because of the magnitude of its note circulation and the ex- 
 tent of French trade and French investments abroad, but still 
 more because of the depreciation of silver and the largeness of the 
 silver circulation in the country. It is, therefore, exceedingly 
 difficult to estimate how much of the gold reserve of the Bank of 
 France is held for those purposes, and how much as a war treasure 
 But, so far as the world knows, the French Government holds no 
 special war chest ; therefore, as in 1870, on the breaking out of a 
 ^reat war, France would have to borrow, and in the first place she 
 would be compelled to draw largely on the Bank of France. 
 
( 99 ) 
 
 " X " may have reasons for what he says unknown to me, but I 
 submit that the management of the Bank of France is far less 
 admirable than I believe it to be if it has not taken the even- 
 tuality into account, and accumulated a large war treasure. No- 
 body knows better than " X " the obstacles put in the way of 
 considerable withdrawals of gold from the Bank of France. Are 
 not those obstacles a convincing proof that the Bank desires to 
 hold something more than a mere adequate banking reserve ? 
 Passing, in the last place, to Germany, I would observe that the 
 six millions sterling held in the fortress of Spandau as a war chest 
 would go but a very short way in case of such a great war as the 
 world fears. Germany would need very much larger sums. And 
 is it in accordance with the proverbial foresight of the German 
 Government in military matters to leave itself dependent upon 
 any foreign country for the funds it would need ? Is it not as 
 •certain as anything in the future can be that Germany likewise 
 would have to borrow on the outbreak of hostilities, and that she 
 would turn in the first place to the Imperial Bank ? The Imperial 
 Bank of Germany is not so completely a branch of the Finance 
 Ministry as is the Imperial Bank of Russia. But it is to be recol- 
 lected that the Imperial Chancellor is in the last resort the arbiter 
 of the policy of the Bank. 
 
 While, then, I am glad to have the opinion of " X " upon this 
 ■extremely important matter, and while I admit the authority with 
 which he speaks, and the special knowledge he is in a position to 
 obtain, I am unable to see where I have over-estimated the 
 European war treasures. At all events, I recommend readers 
 to peruse carefully " X's" letter, and at the same time I present 
 .to them the grounds on which I based my own estimate. 
 
( loo ) 
 
 THE INDEBTEDNESS AND CURRENCY OF 
 THE UNITED STATES.* 
 
 In a recent article in The Statist it was shown that in the first 
 nine months of the current financial year of the United States — 
 the nine months that ended with March — the value of the 
 exports of commodities from the United States exceeded the value 
 of the imports of commodities by somewhat more than 44^ 
 millions sterling, that the value of the exports of silver exceeded 
 the value of the imports of that metal by somewhat over 5^/2 
 millions sterling, and that, adding the silver and the commodities 
 together, the value of the exports of both during the nine months 
 exceeded the value of the imports also of both by, roughly, 50^ 
 millions sterling. And yet gold is being exported in considerable 
 amounts. It may be objected that about 10 milhons sterling in 
 gold were borrowed in the autumn during the height of the cur- 
 rency crisis, that the loans have now fallen due and have to be re- 
 paid. Let us, then, put the figures in a somewhat different way. 
 The exports of silver and commodities together exceeded in value 
 the imports of silver and commodities by ^0% millions sterHng. 
 But 10 millions sterHng of gold were borrowed and imported, and 
 have to be repaid. The excess of the exports of treasure and 
 commodities over the imports of the same was therefore, in round 
 figures, 40^ millions sterling. This would be at the rate of very 
 nearly 54 millions sterling for the whole year. Is it credible that 
 the indebtedness of the United States to Europe amounts to 54 
 millions sterling per annum ? And if it is not, how does it hap- 
 pen that an excess of exports over imports at the rate of nearly 
 54 millions sterling in a single year does not enable the United 
 States to settle without exporting gold the special debts incurred 
 during the crisis last autumn of somewhat over 10 millions ster- 
 ling ? The question at first sight is not easy to answer ; and yet it 
 
 * From The Statist of May 19, 1894. 
 
( loi ) 
 
 is difficult to believe that the indebtedness of the United States to 
 Europe amounts to 54 millions sterling per annum — or, to express 
 the matter more correctly, that the interests, dividends, profits, and 
 commissions annually payable by the United States to Europe 
 amount to about 54 millions sterling per annum. Even at 5 per 
 cent., this would represent a capital debt, or a capital investment, 
 or whatever phrase may be preferred, of nearly 1,100 millions 
 sterling. It may be said that Europe has been investing in the 
 United States ever since the colonisation of America began, and 
 that it is not at all improbable that the capital investments now 
 represent about 1,100 millions sterling. 
 
 But let us look at the matter a little more closely. At the 
 present time, as readers have frequently been reminded in The 
 Statist^ about one-third of the total railway mileage of the United 
 States is in the hands of Receivers, and consequently an immense 
 amount of both interest and dividends that used to be paid is now 
 in default. Further, a large number of the mortgage companies 
 are insolvent. Silver mining has been contracted in the most 
 serious manner, farming is in a depressed state, trade is paralysed, 
 credit is in a deplorable condition. Clearly, then, it follows that 
 the interest, dividends, and profits that can be paid this year 
 must be enormously less than they were in the good times that 
 preceded 1890. Furthermore, it is notorious that ever since the 
 middle of 1890 European capitalists have been withdrawing capital 
 on a very large scale from the United States. Therefore the in- 
 vestments of Europe in the United States must be greatly 
 less now than they were four or five years ago. If allowance 
 be made for the bankruptcies that have occurred, for the 
 depression that is universal, and for the withdrawals of capital 
 during the past four years, it seems not to be an exaggerated 
 estimate that, assuming 54 millions sterling to be payable in the 
 present year from the United States to Europe — representing a 
 capital value of 1,100 millions sterling — the capital value of 
 the European investments four or five years ago cannot have 
 been much less than 2,000 millions sterling. But 2,000 millions 
 
 H 
 
( I02 ) 
 
 Sterling is greatly above the highest estimate that has been framed 
 of the total capital of Italy. It is about a fourth of M. de 
 Foville's estimate of the capital of France, and it is about a 
 fifth of Mr. Giffen's estimate of the capital of the United King- 
 dom. Is it credible that the European investments in the United 
 States exceed the total worth of Italy and everything it contains, 
 and amount to about one-fifth of the total capital of everything in 
 the United Kingdom? I confess that I find it very difficult to be- 
 lieve such a thing. The explanation of the figures I would offer 
 is that the withdrawal of capital which has been going on ever since 
 the difficulties of the Barings became serious is continuing upon a 
 very large scale, and that the excess of exports over imports repre- 
 sents, therefore, to a very considerable extent, capital withdrawn. 
 I need not remind the reader that there is extreme depression 
 all over the United States, that it is very difficult, therefore, to 
 employ money to advantage, and that consequently there would 
 not be anything surprising if capitalists were to withdraw capital 
 in the hope of finding better outlets for it in Europe or elsewhere. 
 Further, it is to be borne in mind that there is extreme distrust. 
 President Cleveland had influence enough to get the Sherman Act 
 repealed; but the Inflationists have not lost courage. They tried to 
 pass the Seigniorage Bill over his veto, they have been endeavouring 
 to carry a Free Coinage Bill, and it is known that they will seize 
 the first opportunity to push forward some other measure of a 
 similar character. Besides that, the Democratic Party seems to 
 be hopelessly demoralised. One fraction of it is trying to dis- 
 credit the President, and to defeat his policy, and the delay in 
 carrying the Tarifl" Bill is causing widespread dissatisfaction. For 
 all these reasons — and I might add many others — it is natural 
 to suppose that capitalists are withdrawing capital. But there is 
 another reason, and it is the redundancy of the currency. 
 
 In the issue of The Statist of September 23rd last year it was 
 shown that on the last day of August, 1893, the total paper circu- 
 lation of the United States outside of the Treasury — the paper, 
 that is, in banks and in the hands of the pubHc — amounted to 
 
( I03 ) 
 
 about 203 millions sterling, composed of greenbacks, Treasury 
 notes issued under the Sherman Act, silver certificates, and bank 
 notes. There was, in addition, a considerable amount of gold coir 
 and about 12 millions sterling of silver com. It is quite evident 
 that this enormous paper circulation is far in excess of the require- 
 ments of the country. If trade were very active and speculation 
 rampant, it is possible that employment might be found for the 
 greater part of it. But it is perfectly clear that in the present con- 
 dition of the United States the circulation is altogether redundant. 
 And it is a well-established fact that where the currency is redun- 
 dant the worst kind drives out the better. The greenbacks, the 
 new Treasury notes, the silver certificates, and the bank notes, 
 are not receivable as money abroad, but they are receivable at 
 home. Gold coin is, however, receivable everywhere. Naturally, 
 therefore, the paper is driving the gold out of circulation ; and, 
 as a matter of course, it is the foreign capitalists who are most 
 sensitive to this state of things, and are withdrawing their capital 
 as a precaution. The New York correspondent of The Statist, 
 in the telegram published from him a fortnight ago, states dis- 
 tinctly that the gold withdrawals were not affecting markets ; and 
 he is a well-informed and careful observer. I accept his word with- 
 out hesitation to this extent : that the general public and the ordi- 
 nary operators are paying no attention to the gold exports, looking 
 upon them as made in the natural course of trade. But I venture 
 to think that it is altogether different with the foreign capitaHsts; 
 that they are by no means sure that the United States will be able 
 to maintain the gold standard, and that, therefore, they are taking 
 timely precautions. Nobody need be surprised at the uneasiness 
 of foreign capitaHsts in view of the enormous excess of the exports 
 over the imports pointed out above. It has has been shown 
 above that, even allowing for the 10 millions sterling of gold bor- 
 rowed last autumn, the value of the exports of all kinds exceeds 
 the value of the imports of all kinds by over 40 millions sterling, 
 being at the rate of nearly 54 millions sterling for the year. Now, if 
 it can be held that this represents the annual, normal, regular in- 
 
 H 2 
 
( I04 ) 
 
 debtedness of the United States to Europe, it is not surprising 
 that the more thoughtful capitalists should come to the conclusion 
 that it is impossible for the United States to maintain the gold 
 standard. In the piping times before 1890, Europe invested upon 
 such an immense scale in the United States that the indebtedness 
 of the latter was masked. Now Europe is not investing — is, on 
 the contrary, withdrawing capital — and the foreign capitalists 
 argue that the real facts are therefore being disclosed. I can- 
 not believe that this is the true interpretation. During the 
 five years ended with 1890 the exports of gold exceeded the 
 imports by less than 17^ million dollars, or about 3^ millions 
 sterling. Is it credible that if during those five years the indebt- 
 edness of the United States to Europe amounted to 60 or 70 
 millions sterling per annum the shipments of gold could have 
 been so small? in other words, that the indebtedness of the 
 United States to Europe could have been almost covered by the 
 excess of goods exports over imports, and by European invest- 
 ments in the United States ? 
 
 THE OUTLOOK IN THE UNITED STATES.*— I. 
 
 If it be true that foreign capitalists are withdrawing the money 
 they have invested in the United States, and that domestic 
 capitalists, as asserted by American papers, are sending money 
 away to Europe for safe keeping, then the position is growing 
 very serious indeed. The banks are afraid to supply exporters 
 with the gold they require. The exporters are drawing upon 
 the Treasury, and as a consequence the reserve in the Treasury 
 is being rapidly depleted. It will be in the recollection of 
 the reader that on February ist the Government invited ten- 
 ders for 10 millions sterling, bearing 5 per cent, interest, the 
 issue price being 117. The loan was taken in full, and yielded 
 
 * From The Statist of June 9, 1894. 
 
( I05 ) 
 
 the Treasury nearly 12 millions sterling. Barely four months 
 have elapsed and the Treasury is once more m a position in 
 which it urgently requires to borrow. It would be absurd to 
 go on in this way. The Treasury is getting gold from the banks 
 and out of the circulation, and is accumulating it in a form so 
 handy for export that it is accordingly being exported as fast as it 
 is collected. The result must be, unless there is a complete 
 change in the public opinion of the country, an enormous increase 
 of the debt charge and the disappearance of gold from the cir- 
 culation. It seems useless to expect the proper remedies from 
 the present Congress. President Cleveland could be depended 
 upon to take the right measures if Congress would follow his lead. 
 But apparently he has lost influence with Congress, and therefore 
 is helpless. Still, it may be worth while to point out the true 
 remedy. It is manifest that those who are expecting permanent 
 improvement from the passing of the Tariff Bill will be disap- 
 pointed. Some kind of settlement of the tariff question is desir- 
 able. It will do a little towards improving matters, but it will not 
 do much. So again, a temporary loan would for the moment pro- 
 duce a better impression. But neither a Tariff Act nor a temporary 
 loan will avail much ; the true remedy is quite different. 
 
 It is perfectly clear that the circulation of the United States is 
 redundant, and that the redundant paper currency is driving out 
 gold. The effectual remedy, then, to apply is, in the first place, 
 to reduce the paper currency. The time no doubt is very un- 
 favourable. But as the opportune moment has been allowed to 
 pass by there is no use in dwelling upon that. What is necessary 
 has to be done, whether under favourable or unfavourable circum- 
 stances. What ought to be done immediately is to withdraw the 
 greenbacks from circulation and cancel them. They amount to 
 nearly 70 millions sterling, and if they were all withdrawn they 
 would reduce the paper currency so much that it is to be hoped 
 confidence would be restored. This is on the assumption that 
 the American Government and the American people have made 
 up their minds to maintain the gold standard at whatever cost. 
 
( io6 ) 
 
 If they have, then the paper currency ought to be reduced. The 
 February loan of lo miUions sterling at 5 per cent, calls for an 
 annual interest of half a million sterling. Now it seems as if 
 another loan of 10 millions sterling would be required. If that 
 loan is raised, then the interest on the debt will be increased by a 
 million sterling annually and nothing really effectual will have 
 been done. Gold will have been taken from the banks and from 
 the circulation, and accumulated in the Treasury in a position 
 in which it can be most easily sent out of the country. The evil, 
 in fact, will after a while be intensified instead of allayed. If the 
 Government were to borrow 70 millions sterling at 3 per cent. — 
 I presume there would be no serious difficulty in so great a 
 country as the United States borrowing 70 millions sterling at 3 
 per cent., or very little more — that would involve an annual 
 interest of less then 2^ millions sterling, or, adding on Sinking 
 Fund, the whole additional charge for the debt would still be 
 only between two and three times as great as the Government 
 will, probably, have to incur even if it only borrows from hand to 
 mouth as occasion requires. The advantage of a large loan 
 would be that it would constitute an effectual remedy, while 
 temporary small loans do no permanent good. The greenbacks 
 were issued during the war. They are Treasury notes, pure and 
 simple. They were not issued either against gold or against 
 silver. But the Government is bound to redeem them in gold ; 
 and it has pledged itself to keep a reserve of 100 million dollars, 
 or 20 millions sterling, always in the Treasury to insure their 
 convertibility. These greenbacks are legal tender for all amounts; 
 they are held largely by the banks in their reserves, and, in fact, 
 the bank notes are redeemable in greenbacks. Their withdrawal 
 would not merely reduce the volume of the paper currency very 
 greatly ; it would make a void in the bank reserves, which would 
 have to be filled up, most likely with gold. 
 
 If the Government were to adopt the measure which I have 
 now been recommending, no doubt it would have a serious effect 
 for a while upon the European Money Markets. A loan of 70 
 
( I07 ) 
 
 millions sterling would have to be issued in Europe as well as 
 in America, and gold would be taken. That, of course, would 
 deplete the stocks in Europe, and would upset the Money Markets 
 for a time. But the withdrawal of the greenbacks would be a 
 slow and gradual process ; therefore, the paying up of the instal- 
 ments of the loan could be spread over several years. The dis- 
 turbance of the Money Markets, if that course were adopted, 
 would therefore be minimised, and as the production of gold is 
 increasing very rapidly, there is no reason to fear that the United 
 States Government by borrowing the amount required would 
 permanently injure business. There are large stocks of gold in 
 many countries where they are not now required — in India, for 
 example. And probably much of the gold that has been ac- 
 cumulated by Austria-Hungary would be got back again if the 
 United States set itself in proper manner to restore order in its 
 finances. But, however that may be, the question for the United 
 States Government to consider is not so much the influence of its 
 policy upon other countries as the effect of that policy upon the 
 prosperity of its own country. The American Government and 
 the American people of course can, if they please, let their gold 
 go and adopt the single silver standard. But if they will not do 
 that, and are resolved to maintain the gold standard, then it seems 
 obvious that the redundant paper currency must be reduced. 
 The withdrawal of the greenbacks, however, though it would be a 
 very important step in the right direction, and would have a 
 powerful influence on public opinion at home and abroad, would 
 not be enough. It should be followed by a reform of the banking 
 system. That, however, is a subject too large to be dealt with at 
 the tail-end of an article like the present. 
 
( io8 ) 
 
 THE OUTLOOK IN THE UNITED STATES.*— 11. 
 
 In the foregoing articles attention has been called to the evidence 
 showing that capital is being withdrawn from the United States 
 by Europeans and Americans alike, because of a fear that the 
 country will have to come, after all, to a silver standard. And 1 
 have pointed out what, I venture to think, is the true remedy. 
 It is to be feared, however, that there is very little likelihood of the 
 true remedy being adopted ; indeed, it would almost look, in- 
 credible as it may appear, as if the majority in Congress rather 
 wishes for another crisis. Last year public opinion in the United 
 States declared so emphatically and so unequivocally against the 
 Sherman Act that even the Senate, stubborn as it was and inde- 
 pendent as it felt itself, had at last to give way, and the Sherman 
 Act was repealed. But the majority in Congress, though it bowed 
 to the will of the people, under the pressure brought to bear upon 
 it, did not let the matter end there. On the contrary, the Silver 
 Seigniorage Bill was passed very shortly afterwards, though it was 
 vetoed by the President; and an attempt was made to carry a Free 
 Coinage Bill. The attempts in these two cases proved to the 
 majority in Congress that the President would neither be intimi- 
 dated nor cajoled ; that he would not allow of any tampering with 
 the currency. Therefore the majority resolved not to give the 
 President the means which he required for tiding the country over 
 its difficulties. From that day to this the majority in Congress 
 has refused even to consider a Bill authorising the President to 
 borrow a sufficient amount at a low rate of interest. From all 
 this it looks as if the majority resented the pressure brought to 
 bear upon it by the public last year, and had resolved to punish 
 both the public and the President by refusing to give the latter 
 
 * From The Statist oi ]\\w(t 23, 1894. 
 
( I09 ) 
 
 the means of carrying out his wise poUcy, and by allowing matters 
 so to drift as to bring on another currency scare. Many persons 
 argue, indeed, that the majority is calculating that the public 
 would then turn round and say "The Sherman Act has been 
 repealed, yet the currency difficulty is as great as ever; therefore 
 let us try whether a Free Coinage Bill will do." 
 
 It seems incredible that this can be the settled policy of the 
 representatives of the American people, for it is as certain as any- 
 thing can be that if the policy is carried through and another scare 
 is caused, the crisis will be far worse than that of last year. Last 
 year the authority of the President was unimpaired. He was 
 backed by public opinion, and there was no serious doubt that 
 after a while the Sherman Act would be repealed. But now the 
 influence of the President with his own party seems to be 
 altogether undermined, and nobody can foretell what the majority 
 may do. Therefore, if there is another scare, gold will first go to 
 a premium, will then be hoarded, and practically will disappear 
 from circulation. If that happens, the Treasury will be unable to 
 meet its obligations in gold. If gold disappears, great as is the 
 credit of the United States Government, and vast as are the 
 resources of the country, it will be impossible for the Treasury to 
 find what does not exist. Consequently, it will have to cash the 
 greenbacks in silver ; and if matters come to that there will be 
 such a fall in the prices of securities as has not been witnessed for 
 many a long day. Remember that silver at present is actually 
 worth less than half what it was worth a quarter of a century ago. 
 Therefore, if the greenbacks, which amount to very nearly 70 
 millions sterling, were to be paid in silver at the present value of 
 that metal they would be worth less than 35 millions sterling. 
 Similarly with the new Treasury notes. And it is obvious that 
 the fall upon the Stock Exchange would be almost unprecedented; 
 for if silver became the money of the country all railway rates 
 would be received in that metal or its equivalent, and so, also, 
 would all railway dividends be paid in that metal. Such a panic, 
 therefore, as would be caused has rarely been witnessed in the 
 
( 11° ) 
 
 history of the world; and it is incredible that a legislative assembly 
 elected by an intelligent people like the American, can be pur- 
 posely manoeuvring to bring about such a catastrophe. For my- 
 self, I do not believe that the majority has the intention that is 
 sometimes attributed to it ; but that there are people who suspect 
 it of the intention is beyond dispute. 
 
 Assuming, however, for the sake of argument, that Congress 
 does refuse to take any of the measures requisite to restore con- 
 fidence ; that, therefore, distrust deepens, until at last gold goes to 
 a premium, is hoarded, and ultimately disappears from the circu- 
 lation, it is clear that the panic which would ensue would be un- 
 paralleled in its magnitude. And yet it is not to be doubted that 
 the prosperity of the United States would be very little affected ; 
 that after a while business would adapt itself to the new condi- 
 tions, and then the country would go on prospering just as before. 
 After all, the greatness and wealth of a country depend upon the 
 qualities of its people and the extent of its resources, not upon 
 the kind of money it employs. If gold were to disappear from 
 the American circulation it would flow over to Europe, and the 
 supplies in Europe would be enormously increased just at the 
 time when the output from the mines is augmenting so rapidly. 
 There would consequently be a marked rise in prices in Europe, 
 and silver, like everything else, would share in the advance. 
 Furthermore, the disappearance of gold from the American circu- 
 lation would cause the currency to be very scarce. It is redun- 
 dant now ; but the export of the gold would end the redundancy 
 and cause scarcity instead. Consequently there would be a 
 demand for silver for coinage, supposing that silver became the 
 real money of the country. Moreover, silver being worth only 
 about half what it was twenty years ago, if prices were measured 
 in silver they would have to be about doubled, and therefore the 
 quantity of silver required for the circulation in America would 
 be very large ; firstly, because the gold displaced would have to 
 be replaced, and secondly, because prices reckoned in silver 
 would be so much enhanced that the amount of silver required 
 
( I" ) 
 
 would be very considerable. I am inclined to think, therefore, 
 that the demand for silver for the United States, and the addition 
 made to the gold supplies of Europe, would raise materially the 
 value of silver all over the world. It is highly probable, more- 
 over, that the example of the United States and the rise in silver 
 would very soon compel the Indian Government to reopen its 
 mints. There would, in consequence, be an inrush of silver into 
 India that would be certain to further send up the price. Lastly, 
 the example of so great, so enterprising, and so prosperous a 
 country as the United States would be likely to be followed by all 
 backward countries in the world. Every country with disordered 
 finances, that could at all manage to maintain or to resume specie 
 payments, would be likely to be greatly impressed by the action 
 of the United States, and therefore the use of silver would in all 
 probability be immensely extended. It is by no means clear 
 therefore, whether silver would not be gradually raised near to its 
 old value if it were to be adopted as a standard by the United 
 States, especially as the additions to the European supply of gold, 
 both from the United States and from the mines, would be such 
 as to send down considerably the value of gold. If gold were to 
 tend downwards and silver to advance rapidly upwards the meet- 
 ing point might not be so far off as is now supposed. 
 
 GOLD TO THE UNITED STATES?* 
 
 There is a vague notion that there will be a drain of 'gold to New 
 York in the autumn. But a drain of gold to New York in the 
 autumn is highly improbable. Of course, the Government may 
 borrow in gold as it borrowed last February. Of course, also, the 
 great railway companies may borrow gold in London, as they did 
 last autumn, and either action may lead to a considerable drain 
 of gold to New York. But if there is not borrowing of gold in 
 
 * From The Statist of August 25, 1894. 
 
( tV2 ) 
 
 some form or other, a drain of the metal to New York seems very 
 unhkely in the autumn. The recent rains have delayed the 
 harvest, but the crops for all that are looking exceedingly well, and 
 we have reason to hope that the harvest, not only at home, but 
 generally speaking all over Europe, will be good. Therefore, 
 here is nothing to suggest an extraordinary European demand for 
 wheat from the United States by-and-by. Even if the harvest 
 should turn out bad we may safely conclude that Russia, India, 
 Australia, Argentina, and all the various other countries that 
 supply us will compete keenly with the United States, and there- 
 fore that America will not have such a control of our wheat market 
 as will enable it to take an extraordinary amount of gold. Again, 
 It does not seem probable that the British investing public will 
 rush wildly to buy American railroad securities. The British 
 public may go mad ; but it is not probable, and if there is not a 
 great speculation in American railroad securities there will be no 
 drain of gold because of British investments in the United States. 
 For the condition of that country — the paralysis of trade, the want 
 of employment, the misery and unrest of the working population — 
 all combine to discourage investment in any form. But if it is not 
 likely that we shall buy immense quantities of American grain, or 
 American securities, or that we shall invest largely either in indus- 
 tries, or in lands, or otherwise, how is there to be a great drain of 
 gold ? Lastly, it is to be presumed there is not likely to be such 
 an outburst of activity in our own manufactures that there will 
 be an immense import of raw materials. Without borrowing, 
 then, I confess myself unable to see how the drain of gold is to 
 arise. 
 
 While the disorder in the American currency lasts, it is to be 
 feared that distrust of all things American will continue in Europe^ 
 and that, therefore, shipments of gold from America to Europe 
 are far more likely than shipments of the metal from Europe to 
 America. Over and over again we have been assured by American 
 journalists of all kinds that the gold shipments were practically at 
 an end, and week after week the assurances have been contradicted 
 
( 113 ) 
 
 by events. Now our own wiseacres are predicting that what is 
 being lost at present by the United States will be taken back again 
 in the autumn ; and the prediction is just as well founded as were 
 the assurances of the American Press just referred to. As has 
 been pointed out in The Statist, over and over again during the 
 past two years and more, the silver experiment of the United 
 States has thrown the currency into hopeless confusion. The 
 currency is redundant, and, as always happens when that is the 
 case, the worse form of currency is driving out the better. Gold 
 is receivable everywhere. Gold, therefore, is being sent from the 
 United States, and is being accumulated in Europe in immense 
 quantities. Much of it came first to London, now it is being 
 taken by Germany and Austria ; and although the export may 
 cease for a while, every now and then, it is reasonably certain that 
 it will begin again. Of course, I freely admit that even yet it is 
 possible to apply a remedy. Indeed, there seems no room for 
 doubt that if Congress was amenable to reason, and would follow 
 the leadership of President Cleveland, order would be by-and-by 
 restored. But nothing seems less likely than that Congress will 
 listen to reason, or follow the President. In the House of 
 Representatives the majority is disciplined enough. The House 
 was elected directly by manhood suffrage at the same time as 
 the President. The House, therefore, is in full harmony with him, 
 and knows that those who voted for it wished it to support, in the 
 fullest way, the President chosen together with it. But only one- 
 third of the Senate was elected at the same time. Another third 
 was chosen four years ago, and the remaining third has now been 
 sitting for very nearly six years. Two-thirds of the Senate, there- 
 fore, was chosen at a time when the feeling of the country was 
 altogether different from what it is now, and it is not surprising in 
 consequence that it should be out of harmony with the President 
 and with the House. The result, unfortunately for the United 
 States, is that there is a dead-lock between the two Chambers, In 
 the Senate, indeed, a portion of the Democrats are almost as 
 hostile to the President as the Republicans themselves. But if 
 
( "4 ) 
 
 Congress will do nothing I greatly fear that matters must become 
 worse before they can be better. 
 
 The danger, then, is real that the country will have to come to 
 a silver standard. I do not say that it must come — that would be 
 to predict — but only that there is danger that it will come. As 
 has been observed more than once already, the real prosperity of 
 a country depends not upon the money it uses, but on the qualities 
 of its people and its material resources. Therefore, in the long- 
 run^ it does not seriously matter what standard of value the United 
 States adopts. For all that, passing from the gold to the silver 
 standard would mean a crisis such as is rarely seen, and temporary 
 chaos. It is possible that when the danger reveals itself fully to 
 the American people they will insist upon Congress taking the 
 necessary action. Last year the Senate was just as much opposed 
 to the repeal of the Sherman Act as it is now to a reasonable tariff 
 reform. And yet popular opinion compelled it to assent to repeal. 
 So it is at least possible that if the public becomes thoroughly 
 alarmed it will insist upon the proper remedies being adopted by 
 Congress. Even if the public is confused and unable to trace the 
 root of its difficulties, and, therefore, is as undecided as Congress 
 itself, it is just possible that the banks may combine to supply the 
 country with a currency that will serve the occasion. As has 
 been often noted in The Statist, American bankers are well 
 trained in the practice of combining for what they believe to be 
 either useful or necessary. It was the boycott of silver by the 
 banks which defeated the silver experiment forced on by Congress ; 
 and every reader will recollect how, last year, the banks combined 
 to support one another, issuing Clearing House certificates, and 
 acceptmg them as if they were legal tender. Therefore, when the 
 occasion arises it is possible that the banks may combine to supply 
 the country with a currency that will be generally accepted. And 
 there are other ways, no doubt, in which the crisis may be turned 
 or averted. But, unless in some way or other a remedy is applied, 
 the danger is very great indeed that the country will have to come 
 to a silver standard. That being so, European capitalists will 
 
( 115 ) 
 
 have lost their cunning if they send their gold in the autumn in 
 large amounts to the United States. And similarly, the American 
 capitalists must act very differently from their kind if they take 
 exceptional measures to force gold into a country in which there 
 is only too much reason to fear that gold, before long, will rise to 
 a premium, and will disappear altogether from the circulation. 
 What seems most Hkely is that continued shipments of gold from 
 New York, interrupted possibly from time to time, but always re- 
 newed, will go on until either the currency is restored to order, or 
 gold altogether disappears from the circulation. 
 
 THE DIFFICULTIES OF THE PRODUCING 
 COUNTRIES.- 
 
 The difficulties of the producing countries, which are made so 
 much of by the Bimetallists, have nothing in them mysterious or 
 even puzzling ; the causes are plain enough. In good times the 
 more backward countries largely work by means of capital raised 
 in Europe, and more especially in this country. Investors are 
 then anxious to employ their money profitably, and they are ready 
 to engage in all kinds of new enterprises. Those who wish to 
 push new enterprises forward or to extend old enterprises there- 
 fore flock from all parts of the world to London. Funds are 
 raised by means of the public issue of loans and companies, by 
 attracting deposits, by borrowing on security from banks, and in 
 short in every conceivable way. As long as this goes on the back- 
 ward countries grow rapidly in prosperity, the area under cultiva- 
 tion is extended, railways are pushed in new directions, public 
 works of all kinds are constructed. But there comes a check 
 when credit receives a shock in Europe. During the years im- 
 mediately preceding the Baring crisis the amount of capital 
 invested by this country abroad was unprecedentedly large. But 
 
 * From The Statist of July 7, 1894. 
 
( ii6 ) 
 
 as soon as the Baring embarrassments became serious, that capital 
 began to be called home. Some of the great financial houses 
 were compelled to bring home their capital in the hope of sus- 
 taining their position ; others were alarmed at the possible conse- 
 quences of the crisis they saw to be impending, and they also 
 withdrew money. As the crisis deepened, the apprehension 
 spread, and more and more investors called home their money. 
 When the crisis actually occurred it will be in the recollection of 
 our readers how great was the alarm here, and how long it con- 
 tinued. Nobody knew what other houses might come down ; 
 credit for the time was paralysed ; and the first thought of all 
 who were engaged in business was to strengthen their own 
 position. The withdrawal of capital then became more eager 
 than ever. Soon new causes of uneasiness sprang up. The 
 bankruptcy of Argentina, the wild speculation that followed the 
 revolution in Brazil, the civil war in Chili, the default of Portugal, 
 the increasing financial embarrassments of Spain, Greece, and 
 Italy intensified the scare, and more and more capital was with- 
 drawn. The refusal of this country to lend more to the Austra- 
 lian Colonies brought on a crisis there ; and as it was seen to be 
 approaching depositors withdrew their funds in immense amounts 
 from the banks. Meantime it became clear that the Sherman 
 Act was a failure, and that it would involve the United States in 
 serious embarrassments. Silver fell ruinously, and alarm sprang 
 up respecting the silver-using countries all over the world. This 
 caused the withdrawals of capital to continue on a still greater 
 scale. 
 
 This long-continued withdrawal of capital threw the more back- 
 ward countries into the most serious difficulties. They would 
 have been embarrassed by the mere stoppage of further supplies. 
 As already said, they have been developed in the past largely by 
 means of capital supplied from Europe, and the refusal of Europe 
 to place more funds at their disposal would have prevented 
 them from continuing their development at the old rate. But 
 when Europe began not merely to refuse fresh supplies, but 
 
OF THK 
 
 UNIVERSITY 
 
 ( 117 ) X^ALIFOR^Vl 
 
 to insist upon the repayment of large portions of what had 
 already been advanced, their embarrassments became grave 
 indeed. In many cases Governments had paid the interest 
 on their debts only by means of fresh loans. Everyone can 
 now see that this was the case with the South American coun- 
 tries, with Portugal, Greece, Spain, and to a lesser extent with 
 Italy, with our own colonies of Australia likewise. The in- 
 ability of the Governments to get further assistance compelled 
 them to draw upon the banks. First they withdrew the deposits 
 they had with the banks ; then they proceeded to borrow from 
 the banks. In doing this they reduced the funds at the disposal 
 of the banks ; and when the banks found themselves in danger 
 of being unable to repay the deposits that were being withdrawn 
 they called upon their debtors to pay up. The consequence was 
 severe and widespread distress and numerous failures. The 
 debtors, to save their credit, were compelled to sell whatever 
 there was a market for. The first step in the process was a great 
 fall in Stock Exchange securities ; the next was a similar fall in 
 commodities. The man who sees bankruptcy staring him in 
 the face cannot wait for better prices ; he has no option but to 
 take what he can get for his goods ; and so the pressure on all 
 the debtors throughout the backward countries to sell brought 
 about the low prices over which so much moan is made. The 
 difficulties of the debtors abroad were of course intensified by 
 the shock to credit all over Europe, and particularly in this 
 country. Business of all kinds shrank here. Very many were 
 unable to buy ; very many more were unwilling to do so. Most 
 people were far more anxious to protect their position than to 
 venture into new undertakings. Thus the producing countries 
 were under the necessity to sell as best they could, while the 
 investing countries were afraid to buy upon any great scale. A 
 fall of prices was then inevitable. When the Baring collapse, 
 occurred, I pointed out in this journal that there must be a great 
 shrinkage in our foreign trade and that this must lead to lower 
 prices. Any reader who will look at The Statist of November 
 
 I 
 
( "8 ) 
 
 2 2, 1890, will see how fully my forecast then has been verified by 
 the event. What it was possible to foresee clearly four years ago 
 is not, then, in its nature either mysterious or puzzling ; on the 
 contrary, what we are now experiencing is a natural consequence 
 of the over-trading of the four or five years before 1890, and the 
 crash that then followed. 
 
 I am far from denying that the appreciation of gold has inten- 
 sified the fall in prices. I admit fully that there is an apprecia- 
 tion of gold, and in this I differ from the gold Monometallists, 
 who, in my opinion, are injuring their own cause by refusing to 
 acknowledge what to me appears to be an incontestible truth. 
 But while in my opinion the gold Monometallists are wrong 
 upon this point, and the Bimetallists are right, I am equally con- 
 vinced that the BimetalHsts so grossly exaggerate the influence of 
 the appreciation of gold, and so misapprehend its bearing upon 
 the economic condition of the world, that they put themselves 
 altogether out of court. The appreciation of gold, of course, 
 aggravates the difficulties of the backward countries which have 
 borrowed too much gold. But it only aggravates ; it does not 
 create the difficulties. Whether gold had or had not appreciated, 
 the countries which borrowed too much gold would be embar- 
 rassed. If they borrowed greatly more than they could afford to 
 pay, they would have to default sooner or later. But the appre- 
 ciation of gold by adding to the burden of their debts necessarily 
 increased their embarrassments. If Argentina, Portugal, Greece, 
 Spain, Italy, and India had been wisely governed, had kept their 
 borrowings well within their means of payment, their Govern- 
 ments could look with indifference upon the appreciation of gold. 
 The real cause of their embarrassments is that they were not 
 wisely governed, but rushed into the most reckless extravagance. 
 It may be admitted further that the difficulties of the producing 
 countries have been aggravated in another way by the appreciation 
 of gold. Prices are lower than they otherwise would be, because 
 of that depreciation. But, as has been pointed out above, prices 
 must necessarily have fallen ruinously whether there was or was 
 
( 119 ) 
 
 not appreciation of gold, because the withdrawals of capital by 
 Europe from the producing countries have been on so enormous 
 a scale during the past four years that those countries have been 
 compelled to sell what they could dispose of at whatever prices 
 they could get. And, unfortunately, the disposition in Europe 
 was to buy little and to grant no credit. The crisis, then, through 
 which the world has been passing for the past four years is the 
 immediate cause of the embarrassments of the producing coun- 
 tries. As the crisis passes away, their condition will begin to 
 improve ; and such of them as have recuperative energy will 
 become prosperous once more when Europe, and more particu- 
 larly when this country, is ready to invest in those countries on 
 the old scale. 
 
 ENGLAND'S FINANCIAL PREDOMINANCE* 
 
 Striking evidence is being afforded just now of the ascendency 
 of this country in the economic system of the world. Since the 
 Baring collapse distrust has prevailed here more or less continu- 
 ously. The public has lost confidence in its old financial leaders, 
 and therefore is unwilling to invest abroad as it used to do for- 
 merly. Consequently, as explained above in the article upon the 
 difficulties of the producing countries, European capitalists, and 
 more particularly British capitalists, have been withdrawing capital 
 on an unparalleled scale from all the newer countries. To this is 
 due the banking crisis in Australia last year, and the general break- 
 down of the Australasian Colonies. To a considerable extent also 
 the breakdown in South America is traceable to the same cause. 
 And, lastly, the difficulties of the United States have been im- 
 mensely increased by the feeUng of distrust that has existed here. 
 Moreover, the collapse of so many continental countries is a 
 
 * From The Statist of July 14, 1894. 
 
 I 2 
 
( I20 ) 
 
 direct result of the unwillingness of the British public to invest. 
 From all this it is clear that it is essential to the modern economic 
 system of the world that this country should lend largely. When 
 it does, the economic machine works smoothly ; when it does 
 not, there is every kind of disorder. It almost looks, in fact, as 
 if only two countries in the world at present are in a position to 
 save much more than they require for their own immediate needs, 
 those two countries being England and France. Almost all other 
 countries — though some of them save on a very large scale — yet 
 want more capital than they are able to lay by themselves. Hol- 
 land and Belgium are small communities, and though they are 
 rich and thrifty, yet the amounts with which they can accommo- 
 date other countries are not of much account. Germany has made 
 wonderful progress during the past thirty years, indeed during the 
 past half century ; but yet it looks as if Germany requires almost 
 all her own capital, and when she invests abroad she has to lean 
 more or less upon this country. 
 
 France confines her investments to a few countries. Her con- 
 dition differs very greatly from our own. Everyone in France 
 saves to some small extent ; but the number of great fortunes is 
 few. The savings of France, therefore, consist of a very large 
 number of very small sums ; and the small people, being timid and 
 rather restricted in their knowledge of the world, do not care to 
 invest widely. When they do invest, however, their power is 
 remarkably great, as has been shown recently by the success with 
 which they have rehabilitated the credit of Russia. Furthermore, 
 the greater financial powei* of France than of Germany is clearly 
 proved by the difficulties of Italy. If France had not sold Italian 
 securities on a great scale the embarrassments of Italy would be 
 much smaller than they are. Even now, if France were willing to 
 come to the help of Italy, it is almost certain that her worst em- 
 barrassments would be surmounted. Germany was quite willing, 
 for political reasons, to aid Italy. But the purse of Germany is 
 not as heavy as that of France, and French hostility, therefore, 
 has proved more powerful than German help. We ourselves have 
 
( 121 ) 
 
 not cared to meddle much with Italian Finance, and therefore 
 Italy is in her present predicament. Practically, it may be said, 
 then, that French financial aid is confined to Russia, Turkey, 
 Greece, Spain, Portugal, and Egypt. Within its own limits it is 
 very powerful ; but the limits are narrow, and the timidity of the 
 French investor prevents France from exercising a great influence 
 upon the world generally. 
 
 Our country differs in almost all respects from France. Great 
 fortunes are much more numerous, and our banks are much more 
 powerful as well as far greater in number. Our banks, too, are 
 scattered all over the country. They gather up the savings of 
 every class, they transfer those savings to London, and thus accu- 
 mulate them at the centre in a form in which they can be em- 
 ployed with the greatest possible effect for any given purpose. 
 Then our great financial houses are much more enterprising, much 
 more closely connected with all parts of the world than are those 
 of France ; and the result is that because of all these peculiarities, 
 and because of the world-wide character of our trade, we have 
 become the bankers for the whole earth. Whenever our investors 
 are inclined to go into new enterprises, promoters flock to London 
 from all quarters under the sun. Companies and loans are brought 
 out with bewildering rapidity, and vast sums are raised as if there 
 was no trouble in saving money. As long as this willingness to 
 invest lasts prosperity spreads from country to country, and in the 
 process gathers momentum. But as soon as our investors decline 
 new enterprises there is a halt, and when our people begin to 
 withdraw capital the newer countries are thrown into difficulties. 
 It is the unwilUngness of our investors to engage in new enter- 
 prises since the Baring crisis that has really brought about all the 
 difficulties which have been experienced since. And if the Bi- 
 metallists would turn away from their craze and study the real 
 facts of the situation, they would see that it is the want of confi- 
 dence here, not the want of money, that is weighing upon the world 
 of trade. The truth appears to be that England is a much richer 
 country than is generally supposed, that she employs much more 
 
( 122 ) 
 
 capital abroad than anyone has had an idea of hitherto, and that 
 the great works that are being constructed all over North and 
 South America, South Africa, our Colonies and India are really 
 and truly being carried on by means of British capital, British 
 skill, and British enterprise. The prosperity of the newer coun- 
 tries, then, is in one sense of the word deceptive. It is not a do- 
 mestic prosperity to anything like the extent that is generally 
 believed ; it is rather the result of our own boldness and our own 
 enterprise. 
 
 THE LOW PRICES.* 
 
 Many observers are puzzled because, in spite of the great increase 
 in the production of gold, prices have continued to fall so that 
 they are actually lower now than they were when the gold out- 
 put was at the minimum. The circumstance would indeed be 
 puzzling if the quantitative theory of prices were true. But it is 
 only another illustration of the falseness of that theory. It has 
 been pointed out again and again in the foregoing papers, and 
 dwelt upon with emphasis, that prices are really regulated by credit, 
 and that credit is only to a small extent affected by the amount 
 of money, or of gold, in existence. The total volume of 
 credit that can exist at one time is limited, of course, by the 
 magnitude of the bank reserves. But while the maximum of 
 credit is so limited, the actual volume of credit at any moment is 
 determined by a multitude of causes quite independent of the 
 largeness or smallness of the bank reserves. Just now the volume 
 of credit is limited, not by the quantity of the bank reserves, but 
 by the after-consequences of the Baring collapse. The Baring 
 collapse immediately compelled the great financial houses to re- 
 strict to an unusual extent their acceptances. Some did this be- 
 cause they were themselves more or less discredited ; some did 
 
 * From The Statist of October 27, 1894. 
 
( 123 ) 
 
 it merely because they did not wish remarks made on the amount 
 of acceptances of theirs outstanding. When the great financial 
 houses restricted the accommodation they gave to their foreign 
 customers in this way, their foreign customers were unable to do 
 the same amount of business as before, and one result was that 
 the newer and the poorer countries were plunged in difficulties. 
 The whole of South America has suffered more or less ever since. 
 So has the United States. So likewise has Australia. I need 
 hardly add that the distrust in London, and the consequent un- 
 willingness to lend, has largely contributed to the embarrassments 
 of Greece, Portugal, Italy, and Spain. The distrust in London 
 having thus plunged so many countries in difficulties, those diffi- 
 culties in their turn reacted upon London. The great financial 
 houses here at first were unwilling to lend because of the distrust 
 existing at home ; and to guard against what might follow the 
 distrust, they withdrew large amounts of money employed by them 
 abroad. 
 
 The refusal of new credits, and the withdrawal of old credits, em- 
 barrassed the countries largely financed from London ; and as the 
 embarrassments of those countries grew, London became timid of 
 giving credit. Thus the whole volume of credit throughout the 
 world has been enormously lessened since the Baring crisis, and 
 the lessening is one of its results. Until the volume of credit ex- 
 pands it is impossible that prices should rise. On the contrary, 
 every contraction of credit has necessitated a fall in prices. The 
 newer countries, which produce food and raw materials for the 
 older countries, have been compelled to sell at whatever prices 
 ihey could obtain, because they could not get credit in London, 
 and because they were compelled to meet their obligations. But 
 as distrust at home prevented speculation, there was a paucity of 
 buyers, and buyers not being very eager, held aloof in the hope 
 of getting better and ever better terms. So the embarrassments 
 of the producing countries, and the distrust of the capitalist coun- 
 tries, have made it more difficult to carry on transactions, and at 
 las! sales have been effected only by continually reducing prices. 
 
( 124 ) 
 
 There is nothing mysterious or puzzling, or incomprehensible 
 in all this when it is looked at from the right standpoint. And it 
 is perfectly clear that no increase in the gold production could 
 have any material influence upon what has happened. Gold is 
 employed only to a very small fractional extent, either in inter- 
 national dealings or in the wholesale markets for commodities 
 within the same country, and the mere additions made to the 
 amount of gold could consequently have no effect upon prices. 
 If credit had been good the increase in the gold output would 
 have enabled the banks to lend and discount more freely than 
 before ; and every addition to the loans and discounts would have 
 been an addition to the volume of credit existing, and so would 
 have tended to send up prices. But as credit was bad, the increase 
 in the gold output has simply gone to swell the bank reserves and 
 the war treasures; but has had no influence upon prices. Credit 
 will revive under other influences than the results of gold-mining. 
 Indeed, credit has already somewhat recovered, and will recover 
 still more by-and-by. But at present the recovery goes no 
 farther than this : that capitalists of all kinds do not feel it 
 necessary to hold immense sums unemployed as they did until 
 the other day, but are investing in sound securities, especially in 
 home securities. There is an inclination, too, to invest largely in 
 South Africa, and there is a desire to find other fields of invest- 
 ment, which promise to be both safe and profitable. In short, 
 there is more readiness to encourage new enterprise than there 
 has been for the past four years. But there is no doubt that the 
 revival of credit is being checked by the political apprehensions 
 that exist, and also by the still serious embarrassments of so many 
 foreign countries. 
 
( 125 ) 
 
 APPENDIX A. 
 
 SCARCITY OF GOLD.=^ 
 
 Sir, — You scarcely do justice to the argument which gold Mono- 
 metallists found on the state of the gold reserves and the rate of 
 discount. 
 
 It is quite possible that appreciation of, or growing scarcity of, 
 gold may accompany low rates of discount ; it may even, as you 
 point out, be in some cases the ultimate cause of low rates of 
 discount. It is also true that an increase in the quantity of gold 
 may accompany, or be the cause of, high rates of discount. 
 
 As a matter of fact, the rate of discount depends upon the de- 
 mand for money, as compared with the supply of money ; and in 
 this relation the demand is the predominant and most varying 
 factor, whilst the quantity of gold available for the time being is, 
 generally speaking, of quite minor importance. 
 
 You may not agree with me in this statement ; and we will, 
 therefore, confine our attention to those special cases in which, as 
 we both agree, an increase or diminution of the quantity of gold 
 available may become an important factor in the Money Market, 
 and in its effect on prices. Your hypothesis, in which I agree 
 with you, is, that the nexus, and the only nexus, between an in- 
 crease or diminution in the quantity of gold for the time being 
 available for currency, on the one hand, and wholesale prices on 
 the other, is to be found in the operation of that increase or dimi- 
 nution on the state of the bank reserves, and on the consequent 
 lowering or raising of the rate of discount. If this hypothesis 
 is sound, it follows necessarily that an increasing scarcity of gold 
 cannot have an effect in lowering prices without first operating 
 to diminish gold reserves, and to mcrease the rate of discount. 
 
 * From The Statist of June 30, 1894. 
 
( 126 ) 
 
 If, therefore, during the period of low prices which has con- 
 tinued during the last twenty years or more, we find that the 
 supply of gold in the bank reserves has been as abundant as ever, 
 and that the rates of discount have not been higher, and have not 
 fluctuated more than they did in previous years, and if it cannot 
 be shown that lowering of prices has been preceded or accom- 
 panied by a diminution in the gold reserves, or a raising of the 
 rate of discount, a strong presumption, to say the least, is raised 
 that the low prices have not been due to an increased scarcity of 
 gold. — I am, Sir, &c., 
 
 June 27, 1894. Farrer. 
 
 APPENDIX B. 
 
 GOLD AS A MEDIUM OF EXCHANGE, AND PRICES.- 
 
 Sir, — You are right in supposing that I tried to be short and 
 became obscure. It is, in truth, impossible to do justice to this 
 abstruse and difficult question in such a compass as either you or 
 I can afford. But there are two points to which I should like to 
 advert. 
 
 Your argument is, that the quantity of gold available for 
 reserves has not increased in proportion to the business of the 
 world. This argument seems to me to be founded on a fallacious 
 assumption ; viz., on the assumption that there is some fixed pro- 
 portion between the amount of business and the quantity of gold 
 needed for the conduct of that business, and that this proportion 
 remains constant through different times and in different countries. 
 I believe that this assumption is contrary to fact. Changes in 
 the modes of doing business, and the growth of credit, make it 
 possible, and even necessary, for an ever-increasing amount of 
 business to be done safely and properly upon the basis of an 
 
 * From The Statist o{ ]\x\y 14, 1894. 
 
( 127 ) 
 
 ever-diminishing proportion of gold ; and the most advanced 
 countries do their business, and do it in the best way, with an 
 ever-diminishing proportion of gold as a basis. 
 
 With the advance of commerce the demand for the precious 
 metals as media of exchange is proportionately an ever-diminish- 
 ing demand. 
 
 It would be trespassing on your space and on your readers' 
 patience to give facts and figures to prove so elementary a pro- 
 position as this. Any history of trade which describes the growth 
 of credit, any tables of statistics which give the amount of trade 
 carried on, and of precious metals used as currency, at different 
 times and in different countries, would establish and illustrate it. 
 
 But, even putting aside considerations such as these, there was, 
 as a matter of fact, no depletion of the gold reserves of the world 
 during the period which the supposed depletion of those reserves 
 is said to have lowered prices. On the contrary, they increased 
 considerably. 
 
 Dr. Soetbeer, in his " Materialien," 1886, p. 70, has given us an 
 estimate or account of these reserves for several years (1877-85), 
 and they are as follows : — 
 
 Million marks. 
 
 1877 2,890 
 
 1878 2,580 
 
 1879 3,500 
 
 1880 3,790 
 
 1881 3,900 
 
 There was, therefore, during the period in question, no reduction in 
 
 the bank reserves of gold ; but, on the contrary, a large mcrease. 
 
 Dr. Neuman Spallart, in his " Uebersichten," 1887, p. 454, 
 after pointing out that in the previous fifteen years the whole circu- 
 lation of the civihsed world, including gold and notes, had not 
 much altered m amount, says : — 
 
 " The special characteristic of this last period is that enormous 
 quantities of the precious metals have been collected in the 
 treasuries and reserves of the banks ; the increase of dead and 
 unproductive treasure from 1876 to 1885 may be reckoned at more 
 
 
 Million marks. 
 
 882 ... 
 
 4,070 
 
 883 ... 
 
 4,600 
 
 884 ... 
 
 4,880 
 
 885 ... 
 
 5,040 
 
( 128 ) 
 
 than 2,400 million marks (^120,000,000); and from these facts, 
 coupled with the increased use of commerical and banking 
 credit, it is clear that the supply of money (Goldstand) in the 
 markets of the world was an abundant one, and the rates of 
 discount sank to what would before have been considered an 
 impossible minimum." 
 
 So far as concerns the actual supply of gold for currency pur- 
 poses. But there is another part of the argument of gold Mono- 
 metallists which you do not touch. Your own hypothesis is that 
 the way, and the only way, in which a diminution in the quantity 
 of gold available for currency can affect prices is through the 
 rate of discount. When gold becomes scarce, the rate of discount 
 rises, enterprise is checked, and prices fall. This, at any rate, 
 is your own hypothesis, in which I agree with you so far as to 
 think that when the scarcity of gold as a medium of exchange 
 does affect prices, it can affect them only by raising the rate of 
 discount. 
 
 The question then arises : " Is there any evidence that the 
 alleged scarcity of gold has raised the rate of discount ? " To 
 this the answer is emphatically " No." The rate of discount has 
 not risen more or been more fluctuating since 1872, which is the 
 date fixed for the commencement of the supposed gold scarcity, 
 than it had been before ; on the contrary, it has been lower and 
 has fluctuated less. 
 
 In the Appendix to the Third Report of the Depression of 
 Trade Commission, pp. 370 to 374, and in Dr. Soetbeer's 
 " Materialien," Part VI., we have a statement of the rate of 
 interest or discount for a series of years. From these tables it 
 appears that the average rate of discount of the Bank of England 
 
 £a 17 6 
 
 3 II 7 
 
 3 14 10 
 
 2 18 3 
 
 382 
 
 The records of the Banks of France and Germany tell a 
 
 v^s : — 
 
 
 
 For the five 
 
 years 
 
 55 
 
 ending 1865 
 „ 1870 
 
 5J 
 
 55 
 
 „ 1875 
 
 55 
 
 55 
 55 
 
 „ 1880 
 
 „ 188.; .. 
 
( 129 ) 
 
 similar story of increased reserves, with no higher rates of dis- 
 count. 
 
 If, again, we look to the fluctuations in the rate of discount — 
 which, even more than the actual amount of the rate, tells us 
 what have been the needs for gold and the apprehensions of the 
 loss of gold (the hoisting of the danger signal, as it has been 
 called) — we find, indeed, that in 1873 there was a quite unusual 
 number of fluctuations — viz., twenty-four — in the course of the 
 year. But this is just what we should expect, considering that in 
 1873 came the collapse after the unprecedented inflation of the 
 previous years, the first great German demand for gold, and the 
 payment of the French indemnity. 
 
 If, however, instead of taking the single year 1873 we take the 
 thirteen years 1873 to 1885 inclusive, and if we compare them 
 with the thirteen years preceding 1873 — i.e.^ i860 to 1873 in- 
 clusive — we find that the average number of fluctuations in the 
 rate of discount in the Bank of England was 10 per cent, per 
 annum in the years i860 to 1872, and only 8^ per cent, in the 
 years 1873 to 1885. 
 
 More striking than any figures is the diagram published by 
 Bates and Hendy, Walbrook, of the rates of discount from 1836 
 to 1885, giving the changes month by month in a form which 
 strikes the eye. Anyone who looks at this will, I think, be 
 satisfied at a glance that, if the rate of discount aflbrds any evi- 
 dence of aft abundant or a deficient supply of gold, there is 
 nothing in the rates for the period subsequent to 1873 to show 
 that there has been any less abundance of gold, or that there has 
 been any greater difficulty in retaining or recalHng gold during 
 that period of alleged comparative scarcity and of low prices, than 
 there had been in the previous period of alleged comparative 
 abundance and of high prices. 
 
 If, then, the alleged scarcity of gold as a medium of exchange 
 has not operated to raise the rates of discount it cannot have 
 operated to lower prices. This is the Monometallist argument, 
 and it appears to me to be a very strong one, and to be untouched 
 by what you say. 
 
( I30 ) 
 
 But I despair of being able to do justice to it or to the causes 
 which affect the rate of discount in such a letter as this, and beg 
 to refer you to the enclosed pamphlet, " Gold Credit and Prices," 
 pp. 57 to 79 (Cassell, 1889), in which I have stated the case with 
 all the clearness and terseness of which I am capable. You 
 will find that I have given full credit to the various factors which 
 raise or lower the rate of discount, amongst which I believe the 
 quantity of gold available as a medium of exchange to be com- 
 paratively unimportant. 
 
 Nor do I plead guilty to any confusion of mind on the subject 
 of that ambiguous word " money." " Money," in the ordinary 
 City sense of the word, is really " loanable capital," of which cash 
 or gold forms a very inconsiderable proportion. If, indeed, credit 
 were to fail altogether, our money or medium of exchange would 
 be limited to the precious metals, and " money " would in that 
 case become synonymous with " cash " or " gold." But this is an 
 imaginary case, and the wildest panic is only a distant approach 
 towards it. I am disposed to retort the charge of confusion of 
 mind on those who confound " money " with " cash," and who, 
 by adopting in one form or another the exploded quantitative 
 theory of gold and prices, have done more to advance bi- 
 metallism than any of its professed advocates. 
 
 The above reasoning is confined entirely to the effect of a sup- 
 posed scarcity of gold considered as a medium of exchange. 
 Considered as a standard of value, no reasonable man doubts 
 that gold follows the usual laws of value, and that if the world's 
 aggregate demand for gold for all purposes has grown in a greater 
 proportion than the world's aggregate supply, the value of gold, 
 including the £, sterling, must have risen, and gold prices must 
 pro tanto have fallen. But has this been proved ? — I am. Sir, &c., 
 
 Farrer. 
 Abinger Hall, July 11, 1894. 
 
( 131 ) 
 
 APPENDIX C. 
 
 THE QUANTITY THEORY.* 
 
 Sir, — In an article in The Statist of 4th inst., signed by Mr. T. 
 Lloyd, I am represented as asking whether the withdrawal of 
 credit would have the same influence on prices as the withdrawal 
 of gold, and Mr. Lloyd answers the question unhesitatingly in the 
 affirmative. 
 
 Mr. Lloyd probably refers to some remarks of mine in The 
 National Review iox July last, in which I argued against the theory 
 of those who hold that the quantity of money has practically no 
 effect on prices, because credit has, quantity for quantity, the same 
 effect on prices as money, and because the amount of credit enor- 
 mously exceeds the quantity of money. 
 
 The exact language which I used is as follows : 
 " The first objection is that the quantity of money has practi- 
 cally no effect on prices, or, as it was put by one authority, that 
 there are ;£"6,ooo millions of credit in England, and only ;£^ioo 
 millions of gold ; and that any possible addition of gold to the 
 ^6,100 millions of circulating medium (credit and gold) in 
 England would have no perceptible effect on prices. Volumes 
 might be written on the relation between prices and the quantity 
 of money, but the argument to which I have alluded may be dis- 
 posed of very briefly. I do not know how the figure giving the 
 quantity of credit in England has been obtained ; but if the cir- 
 culating medium of England is composed of ;^6,ooo millions of 
 credit and ;^ioo millions of gold, and if credit and gold have 
 quantity for quantity, precisely the same effect on prices, the 
 reduction of credit by ;^ioo millions would have no perceptible 
 
 * From 77/(? 6'/a/w/ of August ii, 1894. 
 
( 132 ) 
 
 effect on prices. Could the same thing be said if ^loo millions 
 of gold were withdrawn, or ;£"8o millions, or £,60 millions ? 
 
 " I think that any such withdrawal would produce not merely 
 a greater effect than the withdrawal of an equal amount of 
 credit, but that it would shake our financial system to its founda- 
 tion 
 
 " Again, let us assume that ;^6,ioo millions of gold are added 
 to our circulation. According to the theory about credit and goldj 
 which I have just stated, this increase in the total circulating 
 medium should double prices ; yet the man who holds that such 
 an increase of gold would merely double prices is not a person 
 with whom it is worth while to argue. 
 
 " The cases which I have stated are, of course, extreme cases ; 
 but it is extreme cases which afford the readiest test of the sound- 
 ness of a general law." 
 
 The arguments which I have just re-stated appear to me per- 
 fectly sound when used for the purpose for which I employed 
 them ; namely, to show the utter absurdity of holding that, quan- 
 tity for quantity, credit and gold have precisely the same effect on 
 prices. My opinion as to the relations between money, credit, 
 and prices is not shaken by anything Mr. Lloyd has said. 
 
 Mr. Lloyd appears to think that the fact that gold is being ex- 
 ported from the United States, although her exports exceed her 
 imports, proves that credit has as much effect on prices as gold. 
 I do not know what bearing this assertion has on the point at 
 issue. The export or import of gold is generally, but not invari- 
 ably, determined by the balance of indebtedness for the time 
 being, and not merely by the relation between exports and imports. 
 In any case, I do not see that the export of gold from America 
 proves anything as regards the relation between money, credit, and 
 prices. 
 
 The Baring collapse of 1890 was preceded by many foolish in- 
 vestments, and much rash speculation in the financial world. It 
 was the most marked symptom of a disease, but it was not the 
 disease itself. I see nothing to be gained by contrasting the 
 
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 alleged effects of a financial and commercial crisis, arising from 
 the operation of economic causes, with the probable effects of a 
 mere contraction of the circulating medium, even though the 
 crisis bring with it, among other results, a loss of confidence and 
 contraction of credit. 
 
 Neither can I see that the quantity theory is disproved, because 
 the United States has silver certificates, greenbacks, and bank 
 notes in circulation, and nevertheless the gold standard is effectively 
 maintained in that country, Mr. Lloyd states that the currency 
 of the United States is " undoubtedjy inflated, because it has been 
 artificially swelled by so much silver and notes." 
 
 The circulation of a country may have additions made to it 
 artificially by silver and notes to a very great extent, without de- 
 stroying the metallic basis of the standard. 
 
 What is quite certain is that if the inflation is carried far enough 
 the gold standard will cease to exist. This is the very result which 
 a writer in The Statist q{ August 4th appears to anticipate in the 
 United States, unless special measures are adopted. See the 
 article headed " The Coming Danger in the United States." 
 
 To my mind the phenomena which we now observe in the 
 United Stales furnish an argument in favour of the quantity 
 theory. — I am, Sir, &c., ^avid Barbour. 
 
 Dalrannoch, Comrie, N.B., August 8th. 
 
 APPENDIX D. 
 
 WAR TREASURES.* 
 
 Sir, — In your leading article of last Saturday you call particular 
 attention to the withdrawal from the service of trade of the very 
 large amounts of gold which have accumulated during the last 
 twenty years in the Treasuries and State i)anks of the leading con- 
 
 * From The Statist of Sept. 22, 1894. 
 
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 tinental nations, and you express surprise that so serious a matter 
 has attracted very Uttle notice. 
 
 I share your surprise, and I fully agree with you that this with- 
 drawal, however caused — during a period which, in spite of enor- 
 mous outlay upon national armaments, has been one of very great 
 financial and industrial expansion — has had a most injurious effect, 
 not only upon prices of commodities, but upon general prosperity. 
 As I write, the reports of a strong demand in the open market for 
 gold for Germany suggest that the process of accumulation on the 
 Continent has not yet come to an end. 
 
 But when you ascribe this locking up of gold so largely to the 
 formation of war chests we part company. Your view does not 
 seem to find support in the evidence before us. That military 
 considerations h^ve entered into the calculation I cannot doub*", 
 nor that the leading European nations have established reserves 
 of gold to meet sudden outbreaks of war ; but that any such 
 amount has been set aside for war chests as 150 to 200 millions 
 I have seen no reason for believing. The bulk of the accumu- 
 lations in question can be otherwise accounted for. 
 
 In the case of Germany, Austro-Hungary, and Italy changes in 
 their currency have necessitated the acquisition of most of the 
 gold they have obtained. Russia is on a paper basis ; but for a 
 number of years her Finance Ministers have been striving, by 
 accumulating gold, to improve the national credit and to raise 
 the value of the rouble, in which they have succeeded. France 
 has closed her mint to silver without altering her standard of 
 value, but it appears to me she has had ample reason for wishing 
 to hold more and more gold in the fact that her circulation of 
 silver is very large and that the gold value of the metal in this coin- 
 age has been declining until it is now only one half of its nominal 
 amount. 
 
 In addidon to the causes I have referred to, is it not natural 
 that nations which see silver demonetised and discredited should 
 endeavour to secure and to retain increased supplies of gold, the 
 appreciating metal? When you have made due allowance for 
 
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 these influences upon the continental demand, the amount of 
 gold in the war chests will, I think, be found very far below the 
 figures at which you have put it. 
 
 Whether you accept my explanation or not, there remains 
 the serious matter on which we are already agreed, that a very 
 large amount of gold has been practically withdrawn in Europe 
 from the ordinary service of the world, or has, at any rate, been 
 rendered difficult of access, which has operated to general dis- 
 advantage. Is this state of things to continue ? If so, how long 
 will it take to fill up the void thus created ? Production of gold 
 is indeed increasing, but on the other hand it can hardly be sup- 
 posed that the effects on demand resulting from the demonetisa- 
 tion of silver have already been exhausted. The Indian Mint 
 was closed and the Sherman Act repealed only last year, and trade 
 is still suffering. 
 
 How long will the available supply of gold remain sufficient for 
 our wants after business revives ? — I am, Sir, &c., 
 
 X. 
 
 London, Sept. 12 th. 
 
ASSESSED F°"J*'':"''?HE PENALTY 
 
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